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

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2015-19661

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** August 14, 2015
- **Citation:** 80 FR 48964

## Text

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”
1

or

“major security-based swap participant”
2

without being registered with the Commission.
3

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].”

1

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”).

2

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.

3

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.
4

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.

4

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.
5

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.

5

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,
6

while also taking into account the Commodity Futures Trading Commission's (CFTC's) registration requirements for intermediaries.
7

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.

6
This includes rules promulgated under Sections 15(b) and 17(a) of the Exchange Act.

7
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.
8

The Commission later received 31 additional comment letters in response to the reopening of comment periods for certain proposals applicable to security-based swaps.
9

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.
10

8
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.

9

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”).

10

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.
11

Of those,

three commented on the proposed registration process and forms.
12

11
Twenty-five persons submitted the same comment letter in response to both the Release

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

12
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.
13

In particular, as explained more fully below, we are adopting the following rules:
14

13
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.

14
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.
15

15

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.
16

16
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.
17

17
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 supra,
footnote 7.

As proposed, an SBS Entity that has filed Form BD via FINRA's Central Registration Depository (or “CRD”) system to register as a broker-dealer would be able to use Form SBSE-BD to register with the Commission as an SBS Entity. Similarly, an SBS Entity that has filed Form 7-R with the CFTC (or its designee) to register as a swap dealer or major swap participant would be able to use Form SBSE-A to register with the Commission as an SBS Entity.
18

All others would be required to use Form SBSE to register with the Commission as an SBS Entity. Form SBSE is, necessarily, a longer form because the entities using it would not have already submitted any of the requisite information the Commission can otherwise access. In the Cross-Border Proposing Release, the Commission re-proposed these registration forms to add questions relating to substituted compliance.
19

18
According to the instructions on Form SBSE-A, the applicant would also need to attach a copy of the Form 7-R they filed with NFA to the Form SBSE-A.

19

See supra,
footnote 5 and accompanying text.

In general, commenters supported the application of SBS Entities via the use of these multiple Forms.
20

The Commission is adopting paragraph (a) of Rule 15Fb2-1, as proposed, with two modifications. We have added a sentence stating that applicants shall also file as part of their application the required certifications on Form SBSE-C (§ 249.1600c of this chapter). This is designed to clarify that the application for registration includes the certifications.
21

We also made a technical change to increase the precision of paragraph (a) of Rule 15Fb2-1 by replacing the phrase “in accordance with this section” with the phrase “in accordance with paragraph (c)” because paragraph (c) specifies the method by which applicants must file their application forms.
22

20

See
2011 Barnard Letter, at 3 and SIFMA Letter, at 4.

21
As discussed in more detail in Section II.A.iii. below, the requirement that an applicant file the certifications on Form SBSE-C at the same time they file an application on Form SBSE, SBSE-A, or SBSE-BD, as appropriate, facilitates conditional registration upon filing, which is designed to assure that existing entities are not required to cease operations pending the Commission's consideration of their application. We have also moved the CCO Certification Regarding Associated Persons, which had been included as Schedule G to the Forms, into Form SBSE-C. As proposed, that certification would have been required to be provided as part of Forms SBSE, SBSE-A, and SBSE-BD.

22

See infra,
Section II.G. for a discussion of the information required on each of the Forms.

ii. Senior Officer Certification

Proposed Rule 15Fb2-1(b)(1) and Form SBSE-C would have required that a knowledgeable senior officer of the SBS Entity certify that, after due inquiry, he or she has reasonably determined that the SBS Entity has the operational, financial, and compliance capabilities to act as an SBS Entity. In addition, the proposed Rule would have required that the senior officer certify that he or she had documented the process by which he or she reached that determination.
23

23
As proposed, this was a one-time certification (
see
Registration Proposing Release, 76 FR at 65810), where a senior officer would be certifying as to the SBS Entity's capabilities at the time of the certification (
see
Registration Proposing Release, at 65789-91).

Two commenters took issue with the proposed Senior Officer Certification.
24

One commenter indicated that it believes the Senior Officer Certification is unnecessary, overly burdensome, and unduly vague and indeterminate.
25

This commenter pointed out that the untested nature of the Dodd-Frank regulatory regime would make it difficult for any senior officer to confidently or meaningfully certify that an SBS Entity would have the necessary capabilities.
26

Both commenters contended that the Commission had not adequately defined “operational, financial, and compliance capabilities” nor what constitutes “due inquiry.”
27

Further, one of the commenters suggested that, as an alternative, the Commission require a “policies and procedures”-type certification, such as that set forth in Question 21 to the Registration Proposing Release.
28

24

See, e.g.,
SIFMA Letter, at 5-7; 2011 and the Better Markets Letter, at 5-6.

25

See, e.g.,
SIFMA Letter, at 5-7.

26

See, e.g.,
SIFMA Letter, at 5.

27

See supra,
footnote 24.

28

See
SIFMA Letter, at 6; and Registration Proposing Release, 76 FR at 65791. In pertinent part, Question 21 asks, “Should the Senior Officer Certification instead require that a senior officer certify that `to the best of his or her knowledge, after due inquiry, the security-based swap dealer or major security-based swap participant has developed and implemented written policies and procedures reasonably designed to prevent violation of federal securities laws, the rules thereunder, and applicable self-regulatory organization rules?' ”

As more fully discussed below, after considering the comments, we believe that we can still achieve the objective of the Senior Officer Certification, while avoiding undue uncertainty over what the senior officer is certifying to, by adopting a certification requirement similar to the one articulated in Question 21 in the Registration Proposing Release.

Specifically, the Senior Officer Certification requirement, as adopted in Rule 15Fb2-1(b) and Form SBSE-C, requires that a senior officer
29

certify that: (1) After due inquiry, he or she has reasonably determined that the security-based swap dealer or major security-based swap participant has developed and implemented written policies and procedures reasonably designed to prevent violation of federal securities laws and the rules thereunder, and (2) he or she has documented the process by which he or she reached such determination.
30

The language of this certification is similar to the language in Question 21, and to the language that was supported by the commenter.
31

However, we retained the requirement for the senior officer to have made a reasonable determination from the proposed certification, and modified the language from what was presented in Question 21 to eliminate the reference to “applicable self-regulatory organization rules” because SBS Entities generally will not be subject to those rules.
32

In addition, we retained the proposed requirement that the senior officer certify that he or she had documented the process by which he or she reached his or her determination. We received no comment on that aspect of the certification and believe it would be helpful to the staff when performing examinations to assure compliance with the certification requirement.

29
For purposes of this certification requirement, the term “senior officer” is intended to cover only the most senior executives in the organization, such as an applicant's chief executive officer, chief financial officer, chief legal officer, chief compliance officer, president, or other person at a similar level. Additionally, the person who signs the certification must have the legal authority to bind the applicant.

30

See
Form SBSE-C, Certification 1. Similar to what was proposed, this is a one-time certification, for purposes of registration, where the senior officer certifies as to his or her understanding of the SBS Entity's policies and procedures at the time the certification is signed. While this certification is only required at the time of initial registration, Exchange Act Section 15F(k)(2) establishes duties for a CCO which include, among other things, a requirement that the CCO ensure compliance with Exchange Act Section 15F and the regulations thereunder relating to security-based swaps, including each rule prescribed by the Commission under this section. In addition, the Commission has proposed rules that would require each SBS Entity to establish, maintain and enforce a system to supervise, and to supervise diligently, the business of the SBS Entity involving security-based swaps. Those proposed rules would require that this system be reasonably designed to achieve compliance with applicable federal securities laws and the rules and regulations thereunder.
See
Proposed Rule 15Fh-3(i). In addition, the proposed rules would require that an SBS Entity establish, maintain, and enforce written policies and procedures addressing the types of business in which the security-based swap dealer or major security-based swap participant is engaged that are reasonably designed to achieve compliance with applicable securities laws and the rules and regulations thereunder.
See
Proposed Rule 15Fh-3(i)(2)(iii). The proposed rules also indicate that an SBS Entity would not be deemed to have failed to diligently supervise any other person if, among other things, it has established and maintained written policies and procedures, and a documented system for applying those policies and procedures, that would reasonably be expected to prevent and detect, insofar as practicable, any violation of the federal securities laws and the rules and regulations thereunder relating to security-based swaps.
See
Proposed Rule 15Fh-3(i)(3).
See also, Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants,
Exchange Act Release No. 64766 (Jun. 29, 2011), 76 FR 42396 (Jul. 18, 2011) (the “Business Conduct Standards Proposing Release”), at 42419 through 42421.

31

See supra,
footnote 28.

32
SBS Entities that are also registered as broker-dealers are subject to the rules of a self-regulatory organization (“SRO”) of which they are a member due to their being a registered broker-dealer.

We believe the certification standard that we are adopting in Rule 15Fb2-1(b) and Form SBSE-C is more concrete and understandable than the one that we proposed.
33

Thus, it should be easier for SBS Entities to implement. Further, we believe that the Senior Officer Certification we are adopting is reasonably designed to provide assurances that each SBS Entity has put in place a framework to enable it to operate in compliance with the applicable laws, rules and regulations. The certification requirement should help to protect both investors and markets from potential problems arising from SBS Entities that may have not put in place a framework that enables them to operate their security-based swap business in compliance with their regulatory obligations.
34

Specifically, we believe that receipt of the Senior Officer Certification in Form SBSE-C, which requires that a senior officer certify that he or she has reasonably determined that the SBS Entity has developed and implemented written policies and procedures reasonably designed to prevent violation of federal securities laws and the rules thereunder, is further support that an SBS Entity has undertaken a thorough review of applicable regulations, including any rules adopted by the Commission relating to minimum operational, financial, and compliance standards.
35

In essence, this Senior Officer Certification is designed to help assure that each SBS Entity has thought through what it needs to do to be able to operate in compliance with those requirements applicable to a registered SBS Entity under the federal securities laws (including those related to operations, financial and compliance standards), and has developed and implemented written policies and procedures reasonably designed to prevent violation of those laws, rules, and regulations.
36

33
This standard is used in Exchange Act Section 15(b)(4)(E) and we believe industry participants are familiar with it.

34

See
Registration Proposing Release, at 65789 through 65790.

35
The Commission has separately proposed rules to establish financial, operational and compliance standards for SBS Entities, with which these entities would need to comply upon registration, if the Commission were to adopt the proposed rules. In the Registration Proposing Release, the Commission provided guidance regarding the meaning of the terms operational capability (at footnote 26), financial capability (at footnote 27), and compliance capability (at footnote 28). In its guidance regarding operational capability (or standards), the Commission stated that it expected “that a key foundation for the Senior Officer Certification would be the capability of an SBS Entity to comply with the obligations that would be imposed by the Trade Acknowledgment Proposing Release [
Trade Acknowledgment and Verification of Security-Based Swap Transactions,
Exchange Act Release No. 63727 (Jan. 14, 2011) (76 FR 3859, Jan. 21, 2011) (the “Trade Acknowledgment Proposing Release”)], if adopted, other legal obligations applicable to the operations of an SBS Entity, and the capability of the SBS Entity to conduct its business as represented in the SBS Entity's application for ongoing registration. This would include rules proposed in
Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based Swap Participants, and Broker-Dealers; Capital Rule for Certain Security- Based Swap Dealers,
Exchange Act Release No. 71958, (Apr. 17, 2014) (79 FR 25194, May 2, 2014) (the “Books and Records Proposing Release”). In its guidance regarding financial capability, the Commission indicated that it would separately propose capital rules for SBS Entities (
See e.g., Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers,
Exchange

Act Release No. 68071 (Oct. 18, 2012), 77 FR 70214 (Nov. 23, 2012) (the “Capital and Margin Proposing Release”). In its guidance regarding compliance capability, the Commission referenced the Business Conduct Standards Proposing Release.

36
In the Business Conduct Standards Proposing Release the Commission proposed rules to prescribe business conduct standards for SBS Entities, as authorized under Exchange Act Section 15F(h) and 15F(k), including rules that relate to diligent supervision of the business of the registered SBS Entity (provided for in Exchange Act Section 15F(h)(1)(B)) and rules establishing the duties of the SBS Entity's CCO (provided for in Exchange Act Section 15F(k)). The Commission intends to clarify the obligations underlying these rules when it adopts rules under Exchange Act Sections 15F(h) and 15F(k).

Another commenter, however, contended that, while the proposed process to require an application and certification would establish a registration process that is simple and efficient, the approach taken would be ineffective and would rely too much on the industry and on each entity seeking registration.
37

This commenter suggested that the Commission independently review SBS Entities prior to granting registration.
38

This commenter argued that requiring SEC pre-registration investigations would harmonize the registration process for SBS Entities with others (including SRO review of broker-dealers and NFA review of swap entities), reduce regulatory arbitrage, and protect investors. This commenter also suggested, in the alternative, that we should require each SBS Entity to have an independent auditor conduct a pre-registration review.
39

37

See
2011 Better Markets Letter, at 2.

38

Id.,
at 3-4.

39

Id.,
at 5. The commenter did not specify what a pre-registration review by an independent auditor should entail.

The Commission is not, at this time, adopting the commenter's suggestion that the Commission conduct a pre-registration examination of each applicant, or that we require an applicant to obtain a pre-registration review from an independent auditor.
40

The Commission does not presently conduct pre-registration reviews for other types of market intermediary applicants, such as investment advisers, municipal advisors and transfer agents, or require that they obtain a pre-registration examination from an independent auditor. We recognize that SROs perform pre-registration reviews for broker-dealers, however, the Exchange Act does not create an SRO structure for SBS Entities.
41

The Commission believes that the Senior Officer Certification that applicants must submit should help ensure that each applicant itself has thoroughly reviewed what it must do to comply with applicable federal securities laws and the rules thereunder. In addition, the CCO Certification Regarding Associated Persons is designed to provide the Commission with representations that each applicant has determined that none of its associated persons who effect or are involved in effecting security-based swaps on its behalf is subject to a statutory disqualification, unless otherwise specifically provided by Commission rule, regulation or order.
42

Additionally, the Commission will review all of the documents and other information provided by the applicants on the required Form. The Commission also may, based on an initial assessment of an application, request follow-up information from the applicant.
43

The Commission believes that its review of the information provided in the application, coupled with the Senior Officer Certification as discussed above, is a reasonable approach to registration.

40
As with any new class of registrants, Commission staff will incorporate oversight of those registrants into its examination program to review for compliance with the federal securities laws, rules and regulations.

41

See infra,
footnote 46 and accompanying text.

42

See infra,
Section II.B.3.

43
In the case of an entity registered with the CFTC through NFA, the staff may contact the CFTC or NFA to discuss the application.

As noted above, commenters asked that we clarify what we mean by “due inquiry” in the certification requirement.
44

Essentially, the senior officer should perform diligence regarding the content of what he or she is required to certify. We believe, however, that SBS Entities should have flexibility to determine the steps that the senior officer who must sign the certification will take to be comfortable that he or she has made appropriate inquiries regarding the SBS Entity's written policies and procedures in order to make the certification. For instance, a senior officer might review the SBS Entity's written policies and procedures and/or speak with the SBS Entity's legal and compliance personnel regarding the SBS Entity's written policies and procedures, how they were developed, and how they have been implemented by the SBS Entity. Alternatively, there may be one or more senior officers that are already familiar with the SBS Entity's written policies and procedures and how they have been developed and implemented. It would not be appropriate for a senior officer with little or no knowledge of the firm's written policies and procedures, or its processes to comply with applicable regulations, to sign this certification without taking any steps to learn more information. In light of this, we also have eliminated the requirement that the senior officer signing the form be “knowledgeable” because inclusion of the requirement that the senior officer be “knowledgeable” in addition to requiring that the senior office make “due inquiry” would be unnecessary.

44

See
SIFMA Letter at 6.

One commenter also contended that this requirement differed from the CFTC's registration requirements for swap entities, and that the lack of a similar certification requirement in the CFTC's proposed registration rule “provides further evidence that such a requirement is not needed to promote financial stability or investor protection.”
45

While this certification requirement differs from rules adopted by the CFTC to register swap dealers and major swap participants, the Commodity Exchange Act (“CEA”) and the Exchange Act differ in some respects. While the provisions in the CEA directly relating to swap dealers and major swap participants are similar to those in the Exchange Act relating to SBS Entities, other CEA provisions provide the CFTC with the ability to require swap dealers and major swap participants to become members of NFA, and thus leverage the existing registration process and forms (including a pre-registration review by NFA) used by other CFTC registrants.
46

However, Exchange Act Sections 15A(a) and 3(a)(3)(B) limit the membership of national securities associations to brokers and dealers. In light of the fact that SBS Entities are not subject to SRO oversight, and thus are not subject to the registration review process of an SRO, the adopted Senior Officer Certification is designed to cause SBS Entities to consider whether they have taken steps

to thoroughly review the federal securities laws and the rules thereunder that are applicable to SBS Entities and develop and implement written policies and procedures that are reasonably designed to prevent violation of the those laws, rules and regulations.

45

See id.

46
CEA Section 17(b)(2) permits any CFTC registrant to become a member of a registered futures association (
i.e.,
NFA) and CEA Section 8a(5) gives the CFTC rulemaking authority “to effectuate any of the provisions or to accomplish any of the purposes of this Act.” In addition, CEA Section 4s(b)(4) gives the CFTC general authority to prescribe rules applicable to swap dealers and major swap participants.

iii. Conditional Registration

The Commission proposed in Rule 15Fb2-1 a conditional registration requirement that would have required an SBS Entity to apply for conditional registration by submitting a complete Form SBSE, Form SBSE-A, or Form SBSE-BD to the Commission, then file a Senior Officer Certification (on Form SBSE-C)
47

before the Last Compliance Date
48

to facilitate the Commission's review of each firm's application for ongoing, permanent registration. The Commission proposed conditional registration as a way to register SBS Entities within the Dodd-Frank Act deadline, while allowing SBS Entities to come into compliance with new rules on each respective compliance date and then providing the certification after the last compliance date.
49

47
Form SBSE-C was designed to provide a standard format by which SBS Entities could file their Senior Officer Certifications (discussed in Section II.1.ii.,
supra
).

48
The term “Last Compliance Date” was defined, in paragraph (e) to proposed Rule 15Fb2-1, to mean the latest date, designated by the Commission, by which SBS Entities must comply with any of the initial, substantive rules promulgated under Section 15F.

49

See also infra
Sections II.A.1.v., which discusses the proposed standard for granting conditional registration in proposed Rule 15Fb2-1(e)(1), and II.C.1., which discusses the proposed timing of conditional registration in proposed Rule 15Fb3-1.

The Commission is adopting a conditional registration process, but with changes to take into account the adopted definitions of SBS Dealer and Major SBS Participant, the timing of the compliance date for registration (
see
Section III below), and the modification to the certification.

Pursuant to Rules 3a71-2 and 3a67-8, upon filing of a complete application, a person is deemed to be an SBS Dealer or a Major SBS Participant, respectively.
50

However, Exchange Act Section 15F(a) makes it unlawful for a person to act as an SBS Entity unless the person is registered as such with the Commission. Consequently, we believe it is necessary and appropriate to provide conditional registration for SBS Entities upon the filing of a complete application on Form SBSE, SBSE-A, or SBSE-BD, as applicable, and Form SBSE-C so that existing entities are not required to cease operations during the Commission's consideration of their application. Thus, we are adopting a conditional registration process to permit applicants to continue engaging in security-based swap activities after they file an application to register as an SBS Entity but before the Commission acts on their application for ongoing registration.

50
Pursuant to Exchange Act Rule 3a71-2(b), a person will be deemed not to be a security-based swap dealer until the earlier of the date on which it submits a complete application for registration or two months after the end of the month in which that person becomes no longer able to take advantage of the
de minimis
exception. Rule 3a71-2(b). Similarly, a person that meets the criteria in Rule 3a67-1(a) to be a major security-based swap participant will be deemed not to be a major security-based swap participant until the earlier of the date on which it submits a complete application for registration or two months after the quarter in which it met those criteria.
See
Rule 3a67-8.
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,
51

will be conditionally registered.
52

51
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.

52
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.”
53

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.”

53

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.
54

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.

54

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.
55

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.

55
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)).
56

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.
57

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

56

See
Registration Proposing Release, 76 FR at 65806.

57

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.
58

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.

58
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.
59

59
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.
60

60
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.
61

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

determine whether to deny conditional registration.

61

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.
62

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.
63

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.

62

See infra
footnote 78 and accompanying text.

63
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.
64

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.

64

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.
65

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.”
66

65

See
IIF Letter, at 3-4.

66

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.
67

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.”
68

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.
69

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.

67

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”).

68

See
Cross-Border Adopting Release, at 47288.

69

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.
70

Accordingly, we are not providing for substituted compliance in the context of the registration requirement.
71

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.

70

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)).

71
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.
72

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.
73

72

See
Registration Proposing Release, footnote 54.

73

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,
74

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.
75

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.
76

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.

74

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

75
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.

76

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.
77

77
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.
78

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.
79

78

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))”).

79
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.
80

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.
81

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.

80
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.

81
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.
82

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

82
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.
83

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.
84

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.
85

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.
86

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.”
87

83

See
SIFMA Letter, at 7-9.

84

Id.

85

Id.

86

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

87

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.
88

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.
89

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.

88

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.

89
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).
90

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.
91

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.”
92

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.
93

90

See
Registration Proposing Release, question 90.

91

See
Registration Proposing Release, questions 91 and 93.

92

See
SIFMA Letter, at 8.

93
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.
94

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.

94

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.
95

95

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.
96

96
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 infra
Section III.B., which discusses the relationship between the compliance date and proposed Rule 194.

We therefore are adopting a rule that is designed to facilitate an orderly registration process by minimizing the potential for market disruption in a targeted manner. Specifically, Rule 15Fb6-1 is applicable only to SBS Entity associated persons that are not natural persons, and the relief provided by the rule will only be available to firms at the time that they submit applications to register as SBS Entities. If an SBS Entity is associated with an entity that effects or is involved in effecting security-based swaps on its behalf that becomes subject to a statutory disqualification after the compliance date of these rules but prior to the SBS Entity registering with the Commission, if an SBS Entity that is registered wants to associate with an entity that is subject to statutory disqualification that will effect or be involved in effecting security-based swaps on its behalf, or if an entity with which an SBS Entity is associated and that effects or is involved in effecting security-based swaps on its behalf becomes subject to statutory disqualification after the SBS Entity has registered, the SBS Entity would need to seek relief from the Commission.
97

97

Id.

We included the phrase “unless otherwise ordered by the Commission” to make clear that the rule does not preclude the Commission from exercising its authority under Exchange Act Sections 15F(l) and 21 to take certain actions against associated persons of SBS Entities, including barring them from association with an SBS Entity, if it finds the associated person to have engaged in certain enumerated activities. Likewise, we have also included the phrase “provided that the statutory disqualification(s), described in Sections 3(a)(39)(A) through (F) of the Securities Exchange Act of 1934, occurred prior to the compliance date of this rule” to make clear that this rule does not apply with respect to statutory disqualifications of non-natural associated persons of the SBS Entity that occur in the future (
i.e.,
after the compliance date of the registration rules).

Finally, the SBS Entity is required to identify, on Schedule C of Form SBSE, Form SBSE-A, or Form SBSE-BD, as appropriate, those non-natural persons associated with it, as of the date it submits an application for registration, that are subject to statutory disqualification and that it permits to effect or be involved in effecting security-based swaps on its behalf under the exclusion provided for in Rule 15Fb6-1. This condition is designed to provide the Commission with information to assist in its oversight of SBS Entities,
98

and to provide market participants with information regarding the extent to which an SBS Entity relies on this provision.

98
As discussed in more detail in Section II.G. below, the Commission will use the information provided in the application for registration, including Schedule C, as part of its ongoing oversight of an SBS Entity (for example by assisting representatives of the Commission in the preparation for examination of an SBS Entity, or more broadly to monitor risks specific to a firm or to the market more generally or to assess trends across firms).

The Commission believes that the approach in Rule 15Fb6-1 appropriately considers the potentially competing objectives of facilitating an orderly

registration process by minimizing the potential for market and counterparty disruption while maintaining strong investor protections. In particular, while the rule provides targeted relief with respect to non-natural person entities when an SBS Entity initially registers with the Commission, it is not applicable to associated persons who are natural persons and would not apply to entities an SBS Entity may want to associate with after it is registered nor to statutorily disqualifying events that occur after the compliance date of the rule.

ii. Involved in Effecting Transactions

The Commission has previously interpreted the term “effecting transactions” in the context of securities transactions to include a number of activities, ranging from identifying potential purchasers to settlement and confirmation of a transaction.
99

The statutory provision on statutory disqualification in Section 15F(b)(6) of the Exchange Act includes the phrase “involved in effecting,” separately and in addition to “effecting.” We understand the inclusion of two separate terms in Section 5F(b)(6) to mean that the terms have different meanings, and that the term “involved in effecting” includes a broader range of activities than simply “effecting” security-based swap transactions. Further, while the commenter suggested that we narrow the scope of the term “involved in effecting,” it did not suggest that we treat “effect” and “involved in effecting” as having the same meaning.
100

99

See, e.g.,
Temporary Rule 11a2-2(T), which states, “a member [of a national securities exchange] `effects' a securities transaction when it performs any function in connection with the processing of that transaction, including, but not limited to, (1) transmission of a order for execution, (2) execution of the order, (3) clearance and settlement of the transaction, and (4) arranging for the performance of any such function.” 17 CFR 240.11a2-2(T) (2014), and
Definition of Terms in and Specific Exemptions for Banks, Savings Associations, and Savings Banks Under Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934,
Securities Exchange Act Release No. 44291 (May 11, 2001), 66 FR 27760, 27772-73 (May 18, 2001) (where the Commission stated that “[e]ffecting transactions in securities includes more than just executing trades or forwarding securities orders to a broker-dealer for execution. Generally, effecting securities transactions can include participating in the transactions through the following activities: (1) Identifying potential purchasers of securities; (2) screening potential participants in a transaction for creditworthiness; (3) soliciting securities transactions; (4) routing or matching orders, or facilitating the execution of a securities transaction; (5) handling customer funds and securities; and (6) preparing and sending transaction confirmations (other than on behalf of a broker-dealer that executes the trades).” (footnotes omitted)).

100

See
SIFMA Letter, at 8.

Generally, we view the types of activities covered by the term “involved in effecting” in Section 15F(b)(6) to relate directly to key aspects of the overall process of effecting security-based swap transactions, including sales, booking and cash and collateral management activities. We believe it would be inappropriate to focus solely on the persons that effect transactions and not also on those that are involved more broadly in these key aspects of the process necessary to facilitate transactions, because persons involved in these key aspects of the process have the ability, through their conduct (intentional or unintentional), to increase risks to investors, counterparties and the markets. However, we are further clarifying the meaning of the term “involved in effecting,” as discussed below.

In the Registration Proposing Release we explained our view generally that “involved in effecting” included “persons on a trading desk actively involved in effecting security-based swap transactions.” Upon further consideration, we did not mean to imply (by use of the term “actively”) that there is some minimum amount of trading a person working on a trading desk must be involved with to be considered “involved in effecting” security-based swap transactions. In general, our focus is on the type of activity, not the amount of activity. In addition, we believe it is preferable to use the term “executing” because it is more precise and eliminates the perceived definitional circularity. We believe it is appropriate to clarify our guidance in this manner because the totality of the guidance provided covers other key aspects of the overall process of effecting security-based swap transactions.

We also are clarifying that by including “persons assuring that the SBS Entity's security-based swap business operates in compliance with applicable regulations,” we intended to include only “persons directly supervising” the persons engaged in the other, specified activities. We believe that it is appropriate to view the scope more narrowly rather than to suggest that it includes all persons at an SBS Entity in any way involved in assuring compliance with applicable rules. Consequently, we believe the term “involved in effecting security-based swaps” generally means engaged in functions necessary to facilitate the SBS Dealer's or Major SBS Participant's security-based swap business, including, but not limited to the following activities: (1) Drafting and negotiating master agreements and confirmations; (2) recommending security-based swap transactions to counterparties; (3) being involved in executing security-based swap transactions on a trading desk; (4) pricing security-based swap positions; (5) managing collateral for the SBS Entity; and (6) directly supervising persons engaged in the activities described in items (1) through (5) above.

iii. Licensing

Another commenter suggested that the Commission should establish licensing requirements.
101

After considering the comment, the Commission is not at this time adopting licensing requirements for associated persons of SBS Entities. While SROs generally establish licensing and qualification requirements for those persons associated with their member broker-dealers,
102

there is no similar SRO regulatory system for security based swap dealers.
103

In addition, the Commission does not have licensing or qualification requirements for other market intermediaries registered with it that are not subject to regulation by an SRO. Furthermore, as discussed above, the CCO certification should provide assurance that associated persons of SBS Entities that effect or are involved in effecting security-based swap transactions are not statutorily disqualified by attesting that the firm has itself performed this review. We believe that a CCO would have incentive to provide an accurate certification due to potential regulatory consequences. Consequently, we do not believe a licensing scheme is necessary at this time, and we are not adopting a licensing scheme.

101

See
the 2011 Better Markets Letter, at 7-8.

102

See e.g.,
FINRA's NASD Rule 1031 and FINRA Rule 1230(b)(6) (applicable to associated persons of broker-dealers), and MSRB Rules G-2 and G-3 (applicable to associated persons of municipal securities brokers and municipal securities dealers).
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

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

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

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2015-19661. Public record. Not legal advice.