# Conformed to Federal Register version

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3A5cff7bd00f600598

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

Conformed to Federal Register version
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 201 and 240
[Release No. 34-84858; File No. S7-14-15]
RIN 3235-AL76
Applications by Security-Based Swap Dealers or Major Security-Based Swap Participants
for Statutorily Disqualified Associated Persons to Effect or be Involved in Effecting
Security-Based Swaps
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
SUMMARY: Pursuant to Section 15F(b)(6) of the Securities Exchange Act of 1934
(“Exchange Act”), as added by Section 764(a) of Title VII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (“Dodd-Frank Act”), the Securities and Exchange
Commission (“Commission”) is adopting Rule of Practice 194. Rule of Practice 194 provides a
process for a registered security-based swap dealer or major security-based swap participant
(collectively, “SBS Entity”) to make an application to the Commission for an order permitting an
associated person that is a natural person who is subject to a statutory disqualification to effect or
be involved in effecting security-based swaps on behalf of the SBS Entity. Rule of Practice 194
also provides an exclusion for an SBS Entity from the prohibition in Exchange Act Section
15F(b)(6) with respect to associated persons that are not natural persons. Finally, Rule of
Practice 194 provides that, subject to certain conditions, an SBS Entity may permit an associated
person that is a natural person who is subject to a statutory disqualification to effect or be
involved in effecting security-based swaps on its behalf, without making an application pursuant
to the rule, where the Commission, the Commodity Futures Trading Commission (“CFTC”), a

self-regulatory organization (“SRO”), or a registered futures association has granted a prior
application or otherwise granted relief from the statutory disqualification with respect to that
associated person.
DATES: Effective April 22, 2019.
FOR FURTHER INFORMATION CONTACT: Natasha Vij Greiner, Assistant Chief
Counsel, Devin Ryan, Senior Special Counsel, and Edward Schellhorn, Special Counsel at 202551-5550, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street,
NE, Washington, DC 20549-7010.
SUPPLEMENTARY INFORMATION:
TABLE OF CONTENTS
I.

BACKGROUND

II.

SUMMARY OF FINAL RULE OF PRACTICE 194

III.

DISCUSSION
A. Rule of Practice 194(a) – Scope of the Rule
B. Rule of Practice 194(b) – Required Showing
C. Rule of Practice 194(c) – Exclusion for Other Persons
D. Rule of Practice 194(d) – Form of Application
E. Rule of Practice 194(e) – Written Statement
F. Rule of Practice 194(f) – Prior Applications or Processes
G. Rule of Practice 194(g) – Notification to Applicant and Written Statement
H. Rule of Practice 194(h) – Notice in Lieu of an Application
I. Note to Rule of Practice 194
J. Confidentiality of Materials
K. Deleting Rule 15Fb6-1 and Schedule C to Forms SBSE, SBSE-A and SBSE-BD
-2-

L. Compliance Date
IV.

PAPERWORK REDUCTION ACT
A. Summary of Collection of Information
B. Proposed Use of Information
C. Respondents
D. Total Burden Estimates Relating to Rule of Practice 194
E. Confidentiality

V.

ECONOMIC ANALYSIS
A. Broad Economic Considerations
B. Economic Baseline
1. Security-Based Swap Market Activity and Participants
2. Natural Persons and Entity Persons Associated with SBS Entities
3. Other Markets and Existing Regulatory Frameworks
4. Data on Parallel Review Processes and Statutory Disqualification
5. Requests for Relief from Statutory Disqualification under Rule of Practice 194
C. Benefits, Costs, and Effects on Efficiency, Competition, and Capital Formation
1. Costs and Benefits of Rule of Practice 194
2. Effects on Efficiency, Competition, and Capital Formation
D. Rule Alternatives
1. Temporary Exclusions
2. Relief for Non-Investment-Related Offenses
3. No Relief for CFTC, SRO, or Registered Futures Association Review
4. No Relief for Associated Person Entities from Exchange Act Section 15F(b)(6)
5. Form of Applications to be Submitted: Time Period
6. Public Availability of Applications and Supporting Materials
-3-

VI.

REGULATORY FLEXIBILITY ACT CERTIFICATION
A. Regulatory Framework
B. Assessment of Impact
C. Certification

VII. STATUTORY AUTHORITY
TEXT OF THE RULE

I.

BACKGROUND
Exchange Act Section 15F(b)(6), as added by Section 764(a) of the Dodd-Frank Act,

makes it unlawful for an SBS Entity to permit an associated person1 who is subject to a statutory
disqualification2 to effect or be involved in effecting security-based swaps on behalf of the SBS
Entity if the SBS Entity knew, or in the exercise of reasonable care should have known, of the
statutory disqualification, “[e]xcept to the extent otherwise specifically provided by rule,

1

Exchange Act Section 3(a)(70) generally defines the term “person associated with” an
SBS Entity to include (i) any partner, officer, director, or branch manager of an SBS
Entity (or any person occupying a similar status or performing similar functions); (ii) any
person directly or indirectly controlling, controlled by, or under common control with an
SBS Entity; or (iii) any employee of an SBS Entity. See 15 U.S.C. 78c(a)(70). The
definition generally excludes persons whose functions are solely clerical or ministerial.
Id. The definition of “person” under Exchange Act Section 3(a)(9) is not limited to
natural persons, but extends to both entities and natural persons. See 15 U.S.C. 78c(a)(9)
(“The term ‘person’ means a natural person, company, government, or political
subdivision, agent, or instrumentality of a government.”).

2

The term statutory disqualification as used in Exchange Act Section 15F(b)(6) parallels
the definition of statutory disqualification in Exchange Act Section 3(a)(39)(A) through
(F), 15 U.S.C. 78c(a)(39)(A) through (F). See Applications by Security-Based Swap
Dealers or Major Security-Based Swap Participants for Statutorily Disqualified
Associated Persons To Effect or Be Involved in Effecting Security-Based Swaps,
Exchange Act Release No. 75612 (Aug. 5, 2015), 80 FR 51684, 51686, n.16 (Aug. 25,
2015) (“Proposing Release” or “proposal”).
-4-

regulation, or order of the Commission.”3 In this regard, Exchange Act Section 15F(b)(6) gives
the Commission the discretion to determine, by order, that a statutorily disqualified associated
person may effect or be involved in effecting security-based swaps on behalf of an SBS Entity,
and/or to establish rules concerning the statutory prohibition in Exchange Act Section
15F(b)(6).4
On August 5, 2015,5 the Commission proposed Rule of Practice 194 to establish a
3

Exchange Act Section 15F(b)(6) provides: “Except to the extent otherwise specifically
provided by rule, regulation, or order of the Commission, it shall be unlawful for a
security-based swap dealer or a major security-based swap participant to permit any
person associated with a security-based swap dealer or a major security-based swap
participant who is subject to a statutory disqualification to effect or be involved in
effecting security-based swaps on behalf of the security-based swap dealer or major
security-based swap participant, if the security-based swap dealer or major security-based
swap participant knew, or in the exercise of reasonable care should have known, of the
statutory disqualification.” 15 U.S.C. 78o-10(b)(6). The statutory prohibition in
Exchange Act Section 15F(b)(6), 15 U.S.C. 78o-10(b)(6), is parallel to a statutory
provision for a swap dealer or major swap participant (collectively “Swap Entities”) set
forth in Section 4s(b)(6) of the Commodity Exchange Act (“CEA”), 7 U.S.C. 6s(b)(6).

4

On June 15, 2011, the Commission issued an order that, among other things, granted
temporary relief from compliance with Exchange Act Section 15F(b)(6) for persons
subject to a statutory disqualification who were, as of July 16, 2011, associated with an
SBS Entity and who effected or were involved in effecting security-based swaps on
behalf of such SBS Entity and allowed such persons to continue to be associated with an
SBS Entity until the date upon which rules adopted by the Commission to register SBS
Entities became effective. See Temporary Exemptions and Other Temporary Relief,
Together With Information on Compliance Dates for New Provisions of the Securities
Exchange Act of 1934 Applicable to Security-Based Swaps, Exchange Act Release No.
64678 (June 15, 2011), 76 FR 36287, 36301, 36305-07 (June 22, 2011) (“June 2011
Temporary Exemptions Order”). See also Order Extending Certain Temporary
Exemptions and a Temporary and Limited Exception Related to Security-Based Swaps,
Exchange Act Release No. 75919 (Sept. 15, 2015), 80 FR 56519 (Sept. 18, 2015)
(extending the June 2011 Temporary Exemptions Order).

5

Concurrent with the issuance of the Rule of Practice 194 proposal, the Commission
adopted registration requirements for SBS Entities, including certain rules relating to the
statutory prohibition in Exchange Act Section 15F(b)(6). See Registration Process for
Security-Based Swap Dealers and Major Security-Based Swap Participants, Exchange
Act Release No. 75611 (Aug. 5, 2015), 80 FR 48964 (Aug. 14, 2015) (“Registration
-5-

process by which an SBS Entity could apply to the Commission to permit an associated person
who is subject to a statutory disqualification to effect or be involved in effecting security-based
swaps on behalf of the SBS Entity.6 As discussed in the Commission’s proposal,7 the federal
securities laws provide various procedural avenues that allow certain registered entities to
associate, where warranted, with persons subject to a statutory disqualification or other bar,
including the Commission’s Rule of Practice 1938 and the Financial Industry Regulatory
Adopting Release”). See also 17 CFR 240.15Fb6-1 (providing that an SBS Entity, when
it files an application to register with the Commission, may permit an associated person
that is not a natural person who is subject to a statutory disqualification to effect or be
involved in effecting security-based swaps on the SBS Entity’s behalf, provided that the
statutory disqualification(s) occurred prior to the compliance date set forth in the
Registration Adopting Release and that the SBS Entity identifies each such associated
person on its registration form); 17 CFR 240.15Fb6-2 (requiring a Chief Compliance
Officer of an SBS Entity to certify that it has performed background checks on all of its
associated persons that are natural persons who effect or are involved in effecting
security-based swaps on its behalf, and neither knows, nor in the exercise of reasonable
care should have known, that any of its associated persons that effect or are involved in
effecting security-based swaps on its behalf are subject to a statutory disqualification,
unless otherwise specifically provided by rule, regulation, or order of the Commission).
As discussed in Section III.K below, the Commission is making a technical amendment
that deletes Rule 15Fb6-1 as well as Schedule C to Forms SBSE, SBSE-A and SBSEBD and also conforms the instructions in those forms to take into account the associated
person entity exclusion that the Commission is adopting in final Rule of Practice 194(c).
6

See Proposing Release, 80 FR 51684-722.

7

See id. at 51687-89.

8

17 CFR 201.193. Rule of Practice 193 provides a process by which individuals that are
associated with entities that are not regulated by an SRO (e.g., employees of an
investment adviser, an investment company, or a transfer agent) can seek to reenter the
securities industry despite previously being barred by the Commission. See Registration
of Security-Based Swap Dealers and Major Security-Based Swap Participants, Exchange
Act Release No. 65543 (Oct. 12, 2011), 76 FR 65784, 65797 (Oct. 24, 2011)
(“Registration Proposing Release”). See also Applications by Barred Individuals for
Consent to Associate With a Registered Broker, Dealer, Municipal Securities Dealer,
Investment Adviser or Investment Company, Exchange Act Release No. 20783,
Investment Company Act Release No. 13839, Investment Advisers Act Release No. 903,
49 FR 12204 (Mar. 29, 1984).
-6-

Authority’s (“FINRA”) eligibility proceedings (under the process set forth in Exchange Act Rule
19h-1).9 The Commission modeled proposed Rule of Practice 194 on these existing processes
where persons can make an application to reenter the industry despite previously being barred by
the Commission or subject to a statutory disqualification with respect to membership or
participation in, or association with a member of, an SRO.10 Accordingly, the Commission
proposed to establish a procedural framework that is similar to processes that are familiar to
market participants.11
9

17 CFR 240.19h-1. The FINRA Rule 9520 Series sets forth procedures for a person to
become or remain associated with a member, notwithstanding the existence of a statutory
disqualification, and for a current member or person associated with a member to obtain
relief from the eligibility or qualification requirements of the FINRA By-Laws and rules.
A member (or new member applicant) seeking to associate with a natural person subject
to a statutory disqualification must seek approval from FINRA by filing a Form MC-400
application. See FINRA Form MC-400, Membership Continuance Application,
http://www.finra.org/web/groups/industry/@ip/@enf/@adj/documents/industry/p011542.
pdf. Members (and new member applicants) that are themselves subject to a
disqualification that wish to obtain relief from the eligibility requirements are required to
submit a Form MC-400A application. See FINRA Form MC-400A, Membership
Continuance Application: Member Firm Disqualification Application,
http://www.finra.org/web/groups/industry/@ip/@enf/@adj/documents/industry/p013339.
pdf. Where required, FINRA sends a notice or notification to the Commission of its
proposal to admit or continue the membership of a person or association with a member
notwithstanding statutory disqualification in accordance with Exchange Act Rule 19h-1.

10

“Self-regulatory organization” is defined in Section 3(a)(26) of the Exchange Act, 15
U.S.C. 78c(a)(26), as “any national securities exchange, registered securities association,
or registered clearing agency, or (solely for the purposes of sections 19(b), 19(c) and
23(b) of [the Exchange Act]) the Municipal Securities Rulemaking Board established by
section 15B of this title.”

11

In the proposal, the Commission also discussed, for example, the CFTC’s approach with
respect to the statutory prohibition for swap dealers or major swap participants
(collectively “Swap Entity”) as set forth in CEA Section 4s(b)(6), 7 U.S.C. 6s(b)(6). See
Proposing Release, 80 FR at 51688-89. The CFTC, with respect to statutorily
disqualified associated persons of Swap Entities, limits the definition of associated
persons of Swap Entities to natural persons. See 17 CFR 1.3(aa). As a result, the
prohibition in CEA Section 4s(b)(6), 7 U.S.C. 6s(b)(6), applies to natural persons (not
entities) associated with a Swap Entity. For further discussion on the CFTC’s approach
-7-

The Commission requested comment on all aspects of the proposal as well as two
alternative approaches,12 and received comments in response.13
II.

SUMMARY OF FINAL RULE OF PRACTICE 194
The Commission is adopting Rule of Practice 194 largely as proposed, with certain

modifications.14 As adopted, Rule of Practice 194 provides a process by which an SBS Entity
may apply to the Commission for an order permitting an associated person to effect or be
involved in effecting security-based swaps on behalf of the SBS Entity where the associated
person that is a natural person who is subject to a statutory disqualification and is thereby
otherwise prohibited from effecting or being involved in effecting security-based swaps on
behalf of an SBS Entity under Exchange Act Section 15F(b)(6). Rule of Practice 194 also
provides an exclusion for an SBS Entity from the prohibition in Exchange Act Section 15F(b)(6)
with respect to associated persons that are not natural persons (defined herein as “associated
person entities”).
In particular, as explained more fully in Section III below, the Commission is adopting
the following provisions in Rule of Practice 194:
•

Paragraph (a) of Rule of Practice 194, which defines the scope of the rule and provides a
process for submitting applications by an SBS Entity seeking an order of the Commission
to Swap Entities, see Section II.B.3 of the Proposing Release, 80 FR at 51688-89.

12

See Proposing Release, 80 FR at 51701-05.

13

These comment letters are available at: https://www.sec.gov/comments/s7-1415/s71415.shtml.

14

If any of the provisions of these amendments, 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.
-8-

to permit an associated person who is subject to a statutory disqualification to effect or be
involved in effecting security-based swaps on behalf of the SBS Entity.
•

Paragraph (b) of Rule of Practice 194, which specifies the required showing for an
application. For the Commission to issue an order granting relief under Rule of Practice
194, an SBS Entity is required to make a showing that it would be consistent with the
public interest to permit the associated person to effect or be involved in effecting
security-based swaps on behalf of the SBS Entity, notwithstanding the statutory
disqualification.

•

Paragraph (c) of Rule of Practice 194, which establishes an exclusion from the general
prohibition in Exchange Act Section 15F(b)(6) with respect to all associated person
entities.15

•

Paragraphs (d) and (e) of Rule of Practice 194, which specify the form of the application
with respect to an associated person that is a natural person and the items to be addressed
in the written statement within the application.

•

Paragraph (f) of Rule of Practice 194, which requires an applicant to provide as part of
any application any order, notice or other applicable document reflecting the grant, denial
or other disposition (including any dispositions on appeal) of any prior application
concerning the associated person under Rule of Practice 194 and other similar processes.

•
15

Paragraph (g) of Rule of Practice 194, which provides for notice to the applicant in cases
In conjunction with adopting in Rule of Practice 194(c), the Commission is also making
technical amendments to: (1) delete Exchange Act Rule 15Fb6-1; (2) remove Schedule C
to Forms SBSE, SBSE-A and SBSE-BD; and (3) remove all references to Schedule C in
the instructions in the above-mentioned forms. See Section III.K, infra, for a further
discussion of the technical amendments.

-9-

where the Commission staff anticipates making an adverse recommendation to the
Commission with respect to an application made pursuant to this rule. In such cases, the
applicant will be provided with a written statement of the reasons for the Commission
staff’s preliminary recommendation, and the applicant will have 30 days to submit a
written statement in response.
•

Paragraph (h) to Rule of Practice 194, which provides that, where certain conditions are
met, an SBS Entity does not need to file an application under Rule of Practice 194 to
permit a statutorily disqualified associated person to effect or be involved in effecting
security-based swaps on behalf of the SBS Entity. Specifically, paragraph (h) of Rule of
Practice 194 allows an SBS Entity, subject to certain conditions, to permit a statutorily
disqualified associated person to effect or be involved in effecting security-based swaps
on behalf of the SBS Entity without making an application to the Commission, where the
Commission, CFTC, an SRO (e.g., FINRA) or a national securities exchange), or a
registered futures association (e.g., the National Futures Association (“NFA”)) has
granted a prior application or otherwise granted relief from a statutory disqualification
with respect to that associated person. In such cases where an SBS Entity meets the
requirements of paragraph (h), the SBS Entity will be permitted to file a notice with the
Commission (in lieu of an application).

III.

DISCUSSION
A.

Rule of Practice 194(a) – Scope of the Rule

Proposed Rule of Practice 194 would have defined the scope of the rule, namely
providing a process for an SBS Entity to seek relief from the Commission to permit an associated
person who is subject to a statutory disqualification to effect or be involved in effecting security- 10 -

based swaps on behalf of the SBS Entity or to seek relief to change the terms and conditions of a
previously issued Commission order pursuant to Rule of Practice 194.16 The Commission
proposed to allow an SBS Entity to voluntarily submit an application to the Commission to
request an order where an associated person of an SBS Entity is subject to a statutory
disqualification and consequently prohibited from effecting or being involved in effecting
security-based swaps on behalf of the SBS Entity under Exchange Act Section 15F(b)(6).17
Although no commenters specifically commented on this provision of proposed Rule of
Practice 194, the Commission received general comments regarding the scope of the rule as
proposed.18
A commenter suggested that rather than permit SBS Entities to voluntarily submit an
application to the Commission to request an order providing relief from Exchange Act Section
15F(b)(6), the Commission should instead reaffirm what the commenter viewed as the
Congressional mandate by issuing a rule that prohibits, on a blanket basis, associated persons
that are subject to a statutory disqualification from effecting or being involved in effecting
security-based swaps on behalf of SBS Entities.19
Section 15F(b)(6) of the Exchange Act provides that, except where otherwise specifically
provided by rule, regulation, or order of the Commission, it shall be unlawful for an SBS Entity
16

See Proposing Release, 80 FR at 51689, 51719; proposed Rule of Practice 194(a).

17

15 U.S.C. 78o-10(b)(6); see proposed Rule of Practice 194(a).

18

See Letter from Americans for Financial Reform, dated October 26, 2015 (“Americans
for Financial Reform Letter”), at 1. See also Letter from Robert E. Rutkowski, dated
October 27, 2015 (“Rutkowski Letter”). The Rutkowski Letter requested only that the
Commission seriously consider the recommendations set forth in the Americans for
Financial Reform Letter.

19

Letter from Bartlett Naylor, Public Citizen, dated October 26, 2015 (“Public Citizen
Letter”), at 1-2.
- 11 -

to permit any person associated with the SBS Entity who is subject to a statutory disqualification
to effect or be involved in effecting security-based swaps on behalf of the SBS Entity, if the SBS
Entity knew, or in the exercise or reasonable care should have known, of the statutory
disqualification.20 Thus, while Exchange Act Section 15F(b)(6) makes it unlawful for an SBS
Entity to permit an associated person who is subject to a statutory disqualification to effect or be
involved in effecting security-based swaps on behalf of the SBS Entity, it also gives the
Commission the discretion to determine (by rule, regulation, or order) that a statutorily
disqualified associated person may effect or be involved in effecting security-based swaps on
behalf of an SBS Entity.21 The Commission has determined to exercise its statutory authority
under Exchange Act Section 15F(b)(6) to assess on a case-by-case basis whether to grant relief
from the statutory prohibition because there may be instances where it is consistent with the
public interest to permit an associated person who is subject to a statutory disqualification to
effect or be involved in effecting security-based swaps on behalf of the SBS Entity.
Additionally, the commenter’s approach22 would deviate from the Commission’s current practice
in other contexts, which permits associated persons to apply to reenter the securities industry
notwithstanding the existence of a statutory disqualification.23 In that respect, adopting the
commenter’s approach could lead to the anomalous result where an applicant may be permitted
to engage in securities transactions with members of the retail public—for example, as an
associated person of a broker-dealer or investment adviser—but prohibited from effecting or
20

See Note 3, supra.

21

15 U.S.C. 78o-10(b)(6).

22

See Public Citizen Letter, at 1-2.

23

See, e.g., 17 CFR 240.19h-1; 17 CFR 201.193. See also Section I and Notes 8, 9, supra.
- 12 -

being involved in effecting security-based swap transactions with significantly more
sophisticated institutional clients as an associated person of an SBS Entity.24 Although we
acknowledge that security-based swaps may also be more complex and opaque than equities or
bonds, thus increasing information asymmetries between SBS Entities and their clients, we
believe that institutional clients may be more informed and may process disclosures more
efficiently than retail investors in parallel settings.
The Commission also believes that a process for granting relief with respect to a statutory
disqualification should be formalized, as suggested by one commenter.25 Exchange Act Section
15F(b)(6) provides the Commission with discretion to determine whether a statutorily
disqualified associated person may effect or be involved in effecting security-based swaps on
behalf of an SBS Entity. However, it does not specify what information should be provided to
the Commission when an SBS Entity seeks relief, nor does it set forth the standard under which
the Commission would evaluate requests for relief. Rule of Practice 194 specifies the
information and documents that SBS Entities should provide to the Commission, as well as the
applicable procedures and standard of review, for seeking relief from the statutory prohibition in
Exchange Act Section 15F(b)(6). By articulating the materials to be submitted, the items to be
considered, and the standard of review, Rule of Practice 194 provides a clear process for SBS

24

See Proposing Release, 80 FR at 51698.

25

See Americans for Financial Reform Letter, at 1. The commenter noted that without
proposed Rule of Practice 194, SBS Entities would still be able to apply to the
Commission for relief from the prohibition in Exchange Act Section 15F(b)(6); however,
the commenter supported the Commission’s efforts to formalize a process for seeking
relief from the statutory prohibition of Exchange Act Section 15F(b)(6) to increase
accountability and transparency into the application process.
- 13 -

Entities.26 Therefore, the Commission is adopting paragraph (a) of Rule of Practice 194, which
defines the scope of the rule, as proposed.
B.

Rule of Practice 194(b) – Required Showing

Proposed Rule of Practice 194 provided that the applicant would be required to show that
it would be consistent with the public interest to permit the associated person of the SBS Entity
who is subject to a statutory disqualification to effect or be involved in effecting security-based
swaps on behalf of the SBS Entity.27
The Commission received one comment concerning the required showing set forth in the
proposal. The commenter stated that, in assessing whether it is in the public interest to permit an
associated person who is subject to a statutory disqualification to effect or be involved in
effecting security-based swaps on behalf of an SBS Entity, the Commission should also consider
whether the deterrent effect of disqualification would be diluted.28 Specifically, the commenter
stated that, to be granted relief, the SBS Entity should be required to show that granting relief
“would actually enhance the deterrent effect.”29
In assessing whether it is consistent with the public interest to permit an associated
person that is a natural person who is subject to a statutory disqualification to effect or be
involved in effecting security-based swaps on behalf of an SBS Entity, the Commission may
26

See Proposing Release, 80 FR at 51712.

27

See id. at 51689, 51719; proposed Rule of Practice 194(b). See Exchange Act Section
3(a)(39)(A) through (F), 15 U.S.C. 78c(a)(39)(A) through (F), for a description of
statutorily disqualifying events. See also Note 2, supra.

28

Public Citizen Letter, at 1, 4.

29

Id. at 4. The commenter additionally stated that the entity requesting the waiver should
be required to prove that “the implicit deterrence impact of disqualification is not diluted”
by receiving a waiver from penalties resulting from criminal misbehavior. Id. at 1.
- 14 -

consider deterrence, among other factors.30 However, the Commission does not agree with the
commenter that the “applicant should be required to show that an exemption would actually
enhance the deterrent effect”31 or that any petitioner for an exemption from disqualification
should have to prove that the implicit deterrence impact of disqualification is not diluted by
receiving a waiver from penalties from criminal misbehavior.32 Either standard could preclude
the Commission from granting relief even where the public interest otherwise warrants doing
so—i.e., raising deterrence above all other public interest considerations. Moreover, it is not
clear that any applicant could meet either standard proposed by the commenter. The
Commission does believe, however, consistent with the proposal,33 that the applicant should bear
the burden of showing that permitting the associated person to effect or be involved in effecting
security-based swaps on behalf of the SBS Entity is consistent with the public interest.
The Commission believes that the public interest standard is appropriate and consistent
with Section 15F(b)(6) of the Exchange Act34 and is adopting the standard as proposed.
Exchange Act Section 15F(b)(6) is designed to limit the potential that associated persons who
have engaged in certain types of “bad acts” will be able to negatively affect the security-based
swap market and the participants in that market by prohibiting an SBS Entity from allowing a
30

In this regard, the Commission noted in the Proposing Release that statutory
disqualification and an inability to continue associating with SBS Entities may create a
disincentive against underlying misconduct for associated persons. See Proposing
Release, 80 FR at 51689, 51716-17.

31

Public Citizen Letter, at 4.

32

See id. at 1. Non-criminal conduct also may result in a statutory disqualification. See 15
U.S.C. 78c(a)(39).

33

See Proposing Release, 80 FR at 51689.

34

A public interest standard also is consistent with the standard in Rule of Practice 193.
See 17 CFR 201.193(c).
- 15 -

statutorily disqualified associated person to effect or be involved in effecting security-based
swap transactions, absent Commission relief. However, Section 15F(b)(6) also specifically
provides that the Commission can allow SBS Entities to permit such statutorily disqualified
associated persons to effect or be involved in effecting security-based swap transactions. The
public interest standard is intended to capture those situations where the risk of the associated
person engaging in security-based swap activity that may harm the market or the participants in
the market is mitigated. Thus, as stated in the proposal, the Commission believes that it may
grant relief in cases where the terms or conditions of association and the procedures proposed for
supervision of the statutorily disqualified associated person are reasonably designed to mitigate
the potential harm to the market or participants in the market.35
The Commission also notes that the items set forth in the proposal36 and adopted in final
Rule of Practice 194(e), such as other misconduct in which the associated person may have
engaged, the nature of the conduct that resulted in the statutory disqualification and disciplinary
history of the associated person and SBS Entity requesting such relief, and the supervision to be
accorded the associated person, would be relevant to the Commission’s consideration of whether
the risks of permitting such associated persons that are natural persons to effect or be involved in
effecting security-based swaps on behalf of the SBS Entity are sufficiently mitigated. Therefore,
the Commission is adopting paragraph (b) of Rule of Practice 194 as proposed.37
35

See Proposing Release, 80 FR at 51689.

36

See id. at 51691-93, 51719-20; proposed Rule of Practice 194(d).

37

Where the Commission determines that it would be consistent with the public interest to
permit the associated person that is a natural person of the SBS Entity to effect or be
involved in effecting security-based swaps on behalf of the SBS Entity, the Commission
will issue an order granting relief. Where the Commission does not or cannot make the
determination that it is in the public interest to permit the associated person that is a
- 16 -

C.

Rule of Practice 194(c) – Exclusion for Other Persons

The Commission is adopting Rule of Practice 194(c), which provides an exclusion for an
SBS Entity from the prohibition in Exchange Act Section 15F(b)(6) with respect to associated
person entities.
Proposed Rule of Practice 194(i) would have provided temporary relief, subject to certain
conditions,38 from the statutory prohibition in Exchange Act Section 15F(b)(6) with respect to
associated person entities that are subject to a statutory disqualification.39 The Commission
proposed paragraph (i) of Rule of Practice 194 to address the situation where an operating SBS
Entity becomes subject to the statutory prohibition in Exchange Act Section 15F(b)(6) with
respect to an associated person that is not a natural person—either as a result of an associated
person that effects or is involved in effecting security-based swaps on behalf of the SBS Entity
becoming subject to a statutory disqualification, or as a result of a person who is subject to a
natural person of the SBS Entity to effect or be involved in effecting security-based
swaps on behalf of the SBS Entity, the Commission will issue an order denying the
application. See Proposing Release, 80 FR at 51694.
38

The Commission proposed two general limitations on the applicability of the temporary
exclusion, namely that the temporary exclusion would not be available where: (1) the
Commission has otherwise ordered—for example, where the Commission, by order, has
censured, placed limitations on the activities or functions of the associated person, or
suspended or barred such person from being associated with an SBS Entity; and (2)
where the Commission, CFTC, an SRO or a registered futures association has previously
denied membership, association, registration or listing as a principal with respect to the
associated person that is the subject of the pending application. See id. at 51697. As
discussed below, since the Commission is adopting the alternative that was set forth in
the proposal, these limitations are no longer included in the rule. However, as discussed
below, the Commission maintains its existing statutory authority to institute proceedings
or bring an action against any associated person entities, and nothing in this provision
affects the ability of the Commission, the CFTC, an SRO or the NFA to deny
membership, association, registration or listing as a principal with respect to any
associated person entity.

39

See Proposing Release, 80 FR at 51694-98, 51721; proposed Rule of Practice 194(i).
- 17 -

statutory disqualification becoming an associated person effecting or involved in effecting
security-based swaps on behalf of the SBS Entity.40
The Commission also solicited comment on two alternative approaches with respect to
the temporary exclusion, as proposed, including one alternative that would provide relief from
the general prohibition in Exchange Act Section 15F(b)(6) with respect to all associated person
entities.41 More specifically, the Commission requested comment on whether the Commission
should instead provide an exclusion to permit an SBS Entity to allow associated person entities
subject to a statutory disqualification to effect or be involved in effecting security-based swaps
on behalf of SBS Entities.42 The Commission received two comments on this alternative, both of
which stated that the Commission should not provide an exclusion to permit associated person
entities that are subject to a statutory disqualification to effect or be involved in effecting
security-based swaps on behalf of SBS Entities. 43
One commenter stated that adopting a temporary exclusion, as proposed, would be
inconsistent with the language and Congressional intent of Exchange Act Section 15F(b)(6).44
The commenter believes that the temporary exclusion provision addresses “industry-focused
concerns” and would expose investors and markets to disruptive effects from unscrupulous
40

See, e.g., Proposing Release, 80 FR at 51694.

41

See id. at 51697–98. The other alternative proposed by the Commission related to the
ultimate disposition of an application to the extent the Commission does not act within a
specified time period. See id. at 51697.

42

See id. at 51697-98, 51716. In addition, the Commission also provided an economic
analysis on this proposed alternative. See id. at 51716.

43

See Letter from Dennis M. Kelleher & Stephen W. Hall, Better Markets, Inc., dated
October 26, 2015 (“Better Markets Letter”), at 5; Americans for Financial Reform Letter,
at 3.

44

See Better Markets Letter, at 5.
- 18 -

conduct by associated person entities subject to a statutory disqualification.45 The commenter
also believes that in the event that an associated person entity is prohibited from effecting or
being involved in effecting security-based swaps on behalf of an SBS Entity, other market
participants may fill the void with minimal disruption, or the SBS Entity may adopt measures to
mitigate any negative impacts as a result of the statutory prohibition.46
A second commenter provided similar objections to the temporary exclusion.47 The
commenter stated that disruption to an SBS Entity’s business is not a sufficient justification for
providing a temporary exclusion with respect to an associated person entity who is subject to a
statutory disqualification. The commenter further stated that any statutory disqualification that
may require an SBS Entity to move services (such as advisory, booking, cash or collateral
management services) to another entity is not a “market-moving event,” and would not justify
the adoption of a temporary exclusion with respect to associated person entities. The
commenter, however, acknowledged that there may be limited cases where an immediate change
in a service provider would cause significant disruptions. But, rather than provide an automatic
temporary exclusion, as proposed, the commenter suggested, as an alternative, that the
Commission could in those limited cases grant a temporary exclusion of up to 30 days where
doing so is appropriate and necessary.48
The Commission received a related comment in response to a request for comment in
connection with the proposed requirements for an SBS Entity to register with the Commission,
45

Id.

46

See id.

47

See Americans for Financial Reform Letter, at 3.

48

See id.
- 19 -

which solicited comment on whether the Commission should consider excepting associated
person entities from the statutory prohibition in Exchange Act Section 15F(b)(6).49 The
commenter stated that, based on the Commission’s definition of the phrase “involved in
effecting,” SBS Entities could have hundreds, if not thousands, of associated natural persons who
will effect or will be involved in effecting security-based swaps.50 Moreover, the commenter
stated that the definition of “associated person” could be read to extend not just to natural
persons, but also to non-natural persons (e.g., entities) that are affiliates of SBS Entities.51 As a
result, the commenter stated, prohibiting statutorily disqualified entities from effecting or being
involved in effecting security-based swaps could result in “considerable” business disruptions
and other ramifications.52 To address these concerns, the commenter stated that the Commission
should narrow the scope of the associated persons considered to be effecting or involved in
49

In connection with proposing requirements for an SBS Entity to register with the
Commission, the Commission solicited comment on potentially developing an alternative
process, in accordance with Exchange Act Section 15F(b)(6), to establish exceptions to
the statutory prohibition in Exchange Act Section 15F(b)(6). See Registration Proposing
Release, 76 FR at 65797 (Question 90).

50

See Letter from Kenneth E. Bentsen, Jr., Securities Industry and Financial Markets
Association, dated December 16, 2011 (“12/16/2011 SIFMA Letter”), at 8, available at
https://www.sec.gov/comments/s7-40-11/s74011-4.pdf. The Commission has stated that
the term “involved in effecting security-based swaps” generally means engaged in
functions necessary to facilitate the SBS Entity’s security-based swap business,
including, but not limited to the following activities: (1) drafting and negotiating master
agreements and confirmations; (2) recommending security-based swap transactions to
counterparties; (3) being involved in executing security-based swap transactions on a
trading desk; (4) pricing security-based swap positions; (5) managing collateral for the
SBS Entity; and (6) directly supervising persons engaged in the activities described in
items (1) through (5) above. See Proposing Release, 80 FR at 51686, n.19 (citing the
Registration Adopting Release, at Section II.B.1.ii.).

51

See 12/16/2011 SIFMA Letter.

52

See id. The commenter did not provide supporting data to quantify the number of
associated persons or the magnitude of any potential business disruptions.
- 20 -

effecting security-based swaps, or, alternatively, exercise its statutory authority to grant
exceptions to the general ban on an SBS Entity from associating with a person subject to a
statutory disqualification.53
The Commission believes that adopting a rule providing for an exclusion for associated
person entities is consistent with Exchange Act Section 15F(b)(6), which explicitly permits the
Commission to establish exceptions to that statutory prohibition by “rule, regulation, or order.”54
In discussing the exclusion alternative, the Commission noted that it would take into
consideration the extent to which this alternative approach would minimize potential disruptions
to the business of SBS Entities that could lead to possible market disruption and how this
approach would impact counterparty and investor protection.55 We discuss each of those
considerations below.
The Commission believes that granting an automatic exclusion for associated person
entities could reduce potential disruptions to the business of SBS Entities that could lead to
market disruption. The scope of the prohibition in Section 15F(b)(6) of the Exchange Act covers
a wide range of actions, given the definitions of statutory disqualification and associated person,
and the meaning of “involved in effecting” a security-based swap transaction.56 Absent an
exclusion, the statutory prohibition in Exchange Act Section 15F(b)(6) would apply immediately
53

See id.

54

15 U.S.C. 78o-10(b)(6). In addition, Exchange Act Section 15F(b)(4) provides the
Commission with authority (other than certain inapplicable exceptions specified in
Exchange Act Section 15F(b)(4)(d) and (e)) to “prescribe rules applicable to securitybased swap dealers and major security-based swap participants.” 15 U.S.C. 78o-10(b)(4).

55

See Proposing Release, 80 FR at 51698.

56

See Proposing Release, 80 FR at 51694. See also Registration Adopting Release, at
Section III.B.1.i.
- 21 -

upon an associated person entity becoming subject to a statutory disqualification. Contrary to
one commenter’s general view that moving services to another entity is not a “market-moving
event,”57 the Commission continues to be concerned about the potential disruption to the
security-based swap markets, including potential adverse effects to counterparties and other
market participants, if SBS Entities engaged in the business must either cease operations, even
temporarily, due to not being able to utilize the services of their associated person entities,58 or
move services to another entity that may not be as well-equipped to handle them pending a
determination by the Commission on their application for relief under the proposed temporary
exclusion or pending a determination by another regulator for similar relief.59 For example, and
as the Commission stated in the proposal, moving the cash and collateral management services
from one entity to another would have a much more significant impact on the ability of the SBS
Entity to operate—which, as noted above, could lead to possible market disruption—than
assigning a different natural person to negotiate and execute security-based swap transactions.60

57

Americans for Financial Reform Letter, at 3. The commenter also acknowledged when
discussing the proposed temporary exclusion for associated person entities that there may
be some limited cases where an immediate change in a service provider would cause
significant disruptions.

58

See Proposing Release, 80 FR at 51695-96.

59

Final Rule of Practice 194(h) provides that, subject to certain conditions, an SBS Entity
may permit an associated person who is subject to a statutory disqualification to effect or
be involved in effecting security-based swaps on its behalf, without making an
application pursuant to the proposed rule, where the Commission, CFTC, an SRO or a
registered futures association has granted a prior application or otherwise granted relief
from a statutory disqualification with respect to that associated person. See Rule of
Practice 194(h) and Section III.H, infra.

60

See Proposing Release, 80 FR at 51696, n.88 (citing the Registration Adopting Release,
80 FR at 48975, where the Commission noted that it was particularly concerned that SBS
Entities “may need to either cease operations, even temporarily, due to not being able to
utilize these services of their associated person entities, or move these services to another
- 22 -

One commenter noted that other SBS Entities could potentially provide services to the
market in the event that an associated person entity becomes subject to a statutory
disqualification.61 However, irrespective of whether other SBS Entities may be able to provide
such services over time (which may not necessarily occur), there is nonetheless a potential for
short-term disruptions where an associated person entity becomes immediately barred as a result
of being subject to a statutory disqualification. In particular, absent relief, an SBS Entity that is
associated with a statutorily disqualified entity would be required either to restructure
immediately or to cease dealing activity temporarily, which could result in various costs, such as
costs associated with replacing the statutorily disqualified associated person entity or a legal
reorganization.62 Such short-term disruptions could therefore adversely affect not just SBS
Entities, but also counterparties or other market participants in the form of execution delays,
potentially reduced liquidity or higher transaction costs.63 In that respect, the exclusion is not
limited to addressing “industry-focused concerns” 64 or concerns about disruptions to the SBS
Entity’s business alone.65
Although one commenter asserted that any short-term market disruptions could
potentially be mitigated by the SBS Entity whose associated person entity becomes subject to a
statutory disqualification, the commenter did not specify what measures could be taken by the

entity that may not be as well positioned to handle them, which could have an impact on
the security-based swap market”).
61

See Better Markets Letter, at 5.

62

See also Section V.C.1.c, infra.

63

See id.

64

See Better Markets Letter, at 5.

65

See Americans for Financial Reform Letter, at 3.
- 23 -

SBS Entity to mitigate potential market dislocations.66 It is not clear that any measures that an
SBS Entity could potentially take to mitigate potential market disruptions—e.g., the SBS Entity
restructuring its business to use the services of another associated person entity that is not subject
to a statutory disqualification—would in all instances be effective, feasible, or cost-effective.
For example, there may be instances where a change in a service provider could cause significant
disruptions in the security-based swap market.67 These disruptions are augmented by the fact
that, as discussed below, the Commission estimates that dealing activity in the security-based
swap market is highly concentrated among a small number of dealers, with the top five dealer
accounts intermediating approximately 55 percent of all SBS Entity transactions.68
In comparison to the proposed temporary exclusion approach, SBS Entities would be less
constrained by the general statutory prohibition and would be able to associate with any and all
statutorily disqualified associated person entities in any capacity without applying for relief
under Exchange Act Section 15F(b)(6) or under Rule of Practice 194. This approach gives SBS
Entities more certainty about their ability to permit statutorily disqualified associated person
entities to effect or be involved in effecting security-based swaps, whereas the proposed
temporary exclusion would have expired after 180 days, and SBS Entities would have 60 days to
conform to the general statutory prohibition if the Commission, the CFTC, an SRO or a
registered futures association does not render a decision on the application within that timeframe.
Furthermore, SBS Entities associating with disqualified persons would not have to undergo

66

See Better Markets Letter, at 5.

67

See Americans for Financial Reform Letter, at 3 (acknowledging the potential for
disruption in the event of an immediate change).

68

See Section V.A, infra, for further discussion.
- 24 -

business restructuring or apply for relief, thereby mitigating the risk of disruptions and avoiding
the costs associated with such restructuring or application for relief, which may flow through to
counterparties under the rule being adopted.
As the Commission noted in the proposal, the overall effects on security-based swap
markets of adopting the alternative approach are unclear. The proposal, in connection with
estimating anticipated costs, noted that the alternative approach, which we are now adopting,
could hinder the Commission’s ability to make an individualized determination about whether
permitting an associated person entity who is subject to a statutory disqualification to effect or be
involved in effecting security-based swaps on behalf of an SBS Entity is consistent with the
public interest, and that statutory disqualification and an inability to continue associating with
SBS Entities creates disincentives against underlying misconduct for associated persons.69 The
Commission has also considered the potential impact on investors and the security-based swap
markets from permitting associated person entities subject to a statutory disqualification to effect
or be involved in effecting security-based swaps on behalf of SBS Entities. The Commission
acknowledges, as it did in the proposal, that the counterparty and compliance risks under the
entity exclusion approach may be somewhat greater than those under the proposed approach.70
Nevertheless, the Commission recognizes, as it did in the proposal, that these risks and concerns
are mitigated by the Commission’s ability, in the appropriate case, to institute proceedings under
Exchange Act Section 15F(l)(3) to determine whether the Commission should censure, place
limitations on the activities or functions of such person, or suspend for a period not exceeding 12
69

The Commission received comments supporting the potential deterrence effect of
disqualification. See, e.g., Public Citizen Letter; Better Markets Letter.

70

See, e.g., Better Markets Letter.
- 25 -

months, or bar such person from being associated with an SBS Entity.71 Therefore, the exclusion
in final Rule of Practice 194(c) will neither limit nor otherwise affect the Commission’s existing
statutory authority to institute proceedings or bring an action against any associated person
entities as outlined above.72 In addition, the exclusion in final Rule of Practice 194(c) will also
neither limit nor otherwise affect the ability of the Commission, the CFTC, an SRO or the NFA
to deny membership, association, registration or listing as a principal with respect to any
associated person entity.73
As also noted in the proposal,74 this alternative approach would result in consistency with
the CFTC’s approach with respect to the statutory prohibition for Swap Entities as set forth in
CEA Section 4s(b)(6).75 The CFTC, with respect to statutorily disqualified associated persons of
Swap Entities, limits the definition of associated persons of Swap Entities to natural persons. 76
71

See Proposing Release, 80 FR at 51698, n.98, 51716, n.194 (citing 15 U.S.C. 78o10(l)(3)).

72

See Proposing Release, 80 FR at 51698, n.98, 51716, n.194 (citing 15 U.S.C. 78o10(l)(3)). See, e.g., 15 U.S.C. 78u–3 (authorizing cease-and-desist proceedings).

73

For example, under Exchange Act Section 15A(g)(2), 15 U.S.C. 78o-3(g)(2), where it is
necessary or appropriate in the public interest or for the protection of investors, the
Commission may, by order, direct the SRO to deny membership to any registered broker
or dealer, and bar from becoming associated with a member any person, who is subject to
a statutory disqualification. Section 17(h) of the CEA provides for the CFTC to review
certain NFA decisions, including the NFA’s disciplinary actions and member
responsibility actions, as do the CFTC’s Part 171 Rules, 17 CFR §§ 171.1-171.50.

74

See Proposing Release, 80 FR at 51698.

75

7 U.S.C. 6s(b)(6).

76

See 17 CFR 1.3(aa). Specifically, the CFTC amended CEA Regulation 1.3(aa), 17 CFR
1.3(aa), which generally defines the term “associated person” for purposes of entities
registered with it, to cover Swap Entities. Consequently, with respect to Swap Entities,
the definition reads, “(aa) Associated Person. This term means any natural person who is
associated in any of the following capacities with: . . . (6) A swap dealer or major swap
participant as a partner, officer, employee, agent (or any natural person occupying a
similar status or performing similar functions), in any capacity that involves: (i) The
- 26 -

As a result, the prohibition in CEA Section 4s(b)(6) applies to natural persons (not entities)
associated with a Swap Entity.77 Indeed, under the alternative approach, which we are now
adopting, SBS Entities cross-registered as Swap Entities with the CFTC would experience
potential economies of scope in associating with persons that are statutorily disqualified entities.
One commenter noted that the temporary exclusion provision may expose investors and
markets to disruptive effects from unscrupulous conduct by associated person entities subject to
a statutory disqualification.78 As noted in the Proposing Release, however, the Commission
continues to believe that this approach appropriately considers the potentially competing
objectives of minimizing the likelihood for market disruption while remaining consistent with
the public interest and maintaining investor protections.79
Given the adoption of the exclusion alternative for Rule of Practice 194(c), the
Commission is not adopting a commenter’s proposed alternative that the Commission could, on a
case-by-case basis, provide a temporary exclusion of up to 30 days where doing so is necessary
and appropriate. Under this alternative, pending approval by the Commission for such a
temporary exclusion, an SBS Entity would be required to either (1) disassociate with the
statutorily disqualified associated person entity immediately after the associated person entity
solicitation or acceptance of swaps (other than in a clerical or ministerial capacity); or (ii)
The supervision of any person or persons so engaged.”).
77

See 7 U.S.C. 6s(b)(6), which states, “Except to the extent otherwise specifically provided
by rule, regulation, or order, it shall be unlawful for a swap dealer or a major swap
participant to permit any person associated with a swap dealer or a major swap
participant who is subject to a statutory disqualification to effect or be involved in
effecting swaps on behalf of the swap dealer or major swap participant, if the swap dealer
or major swap participant knew, or in the exercise of reasonable care should have known,
of the statutory disqualification.”

78

See Better Markets Letter, at 5.

79

See id.
- 27 -

became subject to a statutory disqualification, or (2) immediately have that associated person
cease effecting or being involved in effecting security-based swaps on behalf of the SBS Entity.
This result would defeat the intent and purpose of the temporary exclusion and could result in a
risk of market disruption immediately after the associated person entity becomes subject to a
statutory disqualification, but prior to the entry of any order granting a temporary exclusion.
For the reasons discussed above, the Commission is adopting paragraph (c) of Rule of
Practice 194, which provides an exclusion for an SBS Entity from the prohibition in Exchange
Act Section 15F(b)(6) with respect to associated person entities.
D.

Rule of Practice 194(d) – Form of Application

Proposed Rule of Practice 194 would have specified the form of the application to be
submitted under the rule for natural persons.80 In particular, the Commission proposed that each
application would be required to be supported by a written statement, signed by a knowledgeable
person authorized by the SBS Entity, which addresses other items in proposed Rule of Practice
194.81 The proposal would have required an applicant to provide certain exhibits to the written
statement. For associated persons that are natural persons,82 the Commission proposed that an
80

See id. at 51689-91, 51719; proposed Rule of Practice 194(c). The proposal also
specified the form of application to be submitted under the rule for associated person
entities. See proposed Rule of Practice 194(e). Rule of Practice 194(c), as adopted,
provides an exclusion for an SBS Entity from the prohibition in Exchange Act Section
15F(b)(6) with respect to associated persons entities. Accordingly, the corresponding
provision, proposed Rule of Practice 194(e), which would have specified the form of
such applications for entities, is not needed and is not being adopted.

81

See Section III.E, infra, for a discussion of proposed Rule of Practice 194(d).

82

The Commission is making one technical change to the text of Rule of Practice 194(d)
such that the phrase a “person that is subject to a statutory disqualification” (emphasis
added) is being changed to read a “person who is subject to a statutory disqualification”
(emphasis added). This technical change is intended to make the text of Rule of Practice
194 more closely track the language used in Exchange Act Section 15F(b)(6), which
- 28 -

SBS Entity provide: (1) a copy of the order or other applicable document that resulted in the
associated person being subject to a statutory disqualification;83 (2) an undertaking by the
applicant to notify the Commission promptly in writing if any information submitted in support
of the application becomes materially false or misleading while the application is pending;84 (3) a
copy of the questionnaire or application for employment specified in Exchange Act Rule 15Fb62(b);85and (4) a copy of any decision, order, or document issued with respect to any proceeding86
resulting in the imposition of disciplinary sanctions or pending proceeding against the associated
person by the Commission, CFTC, any federal or state or law enforcement regulatory agency,
registered futures association, foreign financial regulatory authority, registered national securities
association, or any other SRO, or commodities exchange, or any court, that occurred during the
five years preceding the filing of the application pursuant to Rule of Practice 194.87 The
Commission also proposed that an application under Rule of Practice 194 would be filed

reads, in pertinent part, “who is subject to a statutory disqualification” (emphasis added).
This technical change is also being made to Rule of Practice 194 (h)(1) and (h)(2).
83

See proposed Rule of Practice 194(c)(1).

84

See id. (c)(2).

85

17 CFR 240.15Fb6-2(b); see proposed Rule of Practice 194(c)(3).

86

In connection with final Rule of Practice 194, applicants should look to the definition of
“proceeding” in Form SBSE, which states that a “proceeding” includes “a formal
administrative or civil action initiated by a governmental agency, self-regulatory
organization or a foreign financial regulatory authority; a felony criminal indictment or
information (or equivalent formal charge); or a misdemeanor criminal information (or
equivalent formal charge). Does not include other civil litigation, investigations, or
arrests or similar charges effected in the absence of a formal criminal indictment or
information (or equivalent formal charge).” See Registration Adopting Release, at
Section III.G.1, and Form SBSE.

87

See proposed Rule of Practice 194(c)(4).
- 29 -

pursuant to Rules of Practice 151, 152 and 153.88
The Commission did not receive any specific comments on the form of application and
written statement in proposed Rule of Practice 194. However, one commenter stated that the
Commission should require applicants to address disciplinary events going back ten years, not
five years.89 In support of a longer time period, the commenter stated that a ten-year time period
would provide greater protections in accordance with the purpose of Exchange Act Section
15F(b)(6), and would be more consistent with other provisions of the securities laws dealing with
statutory disqualification.90
The Commission is adopting renamed paragraph (d) of Rule of Practice 194 as proposed,
including the five-year time period in the proposal, for the reasons discussed in the Proposing
Release.91 In determining to adopt the proposed five-year time period, the Commission carefully
considered the burden that may be imposed by requiring SBS Entities to provide older materials
and documents that may not be as readily available, as well as our need to evaluate the context
88

17 CFR 201.151, 201.152, 201.153. Rule of Practice 151, 17 CFR 201.151, concerns the
procedure for filing of papers with the Commission; Rule of Practice 152, 17 CFR
201.152, concerns the form of filing papers with the Commission; Rule of Practice 153,
17 CFR 201.153, concerns the signature requirement and effect of filing papers.

89

See Better Markets Letter, at 6. Although the commenter did not specify a particular
provision, the Commission did propose a five-year time period in proposed paragraph
(c)(4). Proposed paragraph (c)(4) would require a copy of any decision, order, or
document issued with respect to any proceedings resulting in the imposition of
disciplinary sanctions or pending proceeding against the associated person by the
Commission, CFTC, any federal or state or law enforcement regulatory agency,
registered futures association, foreign financial regulatory authority, registered national
securities association, or any other SRO, or commodities exchange, or any court, that
occurred during the five years preceding the filing of the application pursuant to Rule of
Practice 194. Proposed paragraphs (d)(6) and (d)(10) also contain similar requests for
certain information for a five-year time period. See Section III.E, infra.

90

See Better Markets Letter, at 6.

91

Proposing Release, 80 FR at 51689-91, 51719; proposed Rule of Practice 194(c).
- 30 -

and circumstances underlying the application.92 Furthermore, we note that paragraph (d)(1) of
the Rule as adopted requires that the application include a copy of the order or other applicable
document that resulted in the associated person being subject to a statutory disqualification.
Therefore, the orders or other applicable documents provided with the application may go back
longer than five years.93
In addition, the Commission does not agree with the commenter that a ten-year time
period would be more consistent with the current practice in similar contexts. Paragraph (d)(4)
of the final rule requires a copy of any decision, order, or document issued with respect to any
proceeding resulting in the imposition of disciplinary sanctions or pending proceeding against
the associated person by the Commission, CFTC, any federal or state or law enforcement
regulatory agency, registered futures association, foreign financial regulatory authority,
registered national securities association, or any other SRO, or commodities exchange, or any
court, that occurred during the five years preceding the filing of the application pursuant to Rule
of Practice 194. FINRA’s membership continuance applications require analogous disciplinary
information for a five-year time period—not a ten-year time period.94 For example, like
92

We note that the Appendix paragraph (c) to Rule of Practice 194 states that, in addition to
the information required by the rule, Commission staff may request supplementary
information from the applicant to assist in the Commission’s review. See also Proposing
Release, 80 FR at 51689, n.54, 51722 (proposing the same requirement).

93

For example, statutory disqualification may result where an associated person has
committed “any other felony within ten years.” 15 U.S.C. 78c(a)(39)(F). See also, e.g.,
15 U.S.C. 80a-9(a) (ineligibility under Section 9(a) of the Investment Company Act of
1940 (“Investment Company Act”) may result where a person (or an affiliated person)
within ten years has been convicted of any felony or misdemeanor involving the purchase
or sale of any security or arising out of such person’s conduct as an underwriter, broker,
dealer, investment adviser, or in other specified categories).

94

See FINRA Form MC-400, Section 4, Items 9a, 11; FINRA Form MC-400A, Section 2,
Items 4, 5.
- 31 -

paragraph (d)(4), FINRA Form MC-400, Section 4, Items 9 and FINRA Form MC-400A,
Section 2, Item 4 request information within the past five years concerning “any proceeding
which has resulted in the imposition of disciplinary sanctions by FINRA, the U.S. Securities and
Exchange Commission, the Commodity Futures Trading Commission, any federal or regulatory
agency, foreign financial regulatory authority, any self-regulatory organization or commodities
exchange, or any court or state agency.”95 Additionally, the Commission’s Rule of Practice 193
only requires compliance and disciplinary history during the two years preceding the filing of a
Rule 193 application.96
As with the proposed rule, under the terms of the final rule, the SBS Entity (rather than
the associated person) will be required to submit the application, including the signed written
statement under paragraph (d). Further, as specified below, the Commission is requiring certain
information (e.g., concerning the supervision by the SBS Entity over the associated person) to be
submitted with the application that is within the possession of the SBS Entity itself. An
application under Rule of Practice 194, as proposed and adopted, will be filed pursuant to Rules
of Practice 151, 152 and 153.97 The Commission believes that filing pursuant to these rules will
provide the Commission with the information that it needs to assess an application under Rule of
Practice 194.
95

FINRA Form MC-400, Section 4, Item 9a; FINRA Form MC-400A, Section 2, Item 4.

96

See 17 CFR 201.193(b)(4)(iii). However, and as noted above, although paragraph (d)(4)
(and other provisions relating to information that an applicant must provide regarding an
individual’s disciplinary history) provide for a five-year time period, applicants will be
required under paragraph (d)(1) of the final rule to provide the Commission with a copy
of an order or other applicable document which subjects the individual to, a statutory
disqualification irrespective of when the misconduct that gives rise to the statutory
disqualification occurred (e.g., even if outside the five-year time period).

97

17 CFR 201.151, 201.152, 201.153. See also Note 88, supra.
- 32 -

E.

Rule of Practice 194(e) – Written Statement

Proposed Rule of Practice 194 would have set forth the items to be addressed for
applications for natural persons.98 In particular, the Commission proposed to require an
applicant to address certain information in the written statement. For associated persons that are
natural persons, an SBS Entity would be required to address: (i) the associated person’s
compliance with any order resulting in the statutory disqualification;99 (ii) the associated
person’s employment during the period subsequent to the event giving rise to the statutory
disqualification;100 (iii) the capacity or position in which the associated person subject to a
statutory disqualification proposes to be associated with the SBS Entity;101 (iv) the terms and
conditions of employment and supervision to be exercised over the associated person and, where
applicable, by such associated person;102 (v) the qualifications, experience, and disciplinary
history103 of the proposed supervisor(s) of the associated person;104 (vi) the compliance and
98

See Proposing Release, 80 FR at 51691-93, 51719-20; proposed Rule of Practice 194(d).
The proposal also set forth the items to be addressed for applications for associated
person entities. See proposed Rule of Practice 194(f). Rule of Practice 194(c), as
adopted, provides an exclusion for an SBS Entity from the prohibition in Exchange Act
Section 15F(b)(6) with respect to associated persons entities; therefore, the corresponding
provision with respect to associate person entities, proposed Rule of Practice 194(f), is
not needed and is not being adopted.

99

See proposed Rule of Practice 194(d)(1).

100

See id. (d)(2).

101

See id. (d)(3).

102

See id. (d)(4).

103

Disciplinary history would include, for example, the items contained in Exchange Act
Rule 17a-3(a)(12)(i)(D) through (G), 17 CFR 240.17a-3(a)(12)(i)(D) through (G), which
items are required to be collected by broker-dealers with respect to their associated
persons and are required to be provided on Form U-4. Such items include, among other
things, a record of any disciplinary action taken, or sanction imposed, upon the associated
person by any federal or state agency, or national securities exchange or national
securities association, a record of any permanent or temporary injunction entered against
- 33 -

disciplinary history, during the five years preceding the filing of the application, of the SBS
Entity;105 (vii) the names of any other statutorily disqualified associated persons at the SBS
Entity, and whether they are to be supervised by the associated person;106 (viii) whether the
associated person has taken any relevant courses, seminars, examinations or other actions
subsequent to becoming subject to a statutory disqualification to prepare for his or her
participation in the security-based swap business;107 (ix) why the associated person should be
permitted to effect or be involved in effecting security-based swaps on behalf of the SBS
Entity;108 (x) whether, during the five years preceding the filing of the application, the associated
person has been involved in any litigation concerning investment or investment-related activities
or whether there are there any unsatisfied judgments outstanding against the associated person
concerning investment or investment-related activities;109 and (xi) any other information that the
the associated person, or a record of any arrest or indictment for any felony or certain
specified types of misdemeanors. See also Recordkeeping and Reporting Requirements
for Security-Based Swap Dealers, Major Security-Based Swap Participants, and BrokerDealers; Capital Rule for Certain Security-Based Swap Dealers, Exchange Act Release
No. 71958 (Apr. 17, 2014), 79 FR 25194, 25205, 25308-09 (May 2, 2014).
104

See proposed Rule of Practice 194(d)(5).

105

See id. (d)(6).

106

See id. (d)(7).

107

See id. (d)(8).

108

See id. (d)(9).

109

See id. (d)(10). Applicants should look to the definition of “investment or investmentrelated” in Form SBSE, which states that “investment or investment-related” includes
“pertaining to securities, commodities, banking, savings association activities, credit
union activities, insurance, or real estate (including, but not limited to, acting as or being
associated with a broker-dealer, municipal securities dealer, government securities broker
or dealer, issuer, investment company, investment adviser, futures sponsor, bank,
security-based swap dealer, major security-based swap participant, savings association,
credit union, insurance company, or insurance agency).” See Registration Adopting
Release, Form SBSE.
- 34 -

applicant believes to be material to the application.110
The Commission did not receive any specific comments on the items to be addressed set
forth in the proposal. However, as discussed in Section III.D above, the Commission received
one general comment stating that the Commission should require applicants to address
disciplinary events going back ten years, not five years.111 For the same reasons set forth above
in Section III.D, the Commission is adopting the five-year time period as proposed, and for the
reasons discussed in the proposal,112 the Commission is adopting renamed paragraph (e) of Rule
of Practice 194, as proposed, with four minor technical changes.113
F.

Rule of Practice 194(f) – Prior Applications or Processes

Proposed Rule of Practice 194 would have required an applicant to provide as part of the
application any order, notice or other applicable document reflecting the grant, denial or other
disposition (including any dispositions on appeal) of any prior application concerning the
associated person under Rule of Practice 194 and other similar processes.114 More specifically,
the proposal would have required an applicant to provide any order, notice or other applicable
110

See proposed Rule of Practice 194(d)(11).

111

See Better Markets Letter, at 6. The commenter did not specify a particular provision of
the proposal.

112

See Proposing Release, 80 FR at 51691-93, 51719-20; proposed Rule of Practice 194(d).

113

The technical changes are (1) updating an internal cross reference to subsection (c) in the
proposal to reflect subsection (d) in final Rule of Practice 194; (2) moving the phrase
“notwithstanding the event resulting in statutory disqualification” from an introductory
phrase to later in the text of subparagraph (9) to clarify any possible ambiguity in
subparagraph (9) without changing the scope of that provision; (3) updating the technical
wording in subparagraph (e)(9) to more closely conform to the other provisions in
subsection (e) by removing the phrase “the applicant should provide;” and (4) changing
the term “impact upon” to “affect” to clarify any possible ambiguity in subparagraph (9)
without changing the scope of the provision.

114

See Proposing Release, 80 FR at 51693-94, 51720-21; proposed Rule of Practice 194(g).
- 35 -

document where an application has previously been made for the associated person: (1) pursuant
to Rule of Practice 194;115 (2) pursuant to Rule of Practice 193;116 (3) pursuant to Section 9(c) of
the Investment Company Act;117 (4) pursuant to Exchange Act Section 19(d),118 Exchange Act
Rule 19h-1119 or a proceeding by an SRO for a person to become or remain a member, or an
associated person of a member, notwithstanding the existence of a statutory disqualification; and
(5) by the CFTC or a registered futures association for registration, including as a principal,
notwithstanding the existence of a statutory disqualification.120 Proposed Rule of Practice 194
also addressed: (i) the exception in CFTC Regulation 23.22(b)121 by requiring an SBS Entity to
provide any order or other applicable document providing that the associated person may be
listed as a principal, registered as an associated person of another CFTC registrant, or registered
as a floor broker or floor trader, notwithstanding the statutory disqualification and (ii) the
CFTC’s and NFA’s current process for granting relief from CEA Section 4s(b)(6),122 the
115

See proposed Rule of Practice 194(g)(1).

116

17 CFR 201.193; see proposed Rule of Practice 194(g)(2).

117

15 U.S.C. 80a-9(c); see proposed Rule of Practice 194(g)(3).

118

15 U.S.C. 78s(d); see proposed Rule of Practice 194(g)(4).

119

17 CFR 240.19h-1.

120

See proposed Rule of Practice 194(g)(5).

121

17 CFR 23.22(b); see proposed Rule of Practice 194(g)(5)(i). Under that provision, the
CFTC allows association with a Swap Entity with respect to a person who is already
listed as a principal, registered as an associated person of another CFTC registrant, or
registered as a floor broker or floor trader, notwithstanding that the person is subject to a
statutory disqualification under section 8a(2) or 8a(3) (7 U.S.C. 12a(2), (3)) of the CEA.
See Note 11, supra.

122

7 U.S.C. 6s(b)(6); see proposed Rule of Practice 194(g)(5)(ii). This provision requires
the SBS Entity to submit any determination by NFA (the sole registered futures
association, see CFTC Registration Release, 77 FR at 2624) with respect to that grant of
no-action relief. The Commission is adopting the language in paragraph (f)(5)(ii) largely
as proposed but with a minor technical modification to more accurately reflect the
- 36 -

provision that is parallel to Exchange Act Section 15F(b)(6), with respect to persons that are not
exempt from that provision pursuant to CFTC Regulation 23.22(b).123
Although the Commission did not receive any comments specifically addressing this
provision of the proposal, one commenter stated that the Commission should take into account
the views of other regulatory bodies that may have adjudicated similar issues with respect to the
associated persons subject to a statutory disqualification.124 Renamed paragraph (f) of Rule of
Practice 194, as adopted, will facilitate the Commission’s ability to take such views into account.
Paragraph (f) to Rule of Practice 194 is designed to inform the Commission when a
similar application made with respect to the associated person has been granted or denied (or
been subject to some other disposition).125 Information concerning the grant or denial (or other
disposition) of a prior application or other request for relief, and the reasons for the grant or
denial, may inform the Commission’s assessment as to whether it would be consistent with the
public interest for the person to effect or be involved in effecting security-based swaps on behalf
of an SBS Entity.
For example, in the event that a prior application has been granted, but the terms and
conditions of the association with the other registrant are materially different than the proposed
terms and conditions of the statutorily disqualified person’s association with the SBS Entity, the
CFTC’s and NFA’s approach to statutory disqualification.
123

17 CFR 23.22(b).

124

Letter from Elijah E. Cummings, Ranking Member, Committee on Oversight and
Government Reform, U.S. House of Representatives, dated November 13, 2015
(“Cummings Letter”), at 2.

125

As discussed in the Proposing Release, in cases where a statutorily disqualified person
was formerly associated with another SBS Entity, an applicant should use reasonable
efforts to obtain relevant documentation from the other SBS Entity.
- 37 -

Commission could consider whether the terms and conditions at the SBS Entity that are different
may result in any greater risk of future misconduct.126
Accordingly, for reasons discussed in the proposal,127 the Commission is adopting
renamed Rule of Practice 194(f), as proposed, with one minor technical change to more
accurately reflect the CFTC’s and NFA’s approach to statutory disqualification.
The proposal would have required an applicant to provide any order, notice or other
applicable document reflecting the grant, denial or other disposition (including any dispositions
on appeal) of any prior application or process concerning the associated person by the CFTC and
NFA through their process for granting relief from CEA Section 4s(b)(6)128 with respect to
persons that are not exempt from that provision pursuant to CFTC Regulation 23.22(b).129 Under
the CEA and CFTC regulations, the consequences of an individual’s statutory disqualification
differ depending upon whether the individual is an associated person of a CFTC registrant or a
126

Notably, in circumstances where the prior application has been denied or where the terms
and conditions of employment are not the same, an SBS Entity cannot avail itself of
paragraph (h) of Rule of Practice 194, see Section III.H, infra, and therefore will be
required to file an application under Rule of Practice 194 in order to permit an associated
person subject to a statutory disqualification to be able to effect or be involved in
effecting security-based swaps on behalf of an SBS Entity.

127

See Rule of Practice 194 Proposing Release, 80 FR at 51693-94, 51720-21.

128

7 U.S.C. 6s(b)(6).

129

17 CFR 23.22(b). See Proposing Release, 80 FR at 51693-51694, 51721; proposed Rule
of Practice 194(g)(5(ii). Under the CFTC and NFA’s process, available through noaction relief granted by CFTC staff, a Swap Entity may make an application to NFA to
permit an associated person of a Swap Entity subject to a statutory disqualification to
effect or be involved in effecting swaps on behalf of the Swap Entity. NFA will provide
notice to a Swap Entity whether or not NFA would have granted the person registration
as an associated person. As noted in the Proposing Release, and as adopted here as well,
the rule requires the SBS Entity to submit any determination by NFA (the sole registered
futures association) with respect to that grant of no-action relief. See CFTC Letter No.
12–15, at 5–8 (Oct. 11, 2012), available at
http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-15.pdf.
- 38 -

principal of a CFTC registrant. An associated person of a CFTC registrant is required to register
separately with the CFTC by filing his or her own application for registration. Therefore, if the
associated person of a CFTC registrant has a statutory disqualification, the application for
registration will be denied unless the associated person goes through the process established by
NFA to be registered notwithstanding the statutory disqualification. However, a principal of a
CFTC registrant does not apply, either for registration or to be listed as a principal. Rather, the
entity of which the person is a principal is required to list that principal on the entity’s
application for registration with the CFTC. As a result, if the principal has a statutory
disqualification, the entity’s application for registration with the CFTC will be denied unless the
entity goes through the process with NFA to be registered, notwithstanding having to list a
statutorily disqualified principal.130
G.

Rule of Practice 194(g) – Notification to Applicant and Written Statement

Proposed Rule of Practice 194 would have set forth the procedure where there is an
adverse recommendation proposed by the Commission staff with respect to an application under
proposed Rule of Practice 194.131 Consistent with Rule of Practice 193(e),132 the Commission
proposed that where there would be an adverse recommendation, the applicant would be so
advised and provided with a written statement by the Commission staff of the reasons for such
130

Accordingly, the Commission has adopted the following language with the new language
underlined for subpart (ii): “Any determination by a registered futures association (as
provided in 7 U.S.C. 21) that had the associated person applied for registration as an
associated person of a swap dealer or a major swap participant, or had a swap dealer or
major swap participant listed the associated person as a principal in the swap dealer’s or
major swap participant’s application for registration, notwithstanding statutory
disqualification, the application of the associated person or of the swap dealer or major
swap participant, as the case may be, would have been granted or denied.”

131

See Proposing Release, 80 FR at 51694, 51721; proposed Rule of Practice 194(h).

132

17 CFR 201.193(e).
- 39 -

recommendation, and the applicant would then have 30 days to submit to the Commission a
written statement in response.133
The Commission did not receive comments concerning this provision of the proposal
and, for the reasons discussed in the proposal, is adopting renamed paragraph (g) of Rule of
Practice 194 as proposed.134
H.

Rule of Practice 194(h) – Notice in Lieu of an Application

Proposed Rule of Practice 194 would have limited the applicability of the statutory
prohibition in Exchange Act Section 15F(b)(6) by prescribing the conditions under which an
SBS Entity could permit a person associated with it who is subject to a statutory disqualification
to effect or be involved in effecting security-based swaps on its behalf without being required to
file an application under Rule of Practice 194.135 The Commission proposed to permit, subject to
all of the conditions specified in proposed paragraph (j)(2) being met,136 an associated person
who is subject to a statutory disqualification to effect or be involved in effecting security-based
swaps on behalf of SBS Entities where the Commission or other regulatory authority previously
reviewed the matter and permitted the person subject to a statutory disqualification to be a
member, associated with a member, registered or listed as a principal of a regulated entity
notwithstanding the statutory disqualification.137 The Commission also proposed that where an
133

See Proposing Release, 80 FR at 51694, 51721; proposed Rule of Practice 194(h).

134

See id.

135

Proposing Release, 80 FR at 51698-700, 51721-22; proposed Rule of Practice 194(j).

136

As explained in the proposal, “[a]n SBS Entity seeking to rely on proposed Rule of
Practice (j)(1) would have to meet all of the conditions specified in proposed paragraph
(j)(2).” Id. at 51699. The same is true for adopted Rule of Practice 194(h).

137

See id. at 51698-99 (discussing proposed paragraph (j)(1)(i) through (iv)). These same
provisions are being adopted in Rule of Practice 194(h)(1)(i) through (iv). We note that
- 40 -

SBS Entity meets certain requirements the SBS Entity would be permitted to file notice with the
Commission (in lieu of an application).138
The Commission received comments objecting generally to the proposal.139 One
commenter stated that the provision should not be adopted as proposed because FINRA’s
statutory disqualification process is “typically designed for individuals” and Exchange Act
Section 15F(b)(4) creates a “new statutory disqualification.” As outlined above, FINRA member
firms that are themselves subject to a statutory disqualification and wish to obtain relief from the
eligibility requirements are required to seek approval from FINRA.140 Furthermore, Exchange
Act Section 15F(b)(4)141 does not reference “statutory disqualification” or otherwise establish a
category of conduct that would disqualify an associated person from effecting or being involved
in effecting security-based swaps.142
Rule of Practice 194(h) would not be applicable in instances where the Commission itself
has made an affirmative determination to bar or suspend the associated person. See id. at
51698 (explaining that, other than in cases where the person is subject to a Commission
bar, the Commission did not believe it would be necessary to re-examine an event for
which relief has already been granted by the CFTC, an SRO or a registered futures
association).
138

See Proposing Release, 80 FR at 51699-700; proposed Rule of Practice 194(j)(2)(iii),
(iv).

139

Americans for Financial Reform Letter, at 2; Better Markets Letter, at 3-4; Public Citizen
Letter, at 4-5; Cummings Letter, at 2-3.

140

See Note 9, supra (discussing FINRA Form MC-400A, Membership Continuance
Application: Member Firm Disqualification Application,
http://www.finra.org/web/groups/industry/@ip/@enf/@adj/documents/industry/p013339.
pdf).

141

As noted above, see Note 54, supra, Exchange Act Section 15F(b)(4) provides the
Commission with authority (other than certain inapplicable exceptions specified in
Exchange Act Section 15F(b)(4)(d) and (e)) to “prescribe rules applicable to securitybased swap dealers and major security-based swap participants.” 15 U.S.C. 78o-10(b)(4).

142

Rather, Exchange Act Section 15F(b)(6) references “statutory disqualification,” and the
Commission has previously stated that a “statutory disqualification” for purposes of
- 41 -

The Commission also received comments arguing that allowing deference to SROs is
inconsistent with current practice.143 However, the Commission observes that Rule of Practice
194(h) is generally consistent with the current practice with respect to SROs and their members.
For example, the information provided by the notice under adopted paragraph (h)(2)(iii) is
consistent with the information that is currently required for a notification under Exchange Act
Rule 19h-1(a)(4).144 In the event that the views of the Commission were to diverge from the
CFTC, an SRO or a registered futures association with respect to an associated person subject to
a statutory disqualification under the statutory scheme of the Exchange Act, under Exchange Act
Section 15F(l)(3), the Commission retains the authority to, by order, censure, place limitations
on the activities or functions of the associated person, or suspend or bar such person from being
associated with an SBS Entity.145 As a result, even in cases where the CFTC, an SRO or a
registered futures association has previously granted relief and an SBS Entity files a notice in
lieu of an application under Rule of Practice 194(h), the Commission may, in the appropriate
case, institute proceedings under Exchange Act Section 15F(l)(3) to determine whether the
Commission should censure, place limitations on the activities or functions of such person, or
Exchange Act Section 15F(b)(6) is not a new defined term (with additional categories),
but rather is described (consistent with other contexts) in Exchange Act Sections
3(a)(39)(A) through (F). 15 U.S.C. 78c(a)(39)(A) through (F); see also Registration
Adopting Release, 80 FR at 48972; 17 CFR 240.15Fb2-1(e); 17 CFR 240.15Fb6-1; 17
CFR 240.15Fb6-2.
143

See Americans for Financial Reform Letter, at 2. See also Cummings Letter, at 2-3
(arguing that the Commission should not delegate its authority to interpret the Exchange
Act to the CFTC, FINRA or a registered futures association, in part, because “[n]one of
the entities to which the proposed rule would grant the authority to issue a waiver has
been granted that responsibility by statute.”).

144

17 CFR 240.19h-1(a)(4); proposed Rule of Practice 194(j)(2)(iii), (iv).

145

15 U.S.C. 78o-10(l)(3). See also Proposing Release, 80 FR at 51698 n.98.
- 42 -

suspend for a period not exceeding 12 months, or bar such person from being associated with an
SBS Entity.146 The Commission also believes that where the conditions set forth in paragraph (h)
are met, it would not be necessary for the Commission (other than in cases where the person is
subject to a Commission bar) to re-examine by means of a full application under Rule of Practice
194 an event for which relief has already been granted. Rather, the Commission believes that the
better approach is to require an applicant to provide a notice under Rule of Practice 194(h) in lieu
of a full application under Rule of Practice 194, which would alert the Commission to issues that
could lead to the institution of proceedings pursuant to Exchange Act Section 15F(l)(3)147 where
doing so is appropriate.
Another commenter argued that the Commission should not “delegate” its authority to
determine whether an exclusion from Exchange Act Section 15F(b)(6) is appropriate because
regulators administer different statutory schemes and have different priorities.148 This same
commenter argued that this proposed subsection should not be adopted because, among other
things, the Commission should exercise its own judgment in each case to ensure that the policies
underlying the securities laws are fulfilled.149
The Commission acknowledges that other regulators administer different statutory

146

See 15 U.S.C. 78o-10(l)(3). See also, e.g., 15 U.S.C. 15(b)(6).

147

15 U.S.C. 78o-10(l)(3).

148

See Better Markets Letter, at 3-4.

149

See Better Markets Letter, at 3-4 (arguing that this proposed subsection should not be
adopted because the Commission should exercise its judgment in each case to ensure that
the policies underlying the securities laws are fulfilled and because the proposal would
not ensure that applications for an exemption from disqualification will be subject to
strong, consistent, and relevant considerations under the securities laws).
- 43 -

schemes,150 but it does not believe that the applicable standards that regulators identified in
paragraph (h) use in their respective statutory disqualification processes are sufficiently different
to warrant requiring SBS Entities to file a full application under Rule of Practice 194, as opposed
to a notice in lieu of an application. In particular, the CFTC and NFA assess whether registration
would not pose a substantial risk to the public despite the existence of the statutory
disqualification.151 Likewise, and as noted above, consistent with Exchange Act Section
15A(g)(2),152 under Article 3, Section 3(d) of the FINRA By-Laws,153 the FINRA Board may, in
its discretion, approve the continuance in membership, and may also approve the association or
continuance of association of any person, if the FINRA Board determines that such approval is
consistent with the public interest and the protection of investors.154 Although the CFTC or a
registered futures association may not review “considerations under the securities laws,”155 and
may have “different statutory schemes and . . . different priorities,”156 those regulators, and
SROs, will generally assess whether it is consistent with the public interest to permit a person
who is subject to statutory disqualification to be associated with (or a principal of) a registered
entity. As a result, a review by the regulators provided for in paragraph (h) would substantially
overlap with any review that the Commission would undertake in assessing whether an applicant
150

See Better Markets Letter, at 3-4; Cummings Letter, at 2-3.

151

See CEA Regulation 3.60(e)(1), (2), 17 CFR 3.60(e)(1)(2), NFA Registration 507(a)(1),
(2).

152

15 U.S.C. 78o-3(g)(2).

153

See FINRA By-Laws, Article III, Section 3(d),
http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=4606.
See also Registration Proposing Release, 80 FR at 51687.

154

See also FINRA Rules 9522(e), 9524(b)(1).

155

See Better Markets Letter, at 3-4.

156

Id.
- 44 -

has made a showing under Rule of Practice 194(b) that it would be consistent with the public
interest to grant relief with respect to a statutorily disqualified associated person. And, as stated,
the Commission will retain authority under Exchange Act Section 15F(l)(3)157 to determine
whether potential considerations under the securities law would warrant diverging from a
decision of another regulator in a particular matter.
Similarly, the Commission received comments arguing that SROs are conflicted or do not
otherwise have the impartiality necessary to make decisions regarding the best interests of the
public.158 While the Commission has carefully considered the concerns raised by these
commenters, the Commission believes that the statutory and regulatory framework under which
SROs operate (including the Commission’s oversight function of SROs159 and the CFTC’s
oversight of the NFA160), and the Commission’s independent authority to, where appropriate,

157

15 U.S.C. 78o-10(l)(3).

158

See Public Citizen Letter, at 4-5; Better Markets Letter, at 3-4; Cummings Letter, at 2;
Americans for Financial Reform Letter, at 2.

159

As stated in Note 9, supra, an SRO may be required to send a notice or notification to the
Commission of its proposal to admit or continue the membership of a person or
association with a member notwithstanding statutory disqualification in accordance with
Exchange Act Rule 19h-1. See 17 CFR 240.19h-1. Under Exchange Act Section
15A(g)(2), 15 U.S.C. 78o-3(g)(2), where it is necessary or appropriate in the public
interest or for the protection of investors, the Commission may, by order, direct the SRO
to deny membership to any registered broker or dealer, and bar from becoming associated
with a member any person, who is subject to a statutory disqualification. See also 15
U.S.C. 78f(c)(2) (national securities exchange); 15 U.S.C. 78q-1(b)(4)(A) (registered
clearing agency).

160

The NFA is a registered futures association under section 17 of the CEA, 7 U.S.C. 21,
and is the SRO for swap transactions. Section 17(h) of the CEA provides for CFTC
review of certain NFA decisions, including the NFA’s disciplinary actions and member
responsibility actions, as do the CFTC’s Part 171 Rules, 17 CFR §§ 171.1-171.50. In
addition, the CFTC may institute review of disciplinary actions taken by the NFA on its
own motion. See 17 U.S.C. 21(h)(3). See also CFTC, Division of Clearing and
Intermediary Oversight, Review of the Disciplinary Program of National Futures
- 45 -

institute proceedings with respect to the statutorily disqualified associated person under
Exchange Act Section 15F(l)(3), serves to mitigate commenters’ concerns.161 SROs are
entrusted with quasi-governmental authority, and, subject to Commission oversight.162 SROs
must also be organized and have the capacity to carry out the purposes of the Exchange Act and
to comply and enforce compliance by its members and persons associated with its members with
the Exchange Act, the rules and regulations thereunder and the rules of the SRO.163 The
Exchange Act reflects a recognition of self-regulation as a fundamental component of the
oversight and supervision of U.S. securities markets and their members.
The Commission likewise disagrees with a commenter’s view that “[n]one of the entities
to which the proposed rule would grant the authority to issue a waiver has been granted that
responsibility by statute.”164 To the extent that the commenter may be concerned that the
Commission does not have the statutory authority to rely on prior determinations made by those
regulators, as set forth in Rule of Practice 194(h), Exchange Act Section 15F(b)(6) expressly
provides broadly and without limitation that the Commission can establish exceptions to that
statutory prohibition by “rule, regulation, or order.”165 Granting relief from the statutory
prohibition to SBS Entities where the conditions set forth in Rule of Practice 194(h) are met,
including the filing of a notice in lieu of an application, is within the scope of the statutory
Association, July 2002,
https://www.cftc.gov/sites/default/files/files/tm/tmnfarer071102.pdf.
161

See 15 U.S.C. 78o-10(l)(3); Proposing Release, 80 FR at 51698 n.98.

162

See, e.g., 15 U.S.C. 78o-3 (registered securities associations); 15 U.S.C. 78s (registration,
responsibilities, and oversight of SROs).

163

See, e.g., 15 U.S.C. 78o-3(b)(2).

164

See Cummings Letter, at 2.

165

15 U.S.C. 78o-10(b)(6).
- 46 -

authority provided to the Commission under Exchange Act Section 15F(b)(6).166 Moreover, the
regulators identified in paragraph (j) are currently granted the authority under their own statutory
and regulatory frameworks to provide relief from a statutory disqualification.167 Paragraph (h)
does not “delegate [the Commission’s] authority to interpret the Exchange Act”168 because such
regulators only interpret their own statutory and regulatory frameworks with respect to persons
subject to a statutory disqualification. The Commission believes that where the conditions set
forth in paragraph (h) are met, it would not be necessary for the Commission (other than in cases
where the person is subject to a Commission bar) to re-examine by means of a full application
under Rule of Practice 194 an event for which relief has already been granted. Rather, the
Commission believes that the better approach is to require an applicant to provide a notice under
Rule of Practice 194(h) in lieu of a full application under Rule of Practice 194, which would alert
the Commission to issues that could lead to the institution of proceedings pursuant to Exchange
Act Section 15F(l)(3)169 where doing so is appropriate.
Another commenter objected to the proposal on the grounds that the Commission should
itself make a determination, rather than the CFTC, an SRO or a registered futures association, in
part, because the proposal would “render[] the [Commission] unaccountable to Congress.”170
The Commission also received a comment objecting to the proposal on the grounds that the
Commission retains sole authority and responsibility to interpret and adjudicate the entire body
of securities law in the public interest and any waiver decision should be reviewed by the
166

See 5 U.S.C. 78o-10(b)(4). See also Note 54, supra.

167

See Registration Adopting Release, 80 FR at 51687-89.

168

See Cummings Letter, at 2.

169

15 U.S.C. 78o-10(l)(3).

170

Public Citizen Letter, at 4-5.
- 47 -

Commission.171 In all cases where paragraph (h) applies, although the Commission would not
receive an application under Rule of Practice 194, the Commission would be able to review the
facts of cases.172 Nor is it the case that paragraph (h) of Rule of Practice 194 would “render[] the
[Commission] unaccountable to Congress”173 or divest the Commission of its “sole authority and
responsibility to interpret and adjudicate the entire body of securities law in the public
interest,”174 because, as noted above, the Commission retains its statutory authority to bring an
action under Exchange Act Section 15F(l)(3).
After careful consideration of the comments received, and for the reasons discussed in the
proposal,175 the Commission is adopting renamed paragraph (h) to Rule of Practice 194 as
proposed, with five technical modifications. First, because Rule of Practice 194, as adopted,
provides an exclusion for an SBS Entity from the prohibition in Exchange Act Section 15F(b)(6)
with respect to associated persons entities, references in the proposed rule text to “is a natural
person”176 and one proposed subsection, which pertained to associated person entities only,177 are
no longer needed, and are not being adopted. Second, certain internal cross references to other
provisions within this subsection are being revised to reflect renamed Rule of Practice 194(h).178
Third, the phrase “or otherwise by the Commission” is being added to paragraph (h)(1)(ii) to
171

Cummings Letter, at 2-3.

172

Contra Americans for Financial Reform Letter, at 2.

173

Public Citizen Letter, at 5.

174

Cummings Letter, at 2.

175

See Proposing Release, 80 FR at 51698-700, 51721-22.

176

See proposed Rule of Practice 194(j)(1)(ii), (j)(2)(iii).

177

See id. (j)(2)(iv).

178

Internal cross references to subsection (j) in the proposal are being updated to reflect
subsection (h) in final Rule of Practice 194. See id. (j)(1), (j)(2)(ii).
- 48 -

address situations where the Commission has granted a natural person consent to associate or
change the terms and conditions of association with a regulated entity even if that consent was
not granted pursuant to Rule of Practice 193.179 Fourth, the Commission is changing the phrase a
“person that is subject to a statutory disqualification” (emphasis added) in paragraphs (h)(1) and
(h)(2) to read a “person who is subject to a statutory disqualification” (emphasis added) to more
closely track the language used in Exchange Act Section 15F(b)(6).180 Finally, a reference to the
Commission’s Rules of Practice 151, 152 and 153 is being added to provide guidance on how the
notice in Rule of Practice 194 (h)(2)(iii) should be filed with the Commission.181
I.

Note to Rule of Practice 194

The Commission proposed adopting an accompanying Note to Rule of Practice 194,
similar to the Preliminary Note to Rule of Practice 193.182 The Commission received no
comments concerning the Note to proposed Rule of Practice 194 and is adopting, for the reasons
discussed in the proposal, the Note substantially as proposed.183
As adopted, the Note to Rule of Practice 194 provides that:
•

An application made pursuant to the rule must show that it would be consistent with the

179

This modification to paragraph (h)(1)(ii) is intended to address a regulatory gap with
respect to Commission orders granting natural persons consent to associate with
regulated entities that are not currently listed in Rule of Practice 193, such as, for
example, natural persons associated with municipal advisors. Although Rule of Practice
193 does not currently mention municipal advisors, Rule 15Bc4-1 states that the
Commission may “consent” to a person being associated with a municipal advisor. As a
result, this modification will include Commission orders granting such consent within the
scope of Rule 194.

180

See Note 82, supra (discussing the same technical change to Rule of Practice 194(d)).

181

See Note 88, supra (discussing the Commission’s Rules of Practice 151, 152 and 153).

182

See Proposing Release, 80 FR at 51700-01; proposed Rule of Practice 194, Appendix.
See also 17 CFR 201.193, Preliminary Note.

183

See Proposing Release, 80 FR at 51700-01.
- 49 -

public interest to permit the associated person of the SBS Entity to effect or be involved
in effecting security-based swaps on behalf of the SBS Entity.184
•

The nature of the supervision that an associated person will receive or exercise as an
associated person with a registered entity is an important matter bearing upon the public
interest.

•

In meeting the burden of showing that permitting the associated person to effect or be
involved in effecting security-based swaps on behalf of the SBS Entity is consistent with
the public interest, the application and supporting documentation must demonstrate that
the terms or conditions of association, procedures, or proposed supervision (if the
associated person is a natural person), are reasonably designed to ensure that the statutory
disqualification does not negatively affect the ability of the associated person to effect or
be involved in effecting security-based swaps on behalf of the SBS Entity in compliance
with the applicable statutory and regulatory framework. The Commission made one
technical amendment in the Note to Rule of Practice 194 to change the term “impact
upon” to “affect” in order to clarify any possible ambiguity without changing the scope of
the provision.

•

Normally, the applicant’s burden of demonstrating that permitting the associated person
to effect or be involved in effecting security-based swaps on behalf of the SBS Entity is
consistent with the public interest will be difficult to meet where the associated person is
to be supervised by, or is to supervise, another statutorily disqualified individual.

•
184

The associated person may be limited to association in a specified capacity with a
See Section III.B, supra.

- 50 -

particular registered entity and may also be subject to specific terms and conditions.
Notably, the Commission proposed that where the associated person wishes to become
the sole proprietor of a registered entity and thus is seeking that the Commission issue an order
permitting the associated person who is subject to a statutory disqualification to effect or be
involved in effecting security-based swaps on behalf of an SBS Entity notwithstanding an
absence of supervision, the applicant’s burden will be difficult to meet.185 The Commission has
modified this sentence because the Commission does not anticipate that a registered SBS Entity
will be formed as a sole proprietorship in light of the de minimis exception to the definition of
“security-based swap dealer”186 and the thresholds applicable to the definition of “major
security-based swap participant.”187 As modified, paragraph (i)(5) to the Note to Rule of
Practice 194 provides that where there is an absence of supervision over the associated person
who is subject to a statutory disqualification, the applicant’s burden will be difficult to meet.
The Commission is including this statement because, as stated, the Commission believes that
there is a greater risk of harm where the associated person subject to a statutory disqualification
is not subject to adequate supervision.
Finally, the Note discusses various procedural aspects of Rule of Practice 194, including
the following:
•

In addition to the information specifically required by the rule, applications with respect
to natural persons should be supplemented, where appropriate, by written statements of

185

See, e.g., Final Rule of Practice 194(e)(3). See also Proposing Release, 80 FR at 51700,
51722. Accord 17 CFR 201.193, Preliminary Note.

186

See 17 CFR 240.3a71-2.

187

See, e.g., 17 CFR 240.3a67-1(a)(2), 240.3a67-3, 240.3a67-5, 3a67-9.
- 51 -

individuals who are competent to attest to the associated person’s character, employment
performance, and other relevant information.
•

In addition to the information required by the rule, the Commission staff may request
additional information to assist in the Commission’s review.

•

Intentional misstatements or omissions of fact may constitute criminal violations of 18
U.S.C. 1001, et seq. and other provisions of law.

•

The Commission will not consider any application that attempts to reargue or collaterally
attack the findings that resulted in the statutory disqualification.
J.

Confidentiality of Materials

In the proposal, the Commission stated that orders issued in accordance with Rule of
Practice 194 would be made publicly available, but applications and supporting materials would
be kept confidential subject to applicable law.188 The Commission received three comments
stating that the Commission should require all applications and supporting materials to be made
public.189 Specifically, one commenter stated that requiring all applications and supporting
materials to be made public would: (i) promote transparency; (ii) ensure that the public
understands that the Commission’s handling of such applications, thereby improving the public’s
confidence in the Commission’s oversight of market participants more generally; and (iii)
influence the application process under Rule of Practice 194 if it appears to be too lenient in
favor of allowing disqualified persons to serve in the security-based swap markets.190 Another

188

See Proposing Release, 80 FR at 51694.

189

Better Markets Letter, at 6; American for Financial Reform, at 3-4; Cummings Letter, at
3.

190

Better Markets Letter, at 6.
- 52 -

commenter stated that that: (1) applications and any supporting materials should be made public
as soon as they are received to ensure public transparency in the application and accountability;
and (2) should the Commission adopt the temporary exclusion in paragraph (i), the notice
required to be sent to the Commission should be made public.191 Another commenter noted that,
although the Commission should make applications under Rule of Practice 194 public, the
Commission should be able to make a good cause determination that such applicants remain
under seal.192
The Commission has carefully considered the comments and has determined not to
automatically make applications and supporting materials under Rule of Practice 194 public
(e.g., on the Commission’s website). For the reasons set forth below and consistent with the
Commission’s current practice in other contexts (e.g., applications and supporting materials
under Rule of Practice 193), the Commission believes that, as proposed, it is appropriate to keep
applications and supporting materials confidential, subject to the existing statutory and
regulatory framework with respect to the public availability of such materials, including the
Freedom of Information Act (“FOIA”),193 the Exchange Act,194 and applicable Commission
rules.195
First, applications and supporting materials may contain information that is proprietary or
otherwise confidential and not generally subject to disclosure under applicable law.196 As one
191

Americans for Financial Reform Letter, at 3-4.

192

Cummings Letter, at 3.

193

5 U.S.C. 552, et seq.

194

See 15 U.S.C. 78x.

195

See, e.g., 17 CFR 200.80; 17 CFR 201.190; 17 CFR 240.24b-2.

196

See 5 U.S.C. 552; 17 CFR 200.80(b)
- 53 -

commenter acknowledged, good cause may exist not to disclose certain information contained in
application materials.197 The existing statutory and regulatory framework sets forth a detailed
process for the Commission to make available application materials198 to members of the public,
upon request, but to keep certain information contained in those materials confidential, where
appropriate.199 FOIA, for example, contains express categories of statutory exemptions where
public disclosure is not required200—e.g., information that would invade an individual’s personal
privacy, or trade secrets or commercial or financial information that is confidential or
privileged.201 In addition to protecting the privacy interests of applicants and their associated
persons, there is also a public interest in preserving the confidentiality of such materials to
promote candor in applications so that the Commission may assess, based on all material facts,
whether granting an application is consistent with the public interest.
The Commission believes that this existing statutory and regulatory framework, which
provides for the public availability of certain materials, appropriately takes into consideration the
applicants’ interests in confidentiality with the concerns identified by commenters concerning
accountability, transparency, appropriateness of decision-making, and public confidence in the
Rule of Practice 194 application process (and the Commission’s oversight of market participants
more generally). Moreover, the Commission believes that relying on the existing statutory and
regulatory framework with respect to application materials is preferable to a “good cause”
197

See Cummings Letter, at 3.

198

15 U.S.C. 78x(a) (for purposes of 5 U.S.C. 552, “the term ‘records’ includes all
applications . . . notices, and other documents filed with or otherwise obtained by the
Commission pursuant to the [Exchange Act] or otherwise”).

199

See, e.g., 17 CFR 200.80(a)(4), (b).

200

See 5 U.S.C. 552(b). See also 17 CFR 200.80(b).

201

See 5 U.S.C. 552(b)(4), (6). See also 17 CFR 200.80(b)(4), (b)(6).
- 54 -

standard of public disclosure, as suggested by one commenter,202 for the same reasons noted
above, as well as because the current statutory and regulatory framework is generally wellestablished and is routinely administered by Commission staff.
Second, in light of the information that the Commission intends to make publicly
available, the Commission believes that there is minimal additional benefit in requiring all
applications and supporting materials automatically to be made public—particularly given that
the existing statutory and regulatory framework provides a process for members of the public to
request application materials to be made available, consistent with the protections of the existing
framework. Further, statutorily disqualified associated persons that are natural persons will not
be permitted to effect or be involved in effecting security-based swaps on behalf of SBS Entities
until an order is issued granting relief under Rule of Practice 194. Such orders will be made
publicly available on the Commission’s website, consistent with current practice,203 and will
provide notice to the public and identify for the benefit of counterparties and other market
participants instances where a statutorily disqualified associated person that is a natural person
has been permitted to effect or be involved in effecting security-based swaps on behalf of an SBS
Entity.
K.

Deleting Rule 15Fb6-1 and Schedule C to Forms SBSE, SBSE-A and SBSEBD

Concurrent with the issuance of the Rule of Practice 194 proposal, the Commission
adopted registration requirements for SBS Entities, including certain rules relating to the

202

Cummings Letter, at 3.

203

See 17 CFR 200.80(a)(2)(i), (3).
- 55 -

statutory prohibition in Exchange Act Section 15F(b)(6).204 The Registration Adopting Release
provided, among other things, that an SBS Entity, when it files an application to register with the
Commission, may permit an associated person that is not a natural person who is subject to a
statutory disqualification to effect or be involved in effecting security-based swaps on the SBS
Entity’s behalf, provided that the statutory disqualification(s) occurred prior to the compliance
date set forth in the Registration Adopting Release and that the SBS Entity identifies each such
associated person on its registration form, namely Schedule C to Forms SBSE, SBSE-A and
SBSE-BD.
Because Rule of Practice 194, as adopted, provides an exclusion for an SBS Entity from
the prohibition in Exchange Act Section 15F(b)(6) with respect to associated persons entities,
Rule 15Fb6-1 and its related Schedule C are no longer necessary. Accordingly, given the
associated person entity exclusion that the Commission is adopting in final Rule of Practice
194(c), the Commission is making technical amendments to: (1) delete Exchange Act Rule
15Fb6-1; (2) remove Schedule C to Forms SBSE, SBSE-A and SBSE-BD; and (3) remove all
references to Schedule C in the instructions in the above-mentioned forms.
L.

Compliance Date

As noted above, the effective date of Rule of Practice 194, as adopted, is April 22, 2019.
We note, however, that the compliance date for the SBS Entity registration rules set forth in the
Registration Adopting Release is the later of: six months after the date of publication in the
Federal Register of a final rule release adopting rules establishing capital, margin and
segregation requirements for SBS Entities; the compliance date of final rules establishing

204

See Registration Adopting Release, 80 FR at 48964. See also, e.g., 17 CFR 240.15Fb6-1.
- 56 -

recordkeeping and reporting requirements for SBS Entities; the compliance date of final rules
establishing business conduct requirements under Exchange Act Sections 15F(h) and 15F(k);
or the compliance date for final rules establishing a process for a registered SBS Entity to
make an application to the Commission to allow an associated person who is subject to a
statutory disqualification to effect or be involved in effecting security-based swaps on the SBS
Entity’s behalf.205
IV.

PAPERWORK REDUCTION ACT
Rule of Practice 194 contains “collection of information requirements” within the

meaning of the Paperwork Reduct

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3A5cff7bd00f600598. Public record. Not legal advice.