Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations

Federal RegisterJul 26, 2013

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I

RIN 3038-AD85

Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Interpretive Guidance and Policy Statement.

SUMMARY:

On July 12, 2012, the Commodity Futures Trading Commission (“Commission” or “CFTC”) published for public comment its proposed interpretive guidance and policy statement (“Proposed Guidance”) regarding the cross-border application of the swaps provisions of the Commodity Exchange Act (“CEA”), as added by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act” or “Dodd-Frank”). On December 21, 2012, the Commission also proposed further guidance on certain aspects of the Proposed Guidance (“Further Proposed Guidance”).

The Commission has determined to finalize the Proposed Guidance with certain modifications and clarifications to address public comments. The Commission's Interpretive Guidance and Policy Statement (“Guidance”) addresses the scope of the term “U.S. person,” the general framework for swap dealer and major swap participant registration determinations (including the aggregation requirement applicable to the de minimis calculation with respect to swap dealers), the treatment of swaps involving certain foreign branches of U.S. banks, the treatment of swaps involving a non-U.S. counterparty guaranteed by a U.S. person or “affiliate conduit,” and the categorization of the Dodd-Frank swaps provisions as “Entity-Level Requirements” or “Transaction-Level Requirements.”

DATES:

Effective Date:

This Guidance will become effective July 26, 2013.

FOR FURTHER INFORMATION CONTACT:

Gary Barnett, Director, Division of Swap Dealer and Intermediary Oversight, (202) 418-5977,

gbarnett@cftc.gov;

Sarah E. Josephson, Director, Office of International Affairs, (202) 418-5684,

sjosephson@cftc.gov;

Mark Fajfar, Assistant General Counsel, Office of General Counsel, (202) 418-6636,

mfajfar@cftc.gov;

Laura B. Badian, Counsel, Office of General Counsel, (202) 418-5969,

lbadian@cftc.gov;

Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction

A. The Dodd-Frank Wall Street Reform and Consumer Protection Act

B. The Proposed Guidance and Further Proposed Guidance

II. Scope of This Guidance

III. Interpretation of Section 2(i)

A. Comments

B. Statutory Analysis

C. Principles of International Comity

IV. Guidance

A. Interpretation of the Term “U.S. Person”

1. Proposed Interpretation

2. Comments

a. Phase-In Interpretation

b. Comments on Particular Prongs of the Proposed Interpretation of the Term “U.S. Person”

c. Commenters' Proposed Alternatives

d. Due Diligence

e. Non-U.S. Person That Is Affiliated, Guaranteed, or Controlled by U.S. Person

f. Foreign Branch of U.S. Person

g. Regulation S

h. Other Clarifications

3. Commission Guidance

a. Due Diligence

b. Foreign Branch of U.S. Person

c. Regulation S

d. Other Clarifications

4. Summary

B. Registration

1. Proposed Guidance

2. Comments

3. Commission Guidance

a. Registration Thresholds for U.S. Persons and Non-U.S. Persons, Including Those Guaranteed by U.S. Persons

b. Aggregation

c. Exclusion of Certain Swaps by Non-U.S. Persons From the Swap Dealer De Minimis Threshold

d. Exclusion of Certain Swaps by Non-U.S. Persons From the MSP Calculation

e. Exclusion of Certain Swaps Executed Anonymously on a SEF, DCM, or Foreign Board of Trade (“FBOT”) and Cleared

f. MSP-Parent Guarantees

4. Summary

C. Interpretation of the Term “Foreign Branch;” When a Swap Should Be Considered To Be With the Foreign Branch of a U.S. Person That Is a Swap Dealer or MSP

1. Interpretation of the Term “Foreign Branch” and Treatment of Foreign Branches

2. Comments

3. Commission Guidance

a. Scope of the Term “Foreign Branch”

b. Commission Consideration of Whether a Swap Is With a Foreign Branch of a U.S. Bank

D. Description of the Entity-Level and Transaction-Level Requirements

1. Description of the Entity-Level Requirements

a. First Category of Entity-Level Requirements

i. Capital Adequacy

ii. Chief Compliance Officer

iii. Risk Management

iv. Swap Data Recordkeeping (Except Certain Aspects of Swap Data Recordkeeping Relating to Complaints and Sales Materials)

b. Second Category of Entity-Level Requirements

i. SDR Reporting

ii. Swap Data Recordkeeping Relating to Complaints and Marketing and Sales Materials

iii. Physical Commodity Large Swaps Trader Reporting (Large Trader Reporting)

2. Description of the Transaction-Level Requirements

a. Category A: Risk Mitigation and Transparency

i. Required Clearing and Swap Processing

ii. Margin and Segregation Requirements for Uncleared Swaps

iii. Trade Execution

iv. Swap Trading Relationship Documentation

v. Portfolio Reconciliation and Compression

vi. Real-Time Public Reporting

vii. Trade Confirmation

viii. Daily Trading Records

b. Category B: External Business Conduct Standards

E. Categorization of Entity-Level and Transaction-Level Requirements

1. Categorization Under the Proposed Guidance

2. Comments

a. Reporting and Trade-Execution Requirements

b. Swap Trading Relationship Documentation, Portfolio Reconciliation and Compression, Daily Trading Records and External Business Conduct Standards

c. Internal Conflicts of Interest Requirement

d. Position Limits and Anti-Manipulation Rules

3. Commission Guidance

a. Entity-Level Requirements

i. The First Category—Capital Adequacy, Chief Compliance Officer, Risk Management, and Swap Data Recordkeeping (Except for Certain Recordkeeping Requirements)

ii. The Second Category—SDR Reporting, Certain Swap Data Recordkeeping Requirements and Large Trader Reporting

b. Transaction-Level Requirements

i. The Category A Transaction-Level Requirements

ii. The Category B Transaction-Level Requirements (External Business Conduct Standards)

F. Substituted Compliance

1. Proposed Guidance

2. Comments

3. Overview of the Substituted Compliance Regime

4. Process for Comparability Determinations

5. Conflicts Arising Under Privacy and Blocking Laws

6. Clearing

a. Clearing Venues

b. Foreign End-Users

G. Application of the Entity-Level and Transaction-Level Requirements To Swap Dealers and MSPs

1. Comments

2. Commission Guidance

3. Application of the Entity-Level Requirements To Swap Dealers and MSPs the Commission's policy on

a. To U.S. Swap Dealers and MSPs

b. To Non-U.S. Swap Dealers and MSPs

4. Application of the “Category A” Transaction-Level Requirements To Swap Dealers and MSPs

a. Swaps With U.S. Swap Dealers and MSPs

b. Swaps With Non-U.S. Swap Dealers and Non-U.S. MSPs

c. Swaps With a Non-U.S. Person Guaranteed by a U.S. Person

i. Proposed Guidance

ii. Comments

iii. Commission Guidance

d. Swaps With a Non-U.S. Person That Is an Affiliate Conduit

i. Proposed Guidance

ii. Comments

iii. Commission Guidance

5. Application of the “Category B” Transaction-Level Requirements To Swap Dealers and MSPs

a. Swaps With U.S. Swap Dealers and U.S. MSPs

b. Swaps With Foreign Branches of a U.S. Bank That Is a Swap Dealer or MSP

c. Swaps With Non-U.S. Swap Dealers and Non-U.S. MSPs

H. Application of the CEA's Swap Provisions and Commission Regulations to Market Participants That Are Not Registered as a Swap Dealer or MSP

1. Swaps Between Non-Registrants Where One or More of the Non-Registrants Is a U.S. Person

2. Swaps between Non-Registrants That Are Both Non-U.S. Persons

a. Large Trader Reporting

b. Swaps Where Each of the Counterparties Is Either a Guaranteed or Conduit Affiliate

c. Swaps Where Neither or Only One of the Parties Is a Guaranteed or Conduit Affiliate

V. Appendix A—The Entity-Level Requirements

A. First Category of Entity-Level Requirements

1. Capital Adequacy

2. Chief Compliance Officer

3. Risk Management

i. Swap Data Recordkeeping (Except Certain Aspects of Swap Data Recordkeeping Relating to Complaints and Sales Materials)

B. Second Category of Entity-Level Requirements

1. SDR Reporting

2. Swap Data Recordkeeping Relating to Complaints and Marketing and Sales Materials

3. Physical Commodity Large Swaps Trader Reporting (Large Trader Reporting)

VI. Appendix B—The Transaction-Level Requirements

A. Category A: Risk Mitigation and Transparency

1. Required Clearing and Swap Processing

2. Margin and Segregation Requirements for Uncleared Swaps

3. Trade Execution

4. Swap Trading Relationship Documentation

5. Portfolio Reconciliation and Compression

6. Real-Time Public Reporting

7. Trade Confirmation

8. Daily Trading Records

B. Category B: External Business Conduct Standards

VII. Appendix C—Application of the Entity-Level Requirements to Swap Dealers and MSPs*

VIII. Appendix D—Application of the Category A Transaction-Level Requirements to Swap Dealers and MSPs*

IX. Appendix E—Application of the Category B Transaction-Level Requirements to Swap Dealers and MSPs*

X. Appendix F—Application of Certain Entity-Level and Transaction-Level Requirements to Non-Swap Dealer/Non-MSP Market Participants*

I. Introduction

A. The Dodd-Frank Wall Street Reform and Consumer Protection Act

On July 21, 2010, President Obama signed the Dodd-Frank Act,

Title VII of which amended the CEA to establish a new regulatory framework for swaps. The legislation was enacted to reduce systemic risk (including risk to the U.S. financial system created by interconnections in the swaps market), increase transparency, and promote market integrity within the financial system by, among other things: (1) Providing for the registration and comprehensive regulation of swap dealers

and major swap participants (each, an “MSP”); (2) imposing clearing and trade execution requirements on standardized derivatives products; (3) creating rigorous recordkeeping and data reporting regimes with respect to swaps, including real-time public reporting; and (4) enhancing the Commission's rulemaking and enforcement authorities over all registered entities, intermediaries, and swap counterparties subject to the Commission's oversight.

Public Law 111-203, 124 Stat. 1376 (2010). The text of the Dodd-Frank Act may be accessed at

http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm

For purposes of this Guidance, the term “swap dealer” means any swap dealer registered with the Commission. Similarly, the term “MSP” means any MSP registered with the Commission.

Section 722(d) of the Dodd-Frank Act amended the CEA by adding section 2(i),

which provides that the swaps provisions of the CEA (including any CEA rules or regulations) apply to cross-border activities when certain conditions are met, namely, when such activities have a “direct and significant connection with activities in, or effect on, commerce of the United States” or when they contravene Commission rules or regulations as are necessary or appropriate to prevent evasion of the swaps provisions of the CEA enacted under Title VII of the Dodd-Frank Act.

7 U.S.C. 2(i).

Id.

Section 2(i) of the CEA states that the provisions of the Act relating to swaps that were enacted by the Wall Street Transparency and Accountability Act of 2010 (including any rule prescribed or regulation promulgated under that Act), shall not apply to activities outside the United States unless those activities have a direct and significant connection with activities in, or effect on, commerce of the United States; or contravene such rules or regulations as the Commission may prescribe or promulgate as are necessary or appropriate to prevent the evasion of any provision of this Act that was enacted by the Wall Street Transparency and Accountability Act of 2010.

The potential for cross-border activities to have a substantial impact on the U.S. financial system was apparent in the fall of 2008, when a series of large financial institutional failures threatened to freeze foreign and domestic credit markets. In September 2008, for example, U.S.-regulated insurance company American International Group (“AIG”) nearly failed as a result of risk incurred by the London swap trading operations of its subsidiary AIG Financial Products (“AIGFP”).

Enormous losses on credit default swaps entered into by AIGFP and guaranteed by AIG led to a credit downgrade for AIG, triggering massive collateral calls and an acute liquidity crisis for both entities. AIG only avoided default through more than $112.5

billion in support from the Federal Reserve Bank of New York and nearly $70 billion from the U.S. Department of the Treasury and the Federal Reserve.

See, e.g.,

Congressional Oversight Panel, June Oversight Report, The AIG Rescue, Its Impact on Markets, and the Government's Exit Strategy, (Jun. 10, 2010), available at

http://www.gpo.gov/fdsys/pkg/CPRT-111JPRT56698/pdf/CPRT-111JPRT56698.pdf

(“AIG Report”); Office of the Special Inspector General for the Troubled Asset Relief Program, Factors Affecting Efforts to Limit Payments to AIG Counterparties (Nov. 17, 2009), available at

http://www.sigtarp.gov/Audit%20Reports/Factors_Affecting_Efforts_to_Limit_Payments_to_AIG_Counterparties.pdf

. AIGFP was a Delaware corporation based in Connecticut that was an active participant in the credit default swap (“CDS”) market in the years leading up to the crisis.

See id.

at 23. AIGFP's CDS activities benefited from credit support provided by another Delaware corporation, American International Group, Inc., AIGFP's highly-rated parent company. Although both AIG and AIGFP were incorporated and headquartered in the U.S., much of AIGFP's CDS business was conducted through its London office and involved non-U.S. counterparties and credit exposures.

Id.

at 18. See also Office of the Special Inspector General for the Troubled Asset Relief Program, Factors Affecting Efforts to Limit Payments to AIG Counterparties, at 20 (Nov. 17, 2009) (listing AIGFP's CDS counterparties, including a variety of U.S. and foreign financial institutions), available at:

http://www.sigtarp.gov/Audit%20Reports/Factors_Affecting_Efforts_to_Limit_Payments_to_AIG_Counterparties.pdf

A global, complex, and highly integrated business model also played a role in, and complicated, the bankruptcy of former U.S.-based multinational corporation Lehman Brothers Holding Inc. (“LBHI”) in September 2008. In addition to guaranteeing certain swaps for its subsidiary Lehman Brothers International Europe (“LBIE”), estimated at nearly 130,000 OTC derivatives contracts at the time LBIE was placed into administration on September 15, 2008, LBHI and its global affiliates relied on each other for many of their financial and operational services, including treasury and depository functions, custodial arrangements, trading facilitation, and information management.

The complexity of the financial and operational relationships of LBHI and its domestic and international affiliates, including with respect to risk associated with swaps, provides an example of how risks can be transferred across multinational affiliated entities, in some cases in non-transparent ways that make it difficult for market participants and regulators to fully assess those risks.

“The global nature of the Lehman business with highly integrated, trading and non-trading relationships across the group led to a complex series of inter-company positions being outstanding at the date of Administration. There are over 300 debtor and creditor balances between LBIE and its affiliates representing $10.5B of receivables and $11.0B of payables as of September 15 2008.”

See

Lehman Brothers International (Europe) in Administration, Joint Administrators' Progress Report for the Period 15 September 2008 to 14 March 2009 (Apr. 14, 2009) (“Lehman Brothers Progress Report”), available at

http://www.pwc.co.uk/en_uk/uk/assets/pdf/lbie-progress-report-140409.pdf

Even in the absence of an explicit business arrangement or guarantee, U.S. companies may for reputational or other reasons choose, or feel compelled, to assume the cost of risks incurred by foreign affiliates. In 2007, U.S.-based global investment firm Bear Stearns decided to extend loans secured by assets of uncertain value to two Cayman Islands-based hedge funds it sponsored after they suffered substantial losses due to their investments in subprime mortgages, even though Bear Stearns was not legally obligated to support those funds.

Shortly thereafter, the funds, filed for bankruptcy protection.

See In re Bear Sterns High-Grade Structured Credit Strategies Master Funds, Ltd.,

374 B.R. 122 (Bankr. S.D.N.Y. 2007), available at

http://www.nysb.uscourts.gov/opinions/brl/158971_25_opinion.pdf

See id.

Although the Dodd-Frank Act was enacted in the wake of the 2008 financial crisis, the impact of cross-border activities on the health and stability of U.S. companies and financial markets is not new. A decade before the AIG and Lehman collapses, a Cayman Islands hedge fund managed by Connecticut-based Long-Term Capital Management L.P. (“LTCM”) nearly failed.

The hedge fund had a swap book of more than $1 trillion notional and only $4 billion in capital. The hedge fund avoided collapse only after the Federal Reserve Bank of New York intervened and supervised a financial rescue and reorganization by creditors of the fund.

While the fund was a Cayman Island partnership, its default would have caused significant market disruption in the United States.

See

The President's Working Group on Financial Markets, Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management (April 1999), available at

http://www.treasury.gov/resource-center/fin-mkts/Documents/hedgfund.pdf

See id.

at 13.

See id.

at 17.

More recently, J.P. Morgan Chase & Co. (“J.P. Morgan”), the largest U.S. bank, disclosed a multi-billion dollar trading loss stemming in part from positions in a credit-related swap portfolio managed through its London Chief Investment Office.

The relationship between the New York and London offices of J.P. Morgan that were involved in the credit swaps that were the source of this loss demonstrates the close integration among the various branches, agencies, offices, subsidiaries and affiliates of U.S. financial institutions, which may be located both inside and outside the United States. Despite their geographic expanse, the branches, agencies, offices, subsidiaries and affiliates of large U.S. financial institutions in many cases effectively operate as a single business.

See

Sen. Permanent Subcomm. on Investigations, 113th Cong., Majority and Minority Staff Report, JPMorgan Chase Whale Trades: A Case History of Derivatives Risks and Abuses (March 15, 2013), available at

http://www.levin.senate.gov/download/?id=bfb5cd04-41dc-4e2d-a5e1-ab2b81abfaa8-2560k

See also

Dodd-Frank Statement (“[A]ny suggestion that U.S. financial entities learned enough from AIG's devastating misjudgments are [sic] undercut by the multi-billion dollar loss incurred by a bank generally considered to be among the most careful—J.P.Morgan Chase—in its London derivative trading.”).

See

Letter from Sen. Carl Levin, Chairman of the Permanent Subcommittee on Investigations at 4 (Apr. 23, 2013) (“Letter from Sen. Levin”), available at

http://www.levin.senate.gov/download/levin_comment_letter_cftc_042313

See also

Cross-Border Application of Certain Swaps Provisions of the Commodity Exchange Act, 77 FR 41214, 41216 (Jul. 12, 2012) (“Proposed Guidance”).

Efforts to regulate the swaps market in the wake of the 2008 financial crisis are underway not only in the United States, but also abroad. In 2009, leaders of the Group of 20 (“G20”)—whose membership includes the European Union (“EU”), the United States, and 18 other countries—agreed that: (i) OTC derivatives contracts should be reported to trade repositories; (ii) all standardized OTC derivatives contracts should be cleared through central counterparties and traded on exchanges or electronic trading platforms, where appropriate, by the end of 2012; and (iii) non-centrally cleared contracts should be subject to higher capital requirements. In line with the G20 commitment, much progress has been made to coordinate and harmonize international reform efforts, but the pace of reform varies among jurisdictions and disparities in regulations remain due to differences in cultures, legal and political traditions, and financial systems.

Legislatures and regulators in a number of foreign jurisdictions are undertaking significant regulatory reforms over the swaps market and its participants.

See

CFTC and SEC, Joint Report on International Swap Regulation Required by Section 719(c) of the Dodd-Frank Wall Street Reform and Consumer Protection Act at 13 (Jan. 31, 2012), available at

http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/dfstudy_isr_013112.pdf

For example, the European Commission released a public consultation on revising the Markets in Financial Instruments Directive (“MiFID”) in December 2010.

See

“European Commission Public Consultation: Review of the Markets in Financial Instruments Directive” (Dec. 8, 2010), available at

http://ec.europa.eu/internal_market/consultations/docs/2010/mifid/consultation_paper_en.pdf

In October 2011, the European Commission released two public consultations, one to revise MiFID and the other for creating a new regulation entitled the Markets in Financial Instruments Regulation (“MiFIR”).

See

European Commission, Proposal for a Directive of the European Parliament and of the Council on markets in financial instruments repealing Directive 2004/39/EC of the European Parliament and of the Council, COM (2011) 656 final (Oct. 20, 2011), available at

http://ec.europa.eu/internal_market/securities/docs/isd/mifid/COM_2011_656_en.pdf;

European Commission, Proposal for a Regulation of the European Parliament and of the Council on markets in financial instruments and amending regulation [EMIR] on OTC derivatives, central counterparties and trade repositories, COM (2011) 652 final (Oct. 20, 2011), available at

http://ec.europa.eu/internal_market/securities/docs/isd/mifid/COM_2011_652_en.pdf

As of March 15, 2013, the majority of the regulatory technical standards (

i.e.,

rulemakings) of the European Market Infrastructure Regulation (“EMIR”) entered into force. The EMIR and the related regulatory technical standards generally regard requirements for clearinghouses, clearing, data repositories, regulatory reporting, and uncleared OTC transactions. Certain technical standards under EMIR have yet to be developed and completed. These standards regard margin and capital for uncleared transactions and contracts that have a “direct, substantial and foreseeable effect within the [European] Union.”

See

EMIR Article 11(14)(e).

The Japanese legislature passed the Amendment to the Financial Instruments and Exchange Act

(“FIEA”) in May 2010.

See

Japan Financial Services Agency, Outline of the bill for amendment of the Financial Instruments and Exchange Act (May 2010), available at

http://www.fsa.go.jp/en/refer/diet/174/01.pdf

The failures of Lehman Brothers and the Bear Stearns hedge funds, and the near failures of LTCM's hedge fund and AIG (which required intervention by the government and Federal Reserve), and their collateral effects on the broader economy and U.S. commerce,

provide examples of how risks that a large financial institution takes abroad in swap transactions or otherwise can result in or contribute to substantial losses to U.S. persons and threaten the financial stability of the entire U.S. financial system. These failures and near failures revealed the vulnerability of the U.S. financial system and economy to systemic risk resulting from, among other things, poor risk management practices of certain financial firms, the lack of supervisory oversight for certain financial institutions as a whole, and the overall interconnectedness of the global swap business.

These failures and near failures demonstrate the need for and potential implications of cross-border swaps regulation.

On October 3, 2008, President Bush signed the Emergency Economic Stabilization Act of 2008, which was principally designed to allow the U.S. Treasury and other government agencies to take action to restore liquidity and stability to the U.S. financial system (

e.g.,

the Troubled Asset Relief Program—also known as TARP—under which the U.S. Treasury was authorized to purchase up to $700 billion of troubled assets that weighed down the balance sheets of U.S. financial institutions).

See

Public Law 110-343, 122 Stat. 3765 (2008).

See

Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States at xvi-xxvii (Jan. 21, 2011), available at

http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf

B. The Proposed Guidance and Further Proposed Guidance

To address the scope of the cross-border application of the Dodd-Frank Act, the Commission published the Proposed Guidance on July 12, 2012, setting forth its proposed interpretation of the manner in which it intends that section 2(i) of the CEA would apply Title VII's swaps provisions to cross-border activities.

In view of the complex legal and policy issues involved, the Commission published the Proposed Guidance to solicit comments from all interested persons and to further inform the Commission's deliberations. Specifically, the Proposed Guidance addressed the general manner in which the Commission proposed to consider: (1) When a non-U.S. person's swap dealing activities would justify registration as a “swap dealer,”

as further defined in a joint release adopted by the Commission and the Securities and Exchange Commission (“SEC”);

(2) when a non-U.S. person's swaps positions would justify registration as a “major swap participant,”

as further defined in the Final Entities Rules; and (3) how foreign branches, agencies, affiliates, and subsidiaries of U.S. swap dealers generally should be treated. The Proposed Guidance also generally described the policy and procedural framework under which the Commission would consider compliance with a comparable and comprehensive regulatory requirement of a foreign jurisdiction as a reasonable substitute for compliance with the attendant requirements of the CEA. Last, the Proposed Guidance set forth the manner in which the Commission proposed to interpret section 2(i) of the CEA as it would generally apply to clearing, trading, and certain reporting requirements under the Dodd-Frank Act with respect to swaps between counterparties that are not swap dealers or MSPs.

See

Proposed Guidance, 77 FR 41214. Simultaneously with publication of the Proposed Guidance, the Commission published a proposed exemptive order providing time-limited relief from certain cross-border applications of the swaps provisions of Title VII and the Commission's regulations.

See

Proposed Exemptive Order Regarding Compliance with Certain Swap Regulations, 77 FR 41110 (July 12, 2012) (“Proposed Order”). The Commission approved a final exemptive order on December 21, 2012, which reflected certain modifications and clarifications to the Proposed Order to address public comments.

See

Final Exemptive Order Regarding Compliance with Certain Swap Regulations, 78 FR 858 (Jan. 7, 2013) (“January Order”).

See

7 U.S.C. 1a(49) (defining the term “swap dealer”).

See

Further Definition of `Swap Dealer,' `Security-Based Swap Dealer,' `Major Swap Participant,' `Major Security-Based Swap Participant' and `Eligible Contract Participant,' 77 FR 30596 (May 23, 2012) (“Final Entities Rules”).

See

7 U.S.C. 1a(33) (defining the term “major swap participant”).

The public comment period on the Proposed Guidance ended on August 27, 2012. The Commission received approximately 290 comment letters on the Proposed Guidance from a variety of interested parties, including major U.S. and non-U.S. banks and financial institutions that conduct global swap business, trade associations, clearing organizations, law firms (representing international banks and dealers), public interest organizations, and foreign regulators.

The Commission also received approximately 26 comment letters on the Proposed Order. Because the Proposed Guidance and Proposed Order were substantially interrelated, many commenters submitted a single comment letter addressing both proposals. The comment letters submitted in response to the Proposed Order and Proposed Guidance may be found on the Commission's Web site at

http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1234

Approximately 200 individuals submitted substantially identical letters to the effect that oversight of the $700 trillion global derivatives market is the key to meaningful reform. The letters state that because the market is inherently global, risks can be transferred around the world with the touch of a button. Further, according to these letters, loopholes in the Proposed Guidance could allow foreign affiliates of Wall Street banks to escape regulation. Lastly, the letters request that the Proposed Guidance be strengthened to ensure that the Dodd-Frank derivatives protections will directly apply to the full global activities of all important participants in the U.S. derivatives markets.

The Further Proposed Guidance, issued on December 21, 2012,

reflected the Commission's determination that further consideration of public comments regarding the Commission's proposed interpretation of the term “U.S. person,” and its proposed guidance regarding aggregation for purposes of swap dealer registration, would be helpful to the Commission in issuing final interpretive guidance. In order to facilitate the Commission's further consideration of these issues, in the Further Proposed Guidance the Commission sought public comment on: (1) An alternative interpretation of the aggregation requirement for swap dealer registration in Commission regulation 1.3(ggg)(4);

(2) an alternative “prong” of the proposed interpretation of the term “U.S. person” in the Proposed Guidance which relates to U.S. owners that are responsible for the liabilities of a non-U.S. entity; and (3) a separate alternative prong of the proposed interpretation of the term “U.S. person” which relates to commodity pools and funds with majority-U.S. ownership.

See

Further Proposed Guidance Regarding Compliance With Certain Swap Regulations, 78 FR 909, 913 (Jan. 7, 2013) (“Further Proposed Guidance”).

17 CFR 1.3(ggg)(4). The Commission's regulations are codified at 17 CFR Ch. I.

The public comment period on the Further Proposed Guidance ended on February 6, 2013. The Commission received approximately 24 comment letters on the Further Proposed Guidance from interested parties including major U.S. and non-U.S. banks and financial institutions, trade associations, law firms (representing international banks and dealers), public interest organizations, and foreign regulators.

With respect to both the Proposed Guidance and the Further Proposed Guidance and throughout the process of considering this Guidance,

the Commission (and Commission's staff) held numerous meetings and discussions with various market participants, domestic bank regulators, and other interested parties.

The comment letters submitted in response to the Further Proposed Guidance are available on the Commission's Web site at

http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1315.

The records of these meetings and communications are available on the Commission's Web site at

http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/Cross-BorderApplicationofSwapsProvisions/index.htm.

Further, the Commission's staff closely consulted with the staff of the SEC in an effort to increase understanding of each other's regulatory approaches and to harmonize the cross-border approaches of the two agencies to the greatest extent possible, consistent with their respective statutory mandates.

The Commission is cognizant of the value of harmonization by the Commission and the SEC of their cross-border policies to the fullest extent possible. The staffs of the Commission and the SEC have participated in numerous meetings to work jointly toward this objective. The Commission expects that this consultative process will continue as each agency works towards implementing its respective cross-border policy.

Sections 722 and 772 of the Dodd-Frank Act establish the scope of the Commission's and SEC's jurisdiction over cross-border swaps and security-based swaps, respectively. CEA section 2(i), which was added by section 722 of the Dodd-Frank Act, is discussed above. Section 30(c) of the Securities Exchange Act of 1934 (“Exchange Act”), which was added by section 772 of the Dodd-Frank Act, provides that the swaps provisions of the Exchange Act added by Title VII do not apply “to any person insofar as such person transacts a business in security-based swaps without the jurisdiction of the United States, unless such person transacts such business in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate to prevent the evasion of any provision [added by Title VII of the Dodd-Frank Act] . . . ”

See

15 U.S.C. 78dd(c).

The SEC recently published for public comment proposed rules and interpretive guidance to address the application of the provisions of the Exchange Act, added by Subtitle B of Title VII of the Dodd-Frank Act, that relate to cross-border security-based swap activities.

The Commission has considered the SEC's cross-border proposal and has taken it into account in the process of considering this Guidance. The SEC's proposal acknowledges the statutory provisions and regulatory precedents that are relevant to security-based swaps by virtue of the fact that security-based swaps are securities.

For example, the SEC's proposed rules regarding registration of security-based swap dealers build from the SEC's traditional approach to the registration of brokers and dealers under the Exchange Act.

The SEC's proposal also notes the SEC's belief that Congress intended the territorial application of Title VII to entities and transactions in the security-based swaps market to follow similar principles to those applicable to the securities market under the Exchange Act.

The Commission believes that one factor in harmonization of the two agencies' approaches is that Congress did not express a similar intent that the application of Title VII to entities and transactions in the swaps market should follow principles that preceded the Dodd-Frank Act, but rather mandated a new regulatory regime for swaps.

See

Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants, 78 FR 30968 (May 23, 2013) (“SEC Cross-Border Proposal”).

The SEC Cross-Border Proposal notes that the definition of “security” in the Exchange Act includes security-based swaps, which raises issues related to the statutory definitions of “broker” and “dealer,” the statutory exchange registration requirement, and other statutory requirements related to securities.

Id.

at 30972.

Id.

at 30990.

Id.

at 30983-84.

One commenter expressed the view that the SEC's proposed rule is entirely inapplicable to the CFTC's statutory mandate to regulate the risks from cross border derivatives trading and related activities. This commenter stated that the SEC was given very limited statutory authority in the Dodd-Frank Act related solely to anti-evasion, in contrast to the Commission, which was given the same anti-evasion authority plus an affirmative statutory mandate to regulate cross-border derivative activities that “have a direct an significant connection with activities in, or effect on, commerce of the United States.” This commenter further stated that a broader statutory mandate makes sense because the Commission “has decades of expertise and jurisdiction for virtually the entire derivatives markets,” whereas the SEC has “jurisdiction for no more than 3.5 percent of those markets.”

See

Better Markets Inc. (“Better Markets”) (Jun. 24, 2013) at 2.

The Commission also recognizes the critical role of international cooperation and coordination in the regulation of derivatives in the highly interconnected global market, where risks are transmitted across national borders and market participants operate in multiple jurisdictions. Close cooperative relationships and coordination with other jurisdictions take on even greater importance given that, prior to the recent reforms, the swaps market has largely operated without regulatory oversight, and given that many jurisdictions are in differing stages of implementing their regulatory reform. To this end, the Commission's staff has actively engaged in discussions with their foreign counterparts in an effort to better understand and develop a more harmonized cross-border regulatory framework. The Commission expects that these discussions will continue as it implements the cross-border interpretive guidance and as other jurisdictions develop their own regulatory approaches to derivatives.

This is one aspect of the Commission's on-going bilateral and multilateral efforts to promote international coordination of regulatory reform. The Commission's staff is engaged in consultations with Europe, Japan, Hong Kong, Singapore, Switzerland, Canada, Australia, Brazil, and Mexico on derivatives reform. In addition, the Commission's staff is participating in several standard-setting initiatives, co-chairs the IOSCO Task Force on OTC Derivatives, and has created an informal working group of derivatives regulators to discuss implementation of derivatives reform.

See also

Joint Press Statement of Leaders on Operating Principles and Areas of Exploration in the Regulation of the Cross-border OTC Derivatives Market, published as CFTC Press Release 6439-12, Dec. 4, 2012, available at

http://www.cftc.gov/PressRoom/PressReleases/pr6439-12;

OTC Derivatives Regulators Group Report to the G-20 Meeting of Finance Ministers and Central Bank Governors of 18-19 April 2013, linked to CFTC Press Release ODRG Report to G-20, Apr. 16, 2013, available at

http://www.cftc.gov/PressRoom/PressReleases/odrg_reporttog20release.

In general, many of the financial institutions and law firms (representing financial institutions) that commented on the Proposed Guidance and Further Proposed Guidance stated that the Commission's proposed interpretation of the extraterritorial application of Title VII of the Dodd-Frank Act was overly broad and unnecessarily complex and unclear.

Among the issues they raised were concerns relating to the interpretation of the term “U.S. person,” aggregation for purposes of swap dealer registration, lack of parity in the treatment of foreign branches and affiliates of U.S. persons, the approach to guaranteed non-U.S. affiliates and non-U.S. affiliate “conduits,” and the “comparability” assessment for purposes of substituted compliance. The commenters also urged the Commission to allow sufficient time after the publication of the final interpretive guidance for market participants to understand and implement any new policies of the Commission, before the Commission begins to apply such policies.

See, e.g.,

Securities Industry and Financial Markets Association (“SIFMA”) (Aug. 27, 2012); Institute of International Bankers (“IIB”) (Aug. 27, 2012); Sullivan & Cromwell, on behalf of Bank of America Corp., Citi, and J.P. Morgan (“Sullivan & Cromwell”) (Aug. 13, 2012); Bank of America Merrill Lynch, Barclays Capital, and PNB Paribas et al., submitted by Cleary Gottlieb Steen & Hamilton LLP (“Cleary”) (Aug. 16, 2012).

Other commenters disagreed that the Commission's proposed interpretation of its extraterritorial authority was overly broad, instead arguing that the Commission had not gone far enough.

For example, AFR stated that the Proposed Guidance “takes some real positive steps in affirming CFTC jurisdiction over a variety of cross-border transactions,” but “falls well short of closing potential cross-border loopholes.”

Senator Levin wrote that although “members of the financial industry have filed comment letters urging the CFTC to weaken its proposals . . . American families and businesses deserve strong protections against the risks posed by derivatives trading, including from cross-border swaps, and . . . the Proposed Guidance should be strengthened rather than weakened.”

See, e.g.,

Americans for Financial Reform, submitted by Marcus Stanley (“AFR”) (Aug. 27, 2012); Better Markets (Aug. 16, 2012); Michael Greenberger, Francis King Cary School of Law,

University of Maryland (“Greenberger”) (Aug. 13, 2012).

AFR (Aug. 27, 2012) at 2.

Letter from Sen. Levin at 3.

II. Scope of This Guidance

After carefully reviewing and considering the comments on the Proposed Guidance and the Further Proposed Guidance, the Commission has determined to finalize the Proposed Guidance. This Guidance sets forth the general policy of the Commission in interpreting how section 2(i) of the CEA provides for the application of the swaps provisions of the CEA and Commission regulations to cross-border activities when such activities have a “direct and significant connection with activities in, or effect on, commerce of the United States” or when they contravene Commission rulemaking.

Unlike a binding rule adopted by the Commission, which would state with precision when particular requirements do and do not apply to particular situations, this Guidance is a statement of the Commission's general policy regarding cross-border swap activities

and allows for flexibility in application to various situations, including consideration of all relevant facts and circumstances that are not explicitly discussed in the guidance. The Commission believes that the statement of its policy in this Guidance will assist market participants in understanding how the Commission intends that the registration and certain other substantive requirements of the Dodd-Frank Act generally would apply to their cross-border activities.

See

7 U.S.C. 2(i).

The Commission notes that part 23 of its regulations defines “swaps activities” to mean, “with respect to a [registered swap dealer or MSP], such registrant's activities related to swaps and any product used to hedge such swaps, including, but not limited to, futures, options, other swaps or security-based swaps, debt or equity securities, foreign currency, physical commodities, and other derivatives.”

See

17 CFR 23.200(j); 23.600(a)(7).

In this regard, the Commission notes that it would consider codifying certain aspects of the Guidance in future rulemakings, as appropriate; but at this time, this guidance is intended to provide an efficient and flexible vehicle to communicate the agency's current views on how the Dodd-Frank swap requirements would apply on a cross-border basis.

This release is intended to inform the public of the Commission's views on how it ordinarily expects to apply existing law and regulations in the cross-border context. In determining the application of the CEA and Commission regulations to particular entities and transactions in cross-border contexts, the Commission will apply the relevant statutory provisions, including CEA section 2(i), and regulations to the particular facts and circumstances. Accordingly, the public has the ability to present facts and circumstances that would inform the application of the substantive policy positions set forth in this release.

The Commission understands the complex and dynamic nature of the global swap market and the need to take an adaptable approach to cross-border issues, particularly as it continues to work closely with foreign regulators to address potential conflicts with respect to each country's respective regulatory regime. Although the Commission is issuing the Guidance at this time, the Commission will continue to follow developments as foreign regulatory regimes and the global swaps market continue to evolve. In this regard, the Commission will periodically review this Guidance in light of future developments.

This release is organized into four main sections. Section III sets forth the Commission's interpretation of CEA section 2(i) and the general manner in which it intends to apply the swaps provisions of the Dodd-Frank Act to activities outside the United States. Section IV addresses the public comments and Commission Guidance on: (A) The Commission's interpretation of the term “U.S. person”; (B) swap dealer and MSP registration; (C) the scope of the term “foreign branch” of a U.S. bank and consideration of when a swap should be considered to be with the foreign branch of a U.S. bank; (D) a description of the entity-level requirements and transaction-level requirements under Title VII and the Commission's related regulations (“Entity-Level Requirements” and “Transaction-Level Requirements,” respectively); (E) the categorization of Title VII swaps provisions (and Commission regulations) as either Entity-Level or Transaction-Level Requirements; (F) substituted compliance, including an overview of the principles guiding substituted compliance determinations for Entity-Level and Transaction-Level Requirements, a general description of the process for comparability determinations, and a discussion of conflicts arising under foreign privacy and blocking laws; (G) application of the Entity-Level Requirements and “Category A” and “Category B” Transaction-Level Requirements to swap dealers and MSPs; and (H) application of the CEA's swaps provisions and Commission regulations where both parties to a swap are neither swap dealers nor MSPs.

Certain provisions of Title VII apply regardless of whether a swap dealer or MSP is a counterparty to the swap. These provisions include the clearing requirement (7 U.S.C. 2(h)(1)), the trade execution requirement (2(h)(8)), reporting to SDRs (2(a)(13)(G)), and real-time public reporting (2(a)(13)).

In addition, this Guidance includes the following Appendices, which should be read in conjunction with (and are qualified by) the remainder of the Guidance: (1) Appendix A—The Entity-Level Requirements; (2) Appendix B—The Transaction-Level Requirements: (3) Appendix C—Application of the Entity-Level Requirements; (4) Appendix D—Application of the Category A Transaction-Level Requirements to Swap Dealers and MSPs; (5) Appendix E—Application of the Category B Transaction-Level Requirements to Swap Dealers and MSPs; and (6) Appendix F—Application of Certain Entity-Level and Transaction-Level Requirements to Non-Swap Dealer/Non-MSP Market Participants.

III. Interpretation of Section 2(i)

CEA section 2(i) provides that the swaps provisions of Title VII shall not apply to activities outside the United States unless those activities—

• Have a direct and significant connection with activities in, or effect on, commerce of the United States; or

• contravene such rules or regulations as the Commission may prescribe or promulgate as are necessary or appropriate to prevent the evasion of any provision of [the CEA] that was enacted by the [Dodd-Frank Act].

In the Proposed Guidance, the Commission noted that section 2(i) provides the Commission express authority over swap activities outside the United States when certain conditions are met, but it does not require the Commission to extend its reach to the outer bounds of that authorization. Rather, in exercising its authority with respect to swap activities outside the United States, the Commission will be guided by international comity principles.

A. Comments

Some commenters addressing the interpretation of section 2(i) in the Proposed Guidance stated that the activities of the non-U.S. branches and subsidiaries of U.S. persons outside the United States with respect to swaps with non-U.S. persons should not be subject to Dodd-Frank requirements. Sullivan & Cromwell asserted that the non-U.S. branches and subsidiaries generally do not enter into swaps with U.S. persons and therefore the jurisdictional nexus with the United States that would justify application of the Dodd-Frank Act is absent.

Sullivan & Cromwell stated that there are legitimate business reasons for U.S. persons to establish non-U.S. branches and subsidiaries, so doing so should not be interpreted to mean that the U.S. person is using the branch to evade application of the Dodd-Frank Act.

Sullivan & Cromwell argued that the Dodd-Frank Act's application outside the United States should be narrowly construed because it includes only specific exceptions to the judicial precedent that U.S. laws should be interpreted to apply outside the United States only when such application is clearly expressed in the law.

Similarly, SIFMA argued that the Commission's proposal asserted a broad jurisdictional scope that is inconsistent with the congressional intent expressed in section 2(i) of the CEA.

Sullivan & Cromwell (Aug. 13, 2012) at 6-7.

Id.

at 8.

Id.

at 9.

SIFMA (Aug. 27, 2012) at 2.

Sullivan & Cromwell cited past instances where the Commission has not applied its regulations to firms that deal solely with foreign customers and do not conduct business in or from the United States or to the non-U.S. subsidiaries of entities registered with the Commission.

Sullivan & Cromwell and SIFMA stated that the application of Dodd-Frank requirements to non-U.S. swap activities would be contrary to principles of international comity and cooperation with foreign regulators, would lead to less efficient use of regulatory resources, and would subject the affected entities to potentially conflicting regulations and increased costs of compliance.

SIFMA asserted that the jurisdictional scope in the Commission's proposal is not necessary to prevent evasive activity, because the Commission already has broad authority to address evasion.

Sullivan & Cromwell and SIFMA also argued that imposing the Dodd-Frank requirements on non-U.S. branches and subsidiaries of U.S. persons would put those entities at a disadvantage compared to competitors in foreign jurisdictions, while other federal laws and banking regulations (such as the Edge Act

) indicate that Congress wishes to promote such entities' ability to compete in foreign jurisdictions.

Sullivan & Cromwell (Aug. 13, 2012) at 10.

Id.

at 11; SIFMA (Aug. 27, 2012) at 3 and A55.

SIFMA (Aug. 27, 2012) at 3.

12 U.S.C. 611-31.

Id.;

Sullivan & Cromwell (Aug. 13, 2012) at 12-14.

By contrast, Senator Levin stated that the J.P. Morgan “whale trades” provide an example of how major U.S. financial institutions have integrated their U.S. and non-U.S. swap activities, and therefore supports the application of the swaps provisions of Title VII and Commission regulations to the non-U.S. offices of U.S. financial institutions.

He explained that a Senate investigation found that J.P. Morgan personnel in London executed the “whale trades” using money from the U.S. bank's excess deposits, and while traders in London conducted the trades, the trades were attributed to a U.S. affiliate of J.P. Morgan through back-to-back arrangements between the London branch and New York branch.

He also stated the whale trades were entered into with counterparties including major U.S. banks and J.P. Morgan's own investment bank.

Senator Levin concluded that because of the integration of U.S. and non-U.S. offices and affiliates of U.S. financial institutions, it is critical that the non-U.S. offices and affiliates of U.S. financial institutions follow the same Dodd-Frank requirements as are applicable to the U.S. financial institutions.

Letter from Sen. Levin at 4.

Id.

at 7.

See also

Dodd-Frank Statement (“An exemption for foreign derivatives activity by the [ ] affiliates of American institutions is a free pass no matter where that activity is located.”).

B. Statutory Analysis

In interpreting the phrase “direct and significant,” the Commission has examined the plain language of the statutory provision, similar language in other statutes with cross-border application, and the legislative history of section 2(i).

The statutory language in new CEA section 2(i) is structured similarly to the statutory language in the Foreign Trade Antitrust Improvements Act of 1982 (the “FTAIA”),

which provides the standard for the cross-border application of the Sherman Antitrust Act.

The FTAIA, like CEA section 2(i), excludes certain non-U.S. commercial transactions from the reach of U.S. law. It provides that the antitrust provisions of the Sherman Act “shall not apply to [anti-competitive] conduct involving trade or commerce . . . with foreign nations.”

However, like paragraph (1) of CEA section 2(i), the FTAIA also creates exceptions to the general exclusionary rule and thus brings back within antitrust coverage any conduct that: (1) has a “direct, substantial, and reasonably foreseeable effect” on U.S. commerce;

and (2) “such effect gives rise to a [Sherman Act] claim.”

F. Hoffman-LaRoche, Ltd.

Empagran S.A.,

the Supreme Court stated that “this technical language initially lays down a general rule placing

all

(nonimport) activity involving foreign commerce outside the Sherman Act's reach. It then brings such conduct back within the Sherman Act's reach

provided that

the conduct

both

(1) sufficiently affects American commerce,

i.e.,

it has a `direct, substantial, and reasonably foreseeable effect' on American domestic, import, or (certain) export commerce,

and

(2) has an effect of a kind that antitrust law considers harmful,

i.e.,

the `effect' must `giv[e] rise to a [Sherman Act] claim.' ”

15 U.S.C. 6a.

15 U.S.C. 1-7.

15 U.S.C. 6a.

6a(1).

6a(2).

542 U.S. 155, 162 (2004) (emphasis in original).

It is appropriate, therefore, to read section 2(i) of the CEA as a clear expression of congressional intent that the swaps provisions of Title VII of the Dodd-Frank Act apply to activities beyond the borders of the United States when certain circumstances are present. These circumstances include, pursuant to paragraph (1) of section 2(i), when activities outside the United States meet the statutory test of having a “direct and significant connection with activities in, or effect on,” U.S. commerce.

An examination of the language in the FTAIA, however, does not provide an unambiguous roadmap for the Commission in interpreting section 2(i) of the CEA. There are both similarities, and a number of significant differences, between the language in CEA section 2(i) and the language in the FTAIA. Further, the Supreme Court has not provided definitive guidance as to the meaning of the “direct, substantial, and reasonably foreseeable” test in the FTAIA, and the lower courts have interpreted the individual terms in the FTAIA differently.

Although a number of courts have interpreted the various terms in the

FTAIA, only the term “direct” appears in both CEA section 2(i) and the FTAIA. Relying upon the Supreme Court's definition of the term “direct” in the Foreign Sovereign Immunities Act (“FSIA”),

the U.S. Court of Appeals for the Ninth Circuit construed the term “direct” in the FTAIA as requiring a “relationship of logical causation,”

such that “an effect is `direct' if it follows as an immediate consequence of the defendant's activity.”

However, in an en banc decision, the U.S. Court of Appeals for the Seventh Circuit held that “the Ninth Circuit jumped too quickly on the assumption that the FSIA and the FTAIA use the word `direct' in the same way.”

After examining the text of the FTAIA as well as its history and purpose, the Seventh Circuit found persuasive the “other school of thought [that] has been articulated by the Department of Justice's Antitrust Division, which takes the position that, for FTAIA purposes, the term `direct' means only `a reasonably proximate causal nexus.' ”

The Seventh Circuit rejected interpretations of the term “direct” that included any requirement that the consequences be foreseeable, substantial, or immediate.

See

28 U.S.C. 1605(a)(2).

United States

LSL Biotechnologies,

379 F.3d 672, 693 (9th Cir. 2004). “As a threshold matter, many courts have debated whether the FTAIA established a new jurisdictional standard or merely codified the standard applied in [

United States

Aluminum Co. of Am.,

148 F.2d 416 (2d Cir. 1945)] and its progeny. Several courts have raised this question without answering it. The Supreme Court did as much in

[Harford Fire Ins. Co.

California,

509 U.S. 764 (1993)].”

Id.

at 678.

Id.

at 692-3,

quoting Republic of Argentina

Weltover, Inc.,

504 U.S. 607, 618 (1992) (providing that, pursuant to the FSIA, 28 U.S.C. 1605(a)(2), immunity does not extend to commercial conduct outside the United States that “causes a direct effect in the United States”).

Minn-Chem, Inc.

Agrium, Inc.,

683 F.3d 845, 857 (7th Cir. 2012) (en banc).

Id.

at 856-57.

Other terms in the FTAIA differ from the terms used in section 2(i) of the CEA. First, the FTAIA test explicitly requires that the effect on U.S. commerce be a “reasonably foreseeable” result of the conduct.

Section 2(i) of the CEA, by contrast, does not provide that the effect on U.S. commerce must be foreseeable. Second, whereas the FTAIA solely relies on the “effects” on U.S. commerce to determine cross-border application of the Sherman Act, section 2(i) of the CEA refers to both “effect” and “connection.” “The FTAIA says that the Sherman Act applies to foreign `conduct' with a certain kind of harmful domestic effect.”

Section 2(i), by contrast, applies more broadly—not only to particular instances of conduct that have an effect on U.S. commerce, but also to activities that have a direct and significant “connection with activities in” U.S. commerce. Unlike the FTAIA, section 2(i) applies the swaps provisions of the CEA to activities outside the United States that have the requisite connection with activities in U.S. commerce, regardless of whether a “harmful domestic effect” has occurred.

See, e.g., Animal Sciences Products.

China Minmetals Corp.,

654 F.3d 462, 471 (3d Cir. 2011) (“[T]he FTAIA's `reasonably foreseeable' language imposes an objective standard: the requisite `direct' and `substantial' effect must have been `foreseeable' to an objectively reasonable person.”).

Hoffman-LaRoche,

452 U.S. at 173.

As the foregoing textual analysis indicates, Congress crafted section 2(i) differently from its analogue in the antitrust laws. Congress delineated the cross-border scope of the Sherman Act in section 6a of the FTAIA as applying to conduct that has a “direct” and “substantial” and “reasonably foreseeable” “effect” on U.S. commerce. In section 2(i), on the other hand, Congress did not include a requirement that the effects or connections of the activities outside the United States be “reasonably foreseeable” for the Dodd-Frank swaps provisions to apply. Further, Congress included language in section 2(i) to apply the Dodd-Frank swaps provisions in circumstances in which there is a direct and significant connection with activities in U.S. commerce, regardless of whether there is an effect on U.S. commerce. The different words that Congress used in paragraph (1) of section 2(i), as compared to its closest statutory analogue in section 6a of the FTAIA, inform the Commission in construing the boundaries of its cross-border authority over swap activities under the CEA.

Accordingly, the Commission believes it is appropriate to interpret section 2(i) such that it applies to activities outside the United States in circumstances in addition to those that would be reached under the FTAIA standard.

The provision that ultimately became section 722(d) of the Dodd-Frank Act was added during consideration of the legislation in the House of Representatives.

See

155 Cong. Rec. H14685 (Dec. 10, 2009). The version of what became Title VII that was reported by the House Agriculture Committee and the House Financial Services Committee did not include any provision addressing cross-border application.

See

155 Cong. Rec. H14549 (Dec. 10, 2009). The Commission finds it significant that, in adding the cross-border provision before final passage, the House did so in terms that, as discussed in text, were different from, and broader than, the terms used in the analogous provision of the FTAIA.

As further described in the Proposed Guidance, one of the principal rationales for the enactment of the Dodd-Frank derivatives reforms was the need for a comprehensive scheme of regulation to prevent systemic risk in the U.S. financial system.

More particularly, a primary purpose of Title VII of the Dodd-Frank Act is to address risk to the U.S. financial system created by interconnections in the swaps market.

Title VII of the Dodd-Frank Act gave the Commission new and broad authority to regulate the swaps market to address and mitigate risks arising from swap activities that in the future could cause a financial crisis.

See

Proposed Guidance, 77 FR at 41215-41216.

Cf.

156 Cong. Rec. S5818 (July 14, 2010) (statement of Sen. Lincoln) (“In 2008, our Nation's economy was on the brink of collapse. America was being held captive by a financial system that was so interconnected, so large, and so irresponsible that our economy and our way of life were about to be destroyed.”), available at

http://www.gpo.gov/fdsys/pkg/CREC-2010-07-14/pdf/CREC-2010-07-14.pdf;

156 Cong. Rec. S5888 (July 15, 2010) (statement of Sen. Shaheen) (“We need to put in place reforms to stop Wall Street firms from growing so big and so interconnected that they can threaten our entire economy.”), available at

http://www.gpo.gov/fdsys/pkg/CREC-2010-07-15/pdf/CREC-2010-07-15-senate.pdf;

156 Cong. Rec. S5905 (July 15, 2010) (statement of Sen. Stabenow) (“For too long the over-the-counter derivatives market has been unregulated, transferring risk between firms and creating a web of fragility in a system where entities became too interconnected to fail.”), available at

http://www.gpo.gov/fdsys/pkg/CREC-2010-07-15/pdf/CREC-2010-07-15-senate.pdf.

In global markets, the source of such risk is not confined to activities within U.S. borders. Due to the interconnectedness between firms, traders, and markets in the U.S. and abroad, a firm's failure, or trading losses overseas, can quickly spill over to the United States and affect activities in U.S. commerce and the stability of the U.S. financial system. Accordingly, Congress did not limit the application of the Dodd-Frank Act to activities within the United States. Rather, in recognition of the global nature of the swaps market, and the fact that risks to the U.S. financial system may arise from activities outside the United States, as well as from activities within the United States, Congress explicitly provided for cross-border application of Title VII to activities outside the United States that pose risks to the U.S. financial system.

Therefore, upon consideration of the statutory language, as well as the prophylactic purpose of the CEA and the amendments made to it by Title VII, the Commission construes section 2(i) to apply the swaps provisions of the CEA to activities outside the United States that have either: (1) A direct and significant effect on U.S. commerce; or, in the alternative, (2) a direct and significant connection with activities in U.S. commerce, and through such connection present the type of risks to the U.S. financial system and markets that Title VII directed the Commission to address. The Commission interprets section 2(i) in a manner consistent with the overall goals of the Dodd-Frank Act to reduce risks to the U.S. financial system and avoid future financial crises.

The legislative history of the Dodd-Frank Act shows that in the fall of 2009, neither the Over-the-Counter Derivatives Markets Act of 2009, H.R. 3795, 111th Cong. (1st Sess. 2009), reported by the Financial Services Committee chaired by Rep. Barney Frank, nor the Derivatives Markets Transparency and Accountability Act of 2009, H.R. 977, 111th Cong. (1st Sess. 2009), reported by the Agriculture Committee chaired by Rep. Collin Peterson, included a general territoriality limitation that would have restricted Commission regulation of transactions between two foreign persons located outside of the United States. During the House Financial Services Committee markup on October 14, 2009, Rep. Spencer Bachus offered an

amendment that would have restricted the jurisdiction of the Commission over swaps between non-U.S. resident persons transacted without the use of the mails or any other means or instrumentality of interstate commerce. Chairman Frank opposed the amendment, noting that there may well be cases where non-U.S. residents are engaging in transactions that have an effect on the United States and that are insufficiently regulated internationally and that he would not want to prevent U.S. regulators from stepping in. Chairman Frank expressed his commitment to work with Rep. Bachus going forward, and Rep. Bachus withdrew the amendment.

See

H. Fin. Serv. Comm. Mark Up on Discussion Draft of the Over-the-Counter Derivatives Markets Act of 2009, 111th Cong., 1st Sess. (Oct. 14, 2009) (statements of Rep. Bachus and Rep. Frank), available at

http://financialservices.house.gov/calendar/eventsingle.aspx?EventID=231922.

The Commission also notes that the Supreme Court has indicated that the FTAIA may be interpreted more broadly when the government is seeking to protect the public from anticompetitive conduct than when a private plaintiff brings suit.

See Hoffman-LaRoche,

452 U.S. at 170 (“A Government plaintiff, unlike a private plaintiff, must seek to obtain the relief necessary to protect the public from further anticompetitive conduct and to redress anticompetitive harm. And a Government plaintiff has legal authority broad enough to allow it to carry out its mission.”).

Consistent with this overall interpretation, the Commission believes that the term “direct” in CEA section 2(i) should be interpreted in a manner consistent with the position of the Department of Justice Antitrust Division with respect to the meaning of the same term in the FTAIA, and as recently adopted by the Seventh Circuit.

The Commission therefore interprets the term “direct” in section 2(i) so as to require “a reasonably proximate causal nexus” and not to require foreseeability, substantiality, or immediacy.

See note 63 and accompanying text,

supra.

The Seventh Circuit's rationale for rejecting the Ninth Circuit's interpretation applies with at least equal, if not greater, force to the interpretation of the word “direct” in section 2(i) of the CEA. As discussed in note 68 and the accompanying text,

supra,

Congress expressly declined to import the FTAIA standards of substantiality, immediacy, or foreseeability into section 2(i). The Commission believes that the terms included in section 2(i) that are the same as the terms in the FTAIA should be interpreted in a manner consistent with Congress's determination to not import other, different standards from the FTAIA into section 2(i). Where Congress has included in a new statute one term but not another from an existing statute, it is reasonable to conclude that Congress did not want the other existing standards included in the new statute.

Consistent with the purpose of Title VII to protect the U.S. financial system against the build-up of systemic risks, the Commission does not read section 2(i) so as to require a transaction-by-transaction determination that a specific swap outside the United States has a “direct and significant connection with activities in, or effect on, commerce of the United States” in order to apply the swaps provisions of the CEA to such transactions. Rather, it is the connection of swap activities, viewed as a class or in the aggregate, to activities in commerce of the United States that must be assessed to determine whether application of the CEA swaps provisions is warranted.

The Commission believes this interpretation is supported by Congress's use of the plural term “activities” in CEA section 2(i), rather than the singular term “activity.” The Commission believes it is reasonable to interpret the use of the plural term “activities” in section 2(i) to require not that each particular activity have the requisite connection with U.S. commerce, but rather that such activities in the aggregate, or a class of activity, have the requisite nexus with U.S. commerce. This interpretation is consistent with the overall objectives of Title VII, as described above. Further, the Commission believes that a swap-by-swap approach to jurisdiction would be “too complex to prove workable.”

See Hoffman-LaRoche,

542 U.S. at 168.

This conclusion is bolstered by similar interpretations of other federal statutes regulating interstate commerce. Recently, the Supreme Court reaffirmed a similar “aggregate effects” approach in

Nat'l Fed'n of Indep. Bus.

Sebelius.

In that case, the Court phrased the holding in the seminal “aggregate effects” decision,

Wickard

Filburn,

in this way: “[The farmer's] decision, when considered in the aggregate along with similar decisions of others, would have had a substantial effect on the interstate market for wheat.”

In another recent case,

Gonzales v Raich,

the Court adopted similar reasoning to uphold the application of the Controlled Substance Act

to prohibit the intrastate use of medical marijuana for medicinal purposes. In

Raich,

the Court held that Congress could regulate purely intrastate activity if the failure to do so would “leave a gaping hole” in the federal regulatory structure. These cases support the Commission's cross-border authority over swap activities that as a class, or in the aggregate, have a direct and significant connection with activities in, or effect on, U.S. commerce—whether or not an individual swap may satisfy the statutory standard.

132 S. Ct. 2566 (2012).

317 U.S. 111 (1942).

132 S. Ct. 2566, 2588 (2012). At issue in

Wickard

was the regulation of a farmer's production and use of wheat even though the wheat was “not intended in any part for commerce but wholly for consumption on the farm.” 317 U.S. at 118. The Supreme Court upheld the application of the regulation, stating that although the farmer's “own contribution to the demand for wheat may be trivial by itself,” the federal regulation could be applied when his contribution “taken together with that of many others similarly situated, is far from trivial.”

Id.

at 128-29. The Court also stated it had “no doubt that Congress may properly have considered that wheat consumed on the farm where grown, if wholly outside the scheme of regulation, would have a substantial effect in defeating and obstructing its purpose . . . .”

Id.

545 U.S. 1 (2005).

21 U.S.C. 801

et seq.

Sebelius,

the Court stated, “Where the class of activities is regulated, and that class is within the reach of federal power, the courts have no power to excise, as trivial, individual instances of the class.” 132 S. Ct. at 2587 (

quoting Perez

United States,

402 U.S. 146, 154 (1971).

C. Principles of International Comity

The case law in the antitrust area also teaches the importance of recognizing the laws and interests of other countries in applying an ambiguous federal statute across borders; in such circumstances, principles of international comity counsel courts and agencies to act reasonably in exercising jurisdiction with respect to activity that takes place elsewhere. In

Hoffman-LaRoche,

an antitrust class action lawsuit alleging an international price-fixing conspiracy by foreign and domestic vitamin manufacturers and distributors, the Supreme Court held that ambiguous statutes should be construed to “avoid unreasonable interference with the sovereign authority of other nations.”

The Court explained that this rule of construction “reflects customary principles of international law” and “helps the potentially conflicting laws of different nations work together in harmony—a harmony particularly needed in today's highly interdependent commercial world.”

542 U.S. at 164.

Id.

at 165.

In determining whether the exercise of jurisdiction by one nation over activities in another nation would be reasonable, the courts and agencies are guided by the Restatement (Third) of Foreign Relations Law of the United States (the “Restatement”). Drawing upon traditional principles of international law, the Restatement provides bases of jurisdiction to prescribe law, as well as limitations on the exercise of jurisdiction. In addition

to recognizing territoriality and nationality as bases for jurisdiction, the Restatement expressly provides that a country has jurisdiction to prescribe law with respect to “conduct outside its territory that has or is intended to have substantial effect within its territory.”

See

Restatement sec. 402(1)(c). A comment to the Restatement also identifies jurisdiction with respect to activity outside the country, but having or intended to have substantial effect within the country's territory, as an aspect of jurisdiction based on territoriality.

See

Restatement sec. 402 cmt. d.

The Restatement also provides that even where a country has a basis for jurisdiction, it should not prescribe law with respect to a person or activity in another country when the exercise of such jurisdiction is unreasonable.

The reasonableness of such an exercise of jurisdiction, in turn, is to be determined by evaluating all relevant factors, including certain specifically enumerated factors where appropriate:

Restatement sec. 403(1).

(a) the link of the activity to the territory of the regulating state,

i.e.,

the extent to which the activity takes place within the territory, or has substantial, direct, and foreseeable effect upon or in the territory;

(b) the connections, such as nationality, residence, or economic activity, between the regulating state and the persons principally responsible for the activity to be regulated, or between that state and those whom the regulation is designed to protect;

(c) the character of the activity to be regulated, the importance of regulation to the regulating state, the extent to which other states regulate such activities, and the degree to which the desirability of such regulation is generally accepted;

(d) the existence of justified expectations that might be protected or hurt by the regulation;

(e) the importance of the regulation to the international political, legal, or economic system;

(f) the extent to which the regulation is consistent with the traditions of the international system;

(g) the extent to which another state may have an interest in regulating the activity; and

(h) the likelihood of conflict with regulation by another state.

Restatement sec. 403(2).

Notably, the Restatement does not preclude concurrent regulation by multiple jurisdictions. However, where concurrent jurisdiction by two or more jurisdictions creates conflict, the Restatement recommends that each country evaluate both its interests in exercising jurisdiction and those of the other jurisdiction, and where possible, to consult with each other.

With regard to conflicting exercises of jurisdiction, section 403(3) of the Restatement states:

(3) When it would not be unreasonable for each of the two states to exercise jurisdiction over a person or activity, but the prescriptions by the two states are in conflict, each state has an obligation to evaluate its own as well as the other state's interest in exercising jurisdiction, in light of all the relevant factors, including those set out in Subsection (2), a state should defer to the other state if that state's interest is clearly greater.

Comment e. to section 403 of the Restatement states:

Conflicting exercises of jurisdiction.

Subsection (3) applies when an exercise of jurisdiction by each of two states is not unreasonable, but their regulations conflict. In that case, each state is required to evaluate both its interests in exercising jurisdiction and those of the other state. When possible, the two states should consult with each other. If one state has a clearly greater interest, the other should defer, by abandoning its regulation or interpreting or modifying it so as to eliminate the conflict. When neither state has a clearly stronger interest, states often attempt to eliminate the conflict so as to reduce international friction and avoid putting those who are the object of the regulations in a difficult situation. Subsection (3) is addressed primarily to the political departments of government, but it may be relevant also in judicial proceedings.

Subsection (3) applies only when one state requires what another prohibits, or where compliance with the regulations of two states exercising jurisdiction consistently with this section is otherwise impossible. It does not apply where a person subject to regulation by two states can comply with the laws of both; for example, where one state requires keeping accounts on a cash basis, the other on an accrual basis. It does not apply merely because one state has a strong policy to permit or encourage an activity which another state prohibits, or one state exempts from regulation an activity which another regulates. Those situations are governed by Subsection (2), but do not constitute conflict within Subsection (3).

Consistent with the Restatement, in determining the extent to which the Dodd-Frank swaps provisions apply to activities abroad, the Commission has strived to protect U.S. interests as determined by Congress in Title VII, and minimize conflicts with the laws of other jurisdictions. The Commission has carefully considered, among other things, the level of the home jurisdiction's supervisory interests over the subject activity and the extent to which the activity takes place within the foreign territory.

At the same time, the Commission has also considered the potential for cross-border activities to have substantial connection to or impact on the U.S. financial system and the global, highly integrated nature of today's swap business; to fulfill the purposes of the Dodd-Frank swaps reform, the Commission's supervisory oversight cannot be confined to activities strictly within the territory of the United States.

For purposes of this Guidance, the terms “home jurisdiction” or “home country” are used interchangeably and refer to the jurisdiction in which the person or entity is established, including the European Union.

The Commission believes that the Guidance strikes the proper balance between these competing factors to ensure that the Commission can discharge its responsibilities to protect the U.S. markets, market participants, and financial system, consistent with the traditions of the international system and comity principles, as set forth in the Restatement. Of particular relevance is the Commission's approach to substituted compliance, which would be expected to mitigate any burden associated with potentially conflicting foreign regulations and would generally be appropriate in light of the supervisory interests of foreign regulators in entities domiciled and operating in its jurisdiction.

As discussed in section IV.F,

infra,

the Commission's recognition of substituted compliance would be based on an evaluation of whether the requirements of the foreign jurisdiction are comparable and comprehensive compared to the applicable requirement(s) under the CEA and Commission regulations, based on a consideration of all relevant factors, including among other things: (i) the comprehensiveness of the foreign regulator's supervisory compliance program, and (ii) the authority of such foreign regulator to support and enforce its oversight of the registrant's branch or agency with regard to such activities to which substituted compliance applies.

In addition, recognizing that close cooperation and coordination with other jurisdictions is vital to the regulation of derivatives in the highly interconnected global market, the Commission's staff expects to remain actively engaged in discussions with foreign regulators as the Commission implements the cross-border interpretive guidance and as other jurisdictions develop their own regulatory requirements for derivatives. The Commission recognizes that conflicts of law may exist and is ready to address those issues as they may arise. In that regard, where a real conflict of laws exists, the Commission strongly encourages regulators and registrants to consult directly with its staff.

IV. Guidance

A. Interpretation of the Term “U.S. Person”

1. Proposed Interpretation

Under the Proposed Guidance, the term “U.S. person” identifies those persons who, under the Commission's interpretation, could be expected to satisfy the jurisdictional nexus under section 2(i) of the CEA based on their swap activities either individually or in the aggregate.

As proposed, the Commission's interpretation of the term “U.S. person” would generally encompass: (1) persons (or classes of persons) located within the United

States; and (2) persons that may be domiciled or operate outside the United States but whose swap activities nonetheless have a “direct and significant connection with activities in, or effect on, commerce of the United States” within the meaning of CEA section 2(i).

See

Proposed Guidance, 77 FR at 41218. The discussion of the term “U.S. person” in this Guidance is limited to the relevance of this term for purposes of the Commission regulations promulgated under Title VII. The Commission does not intend that this discussion would apply to other uses of the term “person” in the CEA.

Specifically, as set forth in the Proposed Guidance, the Commission's interpretation of the term “U.S. person” would generally include, but not be limited to:

(i) any natural person who is a resident of the United States;

(ii) any corporation, partnership, limited liability company, business or other trust, association, joint-stock company, fund or any form of enterprise similar to any of the foregoing, in each case that is either (A) organized or incorporated under the laws of the United States or having its principal place of business in the United States (legal entity) or (B) in which the direct or indirect owners thereof are responsible for the liabilities of such entity and one or more of such owners is a U.S. person;

(iii) any individual account (discretionary or not) where the beneficial owner is a U.S. person;

(iv) any commodity pool, pooled account, or collective investment vehicle (whether or not it is organized or incorporated in the United States) of which a majority ownership is held, directly or indirectly, by a U.S. person(s);

(v) any commodity pool, pooled account, or collective investment vehicle the operator of which would be required to register as a commodity pool operator under the CEA;

(vi) a pension plan for the employees, officers or principals of a legal entity with its principal place of business inside the United States; and

(vii) an estate or trust, the income of which is subject to U.S. income tax regardless of source.

Under the proposed interpretation, a “U.S. person” would include a foreign branch of a U.S. person; on the other hand, a non-U.S. affiliate guaranteed by a U.S. person would not be within the Commission's interpretation of the term “U.S. person.”

The Further Proposed Guidance included alternatives for two “prongs” of the proposed interpretation of the term “U.S. person” in the Proposed Guidance: prong (ii)(B), which relates to U.S. owners that are responsible for the liabilities of a non-U.S. entity; and prong (iv), which relates to commodity pools and funds with majority-U.S. ownership.

The alternative version of prong (ii)(B) in the Further Proposed Guidance would limit its scope to a non-U.S. legal entity that is directly or indirectly majority-owned by one or more natural persons or legal entities that meet prong (i) or (ii) of the interpretation, in which such U.S. person(s) bears unlimited responsibility for the obligations and liabilities of the legal entity. This alternative prong (ii)(B) would generally not include an entity that is a corporation, limited liability company or limited liability partnership where shareholders, members or partners have limited liability. Further, the Commission stated in the Further Proposed Guidance that the majority-ownership criterion would be intended to avoid capturing those legal entities that have negligible U.S. ownership interests. Unlimited liability corporations where U.S. persons have majority ownership and where such U.S. persons have unlimited liability for the obligations and liabilities of the entity generally would be covered under this alternative to prong (ii)(B).

The alternative prong (ii)(B) in the Further Proposed Guidance was as follows:

(ii) A corporation, partnership, limited liability company, business or other trust, association, joint-stock company, fund or any form of enterprise similar to any of the foregoing, in each case that is either (A) organized or incorporated under the laws of a state or other jurisdiction in the United States or having its principal place of business in the United States or (B) directly or indirectly majority-owned by one or more persons described in prong (i) or (ii)(A) and in which such person(s) bears unlimited responsibility for the obligations and liabilities of the legal entity (other than a limited liability company or limited liability partnership where partners have limited liability);

The Further Proposed Guidance explained that this alternative proposed prong would generally treat an entity as a U.S. person if one or more of its U.S. majority owners has unlimited responsibility for losses of, or nonperformance by, the entity. This prong would reflect that when the structure of an entity is such that the U.S. direct or indirect owners are ultimately liable for the entity's obligations and liabilities, the connection to activities in, or effect on, U.S. commerce would be expected to satisfy the requisite jurisdictional nexus. This “look-through” requirement also would serve to discourage persons from creating such indirect ownership structures for the purpose of engaging in activities outside of the Dodd-Frank regulatory regime. Under the Further Proposed Guidance, this alternative proposed prong generally would not render a legal entity organized or domiciled in a foreign jurisdiction a “U.S. person” simply because the entity's swaps obligations are guaranteed by a U.S. person.

With respect to prong (iv) of the interpretation of the term “U.S. person” in the Proposed Guidance, the Further Proposed Guidance set forth an alternative under which any commodity pool, pooled account, investment fund or other collective investment vehicle generally would be within the interpretation of the term “U.S. person” if it is (directly or indirectly) majority-owned by one or more natural persons or legal entities that meet prong (i) or (ii) of the interpretation of the term “U.S. person.” The Further Proposed Guidance explained that for purposes of this alternative prong (iv), the Commission would interpret “majority-owned” to mean the beneficial ownership of 50 percent or more of the equity or voting interests in the collective investment vehicle. Similar to the alternative prong (ii)(B) discussed above, the Commission generally would not interpret the collective investment vehicle's place of organization or incorporation to be determinative of its status as a U.S. person. The Further Proposed Guidance clarified that under alternative prong (iv), the Commission would interpret the term “U.S. person” to include a pool, fund, or other collective investment vehicle that is publicly traded only if it is offered, directly or indirectly, to U.S. persons.

The alternative prong (iv) in the Further Proposed Guidance was as follows:

(iv) A commodity pool, pooled account, investment fund, or other collective investment vehicle that is not described in prong (ii) and that is directly or indirectly majority-owned by one or more persons described in prong (i) or (ii), except any commodity pool, pooled account, investment fund, or other collective investment vehicle that is publicly-traded but not offered, directly or indirectly, to U.S. persons;

The Further Proposed Guidance explained that this alternative proposed prong (iv) is intended to capture collective investment vehicles that are created for the purpose of pooling assets from U.S. investors and channeling these assets to trade or invest in line with the objectives of the U.S. investors, regardless of the place of the vehicle's organization or incorporation. These collective investment vehicles may serve as a means to achieve the investment objectives of their beneficial owners, rather than being separate, active operating businesses. As such, the beneficial owners would be directly exposed to the risks created by the swaps that their collective investment vehicles enter into.

2. Comments

In general, commenters stated that the proposed “U.S. person” interpretation presented significant interpretive issues and implementation challenges.

The commenters contended that it would be difficult to determine U.S. person status because of the breadth of the proposed interpretation, potential ambiguities it contains, and the collection of information its application may require. The commenters, therefore, urged the Commission to consider how the proposed interpretation could be stated in a simpler and more easily applied manner.

While a number of commenters stated that the Commission's construction of the term “U.S. person” in the Proposed Guidance was overbroad,

several commenters on the Further Proposed Guidance advocated for a broader reading of the term than any of those proposed by the Commission.

See

SIFMA (Aug. 27, 2012) at 5; Societe Generale (“SocGen”) (Aug. 8, 2012) at 4; IIB (Aug. 27, 2012) at 4-14; Deutsche Bank AG (“Deutsche Bank”) (Aug. 27, 2012) at 1-4; Goldman Sachs “(Goldman”) (Aug. 27, 2012) at 3; The Hong Kong Association of Banks (“Hong Kong Banks”) (Aug. 27, 2012) at 3-4; Australian Bankers' Association Inc. (“Australian Bankers”) (Aug. 27, 2012) at 4.

SIFMA (August 27, 2012) at A10.

See, e.g.,

European Commission (Aug. 24, 2012) at 1-2; Hong Kong Banks (Aug. 27, 2012) at 4; J.P. Morgan (Aug. 13, 2012) at 9.

See

Better Markets (Feb. 15, 2013) at 4-8; Michael Greenberger and Brandy Bruyere, University of Maryland, and AFR (“Greenberger/AFR”) (Feb. 6, 2013) at 3 (stating that none of the definitions of U.S. person proposed by the CFTC are sufficient to protect U.S. taxpayers from the risks of foreign subsidiaries and affiliates of U.S. financial institutions).

See also

Letter from Sen. Levin at 7-8.

a. Phase-in Interpretation

A number of commenters requested that the Commission adopt an interim interpretation of “U.S. person” that would allow firms to rely on their existing systems and classifications and avoid the need to develop systems to follow a temporary interpretation of the term “U.S. person” that may change in the near future.

IIB explained that applying any interpretation of “U.S. person” that departs from status based on residence or jurisdiction of organization, and in some cases principal place of business, will require sufficient time to implement relevant documentation conventions and diligence procedures.

IIB, therefore, requested that the Commission implement a phased-in approach to the “U.S. person” interpretation that would encompass, in general, (1) a natural person who is a U.S. resident and (2) a corporate entity that is organized or incorporated under the laws of the United States or has its place of business in the United States.

See, e.g.,

Cleary (Aug. 16, 2012) at 6; SIFMA (Aug. 27, 2012) at A8-9; IIB (Aug. 9, 2012) at 4; Deutsche Bank (Aug. 13, 2012) at 2; State Street Corporation (“State Street”) (Aug. 27, 2012) at 2; Goldman (Aug. 27, 2012) at 3.

See

IIB (Aug. 9, 2012) at 4.

For purposes of IIB's definition, a foreign branch of a U.S. swap dealer would be considered a non-U.S. person. IIB added that it believes that the Commission should adopt a final definition of “U.S. person” that is consistent with its proposed interim definition.

Id.

SIFMA also urged the Commission to phase in the “U.S. person” interpretation, citing the implementation difficulties identified by IIB. Specifically, SIFMA recommended that the Commission allow market participants to apply an interim interpretation of “U.S. person” until 90 days after the final interpretation of “U.S. person” is published.

SIFMA stated that the interim interpretation—which was identical to IIB's interim interpretation—should identify “core” U.S. persons and would allow its members to phase in compliance with the Dodd-Frank requirements without building new systems that might have to be changed when the Commission states a final interpretation of the term.

See

SIFMA (Aug. 25, 2012) at A8.

Id.

at A8.

b. Comments on Particular Prongs of the Proposed Interpretation of the Term “U.S. Person”

Commenters' concerns were primarily (though not exclusively) directed to three prongs of the proposed “U.S. person” interpretation: prong (ii)(B) relating to U.S. owners that are responsible for the liabilities of a non-U.S. company; prong (iv) relating to commodity pools and funds with majority-U.S. ownership; and prong (v) relating to registered commodity pool operators. Below, the Commission describes the main comments to all the prongs of the proposed interpretation of “U.S. person” in greater detail.

Commenters generally did not comment on prong (i).

With respect to prong (ii)(A), the Investment Industry Association of Canada (IIAC) stated that the Commission should look to the location of a legal entity's management (or the majority of its directors and executive officers), instead of the location of organization.

100

Two commenters stated that the “principal place of business” element of the interpretation was ambiguous and difficult to administer and thus recommended that it be removed.

101

100

See

IIAC (Aug. 27, 2012) at 3-5.

101

See

Lloyds Banking Group (“Lloyds”) (Aug. 24, 2012) at 3; Managed Fund Association and Alternative Investment Management Association (“MFA/AIMA”) (Aug. 28, 2012) at 6.

On the other hand, Senator Levin supported an inclusive interpretation of the term “U.S. person” that would encompass foreign offices and affiliates of U.S. financial institutions and corporations, because requiring a case-by-case analysis of whether they should be subject to the Dodd-Frank Act would be complicated, burdensome, and susceptible to gamesmanship.

102

He also suggested that, since it appears that typically foreign affiliates and subsidiaries operate not as independent actors but are closely integrated with their parent corporations, obtaining from them the financial backing needed for their derivative trades, the Commission's interpretation should presume that a foreign affiliate engaged in swap activity is an extension of the parent corporation, unless the parent can demonstrate that the foreign affiliate should be treated as independent.

103

Senator Levin also stated that the Commission's interpretation should include as a U.S. person any foreign affiliate under common control with a U.S. person, based on factors such as common management, funding, systems, and financial reporting.

104

102

See

Letter from Sen. Levin at 7-8.

103

Id.

(stating that it “makes little economic sense, given the insubstantial reality of many foreign affiliates and subsidiaries in the financial industry” to “view a foreign affiliate or subsidiary as a non-U.S. person even if it were fully integrated with its U.S. parent, operated as a wholly owned shell operation with no offices or employees of its own, and functioned in the same way as a branch or agency office”).

104

Id.

at 8.

With respect to prong (ii)(B) of the interpretation, which addresses situations where the direct or indirect owners of an entity are responsible for its liabilities, several commenters stated that the phrase “responsible for the liabilities” was vague. For example, the Committee on Capital Markets Regulation (“Capital Markets”) stated that the phrase “responsible for the liabilities” was open to interpretation and requested that the Commission provide more details regarding its interpretation of this phrase.

105

SIFMA sought clarification on whether the Commission intended to capture partnerships where the partners have unlimited liability.

106

The International Swaps and Derivatives Association Inc. (“ISDA”) stated that it was not clear whether the concept includes

guarantees, sureties, simple risk of loss of equity, or other type of exposure.

107

Deutsche Bank further noted that the language in prong (ii)(B) could be read to include an entity guaranteed by a U.S. person, which appears at odds with possibly varying policies elsewhere in the Proposed Guidance for entities guaranteed by U.S. persons.

108

105

See

Capital Markets (Aug. 24, 2012) at 5.

106

See

SIFMA (Aug. 27, 2012) at A13 and A19.

107

See

ISDA (Aug. 27, 2012) at 9; MFA/AIMA (Aug. 28, 2012) at 6.

108

See

Deutsche Bank (Aug. 27, 2012) at 3.

See also

Peabody Energy Corporation (“Peabody”)(Aug. 28, 2012) at 2-3 (“By contrast, a foreign affiliate or subsidiary of a U.S. person would be considered a non-U.S. person, even where such an affiliate or subsidiary has certain or all of swap-related obligations guaranteed by the U.S. person.”) (citing Proposed Guidance, 77 FR at 41218); SIFMA (Aug. 27, 2012) at A2 (stating that the Commission should clarify that prong (ii)(B) of the interpretation is not meant to capture an entity merely because it is guaranteed by a U.S. person).

Commenters also expressed concerns about the lack of a minimum U.S.-ownership threshold. For example, Sumitomo Mitsui Trust Bank Ltd. (“Sumitomo”) stated that there should be a minimum level of ownership of the entity in question by one or more U.S. persons for this prong to apply, and suggested that the majority ownership threshold used in prong (iv) apply here as well.

109

ISDA emphasized a different point, stating that without clear thresholds, a non-U.S. business would be within the Commission's interpretation of the term “U.S. person” by virtue of even negligible ownership interests by U.S. persons.

110

The Financial Services Roundtable (“FSR”) stated that prong (ii) is overbroad because it would cover even minority-U.S. owned institutions based only on a pro-rata (or less) parent liability guarantee.

111

109

See

Sumitomo (Aug. 24, 2012) at 2.

110

See

ISDA (Aug. 10, 2012) at 8 (recommending that regardless of the nature of the “responsibilities for the liabilities,” only direct owners of apparent non-U.S. persons should be considered, and that the Commission adopt a presumptive control threshold of 25% direct ownership for distinguishing between control persons and owners that need not be considered in assessing the status of an entity as a U.S. person).

111

See

FSR (Aug. 27, 2012) at 3.

Capital Markets raised a concern that whether a conclusion that the direct or indirect owners of a U.S. legal entity are “responsible for the liabilities” of such entity requires knowledge of each counterparty's legal and ownership structure.

112

FSR stated that interpretation of prong (ii)(B) would depend on a reevaluation of most, if not all, counterparty relationships in order to determine what type of liability guarantees exist between an entity and its parent.

113

Both Capital Markets and FSR stated that firms do not currently have any reasonable means to obtain information necessary to assess this element of the interpretation, particularly within the short time frame prior to the registration date.

112

See

Capital Markets (Aug. 24, 2012) at 5.

113

See

FSR (Aug. 27, 2012) at 3.

One commenter supported finalization of the alternative prong (ii)(B) in the Further Proposed Guidance, with minor clarifying changes. The Commercial Energy Working Group (“CEWG”) stated that the words “all of” should be added to clarify that this prong would generally apply when U.S. persons that are majority owners bear “unlimited responsibility for all of the obligations and liabilities of the legal entity . . .”

114

The CEWG also stated that the Guidance should reaffirm that a guarantee of a non-U.S. person by a U.S. person, in and of itself, generally would not invoke U.S. person status.

115

Other commenters that supported the principles of the alternative prong (ii)(B) thought that the interpretation of “U.S. person” in this regard should be restructured. The Investment Company Institute (“ICI”) stated that the Commission should clarify that collective investment vehicles would not fall within the alternative prong (ii)(B) because the investors' liabilities are limited to the amount of their investment.

116

Thus, ICI stated that it believes the alternative prong (ii)(B) would be superfluous with respect to collective investment vehicles because the alternative prong (iv) in the Further Proposed Guidance would address these entities if they are majority-owned by U.S. persons.

117

MFA/AIMA, on the other hand, supported the combination of majority ownership and unlimited liability elements in the alternative prong (ii)(B) and recommended that collective investment vehicles be considered under that prong.

118

114

See

CEWG, submitted by Sutherland Asbill & Brennan LLP (Feb. 25, 2013) at 5.

115

Id.

116

See

ICI (Feb. 6, 2013) at 3.

117

See id.

at 2.

See also

IIB (Feb 6, 2013) at 10-11 (collective investment vehicles should be excluded from prong (ii) and addressed only in prong (iv)).

118

See

MFA/AIMA (Feb. 6, 2013) at 7-8. Thus under MFA/AIMA's approach, the status of collective investment vehicles would be determined by reference to only the tests in alternative prong (ii)(B).

Other commenters stated that the Commission should clarify that the language at the end of the proposed alternative prong (ii)(B), which refers to limited liability companies and limited liability partnerships, would generally also apply to other types of entities where owners have limited liability but where the entities have different names in foreign legal jurisdictions.

119

MFA/AIMA and SIFMA AMG stated that the Commission should clarify how frequently an entity should consider (

e.g.,

annually) whether U.S. persons are its direct or indirect majority owners, and provide for a transition period after an entity falls within this prong of the interpretation for the first time.

120

119

Id.

at 10-11; Asociación Bancaria y de Entidades Financieras de Colombia (“Colombian Bankers”) (Feb. 6, 2013) at 1-2; IIB (Feb. 6, 2013) at 10; ISDA (Feb. 6, 2013) at 5-6.

120

See

MFA/AIMA (Feb. 6, 2013) at 12; SIFMA/AMG (Feb. 14, 2013) at 6. ISDA stated that the Commission should clarify how the prong would apply to an entity where some but not all of the owners have unlimited responsibility. In this case, the Commission should clarify whether the U.S. owners with majority ownership of the entity also each must bear unlimited responsibility for the entity's obligations and liabilities or, rather, whether it suffices that a single U.S. owner has unlimited responsibility once U.S. majority ownership is established.

See

ISDA (Feb. 6, 2013) at 5-7.

Other commenters were critical of the alternative prong (ii)(B). Greenberger/AFR and Better Markets stated that this proposed prong is too narrow, because it appears to require that U.S. persons be both the majority owners of an entity and bear unlimited responsibility for the entity's obligations and liabilities, in order for the entity to be within the Commission's interpretation of the term “U.S. person” based solely on ownership by U.S. persons.

121

Greenberger/AFR pointed out that a U.S. person could be the majority owner of an entity organized outside the United States, and be responsible for 99% of the entity's obligations, yet the entity would not fall within the Commission's interpretation under the proposed prong.

122

121

See

Greenberger/AFR (Feb. 6, 2013) at 7; Better Markets (Feb. 15, 2013) at 7-8.

122

See

Greenberger/AFR (Feb. 6, 2013) at 7.

Other commenters suggested that the alternative prong (ii)(B) is too broad, recommending that the ownership element be limited to when a majority of the direct owners of an entity are U.S. persons, because considering the indirect ownership of an entity will be unworkable for many entities.

123

ISDA also stated that the concept of “unlimited responsibility” is too amorphous to be a basis for the Commission's interpretation, because it could turn on fact-sensitive and

uncertain legal judgments under doctrines such as “veil-piercing” or “alter ego” entities.

124

Moreover, ISDA asserted that the Commission has not justified the treatment of unlimited liability entities in the proposed alternative prong (ii)(B) by demonstrating how such entities are more susceptible to being used to evade Dodd-Frank regulations or otherwise raise the concerns addressed by the Commission's regulations.

125

123

See

MFA/AIMA (Feb. 6, 2013) at 7; SIFMA, The Clearing House, Association LLC (“The Clearing House”), and FSR (“SIFMA/CH/FSR”) (Feb. 6, 2013) at 2, A8-9; ISDA (Feb. 6, 2013) at 5. IIB and SIFMA/AMG made similar comments and questioned whether extending this prong to entities where a majority of indirect owners are U.S. persons would be consistent with the “direct and significant connection” language in CEA section 2(i).

See

IIB (Feb. 6, 2013) at 10; SIFMA/AMG (Feb. 14, 2013) at 3-4.

124

See

ISDA (Feb. 6, 2013) at 6. ISDA also stated that the Commission should make clear that the reference to “unlimited responsibility” does not include responsibility arising out of separate contractual arrangements or extraordinary circumstances, such as conduct by owners that results in veil piercing or limited partner participation in management of a partnership.

See id.

SIFMA/CH/FSR made similar points and stated that this prong is not necessary because market participants have not used unlimited liability entities to avoid Dodd-Frank regulations.

See

SIFMA/CH/FSR (Feb. 6, 2013) at A12.

125

See

ISDA (Feb. 6, 2013) at 6.

Commenters were also critical of the element of the alternative prong (ii)(B) that would treat a collective investment vehicle as a U.S. person if its principal place of business is in the United States. They stated that application of this element would be very unclear and difficult on an operational level.

126

Commenters also stated that a collective investment vehicle should be treated as a U.S. person if it is organized in the U.S., not if its manager or operator is in the U.S.

127

126

Id.

at 6-7; SIFMA/CH/FSR (Feb. 6, 2013) at A1, A5-6, B5; IIB (Feb. 6, 2013) at 7-8, 10.

127

See

MFA/AIMA (Feb. 6, 2013) at 8-9; SIFMA/AMG (Feb. 6, 2013) at A7-8. The Japanese Bankers Association made similar comments and stated that the Commission should clarify whether the location of the principal place of business of a subsidiary that is controlled by its parent is the location of the subsidiary's headquarters or the parent's headquarters. Japanese Bankers Association (Feb. 6, 2013) at 7.

Peabody Energy Corporation (“Peabody”) and SIFMA/AMG stated the Commission should adopt the interpretation of U.S. person in the January Order, which does not include all the elements of the proposed alternative prong (ii)(B).

128

See

Peabody (Feb. 5, 2013) at 1-2; SIFMA/AMG (Feb. 6, 2013) at 1-3.

Commenters generally did not comment on prong (iii) of the proposed interpretation of the term “U.S. person.”

With respect to prong (iv) relating to majority direct- or indirect-owned commodity pools, pooled accounts, or collective investment vehicles, several commenters stated that this prong was unworkable because the proposed interpretation would require potentially unascertainable information.

129

According to SIFMA, reliance on representations would be the only practical way to consider the status of counterparties as U.S. persons under this prong since other types of information, such as the direct and indirect ownership of any commodity pool, pooled account or collective investment vehicle with which a market participant transacts, may be unavailable, non-public or otherwise sensitive.

130

Moreover, a fund would be required to monitor its level of U.S. ownership on an on-going basis, and this prong could result in frequent changes in the fund's U.S. person status.

131

The Clearing House argued that the interpretation should not look through direct investors to indirect investors, unless there is evidence of evasion.

132

Other commenters questioned whether the proposed interpretation of “U.S. person” for commodity pools, pooled accounts, and collective investment vehicles meets the “direct and significant” jurisdictional nexus applicable to the Commission's application of Title VII to transactions with such persons.

133

129

See, e.g.,

ISDA (Aug. 10, 2012) at 8; SIFMA (Aug. 27, 2012) at A17; Credit Suisse (Aug. 27, 2012) at 3-4; The Clearing House Association LLC (“The Clearing House”) (Aug. 27, 2012) at 12-13; Cleary (Aug. 16, 2012) at 7; IIB (Aug. 27, 2012) at 6-7.

130

See

SIFMA (Aug. 27, 2012) at A17-18.

See also

IIB (Aug. 27, 2012) at 7 (arguing that since pools cannot ascertain or control the status of their indirect investors, the reference to indirect ownership should be removed).

131

SIFMA (Aug. 27, 2012) at A17.

132

See

The Clearing House (Aug. 13, 2012) at 15 n. 20.

133

See, e.g.,

SIFMA/AMG (Aug. 27, 2012) at 2-3; MFA/AIMA (Aug. 28, 2012) at 4-5; ICI (Aug. 23, 2012) at 4.

Cleary urged that the Commission not adopt an interpretation of “U.S. person” based on the composition of fund ownership, at least prior to finalizing the interpretation.

134

As it explained, even if the Commission's interpretation would allow for reasonable reliance on counterparty representations, fund counterparties would not be able to provide any representation except with respect to funds formed after the finalization of the interpretation for which the fund's subscription materials could have been modified to capture the relevant information.

135

If the Commission nevertheless decided to adopt an interpretation based on investor composition, Cleary argued against including a fund in the interpretation on the basis of indirect ownership at any level less than a majority-ownership.

136

134

See

Cleary (Aug. 16, 2012) at 6-7.

135

Id.

136

Id.

IIB also noted that fund sponsors/operators verify investor status through subscription materials provided at the time of initial investment. Therefore, they request that any test based on fund ownership apply only to funds formed after the effective date of the final “U.S. person” interpretation. IIB also agreed that majority ownership is the minimum threshold under which a foreign fund should be included in the interpretation of the term “U.S. person.”

See

IIB (Aug. 27, 2012) at 6-7.

Consideration of majority-ownership is particularly problematic with respect to funds that are publicly traded, according to several commenters.

137

For example, ICI explained that U.S. persons typically purchase shares in non-U.S. funds through intermediaries, and that such shares are registered and held in nominee/street name accounts.

138

In such cases, the fund manager/operator would not have information regarding the underlying investors.

139

SIFMA recommended that publicly offered and listed commodity pools organized in foreign jurisdictions be excluded from the interpretation.

140

Credit Suisse stated that a fund should not be considered a U.S person to the extent that it is organized outside the United States and is subject to foreign regulation that is comparable to U.S. law. To the extent the fund is not so regulated, then the fund would be within the U.S. person interpretation only where it is organized under the laws of the United States or marketed to U.S. residents.

141

137

See, e.g.,

SIFMA (Aug. 27, 2012) at A20; ICI (Aug. 23, 2012) at 3-7; MFA/AIMA (Aug. 28, 2012) at 4; Credit Suisse (Aug. 27, 2012) at 3-4.

138

See

ICI (Aug. 23, 2012) at 3.

139

ICI also noted that certain jurisdictions may prohibit disclosure by intermediaries of beneficial owner information.

Id.

140

See

SIFMA (Aug. 27, 2012) at A19-20.

141

See

Credit Suisse (Aug, 27, 2012) at 3-4.

One commenter strongly supported the alternative prong (iv) in the Further Proposed Guidance. Citadel stated that since the Dodd-Frank clearing and reporting requirements will mitigate systemic risk, increase transparency and promote competition, the U.S. person interpretation should encompass offshore collective investment vehicles that have a sufficient U.S. nexus.

142

If it did not, then a core, active portion of the swaps market would fall outside the scope of the transaction level requirements, including clearing, which would undermine central objectives of Dodd-Frank, create opportunities for regulatory arbitrage, and risk fragmenting the swaps markets.

143

142

See

Citadel (Feb. 6, 2013) at 1.

143

See id.

Other commenters argued that the entities that would be covered by the alternative prong (iv) should not be covered by the interpretation of “U.S. person,” which should cover only entities that are directly majority-owned by U.S. persons. For example, SIFMA/

CH/FSR stated that consideration of indirect ownership could require ongoing monitoring of ownership, which is burdensome or even impossible, and would not necessarily reflect a sufficient jurisdictional nexus to the United States.

144

SIFMA/CH/FSR also stated that if consideration of majority ownership is included in the interpretation, it should reflect an objective statement of the ownership level that the Commission would consider relevant to U.S.-person status, so as to exclude entities that are owned by U.S. persons only to a de minimis extent and allow an annual consideration of ownership.

145

MFA/AIMA and the Investment Adviser Association (“IAA”) also provided reasons that there is not a sufficient jurisdictional nexus with the United States to include in the Commission's interpretation of the term “U.S. person” collective investment vehicles that are indirectly majority-owned by U.S. persons.

146

144

See

SIFMA/CH/FSR (Feb. 6, 2013) at A8-9.

See also

IIB (Feb. 6, 2013) at 11 (systems to track indirect ownership would be difficult and expensive to implement).

145

See

SIFMA/CH/FSR (Feb. 6, 2013) at A8-9. ISDA stated that the lack of an objective policy regarding the interpretation of majority ownership would lead to arbitrary or indeterminate results for many collective investment vehicles due to their varied capital structures (citing, for example, structured finance vehicles, which merit further analysis due not only to their complex capital structures but also to practical difficulties in monitoring ownership of their securities), and the practical consequences of the alternative interpretations can be considered only following a more concrete proposal offered for public comment.

See

ISDA (Feb. 6, 2013) at 6-7.

146

MFA/AIMA stated that since interactions between collective investment vehicles and registered swap dealers are expected to be covered by Dodd-Frank requirements or comparable foreign regulations, the inclusion of collective investment vehicles as “U.S. persons” is less important to achieve regulatory coverage.

See

MFA/AIMA (Feb. 6, 2013) at 7-8. MFA/AIMA also disputed whether the pooling of assets in a collective investment vehicle is a fundamental difference that denotes a greater U.S. nexus than the pooling of assets by corporations or other financial entities, and therefore it is problematic that alternative prong (iv) is more onerous (in MFA/AIMA's view) for non-U.S collective investment vehicles than alternative prong (ii) is for corporate or other financial entities.

See id.

IAA stated that it is inappropriate to define an entity as a U.S. person based on characteristics of investors in the entity rather than the characteristics of the entity itself.

See

IAA (Feb. 6, 2013) at 4.

Some commenters stated that whether a collective investment vehicle would be included in the interpretation of U.S. person should depend on whether the fund or other collective investment vehicle is being offered to U.S. persons, arguing that the interpretation should cover collective investment vehicles that are targeted to the U.S. market or to U.S. investors by focusing on activities within the control of the vehicle's manager.

147

See

Invesco Advisers Inc. (“Invesco”) (Feb. 6, 2013) at 11 (manager of collective investment vehicle determines whether to make offering in the United States; subsequent purchases by non-U.S. persons who have relocated to the U.S. should not alone constitute offering in the U.S.); IIB (Feb. 6, 2013) at 11. Invesco, ICI and IAA each stated that the language at the end of alternative prong (iv) (if it is adopted) should be interpreted to cover collective investment vehicles that are “publicly-offered” only to non-U.S. persons, even if the vehicles are not publicly-traded.

See

Invesco (Feb. 6, 2013) at 2; ICI (Feb. 6, 2013) at 3; IAA (Feb. 6, 2013) at 4.

See also

ICI (Jul. 5, 2013) at 3 n. 9 (“There is an important distinction between publicly-traded funds and publicly-offered funds: publicly-offered funds are those that are broadly available to retail investors; publicly-traded funds are simply a subset of publicly-offered funds that trade on exchanges or other secondary markets. Excluding from the U.S. person definition only publicly-traded funds would capture only a subset of non-U.S. regulated funds. We note that, by contrast, hedge funds are neither publicly offered nor publicly traded and, unlike non-U.S. retail funds, are not subject to substantive government regulation and oversight similar in scope to that provided by the U.S. Investment Company Act.”).

ICI and IAA stated that the Commission should interpret whether an offer is made to U.S. persons in accordance with precedents under the SEC's Regulation S.

See

ICI (Feb. 6, 2013) at 4-5 n. 14; IAA (Feb. 6, 2013) at 4. ISDA stated that the Commission's interpretation should specifically exclude any collective investment vehicle that offers its securities in accordance with local law and customary documentation practices in a local market, as well as offerings conducted in accordance with the Regulation S.

See

ISDA (Feb. 6, 2013) at 7.

Commenters also stated that regardless of the policy adopted in this regard, in the consideration of whether an entity is a U.S. person, only information that is available to third parties or other parties should be considered relevant, and the Commission's policy should contemplate that market participants would rely on a representation of U.S. person status. Also, the Commission's policy should clarify how it would apply during the transition period immediately after expiration of the January Order.

148

See

SIFMA/AMG (Feb. 14, 2013) at 4 n. 8; IIB (Feb. 6, 2013) at 7; ISDA (Feb. 6, 2013) at 7; Japanese Bankers Association (Feb. 6, 2013) at 5.

Addressing prong (v) relating to registered commodity pool operators, many commenters stated that the Commission should not adopt an interpretation that looks to the registration status of a fund's operator, because this interpretation could capture a non-U.S. fund that does not itself trigger registration as a commodity pool operator and has a minimal U.S. nexus.

149

A number of commenters urged the Commission not to adopt an interpretation that looks to the nationality of the fund's manager/operator since this would place U.S.-based investment managers at a competitive disadvantage, without addressing the Commission's regulatory objectives.

150

IIB generally agreed with these commenters and stated that the commodity pool operator registration prong would be over-inclusive because, under the Commission's current rules, an operator of a foreign pool may be required to register as a commodity pool operator with less than 50 percent U.S. ownership; at the same time, the prong also would be under-inclusive because it would not cover funds whose operators are eligible for relief from commodity pool operator registration.

149

See, e.g.,

SIFMA (Aug. 27, 2012) at A21; ICI (Aug. 23, 2012) at 3-7; IIB (Aug. 9, 2012) at 3; MFA/AIMA (Aug. 28, 2012) at 4-5; IIAC (Aug. 27, 2012) at 4, 5. As IIB explained, even a fund that lacks a sufficient U.S. connection can be considered a U.S. person where its commodity pool operator is required to register. IIB (Aug. 9, 2012) at 3. Under Commission regulation 3.10, the operator of a non-U.S. fund with even one U.S.-based owner is required to register as a commodity pool operator.

150

See

SIFMA (Aug. 27, 2012) at A13; ICI (Aug, 23, 2012) at 4; Cleary (Aug. 16, 2012) at 7; The Clearing House (Aug. 27, 2012) at 13-14.

ICI recommended that the Commission, instead, interpret the term “U.S. person” to include a commodity pool, pooled account, or collective investment vehicle that is “offered publicly, directly or indirectly” by the manager/sponsor to U.S. persons.

151

As ICI explained, this alternative approach would base a fund's U.S. person status on more workable considerations, and not on changes in investor status that are beyond the control of a fund or its manager/operator. In the consideration of whether a fund is making a public offering to U.S. persons, ICI recommended that the Commission look to SEC Regulation S.

152

151

See

ICI (Aug. 23, 2012) at 5-6.

152

Id.

at 6-7. Regulation S is codified at 17 CFR 230.901 through 230.905.

IIAC recommended that prong (vi) relating to pension plans be modified so that pension plans designed exclusively for foreign employees of a U.S.-based entity are not within the interpretation of the term “U.S. person.” Further, IIAC urged the Commission to clarify that U.S. investment advisers or other fiduciaries not be considered to be within the interpretation of the term “U.S. person” when they are acting on behalf of non-U.S. accounts.

153

IIAC (Aug. 27, 2012) at 4.

IIB stated that prong (vii) relating to an estate or trust should be replaced, explaining that market participants do not typically identify an estate's or trust's regulatory status on the basis of its tax status. Instead, it recommended that the Commission's interpretation look to the status of the executor, administrator, or trustee. Specifically,

IIB recommended that the Commission's interpretation of the term “U.S. person” include an estate or trust that is organized in the United States “unless (A) an executor, administrator or trustee that is not a U.S. person has sole or shared investment discretion with respect to the assets of the trust or estate, (B) in the case of an estate, the estate is governed by foreign law and (C) in the case of a trust, no beneficiary of the trust (and no settlor if the trust is revocable) is a U.S. person . . . .”

154

IIB (Aug. 27, 2012) at 14.

c. Commenters' Proposed Alternatives

A number of commenters provided substantially different alternative interpretations of the term “U.S. person.”

155

Most notably, the commenters' alternatives would not encompass persons by virtue of “indirect” U.S. ownership. For example, SIFMA's proposed “U.S. person” interpretation would include only those commodity pools or collective investment vehicles that are organized or incorporated under U.S. law or are (1) directly majority owned by “U.S. persons” or, in the case of ownership by a pool, a pool that is organized in the United States and (2) not publicly offered.

156

IIB submitted an alternative “U.S. person” interpretation that generally tracked SIFMA's proposed interpretation.

157

155

See, e.g.,

SIFMA (Aug. 27, 2012); IIB (Aug. 27, 2012); The Clearing House (Aug. 27, 2012).

156

See

SIFMA (Aug. 27, 2012) at A10-11.

157

See

IIB (Aug. 27, 2012) at 13-14.

d. Due Diligence

Many commenters stated that the Commission's policy in this regard should contemplate that a firm would reasonably rely on counterparty representations regarding their U.S. person status.

158

For example, SIFMA stated that the Commission's policy should be consistent with a determination by the swap counterparty itself of its U.S.-person status, but in the alternative, SIFMA recommended that the Commission's policy contemplate reasonable reliance on counterparty representations.

159

According to these commenters, counterparty representations are the only practical means of determining counterparty status as firms do not currently collect the information necessary to evaluate counterparty status under the proposed interpretation. The commenters also were concerned that certain prongs of the proposed interpretation (

e.g.,

“look-through” obligations associated with the “direct and indirect ownership” criterion in prong (iv)) would render it difficult, if not impossible, for market participants to directly consider whether their counterparties would be within the Commission's interpretation of the term “U.S. person.” SIFMA and Cleary further pointed out that the Commission has accepted reasonable reliance on counterparty representations in the context of the external business conduct standards.

160

158

See, e.g.,

SIFMA (Aug. 27, 2012) at A16-17; Deutsche Bank (Aug. 27, 2012) at 4; Capital Markets (Aug. 24, 2012) at 5; SIFMA/AMG (Aug. 27, 2012) at 4-5.

159

SIFMA (Aug. 27, 2012) at A16-18.

160

SIFMA/AMG (Aug. 27, 2012) at 4-5; Cleary (Aug. 16. 2012) at 6.

e. Non-U.S. Person That Is Affiliated, Guaranteed, or Controlled by U.S. Person

Viewed as a whole, the proposed interpretation of the term “U.S. person,” would generally not include a non-U.S. affiliate of a U.S. person, even if all of such affiliate's swaps are guaranteed by the U.S. person.

161

The Commission, nevertheless, raised a concern regarding risks associated with a U.S. person providing a guarantee to its non-U.S. affiliates and requested comments on whether the term “U.S. person” should, in fact, be interpreted to generally include a non-U.S. affiliate guaranteed by a U.S. person.

162

In addition, the Commission sought comments on whether the term “U.S. person” also should be interpreted to generally include any non-U.S. persons controlled by or under common control with a U.S. person.

163

161

See

Proposed Guidance, 77 FR at 41218. For purposes of this Guidance, the Commission generally interprets the term “affiliates” to include an entity's parent entity and subsidiaries, if any, unless stated otherwise.

162

Id.

163

Id.

Responding to the Commission's request for comments on this issue, many commenters stated that Title VII requires the Commission to interpret the term “U.S. person” to include foreign affiliates of U.S. persons, and U.S. affiliates of foreign persons, in order to protect U.S. taxpayers from the risks posed by the global swaps market.

164

Senator Levin urged that “[a]t a minimum, it is essential that [the Guidance] . . . include as a U.S. person any foreign affiliate or subsidiary under common control with a U.S. person.”

165

He also agreed with statements in the Proposed Guidance that non-U.S. affiliates guaranteed by U.S. persons effectively transfer the risks of their swaps to the U.S. guarantor, and therefore the guaranteed non-U.S. affiliates should be subject to U.S. safeguards.

166

Public Citizen stated that not interpreting the term “U.S. person” to include a foreign affiliate of a U.S. person “hides the rabbit in the hat” for Title VII purposes.

167

It argued that Congress intended financial entities that are controlled by U.S. financial institutions or that could adversely impact the U.S. economy to be regulated as U.S. persons under Title VII in order to fully protect American taxpayers from the threat of “future financial bailouts.”

164

See

Public Citizen's Congress Watch (“Public Citizen”) (Aug. 14, 2012) at 9-10; IATP (Aug. 27, 2012) at 4; Better Markets (Aug. 27, 2012) at 6.

165

See

Letter from Sen. Levin at 8.

166

See id.

(citing Proposed Guidance, 77 FR at 41218).

167

Public Citizen (Aug. 14, 2012) at 3.

Greenberger also expressed support for including foreign swap entities controlled by U.S. parents in the interpretation of the term “U.S. person.” In his view, the Commission's distinction between guaranteed and non-guaranteed foreign subsidiaries is arbitrary, as the absence of a U.S. guarantee does not insulate the U.S. parent from risk exposure.

168

Other commenters argued that the Commission's interpretation of the term “U.S. person” should include foreign affiliates whose swaps are guaranteed by a U.S. person.

169

168

Greenberger (Aug. 27, 2012) at 6-7.

169

See

Better Markets (Aug. 27, 2012) at 6-7; Public Citizen (Aug. 14, 2012) at 3.

Other commenters objected to including a non-U.S. entity in the interpretation of the term “U.S. person” solely on the basis of affiliation with a U.S. person or having its swaps guaranteed by a U.S. person. Sullivan & Cromwell argued that foreign operations of a U.S.-based bank do not have a “direct and significant connection with activities in, or effect on,” U.S. commerce based solely on affiliation with or guarantee by a U.S. parent bank.

170

It stated that overseas operations usually have a non-U.S. orientation (

i.e.,

transactions with non-U.S. counterparties for non-U.S. business purposes), and thus the connection to U.S. commerce is indirect and, further, transactions with non-U.S. counterparties will not have a significant effect on U.S. commerce. Other commenters raised similar concerns about the lack of jurisdictional nexus. For example, The Clearing House stated that the Commission must conclude that the risk to the U.S. entity is “significant” before designating a non-U.S. guaranteed entity a “U.S. person,” and further stated that a non-U.S. entity that is subject to local capital

rules or swap dealer registration should be excluded from the interpretation of “U.S. person.”

171

SIFMA, addressing the control issue, objected to including a non-U.S. person that is controlled by, or under common control with, such person in the interpretation of the term “U.S. person” since such control is insufficient to satisfy the jurisdictional nexus required by section 2(i).

172

170

See

Sullivan & Cromwell (Aug. 13, 2012) at A2-3.

See also

Hong Kong Banks (Aug. 27, 2012) at 4.

171

See

The Clearing House (Aug. 27, 2012) at 17.

172

See

SIFMA (Aug. 27. 2012) at A20.

See also

Australian Bankers (Aug. 27, 2012) at 4 (stating that the control concept should not be relevant in the definition of “U.S. person,” and while common control may potentially indicate common risk, the Commission's focus on the ultimate location of the risk is a more relevant to the interpretation of the term “U.S. person.”).

Japanese Bankers Association did not agree that these situations effect a risk transfer to the U.S. person, arguing that the risk would ultimately be incurred by the non-U.S. person and not by the U.S. guarantor; thus, it believed that the term “U.S. person” should not be interpreted to include a non-U.S. person guaranteed by a U.S. person.

173

The Coalition for Derivatives End-Users (“End-Users Coalition”) expressed concerns about competitive implications, stating that imputing U.S. status to a non-U.S. person guaranteed by a U.S. person may disadvantage the non-U.S. affiliates of U.S. end-users, since those non-U.S. affiliates may need to be guaranteed to enter into swaps with non-U.S. counterparties.

174

173

See

Japanese Bankers Association (Aug. 27. 2012) at 8.

174

See

End-Users Coalition (Aug. 27, 2012) at 3 (urging the Commission to exclude a foreign affiliate of a U.S. end-user, guaranteed by that end-user, from its interpretation).

f. Foreign Branch of U.S. Person

In the Proposed Guidance, the Commission stated that a foreign branch of a U.S. swap dealer should be included in the Commission's interpretation of the term “U.S. person” because it is a part, or an extension, of a U.S. person.

175

Several commenters agreed with the Commission's interpretation.

176

Senator Levin asserted that the “JP Morgan whale trades provide strong factual support for an inclusive definition of U.S. person, in particular when it comes to the foreign branch or agency of a U.S. corporation.”

177

Other commenters recommended that a foreign branch of a U.S. swap dealer be excluded from the interpretation. Sullivan & Cromwell argued that a foreign branch should not be included in the interpretation solely on the basis that it is a part of a U.S. bank.

178

Citi recommended that the Commission's policy should be that a foreign branch of a U.S. swap dealer is generally considered a non-U.S. person, so long as the branch remains subject to Entity-Level Requirements and obtains substituted compliance for Transaction-Level Requirements for transactions with non-U.S. persons.

179

In Citi's view, this would address comments by the foreign branch's non-U.S. clients that they would have to register as swap dealers or MSPs, while assuring that such non-U.S. clients' swaps with the foreign branch would generally be covered by the Transaction-Level Requirements or substituted compliance.

175

See

Proposed Guidance, 77 FR at 41218.

176

See, e.g.,

Public Citizen (Aug. 27, 2012) at 5; Greenberger (Aug. 27, 2012) at 3; Better Markets (Aug. 27, 2012) at 2, 6-7.

177

See

Letter from Sen. Levin at 7.

178

See

Sullivan & Cromwell (Aug. 13, 2012) at A6-7.

179

See

Citi (Aug. 27, 2012) at 2-4 (stating that foreign branches of U.S.-based swap dealers should not be considered “U.S. persons,” but should still be subject to the Commission's Entity-Level and Transactional-Level Requirements).

See also

State Street (Aug. 27, 2012) at 3; IIB (Aug. 27, 2012) at 8.

g. Regulation S

Some commenters believed that the Commission's policy should explicitly adopt the SEC's Regulation S definition of a “U.S. person.” MFA/AIMA stated that Regulation S eliminates problems and inconsistencies in the Commission's proposed interpretation.

180

J.P. Morgan stated that Regulation S would facilitate compliance by non-U.S. market participants since they are familiar with the SEC's approach.

181

On the other hand, the Institute for Agriculture and Trade Policy (“IATP”) argued against incorporating the Regulation S definition, stating that it predates the prominence of the swaps market.

182

180

See

MFA/AIMA (Aug. 28, 2012) at 8-9.

181

See

J.P. Morgan (Aug. 13, 2012) at 9.

182

See

IATP (Aug. 27, 2012) at 4.

h. Other Clarifications

A number of commenters voiced concerns regarding potential expansion of the Commission's interpretation of the term “U.S. person,” which they thought could result from the prefatory phrase “includes, but is not limited to,” and requested that the Commission affirmatively state that non-U.S. persons are any persons that would not be covered by the interpretation of the term “U.S. person.”

183

A non-exhaustive “U.S. person” interpretation, they contended, would create unnecessary uncertainty.

183

See

SIFMA (Aug. 27, 2012) at A15; IIB (Aug. 27, 2012) at 11-12; EC (Aug. 24, 2012) at 1-2; Australian Bankers (Aug. 27, 2012) at 4.

A number of commenters further stated that the interpretation of the term “U.S. person” should be applied only for purposes of the registration and regulation of swap dealers and MSPs.

184

The Futures Industry Association (“FIA”) argued that the interpretation of the term “U.S. person” should not extend to those provisions of the CEA governing the activities of futures commission merchants (“FCMs”) with respect to either exchange-traded futures (whether executed on a designated contract market or a foreign board of trade) or cleared swaps.

185

SIFMA similarly requested that the Commission clarify that the final interpretation of the term “U.S. person” does not override existing market practice as it relates to futures or FCMs, including with respect to clearing.

186

SIFMA also requested that the Commission clarify that the final interpretation of the term “U.S. person” for cross-border swaps regulation is the single interpretation for all Dodd-Frank swaps regulation purposes.

187

Finally, SIFMA requested that supranational organizations, such as the World Bank and International Monetary Fund (and their affiliates) be excluded from the interpretation.

188

184

See, e.g.,

The Futures and Options Association Ltd. (“FOA”) (Aug. 13, 2012) at 10-11; SIFMA (Aug. 27, 2012); IIB (Aug. 27, 2012); EC (Aug. 24, 2012).

185

See

FIA (Aug. 27, 2012) at 2-3.

186

See

SIFMA (Aug. 27, 2012) at A14-15.

187

Id.

188

Id.

at A21.

3. Commission Guidance

The Commission has carefully reviewed and considered the comments received and is finalizing a policy that will generally set forth an interpretation of the term “U.S. person,” as used in this Guidance, with certain modifications to the proposed definition as described below. As explained in the Proposed Guidance, the term “U.S. person,” as used in the context of CEA section 2(i), generally encompasses those persons whose activities—either individually or in the aggregate—have the requisite “direct and significant” connection with activities in, or effect on, U.S. commerce within the meaning of section 2(i).

189

The various prongs of

the Commission's interpretation are intended to identify persons for which, in practice, the connection or effects required by section 2(i) are likely to exist and thereby inform the public of circumstances in which the Commission expects that the swaps provisions of the CEA and the Commission's regulations would apply pursuant to the statute. In this respect, the Commission will consider not only a person's legal form and its domicile (or location of operation), but also the economic reality of a particular structure or arrangement, along with all other relevant facts and circumstances, in order to identify those persons whose activities meet the “direct and significant” jurisdictional nexus. Below, the Commission discusses each prong of its proposed interpretation of the term “U.S. person.”

189

For purposes of this Guidance, the Commission interprets the term “U.S. person” by reference to the extent to which swap activities or transactions involving one or more such persons have the relevant jurisdictional nexus. For example, this interpretation would help determine whether non-U.S. persons engaging in swap dealing transactions with “U.S. persons” in excess of the de minimis level would be required to register and be regulated as a swap dealer. In addition, for the same reasons, the term “U.S. person” can be helpful in determining the level of U.S. interest for purposes

of analyzing and applying principles of international comity when considering the extent to which U.S. transaction-level requirements should apply to swap transactions.

First, the Commission will include in its consideration the elements in prongs (i) and (ii)(A), as proposed, renumbered as prongs (i) and (iii).

190

These prongs of the “U.S. person” interpretation generally incorporate a “territorial” concept of a U.S. person.

191

That is, these are natural persons and legal entities that are physically located or incorporated within U.S. territory and, consequently, the Commission would generally consider swap activities involving such persons to satisfy the “direct and significant” test under section 2(i).

192

The Commission clarifies that it expects that prong (iii) would encompass legal entities that engage in non-profit activities, as well as U.S. state, county and local governments and their agencies and instrumentalities. Under prong (iii), the Commission would generally interpret the term “U.S. person” to include also a legal entity that is not incorporated in the United States if it has its “principal place of business” in the United States. The Commission intends that this interpretation would generally include those entities that are organized outside the United States but have the center of direction, control, and coordination of their business activities in the United States.

190

For clarity, the Commission has reordered the prongs of its interpretation of the term “U.S. person.”

191

For purposes of this Guidance, the Commission would interpret the term “United States” to include the United States, its states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, and any other territories or possessions of the United States government, or enclave of the United States government, its agencies or instrumentalities.

192

In this respect, the Commission declines to adopt a commenter's recommendation that IRS regulations should be relevant in considering whether a person is included in the interpretation of the term “U.S. person.” The Commission believes that adopting the IRS's approach in the Commission's policy would be inappropriate; rather, consistent with CEA section 2(i), the Commission's interpretation of the term “U.S. person” focuses on persons whose swap activities meet the “direct and significant” nexus.

The concept of an operating company having a principal place of business has been addressed by the Supreme Court. In a recent case, the Supreme Court described a corporation's principal place of business as the “place where the corporation's high level officers direct, control, and coordinate the corporation's activities.”

193

The Supreme Court explained that “`principal place of business' is best read as referring to the place where a corporation's officers direct, control, and coordinate the corporation's activities. It is the place that Courts of Appeals have called the corporation's `nerve center.' And in practice it should normally be the place where the corporation maintains its headquarters—provided that the headquarters is the actual center of direction, control and coordination,

i.e.,

the `nerve center,' and not simply an office where the corporation holds its board meetings.”

194

The Commission notes that commenters on the Proposed Guidance and Further Proposed Guidance generally did not object to the inclusion in the interpretation of the term “U.S. person” of an entity that has its principal place of business in the United States.

193

See Hertz Corp.

Friend,

559 U.S. 77, 80 (2010) (determining a corporation's principal place of business for purposes of diversity jurisdiction).

194

Id.

at 92-93.

The Commission is of the view that the application of the principal place of business concept to a collective investment vehicle may require consideration of additional factors beyond those applicable to operating companies. A collective investment vehicle is an entity or group of related entities created for the purpose of pooling assets of one or more investors and channeling these assets to trade or invest to achieve the investment objectives of the investor(s), rather than being a separate, active operating business.

195

In this context, the determination of where the collective investment vehicle's “high level officers direct, control, and coordinate the [vehicle's] activities”—to apply the

Hertz

decision noted above—can involve several different factors.

196

195

See

Further Proposed Guidance, 78 FR at 913.

196

As mentioned in the Introduction, Long-Term Capital Portfolio LP, a Cayman Islands hedge fund advised by LTCM, collapsed in 1998, leading a number of creditors to provide LTCM substantial financial assistance under the supervision of the Federal Reserve Bank of New York. High level officers at LTCM's offices in Greenwich, Connecticut, directed, controlled and coordinated the activities of Long-Term Capital Portfolio LP. This hedge fund, with approximately $4 billion in capital and a balance sheet of just over $100 billion had a swap book in excess of $1 trillion notional. Federal Reserve Chairman Alan Greenspan testified that “[h]ad the failure of LTCM triggered the seizing up of markets, substantial damage could have been inflicted on many market participants, including some not directly involved with the firm, and could have potentially impaired the economies of many nations, including our own.” Systemic Risks to the Global Economy and Banking System from Hedge Fund Operations: Hearing Before the House Banking and Fin. Services Comm., 105th Cong., 2nd sess. (Oct. 1, 1998) (statement of Alan Greenspan, Chairman, Federal Reserve), available at 1998 WL 694498.

The Commission is aware that the formation and structure of collective investment vehicles involve a great deal of variability, including with regard to the formation of the legal entities that will hold the relevant assets and enter into transactions (including swaps) in order to achieve the investors' objectives. Legal, regulatory, tax and accounting considerations may all play a role in determining how the collective investment vehicle is structured and the jurisdictions in which the legal entities will be incorporated.

197

Many legal jurisdictions around the world have promulgated specialized regimes for the formation of collective investment vehicles, which offer various legal, regulatory, tax and accounting efficiencies.

198

197

This discussion regarding the location of a collective investment vehicle's principal place of business is solely for purposes of applying Commission swaps regulations promulgated under Title VII. The Commission does not intend to address here the interpretation of “principal place of business” for any other purpose.

198

See

Gerald T. Lins, et al., Hedge Funds and Other Private Funds: Regulation and Compliance § 9:1 (Thomson Reuters 2012-2013 ed. 2012).

In view of these circumstances, the Commission believes that for a collective investment vehicle, the locations where the relevant legal entities have registered offices, hold board meetings or maintain books and records are generally not relevant in determining the principal place of business of the collective investment vehicle. Instead, as stated in the

Hertz

case cited above, the determination should generally depend on the location of the “actual center of direction, control and coordination,”

i.e.,

the “nerve center,” of the collective investment vehicle.

Hertz

focuses on the place where the “high level officers direct, control, and coordinate” the entity's activities.

199

In this regard, the Commission believes that the focus should not necessarily be

on the persons who are named as directors or officers of the legal entities that comprise the collective investment vehicle.

200

As noted above, these legal entities are merely the legal structure through which the investment objectives of the collective investment vehicle are implemented. Rather, the analysis should focus on the persons who are the equivalent for the collective investment vehicle to the “high level officers” of an operating company because they direct, control and coordinate key functions of the vehicle, such as formation of the vehicle or its trading and investment.

199

See

note 193 and accompanying text,

supra.

200

In many cases, the entities that comprise the collective investment vehicle may not have “high level officers” as contemplated by

Hertz,

and the directors of the entities may be individuals who are affiliated with a firm that is the legal counsel or administrator of the collective investment vehicle and who may serve as directors for many different vehicles.

See

Lins,

supra

note 198, at § 9:4.

The “high level officers [who] direct, control and coordinate” the collective investment vehicle may be those senior personnel who implement the investment and trading strategy of the collective investment vehicle and manage its risks, and the location where they conduct the activities necessary to implement the investment strategies of the vehicle may be its center of direction, control and coordination. In this regard, the Commission notes that the achievement of the investment objectives of a collective investment vehicle typically depends upon investment performance and risk management. Investors in a collective investment vehicle seek to maximize the return on their investment while remaining within their particular tolerance for risk. Thus, the key personnel relevant to this aspect of the analysis are those senior personnel responsible for implementing the vehicle's investment strategy and its risk management. Depending on the vehicle's investment strategy, these senior personnel could be those responsible for investment selections, risk management decisions, portfolio management, or trade execution.

201

The Commission understands that the collective investment vehicle may obtain the services of the relevant personnel through a variety of arrangements, including contracting with an asset manager that employs the personnel, contracting with other employers, or retaining the personnel as independent contractors. Thus, in this analysis, the Commission would generally expect to consider the location of the personnel who undertake the relevant activities, regardless of their particular employment arrangements.

The achievement of a collective investment vehicle's investment objectives may be closely linked to its formation. Decisions made in the structuring and formation of the collective investment vehicle may have a significant effect on the performance of the vehicle. Thus, for purposes of identifying the vehicle's principal place of business, the Commission may also consider the location of the senior personnel who direct, control and coordinate the formation of the vehicle (

i.e.,

the promoters).

202

The location of the promoters of the collective investment vehicle is relevant, particularly where the vehicle has a specialized structure or where the promoters of the vehicle continue to be integral to the ongoing success of the fund, including by retaining overall control of the vehicle. The location where the promoters of the collective investment vehicle act to form the vehicle and bring it to commercial life is relevant in determining the center of direction, control and coordination of the vehicle, and those promoters may be the “high level officers” of the vehicle referred to in

Hertz.

203

202

The promoters who form a collective investment vehicle may be integral to the ongoing success of the collective investment vehicle. In fact, the importance of the role played by the promoters of a legal entity has long been recognized.

See generally

1A Fletcher Cyc. Corp. § 189. For example, in

Old Dominion Copper Mining & Smelting Co.

Bigelow,

the court drew upon English law in describing the promoters as follows:

In a comprehensive sense promoter includes those who undertake to form a corporation and to procure for it the rights, instrumentalities and capital by which it is to carry out the purposes set forth in its charter, and to establish it as fully able to do its business. Their work may begin long before the organization of the corporation, in seeking the opening for a venture and projecting a plan for its development, and it may continue after the incorporation by attracting the investment of capital in its securities and providing it with the commercial breath of life.

203 Mass. 159, 177 (1909),

aff'd,

225 U.S. 111 (1912).

Modern law continues to refer to the responsibility of promoters of legal entities.

See, e.g.,

SEC Form D, instructions to Item 3 (requiring information regarding the “promoters” of a securities issuer).

See also

In Re Charles Schwab Corp. Sec. Litig.,

2010 WL 1261705 (N.D. Cal. Mar. 30, 2010) (discussing responsibility of “fund managers and promoters” to operate a collective investment vehicle in accordance with its formation documents).

The Commission generally does not intend that when the promoters of a collective investment vehicle serve an administrative, purely ministerial function of handling the flow of funds from investors into the vehicle, the location of these personnel would be relevant in this context.

203

The Commission is aware that the boards of directors (or equivalent corporate bodies) of the legal entities that comprise a collective investment vehicle typically have the authority to appoint or remove the legal entity's investment manager, administrator, and auditor, and to approve major transactions involving the legal entity and the legal entity's audited financial statements. But since these functions are not key to the actual implementation of the investment objectives of the collective investment vehicle, and noting that

Hertz

focuses on the “high level officers” of the entity rather than its directors, the Commission would generally not view the boards of directors of the legal entities to be key personnel for the collective investment vehicle.

Accordingly, the Commission will generally consider the principal place of business of a collective investment vehicle to be in the United States if the senior personnel responsible for either (1) the formation and promotion of the collective investment vehicle or (2) the implementation of the vehicle's investment strategy are located in the United States, depending on the facts and circumstances that are relevant to determining the center of direction, control and coordination of the vehicle.

Since the Commission recognizes that the structures of collective investment vehicles vary greatly, the Commission believes it is useful to provide examples to illustrate how the Commission's approach could apply to a consideration of whether the “principal place of business” of a collective investment vehicle is in the United States in particular hypothetical situations. However, because of variations in the structure of collective investment vehicles as well as the factors that are relevant to the consideration of whether a collective investment vehicle has its principal place of business in the United States under this Guidance, these examples are for illustrative purposes only. In addition, these examples are not intended to be exclusive or to preclude a determination that any particular collective investment vehicle has its principal place of business in the United States.

Example 1.

An asset management firm located in the United States establishes a collective investment vehicle outside the United States (“Fund A”).

204

Typically, the formation of the collective investment vehicle by the personnel of the asset management firm involves the selection of firms to be the administrator, prime broker, custodian and

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