Registration Process for Security-Based Swap Dealers and Major Security-Based Swap Participants

Federal RegisterAug 14, 2015

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-75611; File No. S7-40-11]

RIN 3235-AL05

Registration Process for Security-Based Swap Dealers and Major Security-Based Swap Participants

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

The Securities and Exchange Commission (the “Commission”) is adopting new Rules 15Fb1-1 through 15Fb6-2 and Forms SBSE, SBSE-A, SBSE-BD, SBSE-C and SBSE-W in accordance with Section 15F of the Securities Exchange Act of 1934 (the “Exchange Act”). Section 15F, which was added to the Exchange Act by Section 764(a) of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), requires the Commission to issue rules to provide for the registration of security-based swap dealers (“SBS Dealers”) and major security-based swap participants (“Major SBS Participants”) (collectively, “SBS Entities”). These new rules and forms establish a process by which SBS Entities can register (and withdraw from registration) with the Commission.

DATES:

Effective Date:

October 13, 2015.

Compliance Date:

The later of: Six months after the date of publication in the

Federal Register

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

Counting Date:

For purposes of complying with the registration and other requirements, persons are not required to begin calculating whether their activities meet or exceed the thresholds established in Exchange Act Rules 3a71-2, 3a67-3, and 3a67-5 until two months prior to the Compliance Date of these rules.

FOR FURTHER INFORMATION CONTACT:

Paula Jenson, Deputy Chief Counsel; Joseph Furey, Assistant Chief Counsel; Bonnie Gauch, Senior Special Counsel; Joanne Rutkowski, Senior Special Counsel; or Jonathan Shapiro, Special Counsel; (202) 551-5550; Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

A. Dodd-Frank Act

B. Proposed Rules

C. Comments Received

D. Summary of Final Rules

II. Final Exchange Act Rules and Forms

A. Registration Application and Amendment

1. Rule 15Fb2-1

i. Form of Application

ii. Senior Officer Certification

iii. Conditional Registration

iv. Electronic Filing and Completeness of the Application

v. Standards for Granting or Initiating Proceedings to Determine Whether to Deny Registration

vi. Comments on Substituted Compliance

2. Amendments to Form SBSE, Form SBSE-A, and Form SBSE-BD: Rule 15Fb2-3

B. Associated Persons

1. Associated Person Certification

i. Associated Person Entities

ii. Involved in Effecting Transactions

iii. Licensing

2. Questionnaire or Application for Employment and Background Checks

3. Final Rule for Associated Person Certification

C. Termination of Registration

1. Duration of Registration: Rule 15Fb3-1

2. Withdrawal: Rule 15Fb3-2

3. Cancellation and Revocation: Rule 15Fb3-3

D. Special Requirements for Nonresident SBS Entities

1. Definition of Nonresident SBS Entities

2. United States Agent for Service of Process

3. Access to Books and Records, and Onsite Inspections and Examinations, of Nonresident SBS Entities

E. Special Situations

1. Succession: Rule 15Fb2-5

2. Insolvency: Rule 15Fb2-6

F. Electronic Signatures

G. Forms

1. Form SBSE

2. Form SBSE-A

3. Form SBSE-BD

4. Form SBSE-C

5. Form SBSE-W

III. Explanation of Dates

A. Effective Date

B. Registration Compliance Date

C. SBS Entity Counting Date

IV. Paperwork Reduction Act

A. Summary of Collection of Information

B. Proposed Use of Information

C. Respondents

D. Total Initial and Annual Reporting and Recordkeeping Burdens

1. Burden Associated With Filing Application Forms

2. Burden Associated With Amending Application Forms

3. Burdens Relating to Associated Persons

4. Burdens on Nonresident SBS Entities

5. Burden Related to Retention of Manually Signed Signature Pages

6. Burden Associated With Filing Withdrawal Form

E. Retention Period of Recordkeeping Requirements

F. Collection of Information Is Mandatory

G. Confidentiality

V. Economic Analysis

A. Introduction and Broad Economic Considerations

B. Baseline

1. Current Security-Based Swap Market

i. Dealing Structures and Participant Domiciles

ii. Market Centers

iii. Current Estimates of Number of SBS Dealers and Major SBS Participants

2. Levels of Security-Based Swap Trading Activity

3. Cross-Market Participation

4. Statutory Disqualification

C. Benefits of Registration

1. Direct Benefits

i. Disciplinary History and Other Information

ii. Statutory Disqualification

iii. Senior Officer Certification and Nonresident Entity Certification

iv. Other Direct Benefits

2. Indirect Benefits

D. Costs of Registration

1. Direct Compliance Costs

2. Other Direct Costs

i. Costs Related to the Disciplinary History Disclosure Requirement

ii. Costs Related to Certifications

iii. Costs Related to the Associated Person Requirements

iv. Costs for Nonresident SBS Entities

2. Indirect Costs

E. Effects on Efficiency, Competition, and Capital Formation

F. Registration Rule Alternatives

1. Associated Person Certification Requirement

2. Licensing, Control Affiliates and CCO Certification Regarding Associated Persons

3. Requirements on Nonresidents

4. Other Considerations

VI. Regulatory Flexibility Act Certification

VII. Statutory Basis

I. Background

A. Dodd-Frank Act

Section 764 of the Dodd-Frank Act added Section 15F to the Exchange Act to require the Commission to adopt rules to provide for registration of SBS Entities. Section 15F(a) of the Exchange Act prohibits any person from acting as a “security-based swap dealer”

“major security-based swap participant”

without being registered with the Commission.

Section 15F(b)(1) further states that a person “shall register as a security-based swap dealer or major security-based swap participant by filing a registration application with the Commission,” and Section 15F(b)(2)(A) states that “[t]he application shall be made in such form and manner as prescribed by the Commission, and shall contain such information, as the Commission considers necessary concerning the business in which the applicant is or will be engaged.” In addition, Section 15F(d)(1) of the Exchange Act directs the Commission to “adopt rules for persons that are registered as [SBS Entities] under [Section 15F].”

See

Exchange Act Section 3(a)(71)(A) [15 U.S.C. 78c(71)(A)] and Rule 3a71-1 [17 CFR 240.3a71-1].

See also, Further Definition of “Swap Dealer,”

“Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant,”

Exchange Act Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012) (“Intermediary Definitions Adopting Release”) and

Application of “Security-Based Swap Dealer” and “Major Security-Based Swap Participant” Definitions to Cross-Border Security-Based Swap Activities,

Exchange Act Release No. 72472 (Jun. 25, 2014), 79 FR 47278 (Aug. 12, 2014) (“Cross-Border Adopting Release”).

See

Exchange Act Section 3(a)(67)(A) [15 U.S.C. 78c(67)(A)] and Rule 3a67-1 [17 CFR 240.3a67-1].

See also,

the Intermediary Definitions Adopting Release and Cross-Border Adopting Release.

See Temporary Exemptions and Other Temporary Relief, Together With Information on Compliance Dates for New Provisions of the Securities Exchange Act of 1934 Applicable to Security-Based Swaps,

Exchange Act Release No. 64678 (Jun. 15, 2011), 76 FR 36287, 36299-300 (Jun. 22, 2011) (the “Effective Date Release”).

B. Proposed Rules

The Commission proposed new rules 15Fb1-1 through 15Fb6-1 and Forms SBSE, SBSE-A, SBSE-BD, SBSE-C, and SBSE-W to establish a process by which SBS Entities could register (and withdraw from registration) with the Commission.

As described in the Registration Proposing Release, this process was designed to be comprehensive, and included, among other things: (1) A requirement to amend an inaccurate application for registration; (2) procedures for succession to, or withdrawal from, registration; (3) procedures for the Commission to cancel or revoke registration; (4) a requirement for an SBS Entity to certify that none of its associated persons that effect, or are involved in effecting, security-based swaps on the SBS Entity's behalf is subject to statutory disqualification; and (5) special requirements applicable to nonresident SBS Entities relating to service of process, opinion of counsel, Commission access to documents and Commission onsite examinations.

Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants,

Exchange Act Release No. 65543 (Oct. 12, 2011), 76 FR 65784 (Oct. 24, 2011) (the “Registration Proposing Release”).

The Commission re-proposed Forms SBSE, SBSE-A, and SBSE-BD in May 2013.

Among other things, the re-proposed Forms provide registrants with a method to provide the Commission with information regarding the registrant's intent to rely on a substituted compliance determination by the Commission with respect to those requirements in Exchange Act Section 15F and the rules and regulations thereunder for which the Commission determines that substituted compliance may be available.

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,

Exchange Act Release No. 69490 (May 1, 2013), 78 FR 30968 (May 23, 2013) (“Cross-Border Proposing Release”).

In general, the proposed rules would have required an SBS Entity to register with the Commission by filing either Form SBSE, Form SBSE-A, or Form SBSE-BD, as appropriate, electronically. The Commission would have then either granted conditional registration to the SBS Entity or initiated proceedings to deny registration. Once all of the substantive requirements applicable to SBS Entities were adopted by the Commission, the SBS Entity would have been required to electronically file Form SBSE-C, a certification signed by a knowledgeable senior officer stating that, to the best of that person's knowledge the SBS Entity had the operational, financial, and compliance capabilities to act as an SBS Dealer or Major SBS Participant, as appropriate. Upon receipt of that certification, the Commission would have either granted ongoing registration or instituted proceedings to deny such registration.

The Commission's proposed registration requirements for SBS Entities were largely modeled after the registration regime applicable to broker-dealers,

while also taking into account the Commodity Futures Trading Commission's (CFTC's) registration requirements for intermediaries.

This approach was designed to both ease the regulatory burden on market participants that register as both an SBS Entity and a broker-dealer by establishing a consistent and complementary registration regime, and to avoid unnecessary duplication by permitting SBS Entities that are otherwise registered or registering as intermediaries with either the Commission or the CFTC to complete simplified application forms.

This includes rules promulgated under Sections 15(b) and 17(a) of the Exchange Act.

17 CFR 3.1

et. seq.

Futures commission merchants (“FCMs”) and introducing brokers presently register with the CFTC by filing Form 7-R with the National Futures Association (“NFA”). On January 11, 2012, the CFTC issued final rules requiring swap dealers and major swap participants to become and remain members of a registered futures association (the NFA is presently the only registered futures association) and amending Rule 3.10 to include swap dealers and major swap participants to the list of entities that must register by filing Form 7-R with the NFA.

Registration of Swap Dealers and Major Swap Participants,

77 FR 2613 (Jan. 19, 2012) (the “CFTC Final Registration Rules”). At the same time, the CFTC delegated to NFA the authority to process swap dealer and major swap participant registration applications.

See Performance of Registration Functions by National Futures Association With Respect To Swap Dealers and Major Swap Participants,

77 FR 2708 (Jan. 19, 2012).

C. Comments Received

In the Registration Proposing Release, the Commission requested comment on all aspects of the proposal, including specific questions and a number of more general requests. The Commission originally received four comment letters in response to the proposed rules and forms.

The Commission later received 31 additional comment letters in response to the reopening of comment periods for certain proposals applicable to security-based swaps.

Of those comment letters, one letter (from six industry groups) requested an extension of time to provide comment, and six specifically commented on the proposed registration process and forms.

Comments were received from Chris Barnard of Germany, dated Oct. 24, 2011 (the “2011 Barnard Letter”); the Securities Industry and Financial Markets Association, dated Dec. 16, 2011 (the “SIFMA Letter”); and Better Markets, Inc., dated Dec. 19, 2011 (the “2011 Better Markets Letter”). One other comment letter directed to the Registration Proposing Release file did not address the content of that release.

Reopening of Comment Periods for Certain Rulemaking Releases and Policy Statement Applicable to Security-Based Swaps Proposed Pursuant to the Securities Exchange Act of 1934 and the Dodd-Frank Wall Street Reform and Consumer Protection Act,

Exchange Act Release No. 69491 (May 1, 2013), 78 FR 30800 (May 23, 2013) (“Release Reopening the Comment Period”).

See

letters from: The Association of Financial Guaranty Insurers, dated Jul. 22, 2013 (the “AFGI Letter”); Better Markets, Inc., dated Jul. 22, 2013 (the “2013 Better Markets Letter”); the Institute of International Finance, dated Aug. 8, 2013 (the “IIF Letter”); the Institute of International Bankers, dated Aug. 21, 2013 (the “IIB Letter”); the European Commission, dated Aug. 21, 2013 (the “EC Letter”); and Nomura Global Financial Products, Inc., dated September 10, 2014 (the “Nomura Letter”).

The Commission also received 38 comment letters in response to the Cross-Border Proposing Release, which re-proposed Regulation SBSR and certain rules and forms relating to the registration of SBS Entities.

Of those,

three commented on the proposed registration process and forms.

Twenty-five persons submitted the same comment letter in response to both the Release

Reopening the Comment Period and the Cross-Border Proposing Release.

All of those persons submitted the same letter to both the Release Reopening the Comment Period and the Cross-Border Proposing Release. These include the IIF Letter, the IIB Letter, and the EC Letter.

While commenters generally supported the proposed rules, a few raised various concerns, including whether a senior officer certification should be required; whether the Commission should require an independent pre-registration review of applicants; whether the Commission should require that SBS Entities investigate their associated persons; and whether nonresident applicants should be required to provide an opinion of counsel as to whether they can provide records to the Commission and allow the Commission to inspect them. Many commenters, while not commenting on the registration process, generally commented that the Commission should model its rules on those adopted by the CFTC in order to reduce the impact on market participants.

D. Summary of Final Rules

The registration rules and Forms the Commission is adopting today largely follow those proposed, with certain modifications.

In particular, as explained more fully below, we are adopting the following rules:

The Commission asked questions regarding limited registration in the Registration Proposing Release.

See

Registration Proposing Release, 76 FR at 65795, questions 62 through 66. We received one comment on this issue, which contended that “the Commission should allow for limited designation and registration, including by trading unit, type of activity and type of counterparty.”

See

the SIFMA Letter, at 10-11. The Commission later adopted Rule 3a71-1(c), in the Intermediary Definitions Adopting Release, to provide that “a person that is a security-based swap dealer in general shall be deemed to be a security-based swap dealer with respect to each security-based swap it enters into, regardless of the type, class, or category of the security-based swap or the person's activities in connection with the security-based swap, unless the Commission limits the person's designation as a security-based swap dealer to specified types, classes, or categories of security-based swaps or specified activities of the person in connection with security-based swaps.” In that release, the Commission and the CFTC stated that the SEC expects to address the process for submitting an application for limited designation as a security-based swap dealer, along with principles to be used by the Commission in analyzing such applications, as part of separate rulemakings.

See

Intermediary Definitions Adopting Release, footnote 573. The Commission has not yet addressed a process through which firms could submit an application for limited designation as a security-based swap dealer. In order to evaluate a process for limited registration, the Commission would need to consider how the substantive rules should be applied to entities that might be subject to limited designations. In light of the fact that the Commission has not yet adopted all rules implementing the Title VII regime that may affect how firms structure their security-based swap business and market practices more generally, the Commission is not addressing limited designation at this time.

If any provision of these rules, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions or application of such provisions to other persons or circumstances that can be given effect without the invalid provision or application.

• Rule 15Fb1-1 specifies the format and certain requirements for signatures to electronic submissions (including signatures within the forms and certifications required by Rules 15Fb2-1, 15Fb2-4 and 15Fb6-2, discussed below).

• Rule 15Fb2-1 describes the process through which an SBS Entity can apply for registration with the Commission. This Rule identifies the Form of application various types of entities must use to register, how such application must be filed, and the standard the Commission will use to determine whether to grant registration. Under Rule 15Fb2-1, an application for registration of an SBS Entity must be filed on Form SBSE, Form SBSE-A or Form SBSE-BD, as appropriate. An applicant also must file Form SBSE-C as part of its application, which includes two separate certifications. One of those certifications, provided for in Rule 15Fb2-1(b), requires a senior officer of the applicant to certify that, after due inquiry, he or she has reasonably determined that the applicant has developed and implemented written policies and procedures reasonably designed to prevent violations of the federal securities laws and the rules thereunder, and that he or she has documented the process by which he or she reached such determination (the “Senior Officer Certification”).

• Rule 15Fb2-3 requires an SBS Entity to promptly file an amendment where the information contained in its Form SBSE, Form SBSE-A, or Form SBSE-BD, as applicable, or in any amendment thereto, is or has become inaccurate for any reason.

• Rule 15Fb2-4 requires that nonresident SBS Entities obtain a U.S. agent for service of process and an opinion of counsel determining that they can, as a matter of law, provide the Commission with access to their books and records and submit to onsite examination. Rule 15Fb2-4 also requires that, as part of their applications, these entities provide the Commission with information regarding their agent for service of process and certify that they can, as a matter of law, and will provide the Commission with access to their books and records and submit to onsite examination.

• Rule 15Fb2-5 provides a process through which an SBS Entity may succeed to the business of another SBS Entity.

• Rule 15Fb2-6 provides a process through which an executor, administrator, guardian, conservator, assignee for the benefit of creditors, receiver, trustee in insolvency or bankruptcy or other fiduciary appointed or qualified by order, judgment or decree of a court of competent jurisdiction may continue the business of an SBS Entity.

• Rule 15Fb3-1 concerns the duration of registration and provides that an SBS Entity will continue to be registered until the effective date of any cancellation, revocation or withdrawal of registration.

• Rule 15Fb3-2 provides a process by which an SBS Entity may withdraw from registration with the Commission.

• Rule 15Fb3-3 provides a process by which the Commission may cancel or revoke the registration of an SBS Entity.

• Rule 15Fb6-1 provides that unless otherwise ordered by the Commission, when it files an application to register with the Commission as an SBS Dealer or Major SBS Participant, an SBS Entity may permit a person that is associated with it that is not a natural person and that is subject to statutory disqualification to effect or be involved in effecting security-based swaps on its behalf, provided that the statutory disqualification(s), described in Sections 3(a)(39)(A) through (F) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(39)), occurred prior to the compliance date of this rule, and provided that it identifies each such associated person on Schedule C of Form SBSE (§ 249.1600 of this chapter), Form SBSE-A (§ 249.1600a of this chapter), or Form SBSE-BD (§ 249.1600b of this chapter), as appropriate.

• Rule 15Fb6-2 requires that the Chief Compliance Officer (“CCO”) of an SBS Entity certify on Form SBSE-C that it neither knows, nor in the exercise of reasonable care should have known, that any person associated with it who effects or is involved in effecting security-based swaps on its behalf is subject to statutory disqualification, unless otherwise specifically provided by rule, regulation or order of the Commission (the “CCO Certification Regarding Associated Persons”). This rule also requires that to support the certification, the CCO, or his or her designee, review and sign the questionnaire or application for employment executed by each of the

SBS Entity's associated persons who are natural persons and effect or are involved in effecting security-based swaps on behalf of the SBS Entity.

In addition, the Commission is adopting the following forms:

• Form SBSE-BD, the registration form for SBS Entities registered or registering with the Commission as broker-dealers;

• Form SBSE-A, the registration form for SBS Entities registered or registering with the CFTC as swap dealers or major swap participants (and not also registered or registering with the Commission as broker-dealers);

• Form SBSE, the registration form for SBS Entities that do not fit either of the above categories;

• Form SBSE-C, the certification form for SBS entity applicants containing the Senior Officer Certification required by Rule 15Fb2-1(b) and the CCO Certification Regarding Associated Persons required by Rule 15Fb6-2(a).

• Form SBSE-W, the form that SBS Entities would file for notice of withdrawal from registration.

The Commission is not adopting proposed Rule 15Fb2-2T, which would have required SBS Entities, among other things, to file their applications in paper form, because the EDGAR system will be updated to receive these application Forms before the effective date of these rules.

See infra,

Section II.A.1.iv.

In developing these rules and forms, Commission staff consulted and coordinated with the CFTC and the prudential regulators.

Section 712(a)(2) of the Dodd-Frank Act provides in part that the Commission shall “consult and coordinate to the extent possible with the Commodity Futures Trading Commission and the prudential regulators for the purpose of assuring regulatory consistency and comparability, to the extent possible.”

II. Final Exchange Act Rules and Forms

A. Registration Application and Amendment

1. Rule 15Fb2-1

Rule 15Fb2-1, as adopted, describes the process through which an SBS Entity will apply for registration with the Commission. As set forth in the rule, each SBS Entity will complete and submit an application Form electronically. The Rule also requires that a senior officer of the SBS Entity must certify, on Form SBSE-C, that, after due inquiry, he or she has reasonably determined that the SBS Entity has developed and implemented written policies and procedures reasonably designed to prevent violations of the federal securities laws and the rules thereunder, and that he or she has documented the process by which he or she reached such determination. In addition, the rule prescribes the timing of such filings and the standard of review that will be applied by the Commission in determining whether to grant registration or institute proceedings to deny registration. While it may be appropriate for certain rules applicable to SBS Dealers to differ from those applicable to Major SBS Participants, the Commission believes that the registration rules and forms need not differ because the of information the Commission will need to review to determine whether to grant registration or institute proceedings to deny such registration is similar for both types of entities.

i. Form of Application

As proposed, paragraph (a) of Rule 15Fb2-1 provided that an SBS Entity could apply for registration by filing either Form SBSE, Form SBSE-A, or Form SBSE-BD. The Commission proposed three separate Forms to recognize that, if an entity is already registered with the Commission or the CFTC, the Commission can otherwise access certain information on that registrant.

The Commission will be able to access information on registered broker-dealers through its access to the CRD system. Form SBSE-A, which would apply to entities already registered with the CFTC, requires that firms filing that form also submit a copy of the Form 7-R they file with NFA.

See

17 CFR 3.10(a) (which generally requires that “application for registration as a futures commission merchant, retail foreign exchange dealer, swap dealer, major swap participant, introducing broker, commodity pool operator, commodity trading advisor, or leverage transaction merchant must be on Form 7-R, completed and filed with the NFA in accordance with the instructions thereto”).

See also,

Intermediary Definitions Adopting Release which, among other things, further defines the terms “security-based swap dealer” and “major security-based swap participant.” In that release, adopted jointly with the CFTC, the Commission adopted Rule 3a71-2, which provides a

de minimis

exemption from the definition of “security-based swap dealer,” and provided timeframes within which an entity must register with the Commission after it exceeds the

de minimis

threshold [at 77 FR 30643, 30754 and 30756]. The Commission also adopted Rule 3a67-8, which establishes the timing requirements within which a person must register with the Commission if it meets the criteria in Rule 3a67-1 to be a major security-based swap participant.

Under the rule as adopted, an applicant must submit the Senior Officer Certification on Form SBSE-C at the same time it submits its Form SBSE, SBSE-A or SBSE-BD, as applicable. Given that the compliance date for the SBS Entity registration rules is not immediate and we have amended Form SBSE-C to include a modified Senior Officer Certification along with the CCO Certification Regarding Associated Persons, the certifications will be a necessary part of the Commission's determination of whether to grant, or institute proceedings to deny, ongoing registration. Consequently, applicants must file the certifications on Form SBSE-C as part of their applications at the same time they file Form SBSE, SBSE-A, or SBSE-BD, as applicable. Thus, paragraph (d) of new Rule 15Fb2-1 states that a person that has filed a complete Form SBSE-C and Form SBSE, SBSE-A, or SBSE-BD, as applicable, with the Commission in accordance with paragraph (c) within the time periods set forth in Exchange Act rules 3a67-8 and 3a71-2, as applicable, and has not withdrawn from registration,

will be conditionally registered.

A conditionally registered SBS Entity would withdraw from registration by filing Form SBSE-W as described in more detail below in Section II.C.2.

Once an SBS Entity is conditionally registered, all of the Commission's rules applicable to registered SBS Entities will apply to the entity and it must comply with them. For instance, a conditionally registered SBS Entity will be required to comply with any recordkeeping rules applicable to SBS Entities. In addition, the staff may choose to conduct an examination of a conditionally registered firm.

An applicant will be considered to be conditionally registered upon filing a complete application, but will not have ongoing registration until the Commission takes action to grant such registration. In that regard, final Rule 15Fb3-1(b), discussed more fully below, provides that a person conditionally registered as an SBS Entity will continue to be so registered until the date the registrant withdraws from registration or the Commission grants or denies the person's ongoing registration in accordance with Rule 15Fb2-1(e).

iv. Electronic Filing and Completeness of the Application

Paragraph (c)(1) of proposed Rule 15Fb2-1 would have established that the application, certification, and any additional registration documents would need to be filed electronically with the Commission or its designee. In addition, paragraph (c)(2) of proposed Rule 15Fb2-1 would have provided that an SBS Entity's application submitted pursuant to paragraph (c)(1) will be considered filed only when a complete Form SBSE, Form SBSE-A, or Form SBSE-BD, as appropriate, and all required additional documents are filed with the Commission or its designee. In addition, the Commission proposed temporary Rule 15Fb2-2T to require SBS Entities to, among other things, file their applications on Form SBSE, Form SBSE-A, or Form SBSE-BD, as applicable, and all additional documents in paper form by sending them in hard-copy to the Commission, notwithstanding paragraph (c)(1) of Rule 15Fb2-1, if the development of an electronic system to receive those Forms was not yet functional by the time final rules were adopted.

The Commission stated in the Registration Proposing Release that it “[anticipated] that the EDGAR system will be expanded to facilitate registration of SBS Entities because it likely would provide the most cost-effective solution.”

In addition, the instructions to proposed Forms SBSE, SBSE-A, and SBSE-BD all indicated that “[t]he applicant must file [the Form] through the EDGAR system, and must utilize the EDGAR Filer Manual (as defined in 17 CFR 232. 11) to file and amend [the Form] electronically to

assure the timely acceptance and processing of those filings.”

See

the Registration Proposing Release, at 65793.

One commenter stated that its members believe that the use of the EDGAR system to facilitate registration may raise technological issues for entities whose computer systems cannot access the EDGAR system because of incompatible security protocols or technology.

This commenter suggested that the Commission should provide at least six months between the adoption of final rules and the effective date of the registration requirement to allow for resolution of these types of issues.

See

SIFMA Letter, at 3.

The Commission is adopting proposed paragraph (c)(1) regarding the electronic filing requirement substantially as proposed. Thus, paragraph (c)(1) of Rule 15Fb2-1 will require applications and any additional documents to be filed electronically with the Commission through the Commission's EDGAR system.

Given the timing of the compliance date for these rules (see Section III below), we believe firms will have sufficient time to work out any technological issues associated with filing registration forms through the Commission's EDGAR system. The Commission is not adopting Rule 15Fb2-2T because the EDGAR system will be updated to receive these application Forms before the compliance date of these rules.

As discussed in the Registration Proposing Release, because the registration forms will be required to be submitted through EDGAR, the electronic filing requirements of Regulation S-T will apply.

See

17 CFR 232 (governing the electronic submission of documents filed with the Commission). General information about EDGAR is available at

http://www.sec.gov/info/edgar.shtml

, where the EDGAR Filer Manual can also be accessed. The EDGAR Filer Manual contains all the technical specifications for filers to submit filings using the EDGAR system. The Commission recommends that applicants read this filer manual before they begin using the system. Generally, entities filing documents in electronic format through the EDGAR system must comply with the applicable provisions of the EDGAR Filer Manual in order to assure the timely acceptance and processing of those filings.

In the Registration Proposing Release, the Commission also discussed the possibility of requiring firms to “tag” data submitted using a computer markup language that can be processed by software programs for analysis (such as eXtensible Markup Language (XML) and eXtensible Business Reporting Language (XBRL)).

At that time we indicated that collecting the information in a standardized format would allow us to make the information available to the public in a format that makes it easier to review and manipulate.

We received no comments on the possible use of XML or XBRL.

See

Registration Proposing Release, 76 FR at 65806.

Id.

The process we will use to collect the Forms, and the data contained thereon, is consistent with what was proposed. The Forms are being developed with a graphical user interface that will allow users to complete a fillable Form on the EDGAR Web site.

As the data will be collected in a structured format, we believe it is not necessary to require that SBS Entities submit the information in a “tagged” format. Collecting the data in a structured format will allow us to make the data public in a manner that will enable users of that data to retrieve, search, and analyze the data through automated means.

To access the Forms, applicants will need to complete the Form ID process and obtain a CIK number and passcode from the Commission.

We are also planning to allow a batch filing process utilizing the XML tagged data format that firms could use to upload application information to the EDGAR system. Applicants and SBS Entities will not be required to utilize this process, but may choose to do so. We believe that some applicants and/or SBS entities may prefer to register or amend their Forms using the batch XML format because it would allow them to automate aspects of the registration process, which may minimize burdens and generate efficiencies. This may be especially true for firms that are already using Edgar's Filer Constructed Submissions capabilities to submit other forms. In connection with the batch filing process, we anticipate publishing a taxonomy of XML data tags in advance of the compliance date for SBS Entity registration for use by filers taking advantage of the optional batch submission process.

Use of such an XML taxonomy will allow the Commission to normalize the data received using the batch filing process with the data collected through the use of the structured Forms and thereby make the data available to the public in a seamless way.

The Commission received no comments on paragraph (c)(2) of proposed Rule 15Fb2-1, and is adopting that paragraph, substantially as proposed.

We modified the rule text of proposed Rule 15Fb2-1(c)(2) to eliminate the phrase “or its designee.” As applications will be submitted through the Commission's EDGAR system, they will not be submitted to any designee.

v. Standards for Granting or Instituting Proceedings to Determine Whether to Deny Registration

Paragraph (d) of proposed Rule 15Fb2-1 would have provided that the Commission may grant or deny applications for conditional and ongoing registration, and set forth the standards the Commission would use to make that determination. In particular, paragraph (d)(1) of the proposed rule specified that the Commission would grant conditional registration if it found the applicant's application was complete, and paragraph (d)(2) specified that the Commission would grant ongoing registration if it finds that the requirements of Exchange Act Section 15F(b) are satisfied. Proposed paragraph (d)(1) also indicated that the Commission may institute proceedings to determine whether conditional registration should be denied if it found that that the applicant is subject to a statutory disqualification (as defined in 15 U.S.C. 78c(a)(39)) or if the Commission was aware of inaccurate statements in the application. In addition, proposed paragraph (d)(2) indicated that the Commission may institute proceedings to determine whether ongoing registration should be denied if it found that the requirements of Exchange Act Section 15F(b) had not been satisfied, the applicant is subject to a statutory disqualification (as defined in Exchange Act Section 78c(a)(39)), or if the Commission is aware of inaccurate statements in the application or certification. Paragraph (d)(2) also stated that the Commission may grant or deny ongoing registration based on an SBS Entity's application and certification, and that a conditionally registered SBS Entity need not submit a new application to apply for ongoing registration, but must amend its application, as required pursuant to § 240.15Fb2-3. The Commission received no comments on proposed paragraph (d).

As discussed above, we have made conditional registration automatic upon submission of a complete application, which includes Form SBSE-C and Form SBSE, SBSE-A or SBSE-BD, as applicable. Paragraph (d) of Rule 15Fb2-1 as adopted states that an applicant that has submitted a complete Form SBSE-C and a complete Form SBSE, SBSE-A, or SBSE-BD, as applicable, in accordance with Rule 15Fb2-1(c) within the time periods set forth in Rule 3a67-8 (if the person is a Major SBS Participant) or Rule 3a71-2(b) (if the person is an SBS Dealer), and has not withdrawn its registration shall be conditionally registered.

Therefore, we are not adopting the proposed standards for granting conditional registration or instituting proceedings to

determine whether to deny conditional registration.

See supra,

Section II.A.1.iii.

The Commission is adopting the standards for making a determination to grant or deny ongoing registration proposed in paragraph (d)(2) with two modifications, and renumbering it as paragraph (e) to Rule 15Fb2-1. First, we amended the reference to Exchange Act Section 3(a)(39). As described in Section II.B. below in the discussion about proposed Rule 15Fb6-1, Exchange Act Section 15F(b)(6) uses the term “statutory disqualification,” but the definition of statutory disqualification in the Exchange Act specifically relates to a person's association with an SRO.

To address this inconsistency, we amended the rule text to replace the phrase “as defined in Section 3(a)(39) of the Securities Exchange Act of 1934” with the phrase “as described in Sections 3(a)(39)(A)-(F) of the Securities Exchange Act of 1934.” This updated cross-reference incorporates the underlying issues that give rise to statutory disqualification without reference to SRO membership.

In addition, we added the phrase “or cannot” to clarify that we may institute proceedings to deny where we are unable to make a finding due to, for example, a lack of necessary information.

See infra

footnote 78 and accompanying text.

We intend for this description to parallel Exchange Act Section 3(a)(39). If Congress were to amend the definition of statutory disqualification in Exchange Act Section 3(a)(39), we believe it would be appropriate for the Commission to consider amending Rule 15Fb6-2 to assure that this description remains consistent with the statutory definition.

Rule 15Fb2-1(e) as adopted states that the Commission may deny or grant ongoing registration to an SBS Dealer or Major SBS Participant based on an SBS Dealer's or Major SBS Participant's application, filed pursuant to paragraph (a) of this section. In addition, Rule 15Fb2-1(e) as adopted provides that the Commission will grant ongoing registration if it finds that the requirements of Exchange Act Section 15F(b) are satisfied. Further, Rule 15Fb2-1(e) provides that the Commission may institute proceedings to determine whether ongoing registration should be denied if it does not or cannot make such finding, if the applicant is subject to a statutory disqualification (described in Sections 3(a)(39)(A) through (F) of the Exchange Act), or the Commission is aware of inaccurate statements in the application, and that such proceedings shall include notice of the grounds for denial under consideration and opportunity for hearing. Finally, the rule states that at the conclusion of such proceedings, the Commission shall grant or deny such registration. The Commission intends to notify entities electronically through the EDGAR system when registration is granted, and will make information regarding registration status publicly available on EDGAR.

As indicated above, final Rule 15Fb2-1(e) also states that such proceedings will include notice of the grounds for denial under consideration and opportunity for hearing, and that at the conclusion of the proceedings, the Commission shall grant or deny such registration. An applicant would have the opportunity (once proceedings are commenced) to provide information as to why the Commission should grant registration.

In addition, as ongoing registration is no longer contingent on an applicant filing a Form SBSE-C after the “Last Compliance Date,” but rather the certification must be filed as part of the initial submission of the application, we removed the language in proposed Rule 15Fb2-1(d)(2) stating that a conditionally registered SBS Entity need not submit a new application to apply for ongoing registration. We also revised the cross-references given the fact that the requirement to file a certification on Form SBSE-C is now included in paragraph (a) rather than paragraph (b).

vi. Comments on Substituted Compliance

In the Cross Border Proposing Release, the Commission proposed Rule 3a71-5 to facilitate certain substituted compliance determinations by the Commission for foreign SBS Dealers.

See

Cross-Border Proposing Release, at 31207-8.

One commenter urged the Commission to consider conditions upon which it could allow appropriate foreign market participants to satisfy the registration requirements through compliance with the relevant requirements in their home jurisdictions, with appropriate notice of such compliance to the SEC.

This commenter urged the Commission not to delay its implementation of its proposed rules to address this issue but to keep consideration “open in order to achieve the full benefits of substituted compliance over the full range of regulatory issues in due course.”

See

IIF Letter, at 3-4.

See id

. at 4.

After further considering the purposes of our proposed approach to substituted compliance, the Commission continues to believe that substituted compliance should not be available for SBS Entity Registration. Requiring foreign persons that engage in security-based swap dealing activity at levels above the SBS Dealer

de minimis

threshold to register serves an important regulatory function that would be significantly impaired by permitting substituted compliance.

Specifically, the Commission has inspection and examination authority over registered SBS Entities, including access to relevant books and records.

As we have noted, “this approach to territorial application of Title VII provides a reasonable means of helping to ensure that our regulatory framework focuses on security-based swap activity that is most likely to raise the concerns that Congress intended to address in Title VII.”

The Commission's inspection and examination authority is part of proper oversight of such dealers, and any limitation on oversight of foreign registered SBS Dealers would impair the Commission's effective regulation of these firms and their security-based swap transactions because it would deprive the Commission of a full picture of their business.

Permitting a foreign SBS Dealer to satisfy these requirements through compliance with the relevant requirements in its home jurisdiction, even with appropriate notice of such compliance to the Commission, may deprive the Commission of the necessary information, including information resulting from inspection

and examination of the books and records of a firm engaged in dealing activity at levels above the

de minimis

threshold.

See

Exchange Act Section 15F(f)(1)(C) (requiring registered security-based swap dealers and registered major security-based swap participants to keep books and records “open to inspection and examination by any representative of the Commission”).

See

Cross-Border Adopting Release, at 47288.

See

Cross-Border Proposing Release, at 31015.

See also, Application of Certain Title VII Requirements to Security-Based Swap Transactions Connected With a Non-U.S. Person's Dealing Activity That Are Arranged, Negotiated, or Executed by Personnel Located in a U.S. Branch or Office or in a U.S. Branch or Office of an Agent,

Exchange Act Release No. 74834 (Apr. 29, 2015), 80 FR 27444 (May 13, 2015) (the “Cross-Border Activity Proposing Release”), at footnote 163 and accompanying text (noting that the Commission must have access to books and records of firms that engage in dealing activity in the United States to effectively monitor the market for abusive and manipulative conduct). For this reason, the Commission is also adopting a rule that would require nonresident security-based swap dealers to certify that they can, as a matter of law, and will provide the Commission with access to their books and records and submit to onsite examination.

See infra,

Section II.D.3.

As we have previously noted, access to books and records is necessary to ensure that the Commission is able to monitor the market for abusive and manipulative practices connected with security-based swap activity in the United States.

Accordingly, we are not providing for substituted compliance in the context of the registration requirement.

The Commission intends to consider the potential availability of substituted compliance in connection with other requirements applicable to SBS Dealers, when the Commission considers final rules to implement those requirements.

See

Cross-Border Activity Proposing Release, at 27466. We have also noted that Title VII recordkeeping requirements will likely be the Commission's primary tool in monitoring compliance with applicable securities laws, including the antifraud provisions of these laws.

See id. See also

Requirements for Security-Based Swap Dealers, Major Security-Based Swap Participants, and Broker-Dealers; Capital Rule for Certain SBSDs; Proposed Rules, Exchange Act Release No. 71958 (April 17, 2014), 79 FR 25194, 25199 (May 2, 2014) (citing Commission Guidance to Broker-Dealers on the Use of Electronic Storage Media under the Electronic Signatures in Global and National Commerce Act of 2000 with Respect to Rule 17a-4(f), Exchange Act Release No. 44238 (May 1, 2001), 66 FR 22916 (May 7, 2001); Books and Records Requirements for Brokers and Dealers Under the Securities Exchange Act of 1934, Exchange Act Release No. 44992 (October 26, 2001), 66 FR 55818 (November 2, 2001)).

Given the importance of ensuring that we have the ability to inspect and examine every security-based swap dealer whose relevant dealing activity exceeds the security-based swap dealer

de minimis

threshold, we think it appropriate to address whether substituted compliance should be allowed with respect to our registration rules in the context of this rulemaking, rather than keep open consideration of substituted compliance for the registration rules, as suggested by the commenter. However, the Commission is not addressing in this rulemaking the potential availability of substituted compliance for SBS Dealers with respect other Commission rules to which SBS Dealers would be subject as a registered SBS Dealer. Instead, we intend to address substituted compliance issues for other rulemakings in the releases finalizing those rules.

2. Amendments to Form SBSE, Form SBSE-A, and Form SBSE-BD: Rule 15Fb2-3

As proposed, Rule 15Fb2-3 would have required an SBS Entity to promptly file an amendment electronically with the Commission, or its designee to amend its application to correct any information it determines was, or had become, inaccurate for any reason. The Commission indicated in the release that the proposed rule was based on Exchange Act Rule 15b3-1, applicable to registered broker-dealers, which has worked well to assure that broker-dealers promptly amend their applications.

In addition, the Commission indicated that, for purposes of proposed Rule 15Fb2-3, it believed that it would be appropriate to interpret the term “promptly” to mean within 30 days.

See

Registration Proposing Release, footnote 54.

See

Registration Proposing Release, footnote 53.

The Commission received no comments regarding this proposed rule, and is adopting it substantially as proposed. However, we modified the rule to make two changes. As the application for registration now includes the certifications on Form SBSE-C,

we revised the rule to specify that if an SBS Entity finds that the information contained in its Form SBSE, Form SBSE-A, or Form SBSE-BD, as appropriate, or in any amendment thereto, is or has become inaccurate for any reason, the SBS Entity shall promptly file an amendment to the appropriate Form to correct such information. This change clarifies that the certifications on Form SBSE-C are one-time certifications and Form SBSE-C need not be amended.

We also made a technical change to specify that amendments must be made through the Commission's EDGAR system, and to remove the phrase “its designee” because amendments will be filed through the EDGAR system directly with the Commission.

The Commission believes this rule is necessary in order for it to have prompt access to accurate information as part of its ongoing oversight of SBS Entities.

See supra,

Section II.A.1.i., and Rule 15Fb2-1(a).

For more information on the Senior Officer Certification,

see supra,

Section II.A.1.ii. For more information on the CCO Certification Regarding Associated Persons,

see infra,

Section II.B. For more information on Form SBSE-C,

see infra,

Section II.G.4.

See also

footnote 30; Exchange Act Sections 15F(b)(6), 15F(h), and 15F(k); and rules proposed in the Business Conduct Standards Proposing Release.

See supra,

Section II.A.1.iv.

B. Associated Persons

Paragraph (b)(6) of Exchange Act Section 15F generally prohibits an SBS Dealer or Major SBS Participant, except as otherwise permitted by rule, regulation or order of the Commission, from permitting any person associated with the SBS Dealer or Major SBS Participant who is subject to a “statutory disqualification” to effect or be involved in effecting security-based swaps on behalf of the SBS Entity if the SBS Entity knew, or in the exercise of reasonable care should have known, of the statutory disqualification.

On June 15, 2011, the Commission issued an Order that, among other things, granted temporary relief from compliance with Exchange Act Section 15F(b)(6), and Exchange Act Section 29(b), 15 U.S.C. 78cc(b), concerning enforceability of contracts that would violate, among other provisions, Exchange Act Section 15F(b)(6).

See

the Effective Date Release. That Order expires on the effective date of rules adopted by the Commission to register SBS Entities. The Commission will consider separately extending the expiration date of the temporary relief.

Although Exchange Act Section 15F(b)(6) does not define “subject to a statutory disqualification,” the term has an established meaning under Section 3(a)(39) of the Exchange Act, which defines circumstances that would subject a person to a statutory disqualification with respect to membership or participation in, or association with a member of, an SRO. In the Registration Proposing Release, proposed rule 15Fb6-1 referenced the definition of “statutory disqualification” set forth in Section 3(a)(39), and the Commission proposed to make this definition applicable to Exchange Act Section 15F(b)(6), notwithstanding the absence of an SRO for SBS Entities.

Accordingly, as proposed, a person would have been “subject to a statutory disqualification” for purposes of proposed Rule 15Fb6-1 if that person would be subject to disqualification from association with a member of an SRO under the provisions of Section 3(a)(39) of the Exchange Act.

See

Registration Proposing Release 76 FR at 65795 (stating that Exchange Act Section 15F(b)(6) applies to “associated persons who are subject to a `statutory disqualification' (as defined in Exchange Act Section 3(a)(39))”).

Likewise, in a similar context, the Commission has proposed to adopt the definition of “statutory disqualification,” as set forth in Section 3(a)(39), for SBS Entities.

See

Business Conduct Standards Proposing Release, at 42404 n.42429-30, and 42454 (proposed Rule 15Fh-2(f)).

Paragraph (a) of proposed Rule 15Fb6-1 would have prohibited an SBS Entity from acting as an SBS Dealer or Major SBS Participant unless it had certified electronically on Schedule G of its application Form that no person associated with it who effects or is involved in effecting security-based swaps on its behalf is subject to statutory disqualification as defined in paragraph (3)(a)(39) of the Exchange Act.

Paragraph (b) of proposed Rule 15Fb6-1 would have required an SBS Entity, to support the certification required in paragraph (a), to obtain a questionnaire or application for employment executed by each of its

associated persons who effects or is involved in effecting security-based swaps on behalf of the SBS Entity that contains certain, specified information, which would serve as a basis for a background check of the associated person.

The proposal also would have required that the questionnaire or application be reviewed and signed by the SBS Entity's CCO. Paragraph (c) of proposed Rule 15Fb6-1 would have required that an SBS Entity maintain all questionnaires and applications for employment obtained pursuant to proposed paragraph (b) as part of its books and records for at least three years after the associated person has terminated his or her association with the SBS Entity.

As proposed, if an associated person later became statutorily disqualified, the SBS Entity would have been required to ensure that the associated person did not continue to effect or be involved in effecting security-based swaps on the SBS Entity's behalf and/or promptly amend its Schedule G in accordance with proposed Rule 15Fb2-3.

See

Registration Proposing Release, at 65795-96.

As proposed, Schedule G would have required that the applicant certify that it had “performed background checks on all of its associated persons who effect or are involved in effecting, or who will effect or be involved in effecting, security-based swaps on its behalf, and determined that no associated person who effects or is involved in effecting, or who will effect or be involved in effecting, security-based swaps on its behalf is subject to statutory disqualification, as defined in Section 3(a)(39) of the Securities Exchange Act of 1924.”

See

Proposed Schedule G, Registration Proposing Release, at 65841, 65863 and 65878. The Commission asked questions regarding the Forms, including Schedule G (76 FR at 65802 to 65805), but received no comments on Schedule G.

The Commission stated in the Registration Proposing Release that it believed the term “involved in effecting” security based swaps would encompass associated persons engaged in functions necessary to facilitate the SBS Entity's security-based swap business, including, but not limited to, associated persons involved in drafting and negotiating master agreements and confirmations, persons recommending security-based swap transactions to counterparties, persons on a trading desk actively involved in effecting security-based swap transactions, persons pricing security-based swap positions and managing collateral for the SBS Entity, and persons assuring that the SBS Entity's security-based swap business operates in compliance with applicable regulations.

In short, the term would encompass persons engaged in functions necessary to facilitate the SBS Entity's security-based swap business.

Registration Proposing Release, at 65795, footnote 56.

The Commission received one comment regarding the scope of the proposed certification and information requirements in proposed paragraphs (a) and (b) of Rule 15Fb6-1.

The commenter stated its belief that, based on the Commission's definition of the phrase “involved in effecting,” SBS Entities could have hundreds, if not thousands, of associated natural persons who effect or are involved in effecting security-based swaps.

Moreover, the commenter stated that the definition of “associated person” could be read to extend not just to natural persons, but also to entities that are affiliates of SBS Entities.

As a result, the commenter stated its view that prohibiting statutorily disqualified entities from effecting or being involved in effecting security-based swaps could result in “considerable” business disruptions and other ramifications.

To address these concerns, the commenter suggested that the Commission could (1) limit the scope of associated persons of SBS Entities solely to natural persons, or (2) narrow the types of activities that would cause an associated person to be deemed to be “involved in effecting security-based swaps.”

See

SIFMA Letter, at 7-9.

Id.

The commenter did not provide supporting data regarding the number of associated persons or the magnitude of any potential business disruptions.

Id.

1. Associated Person Certification

i. Associated Person Entities

Exchange Act Section 3(a)(70) generally defines the term “persons associated with” an SBS Entity to include (i) any partner, officer, director, or branch manager of an SBS Entity (or any person occupying a similar status or performing similar functions); (ii) any person directly or indirectly controlling, controlled by, or under common control with an SBS Entity; or (iii) any employee of an SBS Entity.

The definition of “person” under Exchange Act Section 3(a)(9) is not limited to natural persons, but extends to both entities and natural persons.

Thus, the statutory prohibition in Exchange Act Section 15F(b)(6), with respect to associated persons of an SBS Entity subject to a statutory disqualification, extends to both natural persons and entities.

See

15 U.S.C. 78c(a)(70). The definition generally excludes persons whose functions are solely clerical or ministerial.

See also

Registration Proposing Release, footnote 55, and Cross-Border Activity Proposing Release, footnote 193.

15 U.S.C. 78c(a)(9) (“The term `person' means a natural person, company, government, or political subdivision, agent, or instrumentality of a government.”).

In the Registration Proposing Release, the Commission asked whether it was possible that an associated person that is an entity that effects or is involved in effecting security-based swaps on behalf of an SBS Entity would be subject to a statutory disqualification and, if so, if we should consider excepting those persons from the prohibition in Section 15F(b)(6).

We also asked whether we should except such persons globally or on an individual basis, and whether there should be any differentiation in relief based upon whether the person was a natural person or an entity.

As indicated above, one commenter noted that “business disruptions and other ramifications stemming from an entire entity being statutorily disqualified from effecting or being involved in effecting security-based swaps could be considerable.”

This commenter suggested a number of ways the Commission could address this issue, including a suggestion that the Commission limit the scope of associated persons of SBS Entities solely to natural persons. We note that the CFTC rules provide that associated persons of swap dealers and major swap participants are natural persons.

See

Registration Proposing Release, question 90.

See

Registration Proposing Release, questions 91 and 93.

See

SIFMA Letter, at 8.

The CFTC amended CEA Regulation 1.3(aa), which generally defines the term “associated person” for purposes of entities registered with it, to cover swap dealers and major swap participants. Consequently, with respect to swap dealers and security-based swap dealers, the definition reads, “(aa)

Associated Person.

This term means any natural person who is associated in any of the following capacities with: [. . .] (6) A swap dealer or major swap participant as a partner, officer, employee, agent (or any natural person occupying a similar status or performing similar functions), in any capacity that involves: (i) The solicitation or acceptance of swaps (other than in a clerical or ministerial capacity); or (ii) The supervision of any person or persons so engaged.

Section 4s(b)(6) of the CEA [7 U.S.C. 6s(b)(6)], which is equivalent to Section 15F(b)(6) of the Exchange Act, provides that: “Except to the extent otherwise specifically provided by rule, regulation, or order, it shall be unlawful for a swap dealer or a major swap participant to permit any person associated with a swap dealer or a major swap participant who is subject to a statutory disqualification to effect or be involved in effecting swaps on behalf of the swap dealer or major swap participant, if the swap dealer or major swap participant knew, or in the exercise of reasonable care should have known, of the statutory disqualification.”

After taking into consideration the comment and the implementation of the equivalent CEA provision, the Commission is adopting Rule 15Fb6-1, which provides that unless otherwise ordered by the Commission, when it files an application to register with the Commission as an SBS Dealer or Major SBS Participant, an SBS entity may permit a person associated with such SBS Entity that is not a natural person and that is subject to a statutory disqualification, to effect or be involved in effecting security-based swaps on its behalf, provided that the statutory

disqualification(s), described in Sections 3(a)(39)(A) through (F) of the Securities Exchange Act, occurred prior to the compliance date of this rule, and provided that it identifies each such associated person on Schedule C of Form SBSE, Form SBSE-A, or Form SBSE-BD, as appropriate. As discussed below, this rule is designed to facilitate an orderly registration process by minimizing potential market disruptions that could occur when firms engaged in the security-based swap business trigger the requirements to register with the Commission.

As highlighted above, the scope of the prohibition in Section 15F(b)(6) of the Exchange Act covers a wide range of actions beyond Commission orders and conduct related to the securities markets, including actions by SROs, state regulators, criminal authorities and foreign jurisdictions occurring over a length of time. In addition, the term associated person is expansive and extends to, among other things, partners of an SBS Entity and persons directly or indirectly controlling, controlled by, or under common control with an SBS Entity, all of which could include a non-natural person.

Moreover, the conduct that led to the statutory disqualification of an associated person that is not a natural person may pertain to management practices that occurred a long time ago and may have been remediated or acts engaged in by personnel that are no longer employed by the associated person. Further, as discussed below in Section II.B.1.ii., we generally view the term “involved in effecting” to extend to key aspects of the overall process of effecting security-based swap transactions, including sales, booking, and cash and collateral management activities.

See supra,

footnote 89.

If the prohibition in Section 15F(b)(6) of the Exchange Act were to be applied without this relief, the Commission is concerned about the potential for market disruptions. The Commission's concern is particularly focused on the application of the prohibition under Section 15F(b)(6) with respect to non-natural associated persons, and during the transition period when firms engaged in the security-based swap business, with existing processes and relationships to facilitate that business, trigger the requirement to register with the Commission. Specifically, SBS Entities are likely to rely on non-natural associated persons to provide security-based swap related services to the SBS Entity, such as advisory, booking, and cash or collateral management services. SBS Entities engaged in the security-based swap market may need to either cease operations, even temporarily, due to not being able to utilize these services of their associated entities, or move these services to another entity that may not be as well positioned to handle them, which could have an impact on the security-based swap market.

See

SIFMA Letter at 8.

With respect to natural persons, we believe that replacing, even temporarily, a natural person performing a particular security-based swap function would not create the same practical issues as with moving the services provided by a non-natural person associated person to another entity. For example, we believe that moving the cash and collateral management services from one entity to another would have a much more significant impact on the ability of the SBS Entity to operate than assigning a different natural person to negotiate and execute security-based swap transactions. Further, natural person associated persons are the persons responsible for actually performing or overseeing the functions necessary to effect security-based swap activities. As such, we do not believe this transitional relief in Rule 15Fb6-1 should be extended to cover associated persons that are natural persons.

An SBS Entity could seek relief to allow an associated person subject to statutory disqualification to effect or be involved in effecting security-based swaps on its behalf. Paragraph (b)(6) of Exchange Act Section 15F gives the Commission authority to grant exceptions to the general prohibition “by rule, regulation, or order.” In addition, the Commission has proposed in a separate rulemaking today to provide a procedure by which SBS Entities could seek such relief.

Applications by Security-Based Swap Dealers or Major Security-Based Swap Participants for Statutorily Disqualified Associated Persons to Effect or be Involved in Effecting Security-Based Swaps,

Exchange Act Release No. 75612 (Aug. 5, 2015) (the “Rule 194 Proposing Release”).

See also,

15 U.S.C. 78f(c)(3)(A) and (B), 15 U.S.C. 78o-3(g)(3)(A) and (B), and 15 U.S.C. 78o-4(b)(2)(A)(iii) authorizing such rules.

103

See supra,

discussion in Section II.A.1.ii.

2. Questionnaire or Application for Employment and Background Checks

As noted, to support the certification required by paragraph (a) of proposed Rule 15Fb6-1, proposed Rule 15Fb6-1(b) would have required that an SBS Entity obtain a questionnaire or application for employment executed by each of its associated persons who effects or is involved in effecting security based swaps on the SBS Entity's behalf which would serve as a basis for a background check of the associated person and be reviewed and signed by the SBS Entity's CCO (or his

or her designee). In addition, proposed Schedule G to Forms SBSE, SBSE-A, and SBSE-BD would have required the SBS Entity's CCO to certify that the applicant had performed background checks on all of its associated persons who effect or are involved in effecting, or who will effect or be involved in effecting, security-based swaps on its behalf and determined that no associated person who effects or is involved in effecting, or who will effect or be involved in effecting, security-based swaps on its behalf is subject to statutory disqualification, as defined in Section 3(a)(39) of the Exchange Act.

One commenter stated that entities that screen employees pursuant to other regulatory requirements may decide to register as SBS Entities, and that the Commission should confirm that SBS Entities that are also registered as broker-dealers or that have affiliated broker-dealers may rely on the questionnaires and background checks they conduct of associated persons under Commission and FINRA rules to satisfy their Rule 15Fb6-1 background check obligation, and allow SBS Entities that are not broker-dealers but are overseen by a prudential regulator to rely on the questionnaires and background checks they conduct pursuant to the requirements of their prudential regulator to satisfy those obligations.

104

See

SIFMA Letter, at 9.

The rules as adopted do not specify what steps an SBS Entity should take to perform a background check.

105

The required employment questionnaire or application includes a significant amount of information that can be helpful to determine whether an associated person may be subject to a statutory disqualification.

106

In addition, we believe financial institutions already take steps to verify the background of their employees, such as by calling past employers and checking references. In some cases calling references and past employers may be sufficient, while in other circumstances a firm may decide to take additional steps. We believe it is important for firms to have flexibility to perform background checks, as long as those checks provide them with sufficient comfort to certify that none of the SBS Entity's employees who effect or are involved in effecting security-based swaps on the SBS Entity's behalf are subject to statutory disqualification, unless otherwise specifically provided by rule, regulation or order of the Commission.

107

105

See infra,

Section II.B.3.

106

See infra,

footnote 120 and accompanying text.

See also,

17 CFR 240-17a-3(a)(12)(i) and proposed Rule 18a-5(b)(8)(i).

107

See,

Rule 194 Proposing Release.

As noted, the rules as adopted do not specify what steps an SBS Entity should take to perform a background check. As such, with respect to an SBS Entity whose associated persons are also associated with an affiliated broker-dealer, CFTC-registered entity, or bank, there may be circumstances where the SBS Entity and its CCO are able to rely on current background checks of dual employees performed by an affiliated, regulated entity, as long as those checks provide them with sufficient comfort to certify that none of the SBS Entity's employees who effect or are involved in effecting security-based swaps on the SBS Entity's behalf are subject to statutory disqualification, unless otherwise specifically provided by rule, regulation or order of the Commission.

108

As we have amended paragraph (b) of Rule 15Fb6-2 to require that the CCO, or his or her designee, sign the questionnaire or application that the SBS Entity is required to obtain pursuant to the relevant recordkeeping rule applicable to such SBS Entity, we believe it would be appropriate for the Commission to address the issue of whether an SBS Entity can fulfill its obligation to obtain questionnaires or applications for employment by relying on other documents in the release that will address the recordkeeping requirements for SBS Entities.

See infra,

footnotes 120 and 121 and accompanying text for a discussion of Rule 15Fb6-2(b).

See also,

Rule 194 Proposing Release.

One commenter stated that the statutory disqualification requirements would apply to a foreign registered SBS Entity as a whole (

i.e.,

an entity-level, as opposed to transaction-level, requirement), without regard to the identity of a given counterparty, resulting in situations where non-U.S. employees of non-U.S. SBS Entities who do not interact with U.S. customers would be required to submit to U.S. background checks for statutory disqualification purposes.

109

This commenter indicated that this approach diverges from that adopted by the CFTC, which it states does not apply its statutory disqualification requirements to associated persons of its registrants who engage in activity outside the U.S. and limit such activity to customers located outside the U.S.

110

This commenter recommended that the Commission re-categorize licensing and statutory disqualification requirements as transaction-level requirements because limiting background checks to personnel interacting with U.S. persons would help eliminate potential conflicts with local privacy laws, which the commenter states in some cases may prohibit background checks for employees based abroad.

111

109

See

IIB letter, at 20.

110

Id.

111

Id.

As noted in Section II.A.1.vi., in the Cross Border Proposing Release the Commission proposed Rule 3a71-5 to facilitate certain substituted compliance determinations by the Commission for foreign SBS Dealers.

112

Paragraph (a)(3) of that proposed rule specified that the Commission would not make a substituted compliance determination with respect to registration requirements described in Sections 15F(a)-(d) of the Exchange Act and the rules and regulations thereunder. As discussed above, the Commission continues to believe that substituted compliance should not be available for SBS Entity Registration.

113

The Commission holds this view with respect to all aspects of SBS Entity registration, including the requirements relating to statutory disqualification.

112

See

Cross-Border Proposing Release, at 31207-8.

See also

Cross-Border Proposing Release, at 31015-31016.

113

See supra,

Section II.A.1.vi.

Exchange Act Section 15F(b)(6) generally prohibits an SBS Entity, except as otherwise permitted by rule, regulation or order of the Commission, from permitting any person associated with the SBS Entity who is subject to a “statutory disqualification” to effect or be involved in effecting security-based swaps on behalf of the SBS Entity if the SBS Entity knew, or in the exercise of reasonable care should have known, of the statutory disqualification. Rule 15Fb6-2(a) as adopted states that no registered SBS Entity shall act as an SBS Entity unless it has certified that no person associated with such SBS Entity who is effecting or involved in effecting security-based swaps on behalf of the SBS Entity is subject to statutory disqualification, unless otherwise specifically provided by rule, regulation or order of the Commission. Rule 15Fb6-2(b) as adopted further states that (1) to support the certification required by paragraph (a), the SBS Entity's CCO, or his or her designee, shall review and sign the questionnaire or application for employment, which the SBS Entity is required to obtain pursuant to the relevant recordkeeping rule applicable to such SBS Entity, executed by each associated person who is a natural person and who effects or is involved in effecting security based swaps on the SBS Entity's behalf; and (2) the questionnaire or application shall serve as a basis for a background check of the associated person to verify

that the person is not subject to statutory disqualification.

114

See also

Form SBSE-C and Rule 15Fb6-2(b).

The requirements in paragraph (b) of Rule 15Fb6-2 are designed to support the CCO Certification Regarding Associated Persons required by paragraph (a) of the rule, and the CCO Certification Regarding Associated Persons is designed to provide the Commission with representations regarding the applicant's compliance with the statutory disqualification provision in Section 15F(b)(6) of the Exchange Act. We believe that these requirements are important aspects of our registration regime for SBS Entities, as they will in part help ensure that SBS Entities are performing the necessary diligence to support the requirements of Exchange Act Section 15F(b)(6). The requirements in Rule 15Fb6-2(b) regarding questionnaires or applications and background checks are important elements of each SBS Entity's determination with respect to whether its associated persons that effect or are involved in effecting security-based swap transactions are subject to statutory disqualifications, and can serve as an effective tool for the Commission to use to assess the SBS Entity's diligence with respect to, and compliance with, the requirements of paragraph (a) of the rule. The Commission has considered the function that these statutory disqualification requirements play in the effective oversight and regulation of SBS Entities and has concluded that entity-level classification—and application to all associated persons—will provide for more effective oversight and regulation. Thus, while the Commission has taken into consideration the commenter's concerns regarding the potential impact of certain foreign privacy laws, we are not convinced at this time of a need or basis to provide an exclusion for SBS Entities from the statutory disqualification requirements with respect to certain of its associated persons that are natural persons who effect or are involved in effecting security-based swaps on its behalf. Accordingly, under our final rules, we continue to treat these requirements as entity-level requirements applicable to all associated persons of the registered foreign SBS Entity that effect or are involved in effecting security-based swap transactions.

3. Final Rule for Associated Person Certification

Therefore, for the reasons discussed above, we are adopting the language proposed as Rule 15Fb6-1 as Rule 15Fb6-2 with some modifications, as described below. Paragraph (a) of Rule 15Fb6-2, as adopted, requires that an SBS Entity certify, on Form SBSE-C, that it neither knows, nor in the exercise of reasonable care should have known, that any person associated with it who effects or is involved in effecting security-based swaps on its behalf is subject to statutory disqualification, as described in Sections 3(a)(39)(A) through (F) of the Exchange Act, unless otherwise specifically provided by rule, regulation or order of the Commission.

115

We incorporated the phrase “neither knows, nor in the exercise of reasonable care should have known” to assure that the language in the certification more closely tracks the requirements of Exchange Act Section 15F(b)(6). We added the phrase “unless otherwise specifically provided by rule, regulation or order of the Commission” to this paragraph to acknowledge that if the Commission provides relief to allow an SBS Entity to permit a person associated with it who is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on its behalf,

116

the SBS Entity may do so.

117

In addition, we amended the reference to Exchange Act Section 3(a)(39) in the rule text to replace the phrase “as defined in Section 3(a)(39) of the Securities Exchange Act of 1934” with the phrase “as described in Sections 3(a)(39)(A)-(F) of the Securities Exchange Act of 1934.” This updated cross-reference incorporates the underlying issues that give rise to statutory disqualification without reference to SRO membership.

118

Finally, as described more fully in Sections II.G.1 and II.G.4 below, we have moved the CCO Certification Regarding Associated Persons from Schedule G into Form SBSE-C. This change clarifies that the CCO Certification Regarding Associated Persons is required only at the time of registration to provide the Commission with information before making a determination as to whether to grant registration or institute proceedings to deny registration.

119

115

The certification must be accurate when it is signed. Final Rule 15Fb1-1(b), described below in Section II.F., would require each SBS Entity to maintain a manually signed copy of this certification as part of its books and records until at least three years after the certification has been replaced or is no longer effective.

116

E.g., See,

Rule 15Fb6-1 and the Rule 194 Proposing Release.

117

See supra,

footnote 96. This language is designed to track Exchange Act Section 15F(b)(6), which states, in part, “[e]xcept to the extent otherwise specifically provided by rule, regulation or order of the Commission, it shall be unlawful . . .”

118

As proposed, the associated person certification in Schedule G included the phrase “will effect or be involved in effecting,” while the associated person certification requirement in proposed Rule 15Fb6-1(a) did not. Because the certification is not designed to be forward-looking, and to ensure that Rule 15Fb6-2 and Form SBSE-C, as adopted, have the same language for the same certification, we removed the phrase “will effect or be involved in effecting” from the certification contained in Form SBSE-C as adopted.

119

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

Paragraph (b) of Rule 15Fb6-2 as adopted states that, to support the certification required by paragraph (a), an SBS Entity's CCO, or his or her designee, shall review and sign each questionnaire or application for employment, which the SBS Entity is required to obtain pursuant to the relevant recordkeeping rule applicable to such SBS Entity, executed by each associated person who is a natural person and who effects or is involved in effecting security based swaps on the SBS Entity's behalf, and that the questionnaire or application shall serve as a basis for a background check of the associated person to verify that the person is not subject to statutory disqualification. We have amended paragraph (b) of Rule 15Fb6-2 in recognition of the fact that the Commission separately proposed Rule 18a-5(b)(8)(i), as part of its proposed recordkeeping and reporting rules that would be applicable to stand-alone SBS Dealers, stand-alone Major SBS Participants, bank SBS Dealers, and bank Major SBS Participants, which would require SBS Entities to obtain an employment questionnaire or application from their associated persons that would contain the same information as in proposed Rule 15Fb6-2(b).

120

We do not believe that it would be efficient or necessary to repeat the same requirement for obtaining such questionnaires or applications in two separate Commission rules.

121

We believe that it is more appropriate to include the underlying requirement to obtain the questionnaires or applications in the Commission rule that would broadly cover the books and records requirements for an SBS Entity, and to provide in Rule 15Fb6-2 the

requirement that the CCO sign and review the questionnaire or application that the SBS Entity is required to obtain pursuant to the relevant recordkeeping rule applicable to such SBS Entity, and use it as a basis for a background check, to support the certification required by Rule 15Fb6-2(a).

120

See

Books and Records Proposing Release, at 25205.

121

Paragraph (c) of proposed Rule 15Fb6-1 also would have established a requirement to maintain these employment questionnaires and applications for at least three years after the associated person has terminated his or her association with the SBS Entity. This is substantially the same as the requirement in proposed Rule 18a-6(b) relating to the records created in accordance with Rule 18a-5(b)(8)(i). Rule 15Fb6-2 as adopted, removes this proposed requirement because we intend for the recordkeeping rule to comprehensively address recordkeeping issues.

In addition, we have revised final Rule 15Fb6-2(b) to add the phrase “who is a natural person” in recognition of the fact that only natural persons would be required to complete this type of questionnaire or application. Consequently, the CCO (or the CCO's designee) only must review and sign questionnaires or applications for associated persons that are natural persons. Rule 15Fb6-2(b) as adopted also states that the questionnaire or application shall serve as a basis for a background check of the associated person to verify that the person is not subject to statutory disqualification. This provision is designed to help ensure that due regard is paid to this requirement to collect information on employees and that the SBS Entity's CCO or designee reviews the application and takes any other necessary steps to assure that none of the SBS Entity's employees who effect or are involved in effecting security-based swaps on the SBS Entity's behalf is subject to statutory disqualification, unless otherwise specifically provided by rule, regulation or order of the Commission. As paragraph (b) of Rule 15Fb6-2 is designed to support the certification required by paragraph (a) at the time of registration, it does not impose ongoing obligations. However, the Commission emphasizes that the obligation to comply with Section 15F(b)(6) of the Exchange Act is ongoing.

C. Termination of Registration

1. Duration of Registration: Rule 15Fb3-1

Exchange Act Section 15F(b)(3) provides that “each registration under this section shall expire at such time as the Commission may prescribe by rule or regulation.” This provision is similar to CEA Section 6f(a)(1), which provides that “each registration shall expire on December 31 of the year for which issued or at such other time, not less than one year from the date of issuance, as the Commission may by rule, regulation, or order prescribe. . . .” CEA Rule 3.10(b) provides, among other things, that persons registered with the CFTC pursuant to CEA Rule 3.10 “will continue to be so registered until the effective date of any revocation or withdrawal of such registration.”

As proposed, paragraph (a) of Rule 15Fb3-1 would have established a similar continuous registration as is set forth in CEA Rule 3.10(b), providing that registered SBS Entities “continue to be so registered until the effective date of any cancellation, revocation or withdrawal of such registration or any other event the Commission determines should trigger expiration.” Paragraph (b) of the proposed rule would have established the timeframes within which conditional registration would expire if ongoing registration was not obtained.

122

Paragraph (c) of the proposed rule would have allowed the Commission to extend conditional registration for good cause. The Commission received no comments on this proposed rule.

122

More specifically, proposed paragraph (b)(1) would have provided that during the transitional period conditional registration granted by the Commission would expire on the last compliance date for SBS Entities that filed a completed application before the last compliance date, unless the SBS Entity filed with the Commission a certification, in which case conditional registration extended an additional thirty days. Proposed paragraph (b)(2) would have provided that after the last compliance date, conditional registration granted by the Commission to major security-based swap participants would expire four months after the major security-based swap participant filed its completed application, unless the major security-based swap participant filed a certification; in which case the conditional registration extended an additional thirty days.

We are adopting this proposed rule with several modifications. First, we modified the language of paragraph (a) to eliminate the phrase “or any other event the Commission determines should trigger expiration” because if we determine an SBS Entity's registration should terminate we would follow the revocation process set forth in Rule 15Fb3-3. Consequently, this phrase is extraneous and could cause confusion if not removed. In addition, we have modified the language of paragraph (b) to provide that a person conditionally registered as an SBS Entity will continue to be so registered until the date the registrant withdraws from registration or the Commission grants or denies the person's ongoing registration, as described in Rule 15Fb2-1(e). We also eliminated paragraph (c), because applicants will be conditionally registered upon filing a complete application, and conditional registration will not expire until the Commission either grants or denies ongoing registration. Thus, there is no instance in which an applicant's conditional registration would need to be extended.

2. Withdrawal: Rule 15Fb3-2

As proposed, Rule 15Fb3-2 was designed to provide a process by which an SBS Entity may withdraw from registration with the Commission. The rule was based on Exchange Act Rule 15b6-1, which has historically worked well to facilitate broker-dealer withdrawals.

123

Registration Proposing Release, at footnote 62.

Proposed Rule 15Fb3-2(a) would have required an SBS Entity to electronically file a notice of withdrawal from registration on Form SBSE-W (described in more detail below in Section II.G.4) in accordance with the instructions to the Form. It also would have required that an SBS Entity amend its Form SBSE, Form SBSE-A, or Form SBSE-BD, as appropriate, in accordance with proposed Rule 15Fb2-3 to update any inaccurate information prior to filing its notice of withdrawal from registration. The Commission received no comments on this aspect of the proposed rule. We are adopting paragraph (a) of Rule 15Fb3-2 substantially as proposed, but with a modification to specify that Form SBSE-W must be filed with the Commission through the Commission's EDGAR system.

Paragraph (b) of proposed Rule 15Fb3-2 would have provided that a notice of withdrawal from registration filed by an SBS Entity generally becomes effective on the 60th day after the SBS Entity files Form SBSE-W. However, as discussed in the Registration Proposing Release, the Commission recognizes that there may be circumstances in which it would be advisable to provide flexibility in scheduling the termination of business operations to registered entities seeking to withdraw from registration.

124

Further, we may determine that it would be appropriate for a registered entity that is under investigation by the Commission to maintain its registered status in order to allow the Commission to conclude a pending investigation without prematurely instituting a proceeding to impose conditions on the registered entity's withdrawal. In such instances, we believe it better serves the interests of all parties to provide registered entities and the Commission with the flexibility to extend the effective date of withdrawal, either by consent or Commission order. Thus, paragraph (b) of proposed Rule 15Fb3-2 identified specific situations in which notices of withdrawal from registration would not become effective on the 60th day after the SBS Entity filed Form SBSE-W. Specifically, proposed paragraph (b) stated that rather than becoming effective on the 60th day, the notices of withdrawal would instead

become effective “within such longer period of time as to which such SBS Dealer or Major SBS Participant consents or which the Commission by order may determine as necessary or appropriate in the public interest or for the protection of investors, or within such shorter period of time as the Commission may determine.”

124

See

Registration Proposing Release, at 65798.

Paragraph (b) of proposed Rule 15Fb3-2 also provided that if the Commission institutes proceedings prior to the effective date of Form SBSE-W to censure, place limitations on the activities, functions or operations of, or suspend or revoke the registration of the SBS Entity, or to impose terms or conditions upon the SBS Entity's withdrawal, the notice of withdrawal shall not become effective except at such time and upon such terms and conditions as the Commission deems necessary or appropriate in the public interest or for the protection of investors.

The Commission received no comments on paragraph (b) of proposed Rule 15Fb3-2, and is adopting it as proposed.

3. Cancellation and Revocation: Rule 15Fb3-3

Proposed Rule 15Fb3-3 was designed to provide the Commission with the ability to either cancel or revoke a registered SBS Entity's registration. Paragraph (a) of proposed Rule 15Fb3-3 would have provided that the Commission shall cancel an SBS Entity's registration if the Commission finds that it is no longer in existence or has ceased to do business as an SBS Entity. As highlighted in the Registration Proposing Release, this cancellation process is designed to help the Commission allocate its examination and other resources to entities that are actively engaged in business regulated by the Commission.

125

See

Registration Proposing Release, at 65799.

Paragraph (b) of proposed Rule 15Fb3-3 would have provided that the Commission, by order, shall censure, place limitations on the activities, functions, or operations of, or revoke (on a permanent or temporary basis) the registration of any SBS Entity that has registered with the Commission if it makes a finding as specified in Section 15F(l)(2) of the Exchange Act.

126

This paragraph of the Rule would implement the authority in Section 15F(l)(2) of the Exchange Act.

126

See

Exchange Act Section 15F(l)(2), stat. at 15 U.S.C. 78o-10(l) (providing authority to the Commission to censure, place limitations on the activities, functions, or operations of, or revoke the registration of any SBS Entity).

The Commission received no comments on this proposed rule, and is adopting it as proposed.

D. Special Requirements for Nonresident SBS Entities

As proposed, Rule 15Fb2-4 would have required, among other things, nonresident SBS Entities that register with the Commission to: (1) Appoint an agent for service of process in the United States (other than the Commission or a Commission member, official or employee) upon whom may be served any process, pleadings, or other papers in any action brought against the nonresident SBS Entity; (2) furnish the Commission with the identity and address of its agent for service of process; (3) certify that the firm can, as a matter of law, provide the Commission with prompt access to its books and records and can, as a matter of law, submit to onsite inspection and examination by the Commission; and (4) provide the Commission with an opinion of counsel concurring that the firm can, as a matter of law, provide the Commission with prompt access to its books and records and can, as a matter of law, submit to onsite inspection and examination by the Commission. Proposed Rule 15Fb2-4 also would have required registered nonresident SBS Entities to re-certify within 90 days after any changes in the legal or regulatory framework that would impact the nonresident SBS Entity's ability to provide, or the manner in which it provides, the Commission prompt access to its books and records or impacts the Commission's ability to inspect and examine the registered nonresident SBS Entity.

1. Definition of Nonresident SBS Entities

Paragraph (a) of proposed Rule 15Fb2-4 would have defined the terms “nonresident security-based swap dealer” and “nonresident major security-based swap participant” for purposes of Rule 15Fb2-4. Under this proposed definition, the term “nonresident” SBS Entity would have been defined to mean: in the case of an individual, one who resides, or has his or her principal place of business, “in any place not in the United States;” in the case of a corporation, one incorporated in or having its principal place of business “in any place not in the United States;” and in the case of a partnership or other unincorporated organization or association, one having its principal place of business “outside the United States.” The Commission received no comments on paragraph (a) of Rule 15Fb2-4, and is adopting these definitions as proposed with one technical change to make the language in the three sub-paragraphs (applicable to individuals, corporations, and partnerships) consistent.

127

As proposed, paragraphs (a)(1) and (a)(2) included the phrase “not in the United States,” while paragraph (a)(3) used the phrase “outside the United States.” We modified paragraph (a)(3) to track the phrase included in paragraphs (a)(1) and (a)(2), “not in the United States.”

2. United States Agent for Service of Process

Paragraphs (b)(1) and (2) of proposed Rule 15Fb2-4 would have required that each nonresident SBS Entity registered or registering with the Commission obtain a written irrevocable consent and power of attorney appointing an agent for service of process in the United States (other than the Commission or a Commission member, official or employee) upon whom may be served any process, pleadings, or other papers in any action brought against the nonresident SBS Entity, and furnish the Commission with the identity and address of its agent for services of process on Schedule F to Form SBSE, Form SBSE-A, or Form SBSE-BD, as applicable.

128

Paragraph (b)(1) also would have required that the consent and power of attorney be signed by both the nonresident SBS Entity and the agent(s) for service of process. Paragraphs (b)(3) and (b)(4) of proposed Rule 15Fb2-4 would have required that registered nonresident SBS Entities promptly appoint a successor agent if it discharges its identified agent for service of process or if its agent for service of process is unwilling or unable to accept service on its behalf, and promptly inform the Commission, through an amendment of the Schedule F of Form SBSE, Form SBSE-A, or Form SBSE-BD, as appropriate, of any change to either its agent for service of process or the name or address of its existing agent for service of process. These requirements are important to facilitate the ability of the Commission and others (for example, the U.S. Department of Justice and any other agency with the power to enforce the Exchange Act) to serve process on a nonresident SBS Entity to enforce the Exchange Act. Finally, paragraph (b)(5) of proposed Rule 15Fb2-4 would have required that the registered nonresident SBS Entity maintain, as part of its books and records, the agreement identified in paragraph (b)(1) for at least three years after the agreement is terminated.

128

Paragraphs (b)(1) and (b)(2) of proposed Rule 15Fb2-4, respectively.

The Commission received no comments on paragraphs (b)(1) through

(b)(3) of Rule 15Fb2-4, and is adopting them as proposed. We are adopting paragraphs (b)(4) and (b)(5) with one modification to each to address the documentation of successor agents for service of process. First, we have modified paragraph (b)(4) to clarify that if a nonresident SBS Entity appoints a successor agent for service of process, it must follow the same process described in paragraph (b)(1). We also modified paragraph (b)(5) to require that SBS Entities preserve agreements obtained not only under paragraphs (b)(1), but also under paragraph (b)(4). While we originally intended that SBS Entities would use the same process when replacing an agent for service of process as they did when initially appointed an agent for service of process, we realize that the proposed rule text was unclear on this point.

3. Access to Books and Records, and Onsite Inspections and Examinations, of Nonresident SBS Entities

The Commission proposed to require that each nonresident SBS Entity registering with the Commission certify on Schedule F of Form SBSE, Form SBSE-A, or Form SBSE-BD, as appropriate, that it can, as a matter of law, provide the Commission with prompt access to its books and records and can, as a matter of law, submit to onsite inspection and examination by the Commission.

129

The proposal also would have required that this certification be supported by an opinion of counsel obtained by the nonresident SBS Entity.

130

129

See

proposed Rule 15Fb2-4(c)(1)(i) and Schedule F.

130

See

proposed Rule 15Fb2-4(c)(1)(ii) and Schedule F.

The Commission received three comments on these proposed requirements. Two commenters contended that the Commission should not require the opinion of counsel from foreign SBS Entities because many non-U.S. entities currently engaged in the SBS business in the U.S. will be legally prevented from registering as SBS Entities.

131

One commenter expressed concern that requiring nonresident SBS Entities to provide an opinion of counsel and certify that they can provide the Commission with access to their records and submit to inspections could decrease market liquidity and cause market disruptions, and could introduce competitive disparities with respect to market access.

132

The third commenter stated, in a section of its letter titled “Direct access to Firm Records,” that SBS Entities should not be required to certify or obtain an opinion of counsel because “any need to access the books or records of [a European Union] firm or to carry-out onsite inspections of [European Union] firms, should be addressed through cooperation with the relevant national regulator, via supervisory cooperation and information sharing which are well established channels for cooperative oversight of firms that are internationally active.”

133

131

See

SIFMA Letter, at 9-10, and IIB Letter, at 19.

132

See

IIB Letter, at 19.

133

See

EC Letter at 3. We understand the term “European Union firm” to mean an SBS Entity who is located in, and subject to the regulations of, one of the European Union member states.

While it is possible that nonresident SBS Entities in jurisdictions with legal barriers could be prevented from registering with the Commission because they are unable to comply with the certification requirement, these firms also could choose to restructure their respective businesses such that the registered entity can make the appropriate certification to allow it to register. In addition, this requirement is designed to decrease, rather than increase, competitive disparities between SBS Entities registered with the Commission with respect to their ability to provide access to records and submit to examinations because U.S. SBS Entities must provide access to records and are subject to our examinations.

134

While we recognize that this requirement may be an issue for some prospective registrants, we believe that significant elements of an effective regulatory regime are the Commission's abilities to access registered SBS Entities' books and records and to inspect and examine the operations of registered SBS Entities.

135

Some jurisdictions' laws may require regulators to redact certain information prior to providing the books and records to the SEC or withhold certain records altogether. Thus, if the Commission were to rely solely on information-sharing arrangements with foreign regulators, it could be unable to obtain complete copies of those records, which could compromise the Commission's ability to effectively supervise registered SBS Entities. Therefore, we continue to believe that the Commission must have assurances about access to those entities' records and the ability to inspect and examine them in order to effectively fulfill its regulatory oversight responsibilities with respect to SBS Entities registered with us.

134

See,

Exchange Act Sections 15F(f)(1)(C), 15F(j)(4)(B), and the Books and Records Proposing Release, which proposed Rule 18a-6(d) and changes to Rule 17a-4.

135

See, e.g.,

Dagong Global Credit Rating Agency, Exchange Act Release No. 62968 (Sept. 22, 2010) (denying application as an NRSRO due to applicant's inability to comply with U.S. securities laws, in part because records requests would have to be approved by a Chinese regulator);

Dominick & Dominick, Inc.,

Exchange Act Release No. 29243 (May 29, 1991) (settled administrative proceeding involving a broker-dealer's failure to furnish promptly to the Commission copies of certain records required to be kept pursuant to Exchange Act Section 17(a)(1) and Rule 17a-3 thereunder where the broker-dealer initially asserted that Swiss law prevented it from producing the required records).

Moreover, obtaining information through any third party raises the risk of delay in obtaining information needed to complete staff examinations. Delays in obtaining such information could compromise the ability of the Commission to supervise registered SBS Entities effectively, particularly in the case of SEC staff examinations initiated for cause. The Commission continues to believe that it must be able to access registered SBS Entity books and records and inspect and examine them without only going through a third party, such as a foreign regulator, to effectively fulfill its regulatory oversight responsibilities.

The Commission's memoranda of understanding with foreign counterparts on supervisory cooperation matters (Supervisory MOUs) reflect the Commission's approach to access described above, and are intended to supplement, not replace the Commission's authority to obtain books and records from registrants and conduct onsite examinations without only going through a third party.

136

In the Commission's view, supervisory cooperation complements the Commission's access to SEC registrants in the oversight context.

137

Using various supervisory cooperation mechanisms, including Supervisory MOUs, SEC staff and our foreign counterparts regularly consult, cooperate, and exchange supervisory information on a confidential basis about regulated entities that operate

across borders, which assist staff with focusing their examinations and identifying potential risk areas at Commission registrants, among other things. Our Supervisory MOUs also discuss how the SEC and foreign regulators cooperate during onsite visits at these firms.

136

The Commission's comprehensive supervisory MOUs generally contain the following paragraph: “This MOU does not limit an Authority in taking solely those measures described herein in fulfillment of its supervisory functions. In particular, this MOU does not affect any right of any Authority to communicate with, conduct an On-Site Visit of (subject the procedures described in Article Four), or obtain information or documents from, any Person subject to its jurisdiction that is located in the territory of the other Authority.” The Commission's Supervisory Cooperation MOUs can be accessed at:

http://www.sec.gov/about/offices/oia/oia_cooparrangements.shtml#reg

137

See The International Organization of Securities Commission's (IOSCO) Final Report on Principles Regarding Cross-Border Supervisory Cooperation at 15 (noting that “[supervisory cooperation] is not a mechanism for altering regulatory obligations or limiting regulatory responsibility with respect to regulators that have regulated entities in common).”

In light of the above, the Commission is adopting paragraph (c)(1)(ii) of Rule 15Fb2-4 as proposed, and is adopting paragraph (c)(1)(i) with one modification. As proposed, paragraph (c)(1)(i) would have required a nonresident SBS Entity to certify on Schedule F of Form SBSE, Form SBSE-A, or Form SBSE-BD, as appropriate, that it “can as a matter of law” provide the Commission with prompt access to its books and records and submit to onsite inspection and examination. As adopted, Rule 15Fb2-4(c)(1)(i) now requires the nonresident SBS Entity to certify that it “can, as a matter of law, and will” do those things.

138

This change from the proposal is intended to make clear to a nonresident SBS Entity that it is making an affirmative commitment to comply with its obligation to provide the Commission with prompt access to its books and records.

139

138

Failure to make this certification or provide an opinion of counsel would constitute a basis for the Commission to deny an application for registration.

139

In accordance with Rule 15Fb1-1(b), as adopted, the SBS Entity will need to maintain a manually signed copy of this certification as part of its books and records until at least three years after the certification has been replaced or is no longer effective.

See infra,

Section II.F for a discussion of Rule 15Fb1-1.

Paragraph (c)(2) of proposed Rule 15Fb2-4 would have required that registered nonresident SBS Entities re-certify, on Schedule F to Form SBSE, Form SBSE-A, or Form SBSE-BD, as applicable, within 90 days after any changes in the legal or regulatory framework that would impact the nonresident SBS Entity's ability to provide, or the manner in which it provides, the Commission prompt access to its books and records or impacts the Commission's ability to inspect and examine the nonresident SBS Entity. The re-certification would have been required to include a revised opinion of counsel describing how, as a matter of law, the entity will continue to meet its obligations to provide the Commission with prompt access to its books and records and to be subject to Commission inspection and examination under the new regulatory regime. The Commission did not receive any comments on this requirement. We are adopting this provision as proposed. The Commission emphasizes that if a registered nonresident SBS Entity becomes unable to comply with this certification because of such changes, or otherwise, then this may be a basis for the Commission to institute proceedings to consider revoking the nonresident SBS Entity's registration.

E. Special Situations

1. Succession: Rule 15Fb2-5

The Commission proposed Rule 15Fb2-5 to provide a process through which an SBS Entity could succeed to the business of another SBS Entity.

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As proposed, Rule 15Fb2-5(a) would have provided that, if an SBS Entity succeeds to and continues the business of another SBS Entity, the registration of the predecessor SBS Entity would remain effective as the registration of the successor if the successor files an application for registration in accordance with Rule 15Fb2-1 within 30 days after such succession, and the predecessor files a notice of withdrawal from registration on Form SBSE-W. Paragraph (b) of proposed Rule 15Fb2-5 would have provided that a successor firm that succeeds to the business of another, where the ownership or control of the SBS Entity does not change (

e.g.,

where the firm is changing its date or state of incorporation, form of organization, or the composition of a partnership), may simply amend the registration of the predecessor SBS Entity on Form SBSE, Form SBSE-A, or Form SBSE-BD, as appropriate, within 30 days after the change. The Commission received no comments on this proposed rule, and is adopting it as proposed.

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The proposed rule was based on Exchange Act Rule 15b1-3, which is applicable to registered brokers and dealers and facilitates succession of registrants (

see

Registration Proposing Release, at footnote 72). Consistent with the use of the term in connection with broker-dealer registration, the term “succession” means that a successor firm acquires or assumes substantially all of the assets and liabilities of the predecessor firm.

Registration of Successors to Broker-Dealers and Investment Advisers,

Exchange Act Release No. 31661 (Dec. 28, 1992) (58 FR 7 (Jan. 4, 1993)).

2. Insolvency: Rule 15Fb2-6

The Commission proposed Rule 15Fb2-6 to provide a process through which an executor, administrator, guardian, conservator, assignee for the benefit of creditors, receiver, trustee in insolvency or bankruptcy or other fiduciary appointed or qualified by order, judgment or decree of a court of competent jurisdiction could continue the business of an SBS Entity.

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Specifically, proposed Rule 15Fb2-6 would have provided that the registration of the SBS Entity shall be deemed to be the registration of the appointed fiduciary to continue the business of the registered SBS Entity; provided that the fiduciary filed with the Commission, within 30 days after entering upon the performance of his or her duties, an amended Form SBSE, Form SBSE-A, or Form SBSE-BD, as appropriate, indicating the fiduciary's position with respect to management of the SBS Entity, along with a copy of the order, judgment, decree, or other document appointing the fiduciary. The Commission believes it is important to provide a fiduciary with time to close-out positions and/or wind down an SBS Entity's business. The Commission received no comments on this proposed rule, and is adopting it as proposed.

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The proposed rule was based on Exchange Act Rule 15b1-4, which applies to broker-dealer registrations. Rule 15b1-4 allows fiduciaries to wind-up broker-dealer businesses without the need to separately register as a broker-dealer (

see

Registration Proposing Release, at footnote 74).

F. Electronic Signatures

The Commission proposed Rule 15Fb1-1 to establish requirements regarding electronically submitted forms and certifications that contain signatures. Proposed paragraph (a) of Rule 15Fb1-1 would have specified the format required for signatures to, or within, electronic submissions (including signatures within the forms and certifications required by proposed Rules 15Fb2-1, 15Fb2-4 and 15Fb6-2, discussed above).

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Specifically,

proposed paragraph (a) of Rule 15Fb1-1 would have required that required signatures in electronic submissions be in typed form rather than manual format. In addition, that paragraph would have specified that signatures in an HTML, XML or XBRL document that are not required may, but are not required to, be presented in a graphic or image file within the electronic filing. Further, proposed paragraph (a) of Rule 15Fb1-1 would have specified that when used in connection with an electronic filing, the term “signature” meant an electronic entry in the form of a magnetic impulse or other form of computer data compilation of any letters or series of letters of characters comprising a name, executed, adopted or authorized as a signature.

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This rule is based on Section 302 of Regulation S-T [17 CFR 232.302] and is designed to require standard formatting of electronic signatures and provide the Commission with the ability to obtain additional documents to verify those signatures. Paragraph (a) of Section 302 generally requires that required signatures to, or within, any electronic submission (as specified) must be in typed form rather than manual format; signatures in an HTML document that are not required may, but are not required to, be presented in an HTML graphic or image file within the electronic filing, in compliance with the formatting requirements of the EDGAR Filer Manual; when used in connection with an electronic filing, the term “signature” means an electronic entry in the form of a magnetic impulse or other form of computer data compilation of any letters or series of letters or characters comprising a name, executed, adopted or authorized as a signature; and signatures are not required in unofficial PDF copies submitted in accordance with § 232.104. Paragraph (b) of Section 302 requires that each signatory to an electronic filing (as specified) shall manually sign a signature page or other document authenticating, acknowledging or otherwise adopting his or her signature that appears in typed form within the electronic filing; that such document shall be executed before or at the time the electronic filing is made and shall be retained by the filer for a period of five years; that, upon request, an electronic filer shall furnish to the Commission or its staff a copy of any or all documents retained pursuant to this section. Finally, paragraph (c) of Section 302 states that where the Commission's rules require a registrant to furnish to a national securities exchange or national securities

association paper copies of a document filed with the Commission in electronic format, signatures to such paper copies may be in typed form.

In addition, proposed paragraph (b) of Rule 15Fb1-1 would have required that each signatory to such an electronic filing manually sign a signature page or other document authenticating, acknowledging or otherwise adopting his or her signature that appeared in typed form within the electronic filing either before or at the time the electronic filing is made. Proposed paragraph (b) also would have required that the SBS Entity create the manually signed document when the electronic form is submitted, and furnish a copy of that document to the Commission upon request. Proposed paragraph (c) of Rule 15Fb1-1 would have prohibited a person required to provide a signature on an electronic submission from having another person sign the form or certification on his or her behalf pursuant to a power of attorney or other form of confirming authority.

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Finally, proposed paragraph (d) would have required that the SBS Entity retain the manually signed document associated with Schedules F and G of Forms SBSE, SBSE-A, or SBSE-BD, as appropriate, until at least three years after the form or certification has been replaced or is no longer effective.

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Paragraph (c) of Rule 15Fb1-1 is based on paragraph (c) of Exchange Act Rule 15d-14, which states, “[a] person required to provide a certification specified in paragraph (a), [. . .] may not have the certification signed on his or her behalf pursuant to a power of attorney or other form of confirming authority.”

The Commission received no comments on proposed Rule 15Fb1-1. The Commission believes that these provisions are necessary to assure that persons signing certifications can be held responsible for their statements. We therefore are adopting Rule 15Fb1-1 substantially as proposed, but with a modification in paragraph (a) to eliminate reference to conditional registration and to change the phrase “series of letters

characters” to “series of letters

characters” to correct this typographical error.

G. Forms

1. Form SBSE

As proposed, Form SBSE was generally based on Form BD (the consolidated Form used by broker-dealers to register with the Commission, states and SROs), as modified to recognize differences between the broker-dealer and security-based swap businesses. We explained in the Registration Proposing Release that using Form BD as a template for the registration of SBS Entities would be logical and efficient because Form BD has been used to gather and organize information concerning applicants' business operations to facilitate registration decisions, as well as ongoing examination and monitoring of registrations, and SBS Entities will be subject to many requirements similar to those that affect broker-dealers.

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Registration Proposing Release, at 65802.

The Commission re-proposed Form SBSE in the Cross-Border Proposing Release to add three questions and to add a new instruction to clarify that if an application is not filed properly or completely, it may be delayed or rejected.

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Two of the new questions were designed to elicit information with respect to substituted compliance. The other requested information on whether potential applicants are registered with or subject to the jurisdiction of a foreign financial regulatory authority, which would provide the Commission with information regarding other regulatory schemes that may be applicable to an applicant. In addition, the re-proposal modified proposed Schedule F to provide applicants with additional space to provide information on foreign regulators with which they may be registered or that otherwise have jurisdiction over them.

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Cross-Border Proposing Release, at 31027-8 and 31224-77.

The Commission requested comment on all aspects o

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