Courts and Congress Don't Say What They Mean: Initial Reactions to
Morrison v. National Australia Bank and to the Extraterritorial
Jurisdiction Provisions of the Dodd-Frank Act,'' 20 Minn. J. of
Inter. L. 1 (Winter 2011). But see Liu v. Siemens A.G., 2013 WL
5692504, *3 (S.D.N.Y. Oct. 21, 2013) (``Section 929P(b) permits the
SEC to bring enforcement actions for certain conduct or transactions
outside the United States.''); SEC v. Tourre, 2013 WL 2407172, *1
n.4 (S.D.N.Y. June 4, 2013) (929P(b) ``effectively reversed Morrison
in the context of SEC enforcement actions''); In re Optimal U.S.
Litig., 865 F. Supp. 2d 451, 456 n.28 (S.D.N.Y. 2012) (``Congress
has . . . restor[ed] the conducts and effects test for SEC
enforcement actions.''); SEC v. Gruss, 2012 WL 3306166, *3 (S.D.N.Y.
Aug. 13, 2012) (``Section 929P(b) . . . allows the SEC to commence
civil actions extraterritorially in certain cases.''); SEC v.
Compania Internacional Financiera S.A., 2011 WL 3251813, *6 n.2
(S.D.N.Y. July 29, 2011) (``It may be that [929P(b)] was
specifically designed to reinstate the Second Circuit's `conduct and
effects' test.''); Cornwell v. Credit Suisse Grp., 729 F. Supp. 2d
620, 627 n.3 (S.D.N.Y. 2010) (``[I]n legislation recently enacted,
Congress explicitly granted federal courts extraterritorial
jurisdiction under the conduct or effect test for proceedings
brought by the SEC.'').
    \754\ See rule 250.1.
    \755\ The Morrison decision does not preclude the Commission's
interpretation. When the Supreme Court construed section 10(b) in
Morrison to determine its territorial scope, it acknowledged that
the language of section 10(b) neither required nor precluded
extraterritorial application. Morrison, 130 S.Ct. at 2881-82. It was
merely silent. The Court also looked to other provisions of the
Exchange Act for evidence of extraterritorial intent, but found
none. The Court thus applied a default ``presumption'' against
extraterritoriality to find that section 10(b) lacked
extraterritorial effect, while making clear that this presumption
was not ``a limit upon Congress's power to legislate'' and only
applied ``unless a contrary intent appears.'' Id. at 2877. Section
929P(b) now provides that contrary intent---in the words of
Morrison, it supplies the ``indication of an extraterritorial
application'' that had been missing. Our interpretation is thus, at
a minimum, a reasonable reading of the antifraud provisions in light
of section 929P(b)'s enactment.
---------------------------------------------------------------------------

    Further, we believe that our interpretation of the cross-border
antifraud enforcement authority best advances the strong interest of
the United States in applying the antifraud

provisions to cross-border frauds that implicate U.S. territory, U.S.
markets, U.S. investors, other U.S. market participants, or other U.S.
interests.\756\ We believe that our interpretation of the cross-border
antifraud authority is necessary to ensure honest securities markets
and high ethical standards in the U.S. securities industry, and thereby
to promote confidence in our securities markets among both domestic and
foreign investors. Our interpretation of the cross-border antifraud
authority will also allow us to better protect U.S. investors from
securities frauds executed outside of the United States where those
frauds may involve non-domestic securities transactions but nonetheless
threaten to produce, foreseeably do produce, or were otherwise intended
to produce effects upon U.S. markets, U.S. investors, other U.S. market
participants, or other U.S. interests.
---------------------------------------------------------------------------

    \756\ See generally Restatement (Third) of Foreign Relations Law
of the United States Sec.  402 (1987) (stating that ``the United
States has authority to prescribe law with respect to . . . conduct
that, wholly or in substantial part, takes place within its
territory; the status of persons, or interests in things, present
within its territory'' and ``conduct outside its territory that has
or is intended to have substantial effect within its territory'').
---------------------------------------------------------------------------

B. Economic Analysis

    This rule is designed to ensure the antifraud provisions of the
securities laws are provided broad cross-border reach. Effective cross-
border enforcement of the antifraud provisions should help detect and
deter or stop transnational securities frauds the final rule may
mitigate inefficiencies in allocation of capital. For example, by
directly diverting financial resources from more productive projects to
less productive projects, serious transnational securities frauds can
generate welfare losses.
    Further, in the absence of the cross-border application of the
antifraud provisions, the perceived risk of fraud may indirectly result
in less efficient capital allocation if it reduces investors' trust in
the securities market. \757\ Additionally, given the global nature of
the securities market, ensuring that antifraud provisions of the
securities laws have cross-border reach will reduce the likelihood of a
fragmented market. As a result of reduced ambiguity over the degree to
which they are protected from fraud, U.S. market participants will have
fewer incentives to avoid cross-border activity because, as explained
above, they will have increased confidence in the integrity of the
market. Through this channel, the final rules support a market that
provides greater opportunities for U.S. market participants to share
risks with market participants in other jurisdictions.
---------------------------------------------------------------------------

    \757\ See e.g., Luigi Guiso, Paola Sapienza, and Luigi Zingales.
``Trusting the stock market,'' 63 J. Fin. Vol. 63, No. 6: 2557 2600
(2008); see also David Easley and Maureen O'Hara, Microstructure and
Ambiguity, 65 J. Fin. 1817 (2010).
---------------------------------------------------------------------------

VIII. Impacts on Efficiency, Competition, and Capital Formation

    In developing our approach to the cross-border application of the
Title VII security-based swap dealer and major participant definitions,
we have focused on meeting the goals of Title VII, including the
promotion of the financial stability of the United States, by the
improvement of accountability and transparency in the U.S. financial
system and the protection of counterparties to security-based swaps. We
also have considered the effects of our policy choices on competition,
efficiency, and capital formation as mandated under section 3(f) of the
Exchange Act. That section requires us, whenever we engage in
rulemaking pursuant to the Exchange Act and are required to consider or
determine whether an action is necessary or appropriate in the public
interest, to consider, in addition to the protection of investors,
whether the action will promote efficiency, competition, and capital
formation.\758\ In addition, section 23(a)(2) of the Exchange Act
requires us, when making rules under the Exchange Act, to consider the
impact such rules would have on competition. Section 23(a)(2) also
prohibits the Commission from adopting any rule that would impose a
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act.\759\
---------------------------------------------------------------------------

    \758\ 15 U.S.C. 78c(f).
    \759\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    In this section, we focus particularly on these effects. In
adopting these final rules, we recognize that the most significant
impact of the cross-border implementation of the dealer and major
participant definitions will derive from the role of the definitions in
determining which market entities are subject to security-based swap
dealer and major security-based swap participant regulation under Title
VII and which entities are not. That is, the scope of the final
definitions will affect the ultimate regulatory costs and benefits that
will accompany the full implementation of Title VII rules aimed at
increasing transparency, accountability, and financial stability.
Furthermore, the final cross-border rules may create incentives for
market participants, including dealers as well as non-dealers and other
non-registered entities who transact with dealers, to structure their
businesses to operate wholly outside of the Title VII framework. This
incentive may be particularly strong for entities at the boundaries of
the definitions--for example, entities with relatively limited contact
with U.S. persons--for whom the benefits of operating outside of Title
VII may exceed the costs of restructuring or forgoing trading
opportunities with U.S. counterparties.

A. Competition

    As noted above, a key goal of Title VII of the Dodd-Frank Act is to
promote the financial stability of the United States by improving
accountability and transparency in the financial system. To that end,
Title VII imposes new regulatory requirements on market participants
who register as security-based swap dealers or major participants. The
final cross-border implementation of the dealer and major participant
definitions discussed in this release, including the cross-border
implementation of the de minimis exception, will likely affect
competition in the U.S. security-based swap market and potentially
change the set of available counterparties that would compete for
business and provide liquidity to U.S. market participants. Though
these substantive Title VII requirements have not been finalized,
application of Title VII to registered dealers and major participants
may directly affect the competitive landscape of the security-based
swap market.
    As detailed above, the security-based swap market is a global,
interconnected market. Within this global market, foreign and domestic
dealers compete for business from counterparties, while non-dealers
(including major participants) that participate in the market use
security-based swaps for purposes that can include speculation and
hedging. Because the market for security-based swaps is a global market
and some participants may not engage in relevant security-based swap
activity within the United States, the rules we adopt pursuant to Title
VII will not reach all participants or all transactions in the global
market. We are aware that application of rules to a subset of
participants in the worldwide security-based swap market would change
the costs and benefits of market participation for one group (those
that engage in relevant security-based swap activity within the United
States) relative to another (those that do not) and therefore create
competitive effects.
    More specifically, in addition to requiring U.S. dealers to
register, our

final rules implementing the cross-border approach to the security-
based swap dealer definition would generally apply dealer registration
and other Title VII requirements to non-U.S. entities that conduct
dealing activity (as defined in the Intermediary Definitions Adopting
Release) in excess of the de minimis threshold, but where calculation
of the threshold depends on various features of the person's
transactions (e.g., whether the person's counterparty is a U.S. or non-
U.S. person, whether the transaction is guaranteed by a U.S. person,
whether the counterparty is a registered or non-registered foreign
branch of a U.S. person, and whether the person is a conduit affiliate
of a U.S. person). Similarly, our final rules implementing cross-border
application of the major security-based swap participant definition
would apply major participant registration and other Title VII
requirements to entities that have exposures to U.S. persons that
exceed the major participant thresholds (as defined in the Intermediary
Definitions Adopting Release). Given the approach we are adopting with
respect to application of the dealer de minimis and major participant
threshold calculation requirements, U.S. persons should have no
incentive to favor a non-U.S. person counterparty over a U.S.-person
counterparty.
    However, we recognize that the final rule treats U.S. persons and
different types of non-U.S. persons differently. Unless their dealing
activity is guaranteed by a U.S. person, non-U.S. persons may exclude
from their de minimis calculations dealing activity with other non-U.S.
persons. Similarly, unless their security-based swap activity is
guaranteed by a U.S. person, non-U.S. persons may exclude from their
major participant threshold calculations their positions with non-U.S.
persons. U.S. persons, non-U.S. persons whose security-based swap
transactions are guaranteed by a U.S. person, and conduit affiliates
cannot exclude such transactions or positions from their own
calculations. This differential treatment makes it more likely that
non-U.S. persons will not be subject to the regulatory requirements
associated with dealer and major participant registration. Furthermore,
because transactions with U.S. persons in excess of the de minimis and
major participant thresholds trigger registration requirements, non-
U.S. dealers and other market participants may be reluctant to trade
with U.S. counterparties or clear security-based swap transactions
through U.S. person clearing agencies because of the potential
application of Title VII regulation. For example, our final rules may
produce competitive frictions insofar as market participants prefer to
clear transactions using non-U.S. person clearing agencies who may have
U.S. person members instead of U.S. person clearing agencies, because
only positions held against the latter would count against their major
participant thresholds.\760\ Indeed, some entities may determine that
the compliance costs arising from the requirements of Title VII warrant
exiting the security-based swap market in the United States entirely.
Non-U.S. persons may find this option more attractive than U.S. persons
because they may find it easier to structure their foreign business so
as to prevent it from falling within the scope of Title VII. However,
U.S. entities may also have an incentive to establish separately-
capitalized foreign subsidiaries to conduct their security-based swap
operations, since such subsidiaries would qualify as non-U.S.
persons.\761\ In this case, the cross-border application of Title VII
rules may affect participants depending on their size, as larger
participants could be better-equipped to set up offshore vehicles
enabling them to transact as non-U.S. persons.
---------------------------------------------------------------------------

    \760\ See section 0.
    \761\ The rules we are adopting regarding conduit affiliates
should mitigate this risk to some degree, as the foreign affiliate's
non-U.S. person counterparties would not generally be able to engage
in security-based swap dealing activity on behalf of its U.S.-person
affiliate without itself being required to include those
transactions in its own de minimis calculations.
---------------------------------------------------------------------------

    To the extent that entities engaged in dealing activity exit the
U.S. security-based swap market, the end result could be a U.S. market
where fewer intermediaries compete less intensively for business. These
exits could result in higher spreads and reduced liquidity, and could
affect the ability and willingness of non-dealers within the United
States to engage in security-based swaps. The concentrated nature of
dealing activity suggests that there are high barriers to entry in
connection with security-based swap dealing activity, which could
preclude the ability of new dealers to enter the security-based swap
market and compete away spreads.
    Notwithstanding the potential that our final rule may reduce
competition, the Commission believes it appropriate to require U.S.
persons to count all dealing transactions towards the de minimis
threshold and all positions toward the major security-based swap
participant thresholds, given the potential for these transactions to
create risk to U.S. persons and in the U.S. financial system. We also
note that it is uncertain that such requirements will reduce
competition. In fact, the final rule may enhance competition among
dealers, as the Title VII regulatory requirements and the ability to
meet the standards set by Title VII may allow registered dealers to
credibly signal high quality, better risk management, and better
counterparty protection relative to foreign unregistered dealers that
compete for the same order flow. In this scenario, non-dealers in the
U.S. market may be willing to pay higher prices for higher-quality
services in regulated markets, and registration requirements may
separate high-quality intermediaries that are willing and able to
register from low-quality firms that are not.\762\ Furthermore, while
dealers and speculative traders may prefer to transact in opaque
markets, transparency requirements that apply to U.S. dealers and
transactions that occur within the scope of Title VII may be attractive
to hedgers and other market participants who do not benefit from
opacity. Therefore, Title VII requirements may promote liquidity in the
U.S.; liquid markets should attract additional participants, thereby
enhancing risk sharing and making markets more competitive. These
regulatory benefits could mitigate the competitive burdens imposed by
the proposed and anticipated final cross-border rules and substantive
Title VII requirements applicable to registered security-based swap
dealers by, for example, reducing incentives for firms to exit the
market.
---------------------------------------------------------------------------

    \762\ Cf. Carl Shapiro, ``Investment, Moral Hazard, and
Occupational Licensing,'' The Review of Economic Studies, Vol. 53,
No. 5 (1986) (using a theoretical model to show ``that licensing and
certification tend to benefit customers who value quality highly at
the expense of those who do not''). Oren Fuerst, ``A Theoretical
Analysis of the Investor Protection Regulations Argument for Global
Listing of Stocks,'' Working Paper (1998) (using a theoretical model
of the listing decision to show how managers of high quality firms
signal their quality more effectively in a strict regulatory
regime). Craig Doidge, G. Andrew Karolyi, and Rene M. Stulz, ``Why
are Foreign Firms Listed in the U.S. Worth More?'' Journal of
Financial Economics, Vol. 71, Issue 2 (2004) (hypothesizing that
firms cross-listed in the United States are better able to take
advantage of growth opportunities, and finding that ``expected sales
growth is valued more highly for firms listing in the U.S. and that
this effect is greater for firms from countries with poorer investor
rights''). While economic theory supports the assertion that
registration can separate high-quality dealers from low-quality
dealers, with corresponding differences in pricing, we received no
comments either agreeing or disagreeing with the assertion that some
market participants may be willing to pay higher prices to trade
with a high-quality intermediary.
---------------------------------------------------------------------------

    Similarly, the cross-border application of the de minimis exception

could reduce the number of entities likely to exit the U.S. market
entirely because it would enable an established foreign entity to
transact a de minimis amount of security-based swap dealing activity in
the U.S. market before it determines whether to expand its U.S.
business and become a registered security-based swap dealer.\763\
However, since the ability of smaller entities to access the U.S.
security-based swap market without registration would be limited to
conducting dealing activity below the de minimis threshold, these
entities would have an incentive to curtail their security-based swap
dealing activity with U.S. persons as they approach the de minimis
threshold to avoid dealer registration requirements.
---------------------------------------------------------------------------

    \763\ See IIF Letter (noting that, ``. . . the rule proposal if
adopted would make it much easier for foreign market participants to
offer services in the U.S., providing greater choice and
competition, and making it easier for instance for corporates to
hedge their risks).''
---------------------------------------------------------------------------

    Finally, incentives to restructure ultimately depend on future
regulatory developments, both with respect to final Title VII rules and
foreign regulatory frameworks; the differences in regulatory
requirements across jurisdictions; and strategic interactions with non-
dealer participants. For example, although pre-and post-trade
transparency requirements provide a number of benefits both to
financial markets and the real economy, dealers benefit from operating
in opaque markets. To the extent that foreign jurisdictions require
only regulatory reporting, without public dissemination requirements,
dealers may wish to operate in jurisdictions where they can continue to
benefit from opaque markets.
    Other market participants, however, may prefer transparency, and
the availability of transparent trading venues that result from Title
VII pre- and post-trade transparency requirements could shift market
power away from dealers. If non-dealer market participants are able to
demand transparent trade execution, the incentives to restructure may
be tempered, particularly if transparent venues attract liquidity away
from opaque markets. Ultimately, the effects of transparency
requirements on dealers' incentives to restructure depend on
differences across jurisdictions, as well as whether non-dealer
participants prefer transparency. These preferences may, in turn,
depend on motives for trading among non-dealers. Hedgers and
participants that need liquidity may prefer transparent venues while
participants who believe they have private information about asset
values may prefer opaque markets that allow them to trade more
profitably on their information.
    The potential restructurings and exits described above may impact
competition in the U.S. market in different ways. On one hand, the
ability to restructure one's business rather than exit the U.S. market
entirely to avoid application of Title VII to a person's non-U.S.
operations may reduce the number of entities that exit the market, thus
mitigating the negative effects on competition described above. On the
other hand, U.S. non-dealers may find that the only foreign security-
based swap dealers that are willing to deal with them are those whose
security-based swap business is sufficiently large to afford the costs
of restructuring as well as registration and the ensuing compliance
costs associated with applicable Title VII requirements. To the extent
that smaller dealers continue to have an incentive to exit the market,
the overall level of competition in the market may decline.
    Moreover, regardless of the response of dealers to our approach, we
cannot preclude the possibility that large non-dealer financial
entities and other non-dealer market participants in the United States,
such as investment funds, who have the resources to restructure their
business also may pursue restructuring and move part of their business
offshore in order to transact with dealers outside the reach of Title
VII, either because liquidity has moved offshore or because these
participants want to avoid Title VII requirements (such as transparency
requirements) that may reveal information about trading strategies.
This may reduce liquidity within the U.S. market and provide additional
incentives for U.S. persons and non-U.S. persons to shift a higher
proportion of their security-based swap business offshore, further
reducing the level of competition within the United States. In this
scenario, the competitive frictions caused by the application, in the
cross-border context, of a de minimis threshold for dealing activity
may affect the ability of small market participants of security-based
swaps to access the security-based swap market more than large ones, as
smaller participants are less likely to have the resources that would
enable or justify a restructuring of their business.
    In addition to the global nature of the security-based swap market
and the implications for the reach of Title VII dealer and major
participant registration requirements, we also noted above the current
opacity of the over-the-counter derivatives market and the
informational advantage that dealers currently have over non-dealers.
By having greater private order flow information, dealers are in a
position to make more-informed assessments of market values and can use
that information to extract rents from less-informed counterparties.
While this issue will be the focus of future Commission rulemaking
covering pre- and post-trade transparency, we note that the final rule
to exclude cleared, anonymous transactions from the de minimis
threshold for non-U.S. persons has implications for competition in the
security-based swap market. Because cleared, anonymous transactions
will not trigger registration requirements, the exclusion strengthens
incentives for trading in transparent venues, reducing market power and
the competitive advantage currently enjoyed by dealers over non-dealer
market participants. Furthermore, while Title VII rules governing
clearing, trade execution, and trade reporting have not been finalized,
providing stronger incentives to trade on transparent venues and
through CCPs increases the likelihood that the benefits of Title VII,
including increased transparency and reduced potential for risk
spillovers, will be realized.\764\
---------------------------------------------------------------------------

    \764\ The exclusion for cleared, anonymous transactions does not
require participants to use a registered clearing agency. Therefore,
this benefit may be limited if final Title VII rules for registered
clearing agencies create incentives for market participants to trade
through CCPs that are not registered and regulated under Title VII.
---------------------------------------------------------------------------

    The overall effects of the final approach described in this release
on competition among dealing entities in the U.S. security-based swap
market will depend on the way market participants ultimately respond to
different elements of Title VII. Application of the dealer and major
participant registration requirements may create incentives for dealers
and market participants to favor non-U.S. counterparties; incentives to
restructure due to inconsistent regulatory requirements may increase
concentration among security-based swap dealers providing services to
U.S. non-dealers. However, registration and compliance with Title VII
may signal high quality and mitigate the incentive to restructure and
exit U.S. markets for intermediaries with the ability to meet the
standards set by Title VII. Furthermore, if hedgers and other market
participants who do not benefit from opacity demand transparency and
counterparty protections that come from trading with a registered
dealer, dealers may prefer to register if serving this market is
profitable. Finally, while fewer dealing entities could lead to
decreased competition and wider

spreads in the security-based swap market, exclusion of cleared,
anonymous trades from the de minimis threshold strengthen incentives to
trade in transparent venues, reducing the ability of dealing entities
to post wider spreads and reducing the competitive advantage over
access to information enjoyed by dealers.

B. Efficiency

    As noted above, in adopting the rules and guidance discussed in
this release, we are required to consider whether these actions would
promote efficiency. In significant part, the effect of these rules on
efficiency is linked to the effect of these rules on competition.
Definitional rules that promote, or do not unduly restrict, competition
can be accompanied by regulatory benefits that minimize the risk of
liquidity crises, aggregate capital shortfalls, and other
manifestations of contagion. Furthermore, by reducing the costs that
individual market participants impose on others through their trades--
that is, by imposing registration requirements and substantive
regulations on dealers and major participants who, by virtue of the
volume of their transactions, their number of counterparties, and their
aggregate positions and exposures, are most likely to contribute to
risk spillovers--the rules promote efficiency within the market.
Generally, rules and interpretations that promote competitive capital
markets can be expected to promote the efficient allocation of risk,
capital, and other resources by facilitating price discovery and
reducing costs associated with dislocations in the market for security-
based swaps.\765\
---------------------------------------------------------------------------

    \765\ Definitional rules do not promote efficiency by
themselves; rather, the effect is through the number of entities
required to register as dealers and major participants, and the
corresponding effect on the programmatic costs and benefits
associated with registration requirements.
---------------------------------------------------------------------------

    As discussed several times throughout this release, the global
nature of the security-based swap market suggests that the regulatory
framework adopted under Title VII may not reach all participants or all
transactions. Additionally, differing regulatory timelines and
differences in regulatory scope may moderate the benefits flowing from
Title VII. In particular, if other regulatory regimes offer more
opacity in transactions, those who are most harmed by transparency
(including dealers who currently benefit from privately observing order
flow) have incentives to restructure their business to operate abroad
or otherwise take advantage of regulatory gaps. Restructuring itself,
while potentially optimal for an individual participant, represents a
form of inefficiency for the overall market in that firms expend
resources simply to circumvent regulation and not for any productive
purpose.
    More importantly, altering business models to take advantage of
looser regulatory regimes undermines other efficiency benefits to Title
VII. For example, U.S. dealers may have an incentive to restructure
their businesses by setting up separately capitalized entities in non-
U.S. jurisdictions, through which they would continue their dealing
operations in order to take advantage of the rules applicable to non-
U.S. persons. As discussed above, if some market participants choose to
operate wholly outside of the Title VII regulatory framework, risk and
liquidity may concentrate in less regulated, opaque corners of the
market, undermining the benefits of Title VII. Moreover, insofar as the
types of restructuring contemplated above purely constitute attempts at
arbitraging regulations, including regulations applied to registered
dealers, such as capital and reporting regulations, they represent a
use of resources that could potentially be put to more productive uses.
Ultimately, the incentive to restructure, and the corresponding loss of
benefits, depends on the extent to which other jurisdictions implement
comprehensive OTC derivatives regulations. If foreign jurisdictions
subject security-based swap transactions to regulatory oversight
consistent with Title VII, the ability to arbitrage regulations will be
limited.\766\
---------------------------------------------------------------------------

    \766\ See Section 0, supra (discussing global regulatory
efforts).
---------------------------------------------------------------------------

    Nevertheless, two features of our rules adopted today may mitigate
the incentive for market participants to undermine the benefits of
Title VII through inefficient restructuring or evasion. First, the
requirement that conduit affiliates count all dealing activity towards
the de minimis threshold closes one potential path for evasion. We have
tailored the application of these requirements in connection with
affiliates of registered security-based swap dealers and major
security-based swap participants, as we do not believe that
transactions involving these types of registered entities and their
foreign affiliates raise the types of evasion concerns that the conduit
affiliate concept is designed to address.\767\ Second, the exclusion of
cleared, anonymous transactions from the de minimis threshold for non-
U.S. persons strengthens incentives for trading in transparent venues,
reducing the incentive to trade in opaque corners of the market in
order to avoid the reach of Title VII. Strengthening incentives for
non-U.S. persons to trade in transparent venues reduces the likelihood
that liquidity will fragment to opaque corners of the market and
increases the likelihood that risks that non-U.S. persons present to
the U.S. financial system will be covered by the Title VII regulatory
framework. Furthermore, shifting trades to transparent venues produces
benefits associated with pre- and post-trade price transparency,
including more efficient valuations of financial assets.\768\
---------------------------------------------------------------------------

    \767\ See note 320, supra.
    \768\ As discussed above, this benefit may be limited if final
Title VII rules for registered clearing agencies create incentives
for market participants to trade through CCPs that are not
registered and regulated under Title VII.
---------------------------------------------------------------------------

    Finally, we received several comments from outside commenters
urging us to harmonize our final rules with interpretations set forth
in the CFTC's guidance.\769\ While our final rules track the CFTC's
guidance in many respects--for example, in the treatment of conduit
affiliates, the treatment of transactions with foreign branches, and
the exclusion for cleared, anonymous transactions from non-U.S.
persons' de minimis calculations--we are not adopting rules identical
to the policies and interpretations in the guidance. For example, our
treatment of investment funds with respect to the U.S. person
definition differs from the CFTC's, which, in addition to looking to
the location of incorporation and principal place of business,
considers majority-ownership. While we acknowledge the benefits of
harmonization, we believe our rules meet the goals of Title VII while
appropriately minimizing the costs to security-based swap market
participants. More specifically, our rules are designed to capture
transactions and entities that pose risk to U.S. persons and
potentially to the U.S. financial system, while excluding those
transactions and entities that do not warrant regulation under Title
VII. In the case of investment funds, we have decided not to look to
majority-ownership for determining U.S.-person status, notwithstanding
that the CFTC Cross-Border Guidance articulates such an approach. Our
belief is that, by adopting an approach that generally focuses on the
location of economic decisions made on behalf of a fund, we are more
accurately measuring whether a fund poses risks to U.S. persons and to
the U.S. financial system of the type that Title VII was intended to

address.\770\ Nevertheless, we acknowledge that different regulations
for swaps and security-based swaps may create inefficiencies for market
participants due to conflicting or overlapping requirements,
particularly for those participants who deal in both swaps and
security-based swaps.
---------------------------------------------------------------------------

    \769\ See note 193, supra.
    \770\ For instance, as discussed above, LTCM demonstrated that
an investment vehicle could have a negative impact on U.S. financial
institutions and on the stability of the U.S. financial system more
generally when the vehicle is directed, controlled, or coordinated
from within the United States. See note 271, supra.
---------------------------------------------------------------------------

C. Capital Formation

    We believe that many aspects of the final cross-border approach to
the dealer and major participant definitions are likely to promote
capital formation, by focusing dealer and major participant regulation
on activity and entities that are most likely to serve as conduits of
risk to U.S. persons and potentially to the U.S. financial system. We
also believe that applying the full range of Title VII requirements to
this group of entities will increase the likelihood that the benefits
of Title VII, including increased transparency, accountability, and
financial stability, will be realized. To the extent that these
requirements reduce asymmetric information about market valuations, we
expect that a security-based swap market with enhanced transparency and
enhanced regulatory oversight may facilitate entry by a wide range of
market participants seeking to engage in a broad range of hedging and
trading activities.
    Additionally, strengthening incentives for non-U.S. persons to
trade in transparent venues encourages market participants to express
their true valuations for security-based swaps; information revealed
through transparent trades allows market participants to derive more-
informed assessments with respect to asset valuations, leading to more
efficient capital allocation. This should be true for the underlying
assets as well. That is, information learned from security-based swap
trading provides signals not only about security-based swap valuation,
but also about the value of the reference assets underlying the
swap.\771\ Similarly, we expect transparency to benefit the real
economy as well. Transparent prices provide better signals about the
quality of a business investment, promoting capital formation in the
real economy by helping managers to make more-informed decisions and
making it easier for firms to obtain new financing for new business
opportunities.\772\
---------------------------------------------------------------------------

    \771\ See Sugato Chakravarty, Huseyin Gulen, and Stewart Mayhew,
``Informed Trading in Stock and Option Markets,'' Journal of
Finance, Vol. 59, No. 3 (2004) (estimating that the proportion of
information about underlying stocks revealed first in option markets
ranges from 10 to 20 percent).
    \772\ See Philip Bond, Alex Edmans, and Itay Goldstein, ``The
Real Effects of Financial Markets,'' Annual Review of Financial
Markets, Vol. 4 (Oct. 2012) (reviewing the theoretical literature on
the feedback between financial market prices and the real economy).
---------------------------------------------------------------------------

    However, the Commission recognizes that, to the extent that the
cross-border implementation of the dealer and major participant
definitions encourages inefficient restructuring or results in market
fragmentation, the final rules may impair capital formation and result
in a redistribution of capital across jurisdictional boundaries. We
note that, unlike in the proposed rules, we are requiring non-U.S.
persons with U.S. guarantees to include all transactions that benefit
from a U.S. guarantee in their de minimis calculations. Similarly, we
are requiring conduit affiliates to include all transactions in their
de minimis calculations, whether with a U.S. person or not. Inclusion
of these transactions will limit the risk these participants pose to
U.S. persons and to the U.S. financial system. More generally, the
definition of ``U.S. person'' mitigates the risk of contagion affecting
U.S. markets as a result of cross-border swap activity. To the extent
that future substantive regulation under Title VII is conditioned on
entities' registration status, this definition may also improve
transparency and provide increased customer protection for U.S. persons
who participate in the security-based swap market. Nevertheless,
expanding the scope of transactions that must be included in these
calculations may also increase the scope of potential market
fragmentation, to the extent that it raises the costs that market
participants will incur if they engage in security-based swap activity
through guaranteed non-U.S. persons or conduit affiliates.

IX. Paperwork Reduction Act

A. Introduction

    The Paperwork Reduction Act of 1995 (``PRA'') \773\ imposes certain
requirements on Federal agencies in connection with their conducting or
sponsoring any ``collection of information.'' \774\ An agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid control
number. In addition, 44 U.S.C. 3507(a)(1)(D) provides that before
adopting (or revising) a collection of information requirement, an
agency must, among other things, publish a notice in the Federal
Register stating that the agency has submitted the proposed collection
of information to the Office of Management and Budget (``OMB'') and
setting forth certain required information, including: (1) A title for
the collection of information; (2) a summary of the collection of
information; (3) a brief description of the need for the information
and the proposed use of the information; (4) a description of the
likely respondents and proposed frequency of response to the collection
of information; (5) an estimate of the paperwork burden that shall
result from the collection of information; and (6) notice that comments
may be submitted to the agency and director of OMB.\775\
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    \773\ 44 U.S.C. 3501 et seq.
    \774\ 44 U.S.C. 3502(3).
    \775\ 44 U.S.C. 3507(a)(1)(D) (internal formatting omitted); see
also 5 CFR 1320.5(a)(1)(iv).
---------------------------------------------------------------------------

    In the Cross-Border Proposing Release, we identified a number of
proposed rules that contained ``collection of information
requirements'' within the meaning of the PRA.\776\ The majority of
those proposed rules and forms are outside of the scope of the dealer
and major participant definitions at issue in this release.\777\ In two
areas, however, Exchange Act rule 3a71-3 which we are adopting today
contains collections of information requirements. First, the rule's
definition of ``transaction conducted through a foreign branch,'' which
we are adopting largely as proposed, contains a representation
provision that constitutes a collection of information. Moreover, the
rule's final definition of ``U.S. person'' incorporates, as an addition
to the proposal, a representation provision that constitutes a
collection of information.\778\ Commenters did not

address Paperwork Reduction Act issues in connection with the proposal.
---------------------------------------------------------------------------

    \776\ See Cross-Border Proposing Release, 77 FR 31103.
    \777\ In particular, the present release does not address the
following proposed rules and forms that implicated collections of
information under the Paperwork Reduction Act: Proposed Rule 3Ch-2;
reproposed Forms SBSE, SBSE-A and SBSE-BD; proposed Rule 18a-4, and
reproposed Rules 242.900 through 242.911 of Regulation SBSR. We
expect to address those Paperwork Reduction Act issues in connection
with our consideration of those proposed rules and forms.
    In addition, the representation provision of the proposed
definition of ``transaction conducted within the United States''
contained a collection of information. These final rules do not
encompass that collection of information requirement, however,
because we are not adopting the ``transaction conducted within the
United States'' element of the proposed rule in this release. See
section I.A, supra.
    \778\ We also note that Exchange Act rule 0-13, which we are
adopting today, determines the procedures for market participants
and foreign regulatory authorities to submit substituted compliance
requests. The rule, however, does not provide any substituted
compliance rights, and its applicability will be determined solely
by the substituted compliance provisions of the substantive
rulemakings. Accordingly, collection of information arising from
substituted compliance requests, including associated control
numbers, will be addressed in connection with any applicable
substantive rulemakings that provide for substituted compliance.
---------------------------------------------------------------------------

    The Commission previously submitted proposed rule 3a71-3, as well
as certain other rules proposed as part of the Cross-Border Proposing
Release, to OMB for review in accordance with 44 U.S.C. 3507 and 5 CFR
1320.11. The title of the collection related to proposed rule 3a71-3 is
``Reliance on Counterparty Representations Regarding Activity Within
the United States.'' OMB has not yet assigned Control Numbers in
connection with rule 3a71-3 or the other rules submitted in connection
with the proposal.

B. Reliance on Counterparty Representations Regarding Transactions
Conducted Through a Foreign Branch

1. Summary of Collection of Information
    When determining whether a security-based swap transaction
constitutes a ``transaction conducted through a foreign branch,'' a
person may rely on its counterparty's representation that the
transaction ``was arranged, negotiated, and executed on behalf of the
foreign branch solely by persons located outside the United States,
unless such person knows or has reason to know that the representation
is not accurate.'' \779\
---------------------------------------------------------------------------

    \779\ See Exchange Act rule 3a71-3(a)(3)(ii).
---------------------------------------------------------------------------

2. Proposed Use of Information
    Under the final rules, a non-U.S. person need not count, against
the applicable thresholds of the dealer exception and the major
security-based swap participant definition, dealing transactions with
foreign branches of U.S. banks that are registered as security-based
swap dealers. For these purposes, the foreign branch must be the
counterparty to the security-based swap transaction, and the
transaction must be arranged, negotiated, and executed on behalf of the
foreign branch solely by persons located outside the United
States.\780\
---------------------------------------------------------------------------

    \780\ See Exchange Act rule 3a71-3(a)(3)(i).
---------------------------------------------------------------------------

    As discussed in the Cross-Border Proposing Release, the Commission
acknowledges that verifying whether a security-based swap transaction
falls within the definition of ``transaction conducted through a
foreign branch'' could require significant due diligence. The
definition's representation provision would mitigate the operational
difficulties and costs that otherwise could arise in connection with
investigating the activities of a counterparty to ensure compliance
with the corresponding rules.\781\
---------------------------------------------------------------------------

    \781\ See Cross-Border Proposing Release, 78 FR 31107.
---------------------------------------------------------------------------

    These representations would be provided voluntarily by the
counterparties to certain security-based swap transactions to other
counterparties; therefore, the Commission would not typically receive
confidential information as a result of this collection of information.
However, to the extent that the Commission receives confidential
information described in this representation provision through our
examination and oversight program, an investigation, or some other
means, such information would be kept confidential, subject to the
provisions of applicable law.\782\
---------------------------------------------------------------------------

    \782\ See, e.g., 5 U.S.C. 552 (Exemption 4 of the Freedom of
Information Act provides an exemption for ``trade secrets and
commercial or financial information obtained from a person and
privileged or confidential.'' 5 U.S.C. 552(b)(4). Exemption 8 of the
Freedom of Information Act provides an exemption for matters that
are ``contained in or related to examination, operating, or
condition reports prepare by, or on behalf of, or for the use of an
agency responsible for the regulation or supervision of financial
institutions.'' 5 U.S.C. 552(b)(8)).
---------------------------------------------------------------------------

3. Respondents
    Based on our understanding of the OTC derivatives markets,
including the size of the market, the number of counterparties that are
active in the market, and how market participants currently structure
security-based swap transactions, the Commission estimates that up to
15 entities that are registered as security-based swap dealers may
include a representation that a security-based swap is a ``transaction
conducted through a foreign branch'' in their trading relationship
documentation (e.g., the schedule to a master agreement).\783\
---------------------------------------------------------------------------

    \783\ We have estimated that up to 50 entities may register with
the Commission as security-based swap dealers, based on an analysis
of 2012 data indicating that 27 entities had $3 billion or more in
notional transactions that would be counted against the thresholds
under the final rules, and further accounting for new entrants into
the market. See note 444, supra, and accompanying text. Because six
of those 27 entities are domiciled in the United States, we
conservatively estimate that it is possible that new entrants may
lead up to 15 registered dealers to be U.S. banks. Although not all
U.S. banks engaged in security-based swap dealing activity currently
operate foreign branches, we also conservatively estimate that all
such dealers that are U.S. banks would do so.
    In the Cross-Border Proposing Release, we preliminarily
estimated that 50 entities may include a representation that a
transaction constitutes a ``transaction conducted through a foreign
branch.'' See Cross-Border Proposing Release, 78 FR 31108. This
revised estimate reflects the fact that under the final rules such a
representation would be relevant only if provided by a person that
is registered with the Commission as a security-based swap dealer.
In practice, however, based on our understanding of changes in the
way major U.S. dealers engage with non-U.S. counterparties in the
single-name CDS market following the issuance of the CFTC Cross-
Border Guidance, we believe that few, if any, U.S. persons currently
may participate in the single-name CDS market through their foreign
branches. Also, as noted above, moreover, we recognize that other
regulatory provisions may limit the ability of U.S. banks to conduct
security-based swap activity. See note 366, supra.
---------------------------------------------------------------------------

4. Total Initial and Annual Reporting and Recordkeeping Burdens
    The estimates in this section reflect the Commission's experience
with burden estimates for similar requirements and discussions by our
staff with market participants. The Commission believes that, in most
cases, the representations associated with the definition of
``transaction conducted through a foreign branch'' would be made
through amendments to the parties' existing trading documentation
(e.g., the schedule to a master agreement).\784\ Because these
representations relate to new regulatory requirements, the Commission
anticipates that counterparties may elect to develop and incorporate
these representations in trading documentation soon after the effective
date of the Commission's security-based swap regulations, rather than
incorporating specific language on a transactional basis. The
Commission believes that parties would be able to adopt, where
appropriate, standardized language across all of their security-based
swap trading relationships. This language may be developed by
individual firms or through a combination of trade associations and
industry working groups.
---------------------------------------------------------------------------

    \784\ The Commission believes that because trading relationship
documentation is established between two counterparties, the
question of whether one of those counterparties, that is registered
with the Commission as a security-based swap dealer, is able to
represent that it is entering into a ``transaction conducted through
a foreign branch'' would not change on a transaction-by-transaction
basis and, therefore, such representations would generally be made
in the schedule to a master agreement, rather than in individual
confirmations.
---------------------------------------------------------------------------

    The Commission estimates the maximum total paperwork burden
associated with developing new representations would be, for each U.S.
bank registered as a security-based swap dealer that may make such
representations, no more than five hours, and up to $2,000 for the
services of outside professionals, for an estimate of approximately 75
hours and $30,000 across all security-based swap counterparties that
may make such representations. This estimate assumes

little or no reliance on standardized disclosure language.
    The Commission expects that the majority of the burden associated
with the new disclosure requirements will be experienced during the
first year as language is developed and trading documentation is
amended. After the new representations are developed and incorporated
into trading documentation, the Commission believes that the annual
paperwork burden associated with this requirement would be no more than
approximately 10 hours per counterparty for verifying representations
with existing counterparties and onboarding new counterparties, for a
maximum of approximately 150 hours across all applicable security-based
swap counterparties.\785\
---------------------------------------------------------------------------

    \785\ The Commission staff estimates that this burden would
consist of 10 hours of in-house counsel time for each security-based
swap market participant that may make such representations.
---------------------------------------------------------------------------

C. Reliance on Counterparty Representations Regarding Non-U.S. Person
Status

1. Summary of Collection of Information
    When determining whether its counterparty is a U.S. person for
purposes of the application of the dealer and major participant
analyses, a person may rely on its counterparty's representation that
the counterparty does not meet the applicable criteria to be a U.S.
person, unless the person knows or has reason to know that the
representation is not accurate.\786\
---------------------------------------------------------------------------

    \786\ See Exchange Act rule 3a71-3(a)(4)(iv).
---------------------------------------------------------------------------

2. Proposed Use of Information
    Under the final rules, a non-U.S. person's dealer and major
participant analysis require it to determine whether its security-based
swap counterparties are U.S. persons because certain security-based
swaps in which the counterparty is not a U.S. person will not have to
be counted against the applicable thresholds.
    The Commission recognizes that the ``U.S. person'' definition
encompasses a number of distinct components, and that in some
circumstances verifying whether a security-based swap counterparty is a
``U.S. person'' could require significant due diligence. As a result,
the final rules have added a representation provision to that
definition, to help mitigate the operational difficulties and costs
that could arise in connection with investigating the status of a
counterparty.
    As with the representations associated with the ``transaction
conducted through a foreign branch'' definition, these representations
would be provided voluntarily by the counterparties to certain
security-based swap transactions to other counterparties. The
Commission would not typically receive confidential information as a
result of this collection of information. However, to the extent that
the Commission receives confidential information described in this
representation provision through our examination and oversight program,
an investigation, or some other means, such information would be kept
confidential, subject to the provisions of applicable law.\787\
---------------------------------------------------------------------------

    \787\ See note 782, supra.
---------------------------------------------------------------------------

3. Respondents
    Based on our understanding of the OTC derivatives markets,
including the domiciles of counterparties that are active in the
market, the Commission estimates that up to 2400 entities may provide
representations that they do not meet the criteria necessary to be U.S.
persons.\788\
---------------------------------------------------------------------------

    \788\ Data regarding activity from 2012 indicates that a total
of 4452 accounts had positions in single-name CDS, with those
activities conducted by a total 1030 transacting agents such as
investment advisers. Of those 4452 accounts, 1199 are domiciled
outside of the United States. Accounting for potential growth in the
number of market participants domiciled outside of the United
States--particularly in light of information suggesting there has
been some shifting of derivatives activities to non-U.S. entities--
leads to our estimate that such representations may be made on
behalf of 2400 accounts. To the extent that one transacting agent
such as an investment adviser conducts derivatives activities on
behalf of multiple accounts, it is possible that a single
representation by a transacting agent would address the U.S.-person
status of multiple accounts.
---------------------------------------------------------------------------

4. Total Initial and Annual Reporting and Recordkeeping Burdens
    The estimates in this section reflect the Commission's experience
with burden estimates for similar requirements and discussions by our
staff with market participants. Consistent with the discussion above
related to the representation provision of the ``transaction conducted
through a foreign branch'' definition, the Commission believes that in
most cases the representations associated with the ``U.S. person''
definition would be made through amendments to the parties' existing
trading documentation (e.g., the schedule to a master agreement).\789\
Here too, because these representations relate to new regulatory
requirements, the Commission anticipates that counterparties may elect
to develop and incorporate these representations in trading
documentation soon after the effective date of the Commission's
security-based swap regulations, rather than incorporating specific
language on a transactional basis. The Commission believes that parties
would be able to adopt, where appropriate, standardized language across
all of their security-based swap trading relationships. This language
may be developed by individual firms or through a combination of trade
associations and industry working groups.
---------------------------------------------------------------------------

    \789\ See section 0, supra.
---------------------------------------------------------------------------

    As above, the Commission estimates the maximum total paperwork
burden associated with developing new representations would be, for
each counterparty that may make such representations, no more than five
hours and up to $2,000 for the services of outside professionals, for a
maximum of approximately 12,000 hours and $4.8 million across all
security-based swap counterparties that may make such representations.
This estimate assumes little or no reliance on standardized disclosure
language.
    The Commission expects that the majority of the burden associated
with the new disclosure requirements will be experienced during the
first year as language is developed and trading documentation is
amended. After the new representations are developed and incorporated
into trading documentation, the Commission believes that the annual
paperwork burden associated with this requirement would be no more than
approximately 10 hours per counterparty for verifying representations
with existing counterparties and onboarding new counterparties, for a
maximum of approximately 24,000 hours across all applicable security-
based swap counterparties.\790\
---------------------------------------------------------------------------

    \790\ The Commission staff estimates that this burden would
consist of 10 hours of in-house counsel time for each security-based
swap market participant that may make such representations.
---------------------------------------------------------------------------

X. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \791\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Section 603(a) of the Administrative Procedure
Act,\792\ as amended by the RFA, generally requires the Commission to
undertake a regulatory flexibility analysis of all proposed rules, or
proposed rule amendments, to determine the impact of such rulemaking on
``small entities.'' \793\

Section 605(b) of the RFA \794\ provides that this requirement shall
not apply to any proposed rule or proposed rule amendment which, if
adopted, would not have a significant economic impact on a substantial
number of small entities.
---------------------------------------------------------------------------

    \791\ 5 U.S.C. 601 et seq.
    \792\ 5 U.S.C. 603(a).
    \793\ Although section 601(b) of the RFA defines the term
``small entity,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
``small entity'' for the purposes of Commission rulemaking in
accordance with the RFA. Those definitions, as relevant to this
proposed rulemaking, are set forth in Rule 0-10 under the Exchange
Act, 17 CFR 240.0-10. See Exchange Act Release No. 18451 (Jan, 28,
1982), 47 FR 5215 (Feb, 4, 1982) (File No. AS-305).
    \794\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    For purposes of Commission rulemaking in connection with the RFA, a
small entity includes: (1) When used with reference to an ``issuer'' or
a ``person,'' other than an investment company, an ``issuer'' or
``person'' that, on the last day of its most recent fiscal year, had
total assets of $5 million or less; \795\ or (2) a broker-dealer with
total capital (net worth plus subordinated liabilities) of less than
$500,000 on the date in the prior fiscal year as of which its audited
financial statements were prepared pursuant to Rule 17a-5(d) under the
Exchange Act,\796\ or, if not required to file such statements, a
broker-dealer with total capital (net worth plus subordinated
liabilities) of less than $500,000 on the last day of the preceding
fiscal year (or in the time that it has been in business, if shorter);
and is not affiliated with any person (other than a natural person)
that is not a small business or small organization.\797\ Under the
standards adopted by the Small Business Administration, small entities
in the finance and insurance industry include the following: (i) For
entities engaged in credit intermediation and related activities,
entities with $175 million or less in assets; \798\ (ii) for entities
engaged in non-depository credit intermediation and certain other
activities, entities with $7 million or less in annual receipts; \799\
(iii) for entities engaged in financial investments and related
activities, entities with $7 million or less in annual receipts; \800\
(iv) for insurance carriers and entities engaged in related activities,
entities with $7 million or less in annual receipts; \801\ and (v) for
funds, trusts, and other financial vehicles, entities with $7 million
or less in annual receipts.\802\
---------------------------------------------------------------------------

    \795\ See 17 CFR 240.0-10(a).
    \796\ 17 CFR 240.17a-5(d).
    \797\ See 17 CFR 240.0-10(c).
    \798\ See 13 CFR 121.201 (Subsector 522).
    \799\ See id. at Subsector 522.
    \800\ See id. at Subsector 523.
    \801\ See id. at Subsector 524.
    \802\ See id. at Subsector 525.
---------------------------------------------------------------------------

    The Cross-Border Proposal stated that, based on feedback from
industry participants and our own information about the security-based
swap markets, we preliminarily believed that non-U.S. entities that
would be required to register and be regulated as security-based swap
dealers and major security-based swap participants exceed the
thresholds defining ``small entities'' set out above. Thus, we noted
that we preliminarily believed it is unlikely that the proposed rules
regarding registration of security-based swap dealers and major
security-based swap market participants would have a significant
economic impact any small entity. As a result, we certified that the
proposed rules would not have a significant economic impact on a
substantial number of small entities for purposes of the RFA and
requested written comments regarding this certification.\803\
---------------------------------------------------------------------------

    \803\ See Cross-Border Proposing Release, 78 FR 31205.
---------------------------------------------------------------------------

    While we received comment letters that addressed cost issues in
connection with the proposed rules, we did not receive any comments
that specifically addressed whether the rules applying the definitions
of ``security-based swap dealer'' or ``major security-based swap
participant'' to the cross-border context would have a significant
economic impact on small entities.
    We continue to believe that the types of entities that would engage
in more than a de minimis amount of dealing activity involving
security-based swaps--which generally would be major banks--would not
be ``small entities'' for purposes of the RFA. Similarly, we believe
that only the largest financial companies would be likely to develop
security-based swap exposures of the size that would be required to
cross the major security-based swap participant definition thresholds.
Accordingly, the SEC certifies that the final rules applying the
definitions of ``security-based swap dealer'' or ``major security-based
swap participant'' to the cross-border context will not have a
significant economic impact on a substantial number of small entities
for purposes of the RFA.

XI. Effective Date and Implementation

    These final rules will be effective 60 days following publication
in the Federal Register.
    If any provision of these rules, or the application thereof to any
person or circumstance, is held to be invalid, such invalidity shall
not affect other provisions or application of such provisions to other
persons or circumstances that can be given effect without the invalid
provision or application.
    Because Exchange Act rules 3a67-10 and 3a71-3 through 3a71-5
address the application of the dealer and major participant definitions
to cross-border security-based swap activities, those rules will not
immediately impose requirements upon market participants even after the
rules become effective. In the Intermediary Definitions Adopting
Release, we noted that because the Commission has not yet promulgated
final rules implementing the substantive requirements imposed on
dealers and major participants by Title VII, persons determined to be
dealers or major participants under the regulations adopted in that
release need not register as such until the dates provided in the
Commission's final rules regarding security-based swap dealer and major
security-based swap participant registration requirements, and will not
be subject to the requirements applicable to those dealers and major
participants until the dates provided in the applicable final
rules.\804\ Those principles apply here too.
---------------------------------------------------------------------------

    \804\ See Intermediary Definitions Adopting Release, 77 FR
30700. We also noted that an extended compliance period was
available with regard to the applicable thresholds used in the de
minimis exception to the dealer definition. See id.; see also
section 0, supra.
---------------------------------------------------------------------------

    Although Exchange Act rule 0-13--regarding the procedures for the
submission of substituted compliance requests--also will become
effective at that time, we would not expect to receive any such
requests until relevant substantive rulemakings have been completed.
Those rulemakings are necessary to determine when substituted
compliance may be available, and to promulgate the requirements against
which we may assess comparability for purposes of making substituted
compliance determinations.

Statutory Authority and Text of Final Rules

    Pursuant to the Exchange Act, 15 U.S.C. 78a et seq., and
particularly, sections 3(b), 23(a)(1), and 30(c) thereof, sections
761(b), and 929P(b) of the Dodd-Frank Act, the SEC is adopting rules 0-
13, 3a67-10, 3a71-3, 3a71-4, and 3a71-5 under the Exchange Act, and the
SEC is adding Part 250 to chapter II of Title 17 of the Code of Federal
Regulations.

List of Subjects

17 CFR Part 240

    Brokers, Confidential business information, Fraud, Reporting and
recordkeeping requirements, Securities.

 17 CFR Parts 241 and 250

    Securities.

Text of Final Rules

    For the reasons stated in the preamble, the SEC is amending Title
17, Chapter II, of the Code of Federal Regulations as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934

0
1. The general authority citation for part 240 continues to read, and a
sectional authority is added in numerical order to read as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20,
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq., and
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); and 18 U.S.C. 1350,
unless otherwise noted.
* * * * *
    Sections 240.3a67-10, 240.3a71-3, 240.3a71-4, and 240.3a71-5 are
also issued under Pub. L. 111-203, section 761(b), 124 Stat. 1754
(2010), and 15 U.S.C. 78dd(c).
* * * * *

0
2. Add Sec.  240.0-13 to read as follows:

Sec.  240.0-13  Commission procedures for filing applications to
request a substituted compliance order under the Exchange Act.

    (a) The application shall be in writing in the form of a letter,
must include any supporting documents necessary to make the application
complete, and otherwise must comply with Sec.  240.0-3. All
applications must be submitted to the Office of the Secretary of the
Commission, by a party that potentially would comply with requirements
under the Exchange Act pursuant to a substituted compliance order, or
by the relevant foreign financial regulatory authority or authorities.
If an application is incomplete, the Commission may request that the
application be withdrawn unless the applicant can justify, based on all
the facts and circumstances, why supporting materials have not been
submitted and undertakes to submit the omitted materials promptly.
    (b) An applicant may submit a request electronically. The
electronic mailbox to use for these applications is described on the
Commission's Web site at www.sec.gov in the ``Exchange Act Substituted
Compliance Applications'' section. In the event electronic mailboxes
are revised in the future, applicants can find the appropriate mailbox
by accessing the ``Electronic Mailboxes at the Commission'' section.
    (c) All filings and submissions filed pursuant to this rule must be
in the English language. If a filing or submission filed pursuant to
this rule requires the inclusion of a document that is in a foreign
language, a party must submit instead a fair and accurate English
translation of the entire foreign language document. A party may submit
a copy of the unabridged foreign language document when including an
English translation of a foreign language document in a filing or
submission filed pursuant to this rule. A party must provide a copy of
any foreign language document upon the request of Commission staff.
    (d) An applicant also may submit a request in paper format. Five
copies of every paper application and every amendment to such an
application must be submitted to the Office of the Secretary at 100 F
Street NE., Washington, DC 20549-1090. Applications must be on white
paper no larger than 8\1/2\ by 11 inches in size. The left margin of
applications must be at least 1\1/2\ inches wide, and if the
application is bound, it must be bound on the left side. All
typewritten or printed material must be set forth in black ink so as to
permit photocopying.
    (e) Every application (electronic or paper) must contain the name,
address, telephone number, and email address of each applicant and the
name, address, telephone number, and email address of a person to whom
any questions regarding the application should be directed. The
Commission will not consider hypothetical or anonymous requests for a
substituted compliance order. Each applicant shall provide the
Commission with any supporting documentation it believes necessary for
the Commission to make such determination, including information
regarding applicable requirements established by the foreign financial
regulatory authority or authorities, as well as the methods used by the
foreign financial regulatory authority or authorities to monitor and
enforce compliance with such rules. Applicants should also cite to and
discuss applicable precedent.
    (f) Amendments to the application should be prepared and submitted
as set forth in these procedures and should be marked to show what
changes have been made.
    (g) After the filing is complete, the staff will review the
application. Once all questions and issues have been answered to the
satisfaction of the staff, the staff will make an appropriate
recommendation to the Commission. After consideration of the
recommendation and a vote by the Commission, the Commission's Office of
the Secretary will issue an appropriate response and will notify the
applicant.
    (h) The Commission shall publish in the Federal Register a notice
that a complete application has been submitted. The notice will provide
that any person may, within the period specified therein, submit to the
Commission any information that relates to the Commission action
requested in the application. The notice also will indicate the
earliest date on which the Commission would take final action on the
application, but in no event would such action be taken earlier than 25
days following publication of the notice in the Federal Register.
    (i) The Commission may, in its sole discretion, schedule a hearing
on the matter addressed by the application.

0
3. Add Sec.  240.3a67-10 to read as follows:

Sec.  240.3a67-10  Foreign major security-based swap participants.

    (a) Definitions. As used in this section, the following terms shall
have the meanings indicated:
    (1) Conduit affiliate has the meaning set forth in Sec.  240.3a71-
3(a)(1).
    (2) Foreign branch has the meaning set forth in Sec.  240.3a71-
3(a)(2).
    (3) Transaction conducted through a foreign branch has the meaning
set forth in Sec.  240.3a71-3(a)(3).
    (4) U.S. person has the meaning set forth in Sec.  240.3a71-
3(a)(4).
    (b) Application of major security-based swap participant tests in
the cross-border context. For purposes of calculating a person's status
as a major security-based swap participant as defined in section
3(a)(67) of the Act (15 U.S.C. 78c(a)(67)), and the rules and
regulations thereunder, a person shall include the following security-
based swap positions:
    (1) If such person is a U.S. person, all security-based swap
positions that are entered into by the person, including positions
entered into through a foreign branch;
    (2) If such person is a conduit affiliate, all security-based swap
positions that are entered into by the person; and
    (3) If such person is a non-U.S. person other than a conduit
affiliate, all of the following types of security-based swap

positions that are entered into by the person:
    (i) Security-based swap positions that are entered into with a U.S.
person; provided, however, that this paragraph (b)(3)(i) shall not
apply to:
    (A) Positions with a U.S. person counterparty that arise from
transactions conducted through a foreign branch of the counterparty,
when the counterparty is a registered security-based swap dealer; and
    (B) Positions with a U.S. person counterparty that arise from
transactions conducted through a foreign branch of the counterparty,
when the transaction is entered into prior to 60 days following the
earliest date on which the registration of security-based swap dealers
is first required pursuant to the applicable final rules and
regulations; and
    (ii) Security-based swap positions for which the non-U.S. person's
counterparty to the security-based swap has rights of recourse against
a U.S. person; for these purposes a counterparty has rights of recourse
against the U.S. person if the counterparty has a conditional or
unconditional legally enforceable right, in whole or in part, to
receive payments from, or otherwise collect from, the U.S. person in
connection with the security-based swap.
    (c) Attributed positions--(1) In general. For purposes of
calculating a person's status as a major security-based swap
participant as defined in section 3(a)(67) of the Act (15 U.S.C.
78c(a)(67)), and the rules and regulations thereunder, a person also
shall include the following security-based swap positions:
    (i) If such person is a U.S. person, any security-based swap
position of a non-U.S. person for which the non-U.S. person's
counterparty to the security-based swap has rights of recourse against
that U.S. person.

    Note to paragraph (c)(1)(i). This paragraph describes
attribution requirements for a U.S. person solely with respect to
the guarantee of the obligations of a non-U.S. person under a
security-based swap. The Commission and the Commodity Futures
Trading Commission previously provided an interpretation about
attribution to a U.S. parent, other affiliate, or guarantor to the
extent that the counterparties to those positions have recourse
against that parent, other affiliate, or guarantor in connection
with the position. See Intermediary Definitions Adopting Release,
http://www.gpo.gov/fdsys/pkg/FR-2012-08-13/pdf/2012-18003.pdf. The
Commission explained that it intended to issue separate releases
addressing the application of the major participant definition, and
Title VII generally, to non-U.S. persons. See id. at note 1041.

    (ii) If such person is a non-U.S. person:
    (A) Any security-based swap position of a U.S. person for which
that person's counterparty has rights of recourse against the non-U.S.
person; and
    (B) Any security-based swap position of another non-U.S. person
entered into with a U.S. person counterparty who has rights of recourse
against the first non-U.S. person, provided, however, that this
paragraph (c)(1)(ii)(B) shall not apply to positions described in Sec.
240.3a67-10(b)(3)(i)(A) and (B).
    (2) Exceptions. Notwithstanding paragraph (c)(1) of this section, a
person shall not include such security-based swap positions if the
person whose performance is guaranteed in connection with the security-
based swap is:
    (i) Subject to capital regulation by the Commission or the
Commodity Futures Trading Commission (including, but not limited to
regulation as a swap dealer, major swap participant, security-based
swap dealer, major security-based swap participant, futures commission
merchant, broker, or dealer);
    (ii) Regulated as a bank in the United States;
    (iii) Subject to capital standards, adopted by the person's home
country supervisor, that are consistent in all respects with the
Capital Accord of the Basel Committee on Banking Supervision; or
    (iv) Deemed not to be a major security-based swap participant
pursuant to Sec.  240.3a67-8(a).

0
4. Add Sec. Sec.  240.3a71-3, 240.3a71-4, and 240.3a71-5 to read as
follows:
* * * * *
Sec.
240.3a71-3 Cross-border security-based swap dealing activity.
240.3a71-4 Exception from aggregation for affiliated groups with
registered security-based swap dealers.
240.3a71-5 Substituted compliance for foreign security-based swap
dealers.
* * * * *

Sec.  240.3a71-3  Cross-border security-based swap dealing activity.

    (a) Definitions. As used in this section, the following terms shall
have the meanings indicated:
    (1) Conduit affiliate--(i) Definition. Conduit affiliate means a
person, other than a U.S. person, that:
    (A) Is directly or indirectly majority-owned by one or more U.S.
persons; and
    (B) In the regular course of business enters into security-based
swaps with one or more other non-U.S. persons, or with foreign branches
of U.S. banks that are registered as security-based swap dealers, for
the purpose of hedging or mitigating risks faced by, or otherwise
taking positions on behalf of, one or more U.S. persons (other than
U.S. persons that are registered as security-based swap dealers or
major security-based swap participants) who are controlling, controlled
by, or under common control with the person, and enters into offsetting
security-based swaps or other arrangements with such U.S. persons to
transfer risks and benefits of those security-based swaps.
    (ii) Majority-ownership standard. The majority-ownership standard
in paragraph (a)(1)(i)(A) of this section is satisfied if one or more
persons described in Sec.  240.3a71-3(a)(4)(i)(B) directly or
indirectly own a majority interest in the non-U.S. person, where
``majority interest'' is the right to vote or direct the vote of a
majority of a class of voting securities of an entity, the power to
sell or direct the sale of a majority of a class of voting securities
of an entity, or the right to receive upon dissolution, or the
contribution of, a majority of the capital of a partnership.
    (2) Foreign branch means any branch of a U.S. bank if:
    (i) The branch is located outside the United States;
    (ii) The branch operates for valid business reasons; and
    (iii) The branch is engaged in the business of banking and is
subject to substantive banking regulation in the jurisdiction where
located.
    (3) Transaction conducted through a foreign branch--(i) Definition.
Transaction conducted through a foreign branch means a security-based
swap transaction that is arranged, negotiated, and executed by a U.S.
person through a foreign branch of such U.S. person if:
    (A) The foreign branch is the counterparty to such security-based
swap transaction; and
    (B) The security-based swap transaction is arranged, negotiated,
and executed on behalf of the foreign branch solely by persons located
outside the United States.
    (ii) Representations. A person shall not be required to consider
its counterparty's activity in connection with paragraph (a)(3)(i)(B)
of this section in determining whether a security-based swap
transaction is a transaction conducted through a foreign branch if such
person receives a representation from its counterparty that the
security-based swap transaction is arranged, negotiated, and executed
on behalf of the foreign branch solely by persons located outside the
United States, unless such person knows or has reason to know that the
representation is not accurate; for the purposes of this

final rule a person would have reason to know the representation is not
accurate if a reasonable person should know, under all of the facts of
which the person is aware, that it is not accurate.
    (4) U.S. person. (i) Except as provided in paragraph (a)(4)(iii) of
this section, U.S. person means any person that is:
    (A) A natural person resident in the United States;
    (B) A partnership, corporation, trust, investment vehicle, or other
legal person organized, incorporated, or established under the laws of
the United States or having its principal place of business in the
United States;
    (C) An account (whether discretionary or non-discretionary) of a
U.S. person; or
    (D) An estate of a decedent who was a resident of the United States
at the time of death.
    (ii) For purposes of this section, principal place of business
means the location from which the officers, partners, or managers of
the legal person primarily direct, control, and coordinate the
activities of the legal person. With respect to an externally managed
investment vehicle, this location is the office from which the manager
of the vehicle primarily directs, controls, and coordinates the
investment activities of the vehicle.
    (iii) The term U.S. person does not include the International
Monetary Fund, the International Bank for Reconstruction and
Development, the Inter-American Development Bank, the Asian Development
Bank, the African Development Bank, the United Nations, and their
agencies and pension plans, and any other similar international
organizations, their agencies and pension plans.
    (iv) A person shall not be required to consider its counterparty to
a security-based swap to be a U.S. person if such person receives a
representation from the counterparty that the counterparty does not
satisfy the criteria set forth in paragraph (a)(4)(i) of this section,
unless such person knows or has reason to know that the representation
is not accurate; for the purposes of this final rule a person would
have reason to know the representation is not accurate if a reasonable
person should know, under all of the facts of which the person is
aware, that it is not accurate.
    (5) United States means the United States of America, its
territories and possessions, any State of the United States, and the
District of Columbia.
    (b) Application of de minimis exception to cross-border dealing
activity. For purposes of calculating the amount of security-based swap
positions connected with dealing activity under Sec.  240.3a71-2(a)(1),
except as provided in Sec.  240.3a71-5, a person shall include the
following security-based swap transactions:
    (1)(i) If such person is a U.S. person, all security-based swap
transactions connected with the dealing activity in which such person
engages, including transactions conducted through a foreign branch;
    (ii) If such person is a conduit affiliate, all security-based swap
transactions connected with the dealing activity in which such person
engages; and
    (iii) If such person is a non-U.S. person other than a conduit
affiliate, all of the following types of transactions:
    (A) Security-based swap transactions connected with the dealing
activity in which such person engages that are entered into with a U.S.
person; provided, however, that this paragraph (b)(1)(iii)(A) shall not
apply to:
    (1) Transactions with a U.S. person counterparty that constitute
transactions conducted through a foreign branch of the counterparty,
when the counterparty is a registered security-based swap dealer; and
    (2) Transactions with a U.S. person counterparty that constitute
transactions conducted through a foreign branch of the counterparty,
when the transaction is entered into prior to 60 days following the
earliest date on which the registration of security-based swap dealers
is first required pursuant to the applicable final rules and
regulations; and
    (B) Security-based swap transactions connected with the dealing
activity in which such person engages for which the counterparty to the
security-based swap has rights of recourse against a U.S. person that
is controlling, controlled by, or under common control with the non-
U.S. person; for these purposes a counterparty has rights of recourse
against the U.S. person if the counterparty has a conditional or
unconditional legally enforceable right, in whole or in part, to
receive payments from, or otherwise collect from, the U.S. person in
connection with the security-based swap; and
    (2) If such person engages in transactions described in paragraph
(b)(1) of this section, except as provided in Sec.  240.3a71-4, all of
the following types of security-based swap transactions:
    (i) Security-based swap transactions connected with the dealing
activity in which any U.S. person controlling, controlled by, or under
common control with such person engages, including transactions
conducted through a foreign branch;
    (ii) Security-based swap transactions connected with the dealing
activity in which any conduit affiliate controlling, controlled by, or
under common control with such person engages; and
    (iii) Security-based swap transactions connected with the dealing
activity of any non-U.S. person, other than a conduit affiliate, that
is controlling, controlled by, or under common control with such
person, that are described in paragraph (b)(1)(iii) of this section.

Sec.  240.3a71-4  Exception from aggregation for affiliated groups with
registered security-based swap dealers.

    Notwithstanding Sec. Sec.  240.3a71-2(a)(1) and 240.3a71-3(b)(2), a
person shall not include the security-based swap transactions of
another person (an ``affiliate'') controlling, controlled by, or under
common control with such person where such affiliate either is:
    (a) Registered with the Commission as a security-based swap dealer;
or
    (b) Deemed not to be a security-based swap dealer pursuant to Sec.
240.3a71-2(b).

Sec.  240.3a71-5  Exception for cleared transactions executed on a swap
execution facility.

    (a) For purposes of Sec.  240.3a71-3(b)(1), a non-U.S. person,
other than a conduit affiliate, shall not include its security-based
swap transactions that are entered into anonymously on an execution
facility or national securities exchange and are cleared through a
clearing agency; and
    (b) For purposes of Sec.  240.3a71-3(b)(2), a person shall not
include security-based swap transactions of an affiliated non-U.S.
person, other than a conduit affiliate, when such transactions are
entered into anonymously on an execution facility or national
securities exchange and are cleared through a clearing agency.

PART 241--INTERPRETIVE RELEASES RELATING TO THE SECURITIES EXCHANGE
ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER

0
5. Part 241 is amended by adding Release No. 34-72472 to the list of
interpretive releases as follows:

----------------------------------------------------------------------------------------------------------------
            Subject               Release No.           Date                Federal Register Vol. and Page
----------------------------------------------------------------------------------------------------------------
Application of ``Security-            34-72472  June 25, 2014......  79 FR [Insert FR Page Number].
 Based Swap Dealer'' and
 ``Major Security-Based Swap
 Participant'' Definitions to
 Cross-Border Security-Based
 Swap Activities.
----------------------------------------------------------------------------------------------------------------

0
6. Part 250, consisting of Sec.  250.1, is added to read as follows:

PART 250--CROSS-BORDER ANTIFRAUD LAW-ENFORCEMENT AUTHORITY

    Authority: 15 U.S.C. 77s, 77v(c), 78w, 78aa(b), 80b-11, and 80b-
14(b).

Sec.  250.1  Cross-border antifraud law-enforcement authority.

    (a) Notwithstanding any other Commission rule or regulation, the
antifraud provisions of the securities laws apply to:
    (1) Conduct within the United States that constitutes significant
steps in furtherance of the violation; or
    (2) Conduct occurring outside the United States that has a
foreseeable substantial effect within the United States.
    (b) The antifraud provisions of the securities laws apply to
conduct described in paragraph (a)(1) of this section even if:
    (1) The violation relates to a securities transaction or securities
transactions occurring outside the United States that involves only
foreign investors; or
    (2) The violation is committed by a foreign adviser and involves
only foreign investors.
    (c) Violations of the antifraud provisions of the securities laws
described in this section may be pursued in judicial proceedings
brought by the Commission or the United States.

    By the Commission.

    Date: June 25, 2014.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-15337 Filed 7-3-14; 8:45 am]
BILLING CODE 8011-01-P