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

Federal RegisterAug 25, 2015

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 201

[Release No. 34-75612; File No. S7-14-15]

RIN 3235-AL76

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

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

SUMMARY:

Pursuant to Section 15F(b)(6) of the Securities Exchange Act of 1934 (“Exchange Act”), as added by Section 764(a) of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), the Securities and Exchange Commission (“Commission”) is proposing Rule of Practice 194. Proposed Rule of Practice 194 would provide a process for a registered security-based swap dealer or major security-based swap participant (collectively, “SBS Entity”) to make an application to the Commission for an order permitting an associated person who is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on behalf of the SBS Entity. Proposed Rule of Practice 194 also would exclude an SBS Entity, subject to certain limitations, from the prohibition in Exchange Act Section 15F(b)(6) with respect to associated persons that are not natural persons for a period of 30 days following the associated person becoming subject to a statutory disqualification or 30 days following the person that is subject to a statutory disqualification becoming an associated person of an SBS Entity; for a period of 180 days following the filing of a complete application under proposed Rule of Practice 194 and notice if the application and notice are filed within the same 30-day time period; and for a period of 180 days following the filing of a complete application with, or initiation of a process by, the Commodity Futures Trading Commission (“CFTC”), a self-regulatory organization (“SRO”) or a registered futures association pending a final decision with respect to an application or process with respect to the associated person for the membership, association, registration or listing as a principal, where the application has been filed or process started prior to or within the same 30-day time period and a notice has been filed with the Commission within the same 30-day time period. The proposed Rule of Practice 194 also would provide, in certain circumstances, for an extension of the temporary exclusion from the prohibition in Exchange Act Section 15F(b)(6) with respect to associated persons that are not natural persons to comply with the prohibition in Section 15F(b)(6). Finally, proposed Rule of Practice 194 would provide that, subject to certain conditions, an SBS Entity may permit an associated person that is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on its behalf, without making an application pursuant to the proposed rule, where the Commission, CFTC, an SRO or a registered futures association has granted a prior application or otherwise granted relief from a statutory disqualification with respect to that associated person.

DATES:

Comments must be received on or before October 26, 2015.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's Internet comment form (

http://www.sec.gov/rules/other.shtml

); or

• Send an email to

rule-comments@sec.gov

. Please include File Number S7-14-15 on the subject line; or

• Use the Federal Rulemaking Portal (

http://www.regulations.gov

). Follow the instructions for submitting comments.

Paper Comments

• Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-14-15. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (

http://www.sec/gov/rules/other.shtml

). Comments are also available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should only submit information that you wish to make publicly available.

Studies, memoranda or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission's Web site. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at

www.sec.gov

to receive notifications by email.

FOR FURTHER INFORMATION CONTACT:

Paula R. Jenson, Deputy Chief Counsel, Joseph Furey, Assistant Chief Counsel, Bonnie Gauch, Senior Special Counsel, Joanne Rutkowski, Senior Special Counsel, Natasha Vij Greiner, Branch Chief, Jonathan C. Shapiro, Special Counsel, at 202-551-5550, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

The Commission is proposing for public comment Rule of Practice 194 [17 CFR 201.194], under Exchange Act Section 15F(b)(6) [15 U.S.C. 78o-10(b)(6)].

Table of Contents

I. Background

A. Registration Proposing Release

B. Registration Adopting Release

II. Discussion

A. Overview of Proposed Rule

B. Consistency With Other Processes for Permitting Association Notwithstanding a Statutory Disqualification or Other Bar

1. Rule of Practice 193

2. FINRA Eligibility Proceedings

3. CFTC's Approach to Associated Persons of Swap Entities Subject to a Statutory Disqualification

C. Proposed Rule of Practice 194

1. Scope of the Rule

2. Required Showing

3. Form of Application for Natural Persons and Entities

4. Written Statement for Natural Persons and Entities

5. Prior Applications or Processes

6. Notification to Applicant and Written Statement

7. Orders under Proposed Rule of Practice 194

8. Temporary Exclusion for Other Persons

9. Notice in Lieu of an Application

10. Note to Proposed Rule of Practice 194

III. Request For Comment

IV. Paperwork Reduction Act

A. Summary of Collection of Information

B. Proposed Use of Information

C. Respondents

D. Total Burden Estimates Relating to Proposed Rule of Practice 194

E. Confidentiality

F. Request for Comment

V. Economic Analysis

A. Introduction

B. General Economic Considerations

C. Economic Baseline

1. Affected Participants

2. Incidence of Disqualification

3. Existing Regulatory Frameworks

D. Benefits, Costs, and Effects on Efficiency, Competition, and Capital Formation

1. Anticipated Benefits

2. Anticipated Costs

3. Effects on Efficiency, Competition, and Capital Formation

E. Rule Alternatives

1. Relief for All Entities from Exchange Act Section 15F(b)(6)

2. A Modified Temporary Exclusion

3. Relief for Non-Investment-Related Offenses

4. No Relief for CFTC, SRO, Registered Futures Association Review

5. No Relief for Entities from Exchange Act Section 15(F)(b)(6)

F. Request for Comment

VI. Regulatory Flexibility Act Certification

A. Regulatory Framework

B. Assessment of Impact

C. Certification and Request for Comment

VII. Consideration of Impact on the Economy

VIII. Statutory Authority

I. Background

Exchange Act Section 15F(b)(6), as added by Section 764(a) of the Dodd-Frank Act, makes it unlawful for an SBS Entity to permit an associated person

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, “[e]xcept to the extent otherwise specifically provided by rule, regulation, or order of the Commission.”

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

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.

See

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

Id.

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

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

To date, however, the Commission has not established a separate, more specific rule by which an SBS Entity may apply to the Commission to permit an associated person who is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on behalf of the SBS Entity. This proposal, if adopted, would establish such a rule. The proposal would specify the process for obtaining relief from the statutory prohibition in Exchange Act Section 15F(b)(6), including by setting forth the required showing, the form of application and the items to be addressed with respect to associated persons that are natural persons and that are not natural persons.

The proposal would provide a temporary exclusion from the prohibition in Exchange Act Section 15F(b)(6) that would apply both to the case where (i) an associated person entity that is already effecting or involved in effecting security-based swaps on behalf of an SBS Entity becomes subject to a statutory disqualification, and (ii) an entity that is already subject to a statutory disqualification becomes an associated person that is effecting or involved in effecting security-based swaps on behalf of an SBS Entity. Specifically, an SBS Entity would be temporarily excluded from the prohibition in Exchange Act Section 15F(b)(6) with respect to associated person entities (i) for a period of 30 days following the associated person becoming subject to a statutory disqualification or 30 days following the person that is subject to a statutory disqualification becoming an associated person of an SBS Entity; (ii) for a period of 180 days following the filing of a complete application under proposed Rule of Practice 194 and notice if the application and notice are filed within the same 30-day time period; and (iii) for a period of 180 days following the filing of a complete application with, or initiation of a process by, the CFTC, an SRO

or a registered futures association with respect to the associated person for the membership, association, registration or listing as a principal, where the application has been filed or process started prior to or within the same 30-day time period and a notice is filed with the Commission within the same 30-day period. The proposed Rule of Practice 194 also provides, in certain circumstances, an extension of the temporary exclusion from the prohibition in Exchange Act Section 15F(b)(6) with respect to associated person entities to comply with the prohibition in Section 15F(b)(6) in cases where the temporary exclusion expires or where there is an adverse decision.

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

Finally, this proposal would provide that an SBS Entity may permit, subject to certain conditions, an associated person (whether a natural person or an entity) that is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on behalf of the SBS Entity, without making an application, where the Commission, CFTC, an SRO or a registered futures association has granted a prior application or otherwise granted relief from a statutory disqualification with respect to the associated person.

A. Registration Proposing Release

On October 12, 2011, the Commission proposed requirements for an SBS Entity to register with the Commission, as well as additional provisions related to registration.

In the Registration Proposing Release, the Commission solicited comment on potentially developing an alternative process, in accordance with Exchange Act Section 15F(b)(6), to establish exceptions to the statutory prohibition in Exchange Act Section 15F(b)(6).

In doing so, the Commission noted that Section 15F(b)(6) expressly authorizes the Commission to establish exceptions to the prohibition by rule, regulation or order.

The Commission also solicited comment on whether the Commission should consider excepting entities from the statutory prohibition in Exchange Act Section 15F(b)(6).

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) (“Registration Proposing Release”).

Id.

at 65797.

Id.

at 65797 (Question 90).

The Commission received one comment relevant to potentially developing an alternative process to establish exceptions to Exchange Act Section 15F(b)(6).

The commenter

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

Moreover, the commenter stated that the definition of “associated person” could be read to extend not just to natural persons, but also to non-natural persons (

e.g.,

entities) that are affiliates of SBS Entities.

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

See

Letter from Kenneth E. Bentsen, Jr., Securities Industry and Financial Markets Association, dated December 16, 2011 (“12/16/2011 SIFMA Letter”), at 8.

Id.

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

To address these concerns, the commenter stated that the Commission should narrow the scope of the associated persons considered to be effecting or involved in effecting security-based swaps, or, alternatively, exercise its statutory authority to grant exceptions to the general ban on an SBS Entity from associating with a person subject to a statutory disqualification.

Id.

B. Registration Adopting Release

Concurrent with the issuance of this proposing release,

the Commission is adopting registration requirements for SBS Entities.

Several aspects of the adopted rules relate to the statutory prohibition in Exchange Act Section 15F(b)(6). In particular, the Commission adopted Exchange Act Rule 15Fb6-1,

which provides that, unless otherwise ordered by the Commission, an SBS Entity, when it files an application to register with the Commission as a security-based swap dealer or major security-based swap participant, may permit an associated person 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) under Exchange Act Section 3(a)(39)(A) through (F)

occurred prior to the compliance date set forth in the Registration Adopting Release. SBS Entities seeking to avail themselves of the relief for disqualified associated entities will have to provide a list of disqualified associated entities, which will be made public by the Commission as part of the registration application.

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

Temporary Exemptions and Other Temporary Relief, Together With Information on Compliance Dates for New Provisions of the Securities Exchange Act of 1934 Applicable to Security-Based Swaps, Exchange Act Release No. 64678 (June 15, 2011), 76 FR 36287, 36301, 36305-07 (June 22, 2011) (“Temporary Exemptions Order”). Under the Temporary Exemptions Order, persons subject to a statutory disqualification who were, as of July 16, 2011, associated with an SBS Entity and who effected or were involved in effecting security-based swaps on behalf of such SBS Entity could continue to be associated with an SBS Entity until the date upon which rules adopted by the Commission to register SBS Entities became effective. The Commission will consider separately the expiration date of the temporary relief.

Registration Process for Security-Based Swap Dealers and Major Security-Based Swap Participants, Exchange Act Release No. 75611 (Aug. 5, 2015) (the “Registration Adopting Release”).

17 CFR 240.15Fb6-1.

15 U.S.C. 78c(a)(39)(A)-(F). As stated in the Registration Adopting Release, 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 Exchange Act Rule 15Fb6-2, 17 CFR 240.14Fb6-2, to assure that this description remains consistent with the statutory definition.

See

Registration Adopting Release, at Note 63.

See

Registration Adopting Release, at Section II.B.1.i.

The Commission also adopted a requirement in Rule 15Fb6-2 that the Chief Compliance Officer of an SBS Entity certify on Form SBSE-C that it has performed background checks on all of its associated persons that are natural persons who effect or are involved in effecting security-based swaps on its behalf, and neither knows, nor in the exercise of reasonable care should have known, that any of its associated persons that effect or are involved in effecting security-based swaps on its behalf are subject to a statutory disqualification, unless otherwise specifically provided by rule, regulation or order of the Commission.

See

Rule 15Fb6-2(a) and Form SBSE-C;

see also

Registration Proposing Release, 76 FR at 65797; Applications by Barred Individuals for Consent to Associate With a Registered Broker, Dealer, Municipal Securities Dealer, Investment Adviser or Investment Company, Exchange Act Release No. 20783, Investment Company Act Release No. 13839, Investment Advisers Act Release No. 903, 49 FR 12204 (Mar. 29, 1984) (“Applications by those barred individuals who seek to associate with an investment adviser, investment company, or other entity that is not a member of an SRO, should be submitted directly to the Commission pursuant to Rule 29 [current Rule 193]”).

The rule requires the filing of an affidavit from the individual, addressing, among other items, (1) the time period since the imposition of the bar; (2) any restitution or similar action taken by the individual to recompense any person injured by the misconduct that resulted in the bar; (3) the individual's employment during the period subsequent to imposition of the bar; (4) the capacity or position in which the individual proposes to be associated; (5) the manner and extent of supervision to be exercised over such individual and, where applicable, by such individual and (6) any relevant courses, seminars, examinations or other actions completed by the individual subsequent to imposition of the bar to prepare for his or her return to the securities business.

17 CFR 201.193(b), (d).

Rule 193 also requires a written statement from the proposed employer, describing, among other things, the terms and conditions of employment and the supervision to be exercised over the barred individual.

17 CFR 201.193(b)(4)(i)-(iv).

2. FINRA Eligibility Proceedings

Under Exchange Act Section 15A(g)(2), “[a] registered securities association may, and in cases in which the Commission, by order, directs as necessary or appropriate in the public interest or for the protection of investors shall, deny membership to any registered broker or dealer, and bar from becoming associated with a member any person, who is subject to a statutory disqualification.”

Consistent with that provision, Article III, Section 3 of the FINRA By-Laws provides that no person shall be associated with a member, continue to be associated with a member, or transfer association to another member if such person is or becomes subject to a disqualification; and, that no person shall be admitted to membership, and no member shall be continued in membership, if any person associated with it is subject to a disqualification.

Under Article III, Section 4 of the FINRA By-Laws, a person is subject to a “disqualification” with respect to membership, or association with a member, if such person is subject to any “statutory disqualification” as such term is defined in Exchange Act Section 3(a)(39).

Article III, Section 3(d) of FINRA's By-Laws permits a disqualified person or member to request permission to enter or remain in the securities industry.

Consistent with Exchange Act Section 15A(g)(2),

under Article 3, Section 3(d) of the FINRA By-Laws, the FINRA Board may, in its discretion approve the continuance in membership, and may also approve the association or continuance of association of any person, if the FINRA Board determines that such approval is consistent with the

public interest and the protection of investors.

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

See

FINRA By-laws, Article III, Section 3,

http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=4606

See

FINRA By-Laws, Article III, Section 4,

http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=4607

; 15 U.S.C. 78c(a)(39).

See

FINRA By-laws, Article III, Section 3, at Note 27,

supra.

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

See

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

The FINRA Rule 9520 Series sets forth procedures for a person to become or remain associated with a member, notwithstanding the existence of a statutory disqualification, and for a current member or person associated with a member to obtain relief from the eligibility or qualification requirements of the FINRA By-Laws and rules.

A member (or new member applicant) seeking to associate with a natural person subject to a statutory disqualification must seek approval from FINRA by filing a Form MC-400 application.

Members (and new member applicants) that are themselves subject to a disqualification that wish to obtain relief from the eligibility requirements are required to submit a Form MC-400A application.

See

FINRA Rule 9520 Series,

http://finra.complinet.com/en/display/display_viewall.html?rbid=2403&element_id=3985&record_id=5063&filtered_tag=

See

FINRA Form MC-400,

Membership Continuance Application,

http://www.finra.org/web/groups/industry/@ip/@enf/@adj/documents/industry/p011542.pdf

See

FINRA Form MC-400A,

Membership Continuance Application: Member Firm Disqualification Application, http://www.finra.org/web/groups/industry/@ip/@enf/@adj/documents/industry/p013339.pdf

Where required, FINRA sends a notice or notification to the Commission of its proposal to admit or continue the membership of a person or association with a member notwithstanding statutory disqualification in accordance with Exchange Act Rule 19h-1.

Exchange Act Rule 19h-1 provides for Commission review of notices filed by SROs proposing to admit any person to, or continue any person in, membership or association with a member, notwithstanding statutory disqualification. However, Exchange Act Rule 19h-1(a)(2)

and (3)

provide that, for certain persons, and in limited circumstances, a notice does not need to be filed. With respect to certain persons subject to a statutory disqualification, under Exchange Act Rule 19h-1(a)(4),

an SRO is required to furnish to the Commission a notification (containing less information than a notice). Under Exchange Act Section 15A(g)(2),

where it is necessary or appropriate in the public interest or for the protection of investors, the Commission may, by order, direct the SRO to deny membership to any registered broker or dealer, and bar from becoming associated with a member any person, who is subject to a statutory disqualification.

17 CFR 240.19h-1.

Exchange Act Rule 19h-1(a)(2), 17 CFR 240.19h-1(a)(2), provides that a notice need not be filed with the Commission, pursuant to Exchange Act Rule 19h-1, regarding an associated person subject to a statutory disqualification if the person's activities with respect to the member are solely clerical or ministerial in nature and such person does not have access to funds, securities, or books and records.

Exchange Act Rule 19h-1(a)(3), 17 CFR 240.19h-1(a)(3), provides that a notice need not be filed with the Commission, pursuant to Exchange Act Rule 19h-1, regarding a person or member subject to a statutory disqualification if the person or member proposed for continued association or membership, respectively, satisfies the requirements of Exchange Act Rule 19h-1(a)(3)(i)-(vi).

17 CFR 240.19h-1(a)(4). A notification must be filed if the person or member proposed for continued association or membership, respectively, satisfies the requirements of Exchange Act Rule 19h-1(a)(3)(ii), (iv) or (v). 17 CFR 240.19h-1(a)(3)(ii), (iv), (v).

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

3. CFTC's Approach to Associated Persons of Swap Entities Subject to a Statutory Disqualification

The statutory prohibition in Exchange Act Section 15F(b)(6)

is parallel to a statutory provision for a swap dealer or major swap participant (collectively “Swap Entity”) as set forth in Section 4s(b)(6) of the Commodity Exchange Act (“CEA”).

With respect to statutorily disqualified associated persons of Swap Entities, the CFTC, among other things:

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

See

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

• Defined associated persons of Swap Entities to be limited to natural persons.

As a result, the prohibition in Section 4s(b)(6) of the CEA

applies to natural persons associated with a Swap Entity (not entities).

Specifically, the CFTC amended CEA Regulation 1.3(aa), 17 CFR 1.3(aa), which generally defines the term “associated person” for purposes of entities registered with it, to cover Swap Entities. Consequently, with respect to Swap Entities, the definition reads, “(aa)

Associated Person.

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

See

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

• Adopted Regulation 23.22(b), permitting association with a Swap Entity with respect to a person who is already listed as a principal, registered as an associated person of another CFTC registrant, or registered as a floor broker or floor trader, notwithstanding that the person is subject to a statutory disqualification under the CEA.

With respect to those applicants or registrants, NFA Registration Rule 504 sets forth procedures governing applicants and registrants statutorily disqualified from registration under CEA Section 8a(2), 8a(3) or 8a(4).

Under NFA Registration Rules 504(b)(2) and 507, the applicant or registrant must show that, notwithstanding the existence of a statutory disqualification, his registration would pose no substantial risk to the public.

Likewise, under CFTC Regulation 3.60(b)(2)(i), (e)(1) and (2)

an applicant or registrant must show that registration would not pose a substantial risk to the public despite the existence of the statutory disqualification.

See

Registration of Swap Dealers and Major Swap Participants, 77 FR 2613, 2315 (Jan. 19, 2012) (“CFTC Registration Release”). Specifically, CFTC Regulation 23.22(b) provides: “No swap dealer or major swap participant may permit a person who is subject to a statutory disqualification under section 8a(2) or 8a(3) of the [CEA] to effect or be involved in effecting swaps on behalf of the [Swap Entity], if the [Swap Entity] knows, or in the exercise of reasonable care should know, of the statutory disqualification; Provided, however, that the prohibition set forth in this paragraph (b) shall not apply to any person listed as a principal or registered as an associated person of a futures commission merchant, retail foreign exchange dealer, introducing broker, commodity pool operator, commodity trading advisor, or leverage transaction merchant, or any person registered as a floor broker or floor trader, notwithstanding that the person is subject to a disqualification from registration under section 8a(2) or 8a(3) of the [CEA].” 17 CFR 23.22(b).

7 U.S.C. 12a(2), (3) or (4).

Specifically, under NFA Registration Rule 507(a)(1), in actions involving statutory disqualification set forth in CEA Section 8a(2), 7 U.S.C. 12a(2), the applicant or registrant must make a clear and convincing showing that, notwithstanding the existence of the statutory disqualification, full or conditioned registration would not pose a substantial risk to the public; under NFA Registration Rule 507(a)(2), in actions involving statutory disqualification set forth in CEA Section 8a(3) or 8a(4), 7 U.S.C. 12a(3) or (4), the applicant or registrant must show by a preponderance of the evidence that, notwithstanding the existence of the statutory disqualification, full or conditioned registration would not pose a substantial risk to the public.

17 CFR 3.60(b)(2)(i), (e)(1), (e)(2).

Under CFTC Regulation 3.60(e)(1), 17 CFR 3.60(e)(1), in actions involving statutory disqualifications set forth in CEA Section 8a(2), 7 U.S.C. 12a(2), the applicant or registrant must make a clear and convincing showing that full, conditioned or restricted registration would not pose a substantial risk to the public despite the existence of the statutory disqualification. Under CFTC Regulation 3.60(e)(2), 17 CFR 3.60(e)(2), in actions involving statutory disqualifications set forth in CEA Section 8a(3) or 8a(4), 7 U.S.C. 12a(3) or (4), the applicant or registrant must make a showing by a preponderance of the evidence that full, conditioned or restricted registration would not pose a substantial risk to the public despite the existence of the statutory disqualification.

• In addition, CFTC staff has issued no-action relief to Swap Entities that allows them to permit a statutorily disqualified associated person to effect or be involved in effecting swap transactions on behalf of a Swap Entity, provided that NFA provides notice to the Swap Entity that, had the person applied for registration as an associated person, NFA would have granted such registration.

NFA has established a process by which such associated persons of Swap Entities may apply for relief from CEA Section 4s(b)(6).

See

Staff No-Action Positions: Registration Relief for Certain Persons, CFTC Letter No. 12-15, at 5-8 (Oct. 11, 2012) (“CFTC Staff No-Action Letter”),

available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-15.pdf

See

NFA, EasyFile AP Statutory Disqualification Form Submission,

https://www.nfa.futures.org/NFA-electronic-filings/easyFile-statutory-disqualification.HTML

C. Proposed Rule of Practice 194

1. Scope of the Rule

Proposed paragraph (a) defines the scope of proposed Rule of Practice 194, providing a process for submitting applications by an SBS Entity seeking an order of the Commission permitting an associated person that is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on behalf of the SBS Entity. The proposed rule would allow an SBS Entity to voluntarily submit an application to the Commission to request an order where an associated person of an SBS Entity is subject to a statutory disqualification and thereby prohibited from effecting or being involved in effecting security based swaps on behalf of the SBS Entity under Exchange Act Section 15F(b)(6).

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

Notably, however, where the conditions set forth in proposed paragraph (j) are met, an SBS Entity would not need to file an application under Rule of Practice 194 to permit a statutorily disqualified associated person to effect or be involved in effecting security-based swaps on behalf of the SBS Entity. In such instances, a more limited notification would be required.

2. Required Showing

Proposed paragraph (b) sets forth the required showing for an application under proposed Rule of Practice 194. For the Commission to issue an order granting relief under proposed Rule of Practice 194, the Commission would need to find that it would be consistent with the public interest to permit the associated person of the SBS Entity who is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on behalf of the SBS Entity.

In meeting the burden of showing that permitting the associated person to effect or be involved in effecting security based swaps on behalf of the SBS Entity is consistent with the public interest, the application and supporting documentation must demonstrate that the terms or conditions of association, procedures, or proposed supervision (if the associated person is a natural person), for an associated person are reasonably designed to ensure that the statutory disqualification does not negatively impact upon the ability of the associated person to effect or be involved in effecting security-based swaps on behalf of the SBS Entity in compliance with the applicable statutory and regulatory framework. In addition to the items set forth in paragraphs (d) and (f) of proposed Rule of Practice 194, the Commission would consider the nature of the findings that resulted in the statutory disqualification in determining whether the association is consistent with the public interest.

The Commission preliminarily believes that the public interest standard is appropriate because it is consistent with the overall purpose of the Exchange Act, and specifically for “transactions in securities . . . [to be] effected with a national public interest which makes it necessary to provide for regulation and control of such transactions and of practices and matters related thereto.”

By prohibiting an SBS Entity from allowing a statutorily disqualified associated person from effecting or being involved in effecting security-based swap transactions, absent Commission relief, we believe that Exchange Act Section 15F(b)(6) is designed to limit the potential that associated persons who have engaged in certain types of “bad acts” will be able to negatively impact the security-based swap market, and the participants and investors in that market. However, Section 15F(b)(6) also specifically provides that the Commission can allow SBS Entities to continue to permit such statutorily disqualified associated persons to effect or be involved in effecting security-based swap transactions. The Commission preliminarily believes that the public interest standard is intended to capture those situations where the risk of the associated person engaging in security-based swap activity that may harm the market or the participants in the market is mitigated. For example, other items including, but not limited to, other misconduct in which the associated person may have engaged, the nature and disciplinary history of the associated person and SBS Entity requesting such relief, and the supervision to be accorded the associated person, would be relevant to the Commission's consideration of whether the risks of permitting such associated persons to effect or be involved in effecting security-based swaps on behalf of the SBS Entity are sufficiently mitigated. The Commission preliminarily believes that the public interest standard appropriately reflects this type of analysis.

See, e.g.,

Exchange Act Section 2, 15 U.S.C. 78b.

A public interest standard also is consistent with the standard in Rule of Practice 193.

See

17 CFR 201.193(c).

3. Form of Application for Natural Persons and Entities

Proposed paragraphs (c) and (e) specify the form of the application to be submitted under proposed Rule of Practice 194 for natural persons and entities (respectively). Proposed paragraphs (c) and (e) would require that each application with respect to an associated person subject to a statutory disqualification shall be supported by a written statement, signed by a knowledgeable person authorized by the SBS Entity, which addresses the items in proposed Rule of Practice 194(d) and (f).

In addition to the information required in proposed paragraph (c)-(g), the Commission reserves the right to request from the applicant supplementary information to assist in its review.

See

proposed Rule of Practice 194, Appendix, paragraph (c), and Section II.C.10,

infra.

The Commission proposes that the SBS Entity (rather than the associated person) submit the application, including by providing the signed written statement under proposed paragraphs (c) and (e), for several reasons. First, the SBS Entity is the person that is subject to the restrictions under Exchange Act Section 15F(b)(6). Second, requiring an SBS Entity to submit the written statement with respect to an associated person would reinforce, in certain circumstances, the necessity of additional oversight by the SBS Entity over the associated person that is subject to a statutory disqualification, as SBS Entities would determine what information and documents to include in an application with respect to an associated person.

Third, as specified below, the Commission is proposing to require information (

e.g.,

concerning the supervision by the SBS Entity over the

associated person) that is within the possession of the SBS Entity itself.

See

proposed Rule of Practice 194, Appendix, paragraph (b).

In addition, requiring an SBS Entity to submit the application would provide a familiar practice, as it is consistent with the current practice for SBS Entities that are registered with FINRA under FINRA Form MC-400. In particular, under FINRA Form MC-400, an application for a statutorily disqualified associated person who is a natural person of a member firm is submitted by a member firm (not by the individual).

See

FINRA Form MC-400, Note 33,

supra; see also

Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change to Adopt FINRA Rule 1113 (Restriction Pertaining to New Member Applications) and to Amend the FINRA Rule 9520 Series (Eligibility Proceedings), Exchange Act Release No. 63933 (Feb. 18, 2011), 76 FR 10629, 10630 (Feb. 25, 2011) (“A member (or new member applicant) seeking to associate with a person subject to a disqualification must seek approval from FINRA by filing a Form MC-400 application, pursuant to the FINRA Rule 9520 Series.”).

The application would be filed pursuant to Rules of Practice 151, 152 and 153.

The Commission believes filing pursuant to these rules would provide the Commission with the information that it needs to assess an application under proposed Rule of Practice 194.

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

Proposed paragraphs (c) and (e) would require that the following exhibits be included with an application to help the Commission assess whether it is consistent with the public interest to allow the associated person to effect or be involved in effecting security-based swaps on behalf of an SBS Entity:

• Proposed paragraphs (c)(1) and (e)(1) would require a copy of the order or other applicable document that resulted in the associated person being subject to a statutory disqualification. The proposed requirement would help inform the Commission about the nature of the conduct that led to the statutory disqualification. For example, in the event that the statutory disqualification arose from misconduct relating to security-based swap transactions in particular, or is otherwise investment-related, it may inform the Commission's decision of whether it is consistent with the public interest for the associated person to effect or be involved in effecting security-based swaps on behalf of an SBS Entity.

• Proposed paragraphs (c)(2) and (e)(2) would require an undertaking by the applicant to notify the Commission promptly in writing if any information submitted in support of the application becomes materially false or misleading while the application is pending. This proposed requirement is designed to require that information provided by the applicant be complete and accurate so that the Commission is provided the necessary information in order to effectively evaluate the pending application.

• Proposed paragraphs (c)(4) and (e)(5) would require a copy of any decision, order, or document issued with respect to any proceedings

resulting in the imposition of disciplinary sanctions or pending proceeding against the associated person by the Commission, CFTC, any federal or state or law enforcement regulatory agency, registered futures association, foreign financial regulatory authority, registered national securities association, or any other SRO, or commodities exchange, or any court, that occurred during the five years preceding the filing of the application pursuant to proposed Rule of Practice 194. The Commission believes that the information required by this proposed provision would be useful to assess the disciplinary history of the associated person. The disciplinary history of the associated person subject to a statutory disqualification provides the Commission with relevant information to help assess the risk that the associated person may engage in future misconduct. The Commission is requesting the underlying decision, order, or other document itself (as opposed to a description or record of the decision), so that the Commission can directly review the materials to assess the disciplinary history of the associated person. Where the associated person has a history of misconduct, in addition to the conduct that triggered the statutory disqualification, the Commission generally would be less likely to find it in the public interest to permit the associated person to effect or be involved in effecting security-based swaps on behalf of an SBS Entity. In addition, this proposed requirement would help inform the Commission of any pending proceedings against the associated person, which may factor into the totality of the information when the Commission makes a determination as to whether the associated person should be allowed to effect or be involved in effecting security-based swaps on behalf of the SBS Entity. In this context, the Commission preliminarily believes that the five-year timeframe is appropriate. We balanced the burden that may be imposed by requiring SBS Entities to provide older materials and documents that may not be as readily available with our need to evaluate the context and circumstances underlying the application.

For purposes of providing the information requested by paragraphs (c)(4) and (c)(5), applicants should look to the definition of “proceeding” in Form SBSE, which states that a “proceeding” includes “a formal administrative or civil action initiated by a governmental agency, self-regulatory organization or a foreign financial regulatory authority; a felony criminal indictment or information (or equivalent formal charge); or a misdemeanor criminal information (or equivalent formal charge). Does not include other civil litigation, investigations, or arrests or similar charges effected in the absence of a formal criminal indictment or information (or equivalent formal charge).”

See

Registration Adopting Release, at Section II.G.1, and Form SBSE.

In addition to the information above, proposed paragraph (c) of the proposed rule would require that each application with respect to an associated person that is a

natural person

include the following information and documents:

• Proposed paragraph (c)(3) would require a copy of the questionnaire or application for employment specified in Exchange Act Rule 15Fb6-2(b) with respect to the associated person,

which would provide the Commission with basic background information concerning the associated person, as well as the disciplinary history of the associated person. Information concerning the disciplinary history of the associated person is important because it may help the Commission assess the risk of future misconduct by the associated person.

See

Registration Adopting Release, at Section II.B.2.

Additionally, proposed paragraph (e) of the proposed rule would require that each application with respect to an associated person that is

not a natural person

include the following information and documents:

• Proposed paragraph (e)(3) would require a copy of any organizational charts of the associated person, if available. To the extent that the associated person employs any natural persons subject to a statutory disqualification (which would be required to be disclosed pursuant to paragraph (e)(6) of proposed Rule of Practice 194, discussed

infra

), organizational charts would assist the Commission in assessing whether such natural persons are supervising or being supervised by other natural persons that are also subject to a statutory disqualification, whether directly (

i.e.,

an immediate supervisor) or indirectly. This information would assist the Commission in making its determination because, for example, the concentration of statutorily disqualified natural persons in an associated person entity could pose a greater risk of future misconduct by such associated person entity.

• Proposed paragraph (e)(4) would require a copy of policies and procedures relating to the conduct resulting in the statutory disqualification that the associated person entity has in place to ensure compliance with any federal or state securities laws, the CEA, the rules or regulations thereunder, or the rules of the Municipal Securities Rulemaking Board, any SRO, or any foreign regulatory authority, as applicable. Such information would help inform the Commission as to whether the associated person entity has adequate policies and procedures in place, to the extent applicable, to ensure compliance with the federal securities laws or SRO rules. The information requested here is also consistent with the statutory scheme, as violations of the statutes and regulations listed here may result in a statutory disqualification under Exchange Act Section 3(a)(39).

Given that violations of any of the statutes and regulations listed here may result in a statutory disqualification under Section 3(a)(39) of the Exchange Act, the Commission believes that information about the associated person entity's policies and procedures would help inform the Commission as to steps taken to reduce the risk of further misconduct by the associated person entity. In particular, the Commission believes that where the associated person entity does not have sufficient policies and procedures to help ensure compliance with applicable laws, rules and regulations, there is a greater risk that the entity will engage in future misconduct.

See

15 U.S.C. 78c(a)(39); 15 U.S.C. 78o(b)(4).

• Proposed paragraph (e)(6) would require the name of any natural persons employed by the associated person that are subject to a statutory disqualification and would effect or be involved in effecting security-based swaps on behalf of the SBS Entity. For any such natural person, the applicant should indicate whether the individual is an officer, partner, direct or indirect owner of the associated person. Because an SBS Entity separately would be required to seek relief under proposed Rule of Practice 194 for any such natural persons to be able to effect or be involved in effecting security-based swaps on behalf of the SBS Entity, the application would only require a list of the names, not any further information that would be included in those separate applications.

4. Written Statement for Natural Persons and Entities

Proposed paragraphs (d) and (f) under Rule of Practice 194 set forth the items to be addressed for applications with respect to natural persons and entities (respectively). Each of the items in proposed paragraphs (d) and (f) would be addressed in the written statement required by proposed paragraphs (c) and (e). The Commission believes that the items listed are important to help the Commission assess whether it would be consistent with the public interest to allow the associated person subject to a statutory disqualification to effect or be involved in effecting security-based swaps on behalf of the SBS Entity.

• Proposed paragraphs (d)(1) and (f)(2) would require an applicant to address the associated person's compliance with any order resulting in the statutory disqualification, including whether the associated person has paid fines or penalties, disgorged monies, made restitution or paid any other monetary compensation required by any such order. Whether an associated person has complied in full with any order resulting in the statutory disqualification (including with all monetary penalties imposed) could be relevant to assessing whether it is consistent with the public interest to allow the associated person to effect or be involved in effecting security-based swaps on behalf of an SBS Entity. This information could be relevant because the Commission believes that it generally would not be consistent with the public interest to issue an order granting relief under proposed Rule of Practice 194 with respect to persons that have failed to abide by the terms of a prior order resulting in a statutory disqualification. The Commission believes that the failure to comply with an order resulting in the statutory disqualification may be relevant for assessing the risk of whether an associated person subject to a statutory disqualification may engage in future misconduct.

• Proposed paragraphs (d)(3) and (f)(3) would require the applicant to address the capacity or position in which the associated person subject to a statutory disqualification proposes to be associated with the SBS Entity. In addressing the capacity or position in which the associated person subject to a statutory disqualification proposes to be associated with the SBS Entity, the applicant should provide a description of the proposed duties and responsibilities of the associated person. An associated person effecting or “involved in effecting”

security-based swaps on behalf of an SBS Entity may operate in a varied range of capacities or positions, each presenting different risks. As a result, the information requested by paragraphs (d)(3) and (f)(3) would provide information about the nature of the activity that the associated person will be providing for the SBS Entity, and thus may help the Commission assess whether the associated person is engaging in activities that may create greater risks to SBS Entities, counterparties or other persons. In the event a prior application has been submitted with respect to the associated person, as set forth in proposed paragraph (g) to proposed Rule of Practice 194, the SBS Entity should describe in what manner the association will differ, if at all, from the association in any such prior application.

See

Registration Adopting Release, at Section II.B.1.ii, for discussion of guidance about what it means to be “involved in effecting” security-based swaps in the context of Section 15F(b)(6) of the Exchange Act.

• Proposed paragraphs (d)(6) and (f)(6) would require the applicant to describe the compliance and disciplinary history, during the five years preceding the filing of the application, of the SBS Entity. In addition to the description of the compliance and disciplinary history, the applicant may provide any relevant documentation during the five years preceding the filing of the application, including, but not be limited to, the disclosure reporting pages on Forms SBSE, SBSE-A and SBSE-BD

for the SBS Entity with respect to events occurring, along with any letters of caution, deficiency letters or similar documents received from the Commission, an SRO or other law enforcement or regulatory agency. The Commission believes that information regarding the compliance and disciplinary history of the SBS Entity could be useful to the Commission in assessing the risk that the associated person subject to a statutory disqualification may engage in future misconduct. In cases where an associated person subject to a statutory disqualification will be employed at an SBS Entity with significant compliance and disciplinary issues during the five years preceding the filing of an application under proposed Rule of Practice 194, the Commission would consider, among other things noted in this rule, the nature of the conduct that resulted in the statutory disqualification in determining whether the association

is consistent with the public interest. In this context, the Commission preliminarily believes that the five-year timeframe is appropriate. We balanced the burden that may be imposed by requiring SBS Entities to provide older materials and documents that may not be as readily available with our need to evaluate the circumstances underlying the application.

See

Registration Adopting Release, at Sections II.G.1, II.G.2, and II.G.3.

• Proposed paragraphs (d)(9) and (f)(5) would require a detailed statement of why the associated person should be permitted to effect or be involved in effecting security-based swaps on behalf of the SBS Entity, including what steps the associated person or applicant have taken, or will take, to ensure that the statutory disqualification does not negatively impact upon the ability of the associated person to effect or be involved in effecting security-based swaps on behalf of the SBS Entity in compliance with the applicable statutory and regulatory framework. This proposed requirement is designed to provide an opportunity for an applicant to provide a narrative or rationale to explain why it is consistent with the public interest to allow the associated person to effect or be involved in effecting security-based swaps on behalf of the SBS Entity.

• Proposed paragraphs (d)(10) and (f)(7) would require an applicant to discuss whether, during the five years preceding the filing of the application, the associated person has been involved in any litigation concerning investment or investment-related activities

or whether there are there any unsatisfied judgments outstanding against the associated person concerning investment or investment-related activities, to the extent not otherwise covered by proposed paragraph (d)(9); if so, the applicant should provide details regarding such litigation or unsatisfied judgments. The Commission believes information concerning such litigation may factor into the totality of the information when the Commission makes a determination as to whether the associated person should be allowed to effect or be involved in effecting security-based swaps on behalf of the SBS Entity. Information concerning unsatisfied judgments outstanding against the associated person concerning investment or investment-related activities may help inform the Commission as to whether the associated person subject to a statutory disqualification has abided by any judgment or order, or has failed to compensate persons as required by a court or other relevant authority. In this context, the Commission preliminarily believes that the five-year timeframe is appropriate. We balanced the burden that may be imposed by requiring SBS Entities to provide older information that may not be as readily available with our need to evaluate the circumstances underlying the application.

For purposes of providing the information requested by paragraphs (d)(10) and (f)(7), applicants should look to the definition of “investment or investment-related” in Form SBSE, which states that “investment or investment-related” includes “pertaining to securities, commodities, banking, savings association activities, credit union activities, insurance, or real estate (including, but not limited to, acting as or being associated with a broker-dealer, municipal securities dealer, government securities broker or dealer, issuer, investment company, investment adviser, futures sponsor, bank, security-based swap dealer, major security-based swap participant, savings association, credit union, insurance company, or insurance agency).”

See

Registration Adopting Release, Form SBSE.

• Proposed paragraphs (d)(11) and (f)(8) would require any other information that the applicant believes to be material to the application. This provision is designed to require an applicant to provide all information that likely will be material to the Commission's consideration of an application under proposed Rule of Practice 194, notwithstanding that such information may not be specifically required by the rule. This provision also is designed to provide the applicant with an opportunity to provide any additional information that the applicant believes is important to the Commission's consideration of the SBS Entity's application under proposed Rule of Practice 194, but that is not specifically required by the rule.

In addition to the items discussed above, proposed paragraph (d) of the proposed rule would require applications with respect to

natural persons

to address the following items:

• Proposed paragraph (d)(2) would require the applicant to address the associated person's employment during the period subsequent to the issuance of the statutory disqualification. Where the associated person subject to a statutory disqualification has been employed without issue since the conduct resulting in the statutory disqualification, that fact may be relevant to the Commission's assessment as to whether it would be consistent with the public interest for the person to effect or be involved in effecting security-based swaps on behalf of an SBS Entity.

• Proposed paragraph (d)(4) would require the applicant to describe the terms and conditions of employment and supervision to be exercised over the associated person and, where applicable, by such associated person. The Commission is proposing this requirement so that the Commission will be able to better assess the extent to which the terms and conditions of employment and supervision may create or mitigate the risk that the associated person subject to a statutory disqualification may engage in future misconduct. Moreover, the Commission is proposing to require that the applicant describe any supervision to be exercised by the associated person because the Commission believes that there could be a greater risk of harm where an associated person that is subject to a statutory disqualification has greater supervisory responsibilities, or is supervising another person that is also subject to a statutory disqualification. In the event a prior application has been submitted with respect to the associated person, as set forth in proposed paragraph (g) to proposed Rule of Practice 194, the SBS Entity should describe in what manner the terms and conditions of employment and supervision will differ, if at all, from the supervision in any such prior application.

• Proposed paragraph (d)(5) would require the applicant to list the qualifications, experience, and disciplinary history

of the proposed supervisor(s) of the associated person. This provision is designed to assist the Commission in considering the capacity of the supervisor to oversee the associated person subject to a statutory disqualification in assessing whether the supervision of a person is likely to minimize the risk of future misconduct by the associated person. The Commission believes that the qualifications and experience of the supervisor of an associated person subject to a statutory disqualification has a bearing on the potential for future misconduct by that person.

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

See also

Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based Swap Participants, and Broker-Dealers; Capital Rule for Certain Security-Based Swap Dealers, Exchange Act Release No. 71958 (Apr. 17, 2014), 79 FR 25194, 25205, 25308-09 (May 2, 2014).

• Proposed paragraph (d)(7) would require the applicant to list the names of any other associated persons at the SBS Entity who have previously been

subject to a statutory disqualification, and whether they are to be supervised by the associated person. Proposed Rule of Practice 194(d)(7) is designed to assist the Commission in assessing whether there could be a greater risk of misconduct where an associated person that is subject to a statutory disqualification is working directly with or is supervising another person that is subject to a statutory disqualification.

• Proposed paragraph (d)(8) would require the applicant to address whether the associated person has taken any relevant courses, seminars, examinations or other actions subsequent to becoming subject to a statutory disqualification to prepare for his or her participation in the security-based swap business. The information provided by proposed paragraph (d)(8) would inform the Commission as to whether the associated person has taken steps to apprise himself of relevant obligations under the federal securities or other laws or regulations, and, as a result, may factor into the Commission's decision as to whether it would be consistent with the public interest for the person to effect or be involved in effecting security-based swaps on behalf of an SBS Entity.

In addition to the items discussed above, proposed paragraph (f) of the proposed rule would require applications with respect to persons that are

not natural persons

to address the following items:

• Proposed paragraph (f)(1) would require general background information about the associated person, including (i) the number of employees, (ii) the number and location of offices, (iii) the type(s) of business(es) in which the associated person is engaged; and (iv) the SRO memberships and effective dates of such membership of the associated person, if applicable. This requirement would assist the Commission in understanding the business of the associated person, including determining what SROs, if any, oversee the associated person. The Commission believes that obtaining basic background information about the firm would aid the Commission in understanding the entity that is an associated person, and therefore aid in its assessment of whether it is in the public interest to permit the associated person to effect or be involved in effecting security-based swaps on behalf of the SBS Entity.

• Proposed paragraph (f)(4) would require a description of whether, with respect to the statutory disqualification and the sanctions imposed, the associated person was ordered to undertake any changes to its organizational structure or policies and procedures set forth in proposed Rule of Practice 194(e)(4), and to the extent that such changes were mandated, to describe what changes were mandated and whether the associated person has implemented them. This proposed requirement may aid the Commission in assessing whether the applicant has made changes to mitigate the occurrence of any future conduct that may result in statutory disqualification.

5. Prior Applications or Processes

Proposed paragraph (g) would require an applicant to provide as part of the application any order, notice or other applicable document reflecting the grant, denial or other disposition (including any dispositions on appeal) of any prior application concerning the associated person under proposed Rule of Practice 194 and other similar processes.

This provision is designed to inform the Commission when a similar application made with respect to the associated person has been granted or denied (or been subject to some other disposition).

In cases where a statutorily disqualified person was formerly associated with another SBS Entity, an applicant should use reasonable efforts to obtain relevant documentation from the other SBS Entity.

Information concerning the grant or denial (or other disposition) of a prior application or other request for relief, and the reasons for the grant or denial, may be relevant to the Commission's assessment as to whether it would be consistent with the public interest for the person to effect or be involved in effecting security-based swaps on behalf of an SBS Entity. For example, in the event that a prior application has been granted, but the terms and conditions of employment with the other registrant are materially different from the SBS Entity, the Commission could consider whether the terms and conditions at the SBS Entity that are different may result in any greater risk of future misconduct. In addition, if a prior application has been denied the Commission may take into consideration the prior application or request for relief in its determination of whether permitting an associated person to effect or be involved in effecting security based swaps on behalf of the SBS Entity would be consistent with the public interest to grant an application under Rule of Practice 194. Notably, under such circumstances (

i.e.,

a denial or where the terms and conditions of employment are not the same), an SBS Entity could not avail itself of paragraph (j) of proposed Rule of Practice 194

and therefore would be required to file an application under proposed Rule of Practice 194 in order to permit an associated person subject to a statutory disqualification to be able to effect or be involved in effecting security-based swaps on behalf of an SBS Entity.

See

Section II.C.9,

infra.

• Proposed paragraph (g)(1) would require an applicant to provide any order, notice or other applicable document where an application has previously been made for the associated person pursuant to Rule of Practice 194.

• Proposed paragraph (g)(2) would require an applicant to provide any order, notice or other applicable document where an application has previously been made for the associated person pursuant to Rule of Practice 193.

17 CFR 201.193.

• Proposed paragraph (g)(3) would require an applicant to provide any order, notice or other applicable document where an application has previously been made on behalf of the associated person pursuant to Section 9(c) of the Investment Company Act of 1940 (“Investment Company Act”).

Similar to proposed Rule of Practice 194, under Investment Company Act Section 9(c), any person who is ineligible under Investment Company Act Section 9(a)

may file with the Commission an application for an exemption.

15 U.S.C. 80a-9(c).

Under Investment Company Act Section 9(a), it is unlawful for any persons to serve or act in the capacity of employee, officer, director, member of an advisory board, investment adviser, or depositor of any registered investment company, or principal underwriter for any registered open-end company, registered unit investment trust, or registered face-amount certificate company where, among other things: (1) that person (or an affiliated person) within ten years has been convicted of any felony or misdemeanor involving the purchase or sale of any security or arising out of such person's conduct as an underwriter, broker, dealer, investment adviser, or in other specified categories; or (2) that person (or an affiliated person), by reason of any misconduct, has been permanently or temporarily enjoined by order, judgment, or decree of any court of competent jurisdiction from acting as an underwriter, broker, dealer, investment adviser, or in other specified categories.

See

15 U.S.C. 80a-9(a).

Under Investment Company Act Section 9(c), the Commission will grant such application if it is established that: (i) the prohibition is unduly or disproportionately severe; or (ii) the conduct of such person has been such as not to make it against the public interest or protection of investors to grant such application.

See

15 U.S.C. 80a-9(c).

• Proposed paragraph (g)(4) would require an applicant to provide any order, notice or other applicable document where an application has previously been made on behalf of the associated person pursuant to Exchange Act Section 19(d),

Exchange Act Rule

19h-1

or a proceeding by an SRO for a person to become or remain a member, or an associated person of a member, notwithstanding the existence of a statutory disqualification. For example, for broker-dealers, where FINRA has granted or denied an application for consent to be a member or an associated person of a member, or to continue to be a member or an associated person of a member, notwithstanding the statutory disqualification, the applicant would provide such information to the Commission in accordance with proposed paragraph (g)(4).

15 U.S.C. 78s(d).

17 CFR 240.19h-1.

• Proposed paragraph (g)(5) would require an applicant to provide any order, notice or other applicable document reflecting the grant, denial or other disposition (including any dispositions on appeal) of any prior process concerning the associated person by the CFTC or a registered futures association for listing as a principal, or for registration, including as an associated person, notwithstanding the existence of a statutory disqualification. Specifically, paragraph (g)(5) would provide as follows:

• Proposed paragraph (g)(5)(i) addresses the exception in CFTC Regulation 23.22(b).

Under that provision, the CFTC allows association with a Swap Entity with respect to a person who is already listed as a principal, registered as an associated person of another CFTC registrant, or registered as a floor broker or floor trader, notwithstanding that the person is subject to a statutory disqualification under section 8a(2) or 8a(3)

of the CEA.

Under proposed paragraph (g)(5)(i), an SBS Entity would be required to provide any order or other applicable document providing that the associated person may be listed as a principal, registered as an associated person of another CFTC registrant, or registered as a floor broker or floor trader, notwithstanding the statutory disqualification.

17 CFR 23.22(b).

7 U.S.C. 12a(2), (3).

See

Note 44,

supra.

• Proposed paragraph (g)(5)(ii) addresses the CFTC and NFA's current process for granting relief from CEA Section 4s(b)(6),

the provision that is parallel to Exchange Act Section 15F(b)(6), with respect to persons that are not exempt from that provision pursuant to CFTC Regulation 23.22(b).

Under that process, available through no-action relief granted by CFTC staff, a Swap Entity may make an application to NFA to permit an associated person of a Swap Entity subject to a statutory disqualification to effect or be involved in effecting swaps on behalf of the Swap Entity. NFA will provide notice to a Swap Entity whether or not NFA would have granted the person registration as an associated person.

Proposed paragraph (g)(5)(ii) would require the SBS Entity to submit any determination by NFA (the sole registered futures association

) with respect to that grant of no-action relief.

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

17 CFR 23.22(b).

See

CFTC Staff No-Action Letter,

supra

Note 49, at 8.

See

CFTC Registration Release, 77 FR at 2624.

6. Notification to Applicant and Written Statement

Proposed paragraph (h) governs the procedure where there is an adverse recommendation proposed by the Commission staff with respect to an application under proposed Rule of Practice 194. Consistent with Rule of Practice 193(e),

proposed Rule of Practice 194(h) would provide that where there is such an adverse recommendation, the applicant shall be so advised and provided with a written statement by the Commission staff of the reasons for such recommendation.

17 CFR 201.193(e).

Under proposed paragraph (h), Commission staff would be required to provide a written statement for the reasons for an adverse recommendation. Consistent with Rule of Practice 193(e),

the applicant would then have 30 days to submit to the Commission a written statement in response. This proposed provision is designed to give an applicant an opportunity to directly address an adverse recommendation by Commission staff and to assist the Commission's evaluation of applications under proposed Rule of Practice 194.

Id.

7. Orders Under Proposed Rule of Practice 194

Where the Commission determines that it would be consistent with the public interest to permit the associated person of the SBS Entity to effect or be involved in effecting security-based swaps on behalf of the SBS Entity, the Commission would issue an order granting relief. Where the Commission does not or cannot make the determination that it is in the public interest to permit the associated person of the SBS Entity to effect or be involved in effecting security-based swaps on behalf of the SBS Entity, the Commission would issue an order denying the application. Orders issued in accordance with Rule of Practice 194 would be made publicly available. Applications and supporting materials would be kept confidential subject to applicable law.

However, a notice pursuant to paragraph (i)(2) to proposed Rule of Practice 194 would be made publicly available on the Commission's Web site.

See

Section II.C.8,

infra.

8. Temporary Exclusion for Other Persons

Proposed paragraph (i) would provide for temporary relief from the statutory prohibition in Exchange Act Section 15F(b)(6) with respect to associated persons that are not natural persons and that are subject to a statutory disqualification. Proposed paragraph (i) is designed to address the situation where an operating SBS Entity becomes subject to the statutory prohibition in Exchange Act Section 15F(b)(6)

with respect to an associated person that is not a natural person—either as a result of an associated person that effects or is involved in effecting security-based swaps on behalf of the SBS Entity becoming subject to a statutory disqualification, or as a result of a person that is subject to a statutory disqualification becoming an associated person effecting or involved in effecting security-based swaps on behalf of the SBS Entity.

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

As stated in Section I.B,

supra,

the Commission has separately adopted Exchange Act Rule 15Fb6-1, 17 CFR 240.15Fb6-1, which provides that unless otherwise ordered by the Commission, an SBS Entity, when it files an application for registration as 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) occurred prior to the compliance date set forth in the Registration Adopting Release. SBS Entities seeking to avail themselves of this provision will have to provide a list of disqualified associated entities, which will be made public by the Commission as part of the registration application.

As noted in a separate release adopting registration rules for SBS Entities, the scope of the prohibition in Section 15F(b)(6) of the Exchange Act covers a wide range of actions, given the definitions of statutory disqualification and associated person, and the meaning of “involved in effecting” a security-based swap transaction, and the conduct that led to a statutory disqualification may pertain to management practices that occurred a long time ago or acts engaged in by personnel that are no longer employed by the associated person.

A commenter to the Registration Proposing Release stated that prohibiting statutorily disqualified

entities from effecting or being involved in effecting security-based swaps could result in “considerable” business disruptions and other ramifications.

See

Registration Adopting Release, at Section II.B.1.i.

See

12/16/11 SIFMA Letter, at 8, Note 8,

supra.

The Commission is concerned about the potential for business disruption to SBS Entities, and disruption to the security-based swap market, if SBS Entities engaged in the business must either cease operations, even temporarily, due to not being able to utilize the services of their associated entities, or move services to another entity that may not be as equipped to handle them pending a determination by the Commission on their application for relief under proposed Rule of Practice 194 or pending a determination by another regulator for similar relief.

Therefore, to provide for a fair and orderly process when an SBS Entity files an application with respect to associated person entities pursuant to proposed Rule of Practice 194, the Commission preliminarily believes that it is appropriate to provide a temporary exclusion, subject to certain limitations and conditions, to allow an SBS Entity to permit an associated person entity that is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on its behalf pending a determination by the Commission or other regulatory body. In such cases, SBS Entities may consider implementing safeguards pending a determination by the Commission or other regulatory body to ensure that the statutory disqualification does not negatively impact upon the ability of the associated person to effect or be involved in effecting security-based swaps on behalf of the SBS Entity in compliance with the applicable statutory and regulatory framework.

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

See

proposed Rule of Practice 194(j) and Section II.C.9,

infra.

The Commission preliminarily believes that the approach in proposed Rule of Practice 194(i) would appropriately consider the potentially competing objectives of minimizing the likelihood for business or market disruption while maintaining strong investor protections. In particular, while the rule would provide targeted relief with respect to associated person entities, it would not provide relief with respect to associated persons who are natural persons. The Commission believes 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 an associated person entity to another entity.

Further, associated persons that are natural persons are the persons responsible for actually performing or overseeing the functions necessary to effect security-based swap activities. As such, the Commission preliminarily does not believe the scope of proposed Rule of Practice 194(i) should be extended to cover associated persons that are natural persons.

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.

See

Registration Adopting Release, at Section II.B.1.i.

Under proposed paragraph (i)(1)(i), an SBS Entity would be temporarily excluded from the prohibition in Exchange Act Section 15F(b)(6) with respect to an associated person that is not a natural person (1) for 30 days following the associated person becoming subject to a statutory disqualification, or (2) 30 days following the person that is subject to a statutory disqualification becoming an associated person of an SBS Entity.

This provision is designed to provide an applicant with an initial time period to determine whether the applicant should file an application (or a notice in lieu of an application pursuant proposed paragraph (j)) with the Commission under proposed Rule of Practice 194, and to afford the applicant sufficient time to gather the materials for, draft, and file an application with respect to that associated person. The Commission preliminarily believes that allowing longer than 30 days would permit the associated person that is subject to a statutory disqualification to continue to effect or be involved in effecting security-based swaps on behalf of the SBS Entity for too long a period of time without filing an application or notice under proposed Rule of Practice 194. Moreover, the Commission believes that an SBS Entity should be able to submit an application or notice within 30 days, as the information requested should already be readily available or accessible to the SBS Entity.

Because a person would not become an associated person of an SBS Entity until the entity itself becomes a security-based swap dealer or a major security-based swap participant pursuant to the Commission's rules (

see

17 CFR 240.3a67-8, 240.3a67-9, 240.3a71-2), proposed paragraph (i) to Rule of Practice 194 would not apply until such time as the relevant entity is first deemed to be either a security-based swap dealer or a major security-based swap participant. For example, a person whose security-based swap dealing activity crosses a

de minimis

threshold contained in Exchange Act Rule 3a71-2 (17 CFR 240.3a71-a) would not be deemed to be a security-based swap dealer until the earlier of the date on which it submits a complete application for registration pursuant to Exchange Act Section 15F(b), 15 U.S.C. 78o-10(b), 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. Therefore, the SBS Entity would be able to rely on the temporary exclusion contained in proposed paragraph (i) to Rule of Practice 194 if the SBS Entity is associated with any entity that is subject to a statutory disqualification that effects or is involved in effecting security-based swaps on its behalf if: (1) The entity has filed a complete application with the Commission to become registered with the Commission as an SBS Entity within the time periods specified in the applicable Commission rules; and (2) the entity has filed a complete application under proposed Rule of Practice 194 within 30 days from the date on which it filed its application with the Commission to become registered as an SBS Entity.

Under proposed paragraph (i)(1)(ii), the SBS Entity would be excluded from the prohibition in Exchange Act Section 15F(b)(6) with respect to the associated person for 180 days following the filing of a complete application and notice pursuant to proposed Rule of Practice 194 by the SBS Entity if the application and notice is filed within the time period specified in proposed paragraph (i)(1)(i) (

i.e.,

30 days), or until such time the Commission makes a determination on such application within the 180-day time period. The Commission preliminarily believes that 180 days should provide a sufficient maximum amount of time for the Commission to review the application, including obtaining any supplementary information from the applicant, and any recommendation by Commission staff and any response thereto by the applicant, and to make a determination on the application. The Commission anticipates that many applications under proposed Rule of Practice 194 will be instances where the Commission has not previously reviewed or acted on the underlying conduct by the associated person entity that resulted in the statutory disqualification. As such, the 180-day time period would afford the Commission a sufficient maximum amount of time to appropriately evaluate an application under proposed Rule of Practice 194.

Proposed paragraph (i)(1)(ii) does not limit the Commission from making a determination on the application prior to the expiration of the 180-day time period, and the Commission anticipates

that it would do so as appropriate.

The Commission may act sooner in cases, for example, where the misconduct of an associated person is already familiar to the Commission or otherwise conducive to immediate consideration. The Commission may also need to act quickly if there are imminent concerns regarding potential investor or counterparty harm.

The Commission expects that it will expeditiously process applications and take necessary steps to facilitate timely action.

While we expect that most applications could be acted upon within the proposed 180-day time period, a decision could be delayed for a number of reasons, such as when an application raises complex issues associated with the Commission's determination whether to grant permanent relief from the statutory prohibition in Exchange Act Section 15F(b)(6). Proposed paragraph (i)(1)(ii) thus would address the situation where the Commission does not render a decision on the Rule of Practice 194 application within the 180-day time period. Specifically, proposed paragraph (i)(1)(ii) provides that where the Commission does not render a decision within 180 days following the filing of an application under proposed Rule of Practice 194, the SBS Entity would have 60 additional days to conform its activities to comply with the prohibition set forth in Exchange Act Section 15F(b)(6). As a result, the proposed rule would provide that if the Commission does not act on the application within 180 days, the statutory prohibition would apply.

As noted, Exchange Act Section 15F(b)(6) prohibits SBS Entities from permitting associated persons that are subject to a statutory disqualification from effecting or being involved in effecting security-based swap transactions on behalf of the SBS Entity, except to the extent otherwise provide by rule, regulation or order of the Commission. The Commission is proposing to provide in paragraph (i)(1)(ii) that, if the Commission does not act on the application within the specified time period, the statutory prohibition would apply (subject to a 60-day period to provide an SBS Entity time to conform its activities to the statutory prohibition, as discussed below). The Commission preliminarily believes that in the context of this statutory framework, the proposed time period provided for in paragraph (i)(1)(ii) is appropriately tailored. In proposing to proceed in this manner and provide a period of time for the exception from the prohibition to continue, the Commission has taken into consideration the potential for the risk of market and business disruptions and the objective of maintaining strong investor and market protections, as discussed above. We preliminarily believe that the approach has taken into consideration these factors.

We note that it would also provide an SBS Entity certainty about the applicable process and time frames, including the 60 additional days to comply, as discussed below.

See

Sections V.D and E,

infra.

Proposed paragraph (i)(1)(ii) also would provide that where the Commission does not render a decision within 180 days, the SBS Entity would have 60 additional days to comply with the prohibition set forth in Exchange Act Section 15F(b)(6). This provision is designed to provide the applicant, where the Commission does not act on an application under proposed Rule of Practice 194 within 180 days and the SBS Entity becomes immediately subject to the statutory prohibition set forth in Exchange Act Section 15F(b)(6), sufficient time to implement any structural or other changes necessary to ensure that the SBS Entity would not have the associated person that is subject to a statutory disqualification effect or be involved in effecting security-based swaps on behalf of the SBS Entity. The 60-day time period is designed to provide the SBS Entity a sufficient amount of time to make any structural or other changes necessary to ensure compliance with the prohibition set forth in Exchange Act Section 15F(b)(6) to avoid disruption, but not so long as to continue to allow an SBS Entity to permit an associated person that is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on behalf of the SBS Entity for longer than necessary to avoid potential market or business disruptions.

Under proposed paragraph (i)(1)(iii), the SBS Entity would be excluded from the prohibition in Exchange Act Section 15F(b)(6) for a period of 180 days following the filing of a complete application with, or initiation of a process by,

the CFTC, an SRO or a registered futures association with respect to the associated person for the membership, association, registration or listing as a principal, where such application has been filed or process started prior to or within the time period specified in paragraph (i)(1)(i) and a notice has been filed with the Commission within the time period specified in proposed paragraph (i)(1)(i). This provision is designed to provide a temporary exclusion to an SBS Entity such that an SBS Entity could avail itself of filing a notice in lieu of an application, as set forth in proposed paragraph (j), and thus would provide temporary relief to the SBS Entity from the prohibition set forth in Exchange Act Section 15F(b)(6) during the pendency of an application or process by the CFTC, an SRO or a registered futures association. As with the provisions of proposed paragraph (i)(1)(ii) with regard to the Commission's consideration of an application under proposed Rule of Practice 194, this provision is designed to address the Commission's concerns about potential market or business disruptions while the SBS Entity has an application or process pending before the CFTC, an SRO or a registered futures association with regard to the associated person subject to a statutory disqualification. The Commission preliminarily believes that 180 days should generally provide a sufficient amount of time for the CFTC, an SRO or a registered futures association to make a determination on the application, and would also be consistent with the time period proposed in paragraph (i)(1)(ii).

The commencement of the 180-day time period would begin at the time of filing of an application with an SRO (

e.g.,

Form MC-400A) or the initiation of a proceeding under NFA Registration Rule 504 (

e.g.,

a Notice of Intent to Revoke Registration) or CFTC Regulation 3.60, 17 CFR 3.60.

In addition, under proposed paragraph (i)(1)(iii), where the CFTC, an SRO or a registered futures association does not render a decision or renders an adverse decision with respect to the associated person within the 180-day time period, the SBS Entity would have 60 additional days to conform its activities to comply with the prohibition set forth in Exchange Act Section 15F(b)(6). Similar to proposed paragraph (i)(1)(ii), this provision is aimed at preventing market or business disruptions that may result from the scenario where the CFTC, an SRO or a registered futures association does not render a decision or renders an adverse decision with respect to the associated person within the 180-day time period, and the SBS Entity therefore becomes immediately subject to the statutory prohibition set forth in Exchange Act Section 15F(b)(6). The 60-day time period is designed to provide the SBS Entity a sufficient amount of time to make any structural or other necessary changes to ensure compliance with the prohibition set forth in Exchange Act Section 15F(b)(6), but not so long as to continue to allow an SBS Entity to permit an associated person that is subject to a statutory disqualification to

effect or be involved in effecting security-based swaps on behalf of the SBS Entity for longer than necessary to avoid potential market or business disruptions where the CFTC, an SRO or registered futures association has not made a decision or has rendered an adverse decision within the 180-day time period.

The SBS Entity would not be able to avail itself of the temporary exclusion set forth in proposed paragraph (i)(1) in two circumstances. First, the temporary exclusion from the prohibition in Exchange Act Section 15F(b)(6) would not be available where the Commission has otherwise ordered—for example, where the Commission, by order, has censured, placed limitations on the activities or functions of the associated person, or suspended or barred such person from being associated with an SBS Entity. Second, the temporary exclusion from the prohibition in Exchange Act Section 15F(b)(6) would not be available in cases where the Commission, CFTC, an SRO or a registered futures association has previously denied membership, association, registration or listing as a principal with respect to the associated person that is the subject of the pending application. In both circumstances, the Commission, CFTC, an SRO or registered futures association will have affirmatively made a determination to not allow an associated person to participate in the financial industry. The Commission preliminarily believes that, in such cases, the SBS Entity should not be able to avail itself of the temporary exclusion with respect to the associated person because doing so would enable an associated person to participate in the security-based swap market notwithstanding that the Commission or another regulator has otherwise prohibited the associated person from participating in another sector of the financial industry.

Proposed paragraph (i)(2) would provide that an SBS Entity would be excluded from the statutory prohibition in Exchange Act Section 15F(b)(6)

as provided in proposed paragraph (i)(1)(ii) and (i)(1)(iii) only where the SBS Entity has filed (within the 30-day timeframe) a notice with the Commission setting forth the name of the SBS Entity and the name of the associated person that is subject to a statutory disqualification, and attaching as an exhibit to the notice a copy of the order or other applicable document that resulted in the associated person being subject to a statutory disqualification.

The Commission proposes to make publicly available on its Web site the notice provided under proposed paragraph (i)(2). The Commission is proposing to require such notice to help inform market participants of the fact that an SBS Entity is availing itself of the temporary exclusion set forth in proposed paragraph (i) with respect to an associated person entity subject to a statutory disqualification that is effecting or involved in effecting security-based swaps on behalf of an SBS Entity.

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

See

proposed Rule of Practice 194(c)(1), (e)(1); Section II.C.3,

supra.

The Commission is not proposing to require such notice with respect to associated persons that are natural persons, because natural persons would not be able to avail themselves of the temporary exclusion proposed in paragraph (i). As a result, a natural person that is subject to a statutory disqualification would not be permitted to effect or be involved in effecting security-based swaps on behalf of an SBS Entity while an application is pending. Additionally, where the association, registration or listing as a principal has been granted or otherwise approved with respect to an associated person that is a natural person by the Commission, CFTC, an SRO or registered futures association, notwithstanding that the associated person is subject to a statutory disqualification, such an order or other relevant document would be made publicly available,

and thus would provide information to market participants with respect to the associated person and the statutory disqualification.

See

Section II.C.7,

supra.

Proposed paragraph (i)(3) would provide that where the Commission denies an application pursuant to proposed Rule of Practice 194 with respect to an associated person that is not a natural person, the Commission may provide by order an extension of the exclusion provided for in proposed paragraph (i)(1)(ii) as is necessary or appropriate to allow the applicant to comply with the prohibition in Exchange Act Section 15F(b)(6). Under this proposed provision, the Commission would extend the temporary exclusion provided for in proposed paragraph (i)(1)(ii) where the Commission determines that doing so is necessary or appropriate. The Commission believes that proposed paragraph (i)(3) provides the Commission with sufficient flexibility so that the Commission may determine, based on its discretionary review of the particular facts and circumstances with respect to an application, whether or not it is necessary or appropriate to extend the temporary exclusion provided for in proposed paragraph (i)(1)(ii). For example, under certain circumstances, the Commission may determine that is necessary or appropriate to provide a certain amount of time for an SBS Entity to wind down operations with an associated person entity that is subject to a statutory disqualification in order to avoid disruptions to the security-based swaps business of the SBS Entity or to the security-based swap market. In other instances, there may not be a risk of market or business disruptions in the event that an SBS Entity is prohibited from permitting an associated person entity to effect or be involved in effecting security-based swaps on behalf of the SBS Entity. In such instances, the Commission may specify in an order denying an application under proposed Rule of Practice 194 that no extension of the exclusion provided for in proposed paragraph (i)(1)(ii) would be necessary or appropriate.

Although the Commission is proposing paragraph (i)(1) at this time, the Commission is also soliciting comment on two alternative approaches with respect to this provision. First, the Commission solicits comment on whether proposed paragraph (i)(1)(ii) should alternatively provide that, if the Commission does not render a decision within the appropriate time frame, the application shall be deemed granted. Under this alternative, the Commission would consider the extent to which providing that the application would be deemed granted if the Commission does not act in the 180-day time period would help to avoid potential market and business disruptions that may result when the temporary exclusion expires after day 180 (as opposed to providing a 60-day conformity period). The Commission would also consider how such an approach would impact counterparty and investor protection in cases where the Commission has not made a specific finding that it is consistent with the public interest to permit a statutorily disqualified associated person entity to effect or be involved in effecting security-based swaps on behalf of an SBS Entity.

Second, the Commission solicits comment on whether, alternatively, the Commission should provide an exclusion to permit an SBS Entity to allow associated person entities subject to a statutory disqualification to effect or be involved in effecting security-based swaps on behalf of SBS Entities. As noted in Section II.B.3, the CFTC has

defined associated persons of Swap Entities to be limited to natural persons,

which results in the application of Section 4s(b)(6) of the CEA

to natural persons associated with a Swap Entity (not entities). As a result, this alternative would result in consistency with the CFTC. As with the first alternative, under this alternative, the Commission would take into consideration the extent to which the approach, by providing an exclusion from the statutory prohibition in Exchange Act Section 15F(b)(6) with respect to associated person entities, would minimize potential disruptions to the business of SBS Entities that could lead to possible market disruption. The Commission would also consider how this approach, which would apply the statutory prohibition in Exchange Act Section 15F(b)(6) to associated persons that are natural persons, but not to associated person entities, would impact counterparty and investor protection.

See

Note 42,

supra.

See

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

Moreover, although SBS Entities would be excluded from the statutory prohibition in Exchange Act Section 15F(b)(6) with respect to associated person entities under this alternative, the Commission nonetheless could, by order, censure, place limitations on the activities or functions of the associated person, or suspend or bar such person from being associated with an SBS Entity.

See

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

9. Notice in Lieu of an Application

Paragraph (j) of proposed Rule of Practice 194 would limit the applicability of the prohibition in Exchange Act Section 15F(b)(6) by prescribing the conditions under which an SBS Entity may permit a person associated with it that is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on its behalf without being required to file an application under Rule of Practice 194.

Generally, proposed paragraph (j) would permit associated persons that are subject to a statutory disqualification to effect or be involved in effecting security-based swaps on behalf of SBS Entities where the Commission or other regulatory authority previously reviewed the matter and permitted the person subject to a statutory disqualification to be a member, associated with a member, registered or listed as a principal of a regulated entity notwithstanding statutory disqualification.

See

proposed Rule of Practice 194(j).

Under the proposed rules, the Commission, the CFTC, an SRO or a registered futures association will have specifically reviewed the underlying basis for the statutory disqualification and made an affirmative finding to grant or otherwise approve membership, association, registration or listing as a principal, notwithstanding the statutory disqualification. So long as the terms and conditions are adhered to in the context of the association with the SBS Entity, the Commission believes it would not be necessary for the Commission (other than in cases where the person is subject to a Commission bar) to re-examine an event for which relief has already been granted. The Commission further notes, consistent with the CFTC in adopting an analogous provision in Regulation 23.22(b),

100

that it would generally be anomalous for a person to be able to engage in securities transactions with members of the retail public—for example, as an associated person of a broker-dealer—but be prohibited from effecting or being involved in effecting security-based swap transactions with significantly more sophisticated clients as an associated person of a SBS Entity.

100

In adopting Regulation 23.22(b), the CFTC stated that, if it did not provide an exception as suggested, a person could be permitted to direct futures-related activities or solicit futures-related business with members of the retail public—

e.g.,

as, respectively, a principal or associated person of futures commission merchant or commodity pool operator—but that same person would be barred from soliciting, accepting, or otherwise effecting or being involved in effecting swaps transactions with significantly more sophisticated clients as an associated person of a Swap Entity.

See

CFTC Registration Release, 77 FR at 2615.

Specifically, subject to the conditions specified in proposed paragraph (j)(2), proposed Rule of Practice of Practice 194(j)(1) would provide as follows:

Proposed Rule of Practice 194(j)(1)(i) would permit a person associated with an SBS Entity that is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on behalf of the SBS Entity where the person has admitted to or continued in membership, or participation or association with a member, of an SRO, such as FINRA, notwithstanding that such person is subject to a statutory disqualification under Exchange Act Section 3(a)(39).

101

See

17 CFR 240.19h-1. As discussed in Section II.B.2,

supra,

Exchange Act Rule 19h-1 prescribes the form and content, and provides for Commission review of proposals submitted by SROs to allow a member or associated person subject to a statutory disqualification to become or remain a member or associated person of a member.

Proposed Rule of Practice 194(j)(1)(ii) would permit a person associated with an SBS Entity that is a natural person and that is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on behalf of the SBS Entity where the person has been granted consent to associate pursuant to Rule of Practice 193.

102

As stated in Section II.B.1,

supra,

Rule of Practice 193 provides a process by which persons that are not regulated by an SRO (

e.g.,

employees of an investment adviser, an investment company, or a transfer agent) can seek to reenter the securities industry despite previously being barred by the Commission.

102

17 CFR 201.193.

Proposed Rule of Practice 194(j)(1)(iii) would permit a person associated with an SBS Entity that is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on behalf of the SBS Entity where an application has previously been granted under proposed Rule of Practice 194 with respect to the associated person. For example, proposed paragraph (j)(1)(iii) would include instances where an SBS Entity had previously received approval of an application under proposed Rule of Practice 194 with respect an associated person, and the same person becomes an associated person of a different SBS Entity.

Proposed Rule of Practice 194(j)(1)(iv) would permit a person associated with an SBS Entity to effect or be involved in effecting security-based swaps on behalf of the SBS Entity where, notwithstanding the a statutory disqualification under CEA Sections 8a(2) or 8a(3),

103

the person (1) has been registered as or listed as a principal of a futures commission merchant, retail foreign exchange dealer, introducing broker, commodity pool operator, commodity trading advisor, or leverage transaction merchant, registered as an associated person of any of the foregoing, registered as or listed as a principal of a swap dealer or major swap participant, or registered as a floor broker or floor trader, and (2) is not subject to a Commission bar pursuant to Sections 15(b), 15B, 15E, 15F or 17A of the Exchange Act (15 U.S.C. 78o(b), 78o-4, 78o-7, 78o-10, 78q-1), Section 9(b) of the Investment Company Act (15 U.S.C. 80a-9(b)) or Section 203(f) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3(f)). This provision is designed to exclude from scope of the statutory prohibition in Exchange Act Section 15F(b)(6) persons that have previously been permitted to be registered or listed as a principal by the CFTC or the NFA, notwithstanding that such persons are subject to a statutory disqualification, including those persons that fall within the scope of the exclusion in CFTC Regulation 23.22(b) (thereby harmonizing the approach of

the Commission with the CFTC in that respect).

104

However, the provision would exclude instances where the Commission itself has made an affirmative determination to bar or suspend the associated person. In such cases, the Commission believes that it should be afforded an opportunity to review an application with regard to such barred person or during the pendency of the suspension in cases where an SBS Entity requests relief from the statutory prohibition in Exchange Act Section 15F(b)(6).

105

103

7 U.S.C. 12a(2), (3).

104

See

Sections II.B.3 and II.C.5,

supra,

concerning CFTC Regulation 23.22(b), 17 CFR 23.22(b). Under the proposed rule, such relief would not be available in cases where a registered futures association has made a determination that, had the associated person applied for registration as an associated person of an SBS Entity, notwithstanding a statutory disqualification, the application would have been granted.

See

CFTC Staff No-Action Letter,

supra

Note 49, at 5-8.

105

A suspension remains in effect for a period not exceeding twelve months. Once the suspension is lifted, the person is not deemed to be subject to a statutory disqualification, and thus would not need to apply to the Commission to reassociate.

Paragraph (j)(2) of proposed Rule of Practice 194 would set forth the conditions necessary for an SBS Entity to meet in order to permit an associated person that is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on behalf of the SBS Entity. An SBS Entity seeking to rely on proposed Rule of Practice 194(j)(1) would have to meet all of the conditions specified in proposed paragraph (j)(2).

Under proposed paragraph (j)(2)(i), all matters giving rise to a statutory disqualification under Exchange Act Section 3(a)(39)(A) through (F) must have been subject to an application or process where the membership, association, registration or listing as a principal has been granted or otherwise approved by the Commission, CFTC, an SRO or registered futures association. This provision is designed to ensure that either the Commission, CFTC, an SRO (

e.g.,

FINRA) or a registered futures association (

i.e.,

NFA) has specifically reviewed the underlying basis for each and every statutory disqualification under Exchange Act Section 3(a)(39)(A) through (F),

106

and made an affirmative finding to permit or continue the membership, association, registration or listing as a principal, notwithstanding the statutory disqualification. For example, the mere fact that an associated person is permitted to effect or be involved in effecting swaps on behalf of a Swap Entity because of the applicability of the exclusion in CFTC Regulation 23.22(b) would not, by itself, allow the associated person of the SBS Entity to effect or be involved in effecting security-based swaps on its behalf. Rather, the CFTC or NFA must have reviewed all matters giving rise to a statutory disqualification for purposes of Exchange Act Section 3(a)(39)(A) through (F).

107

The Commission believes that it is consistent with investor protection to provide an exclusion for an SBS Entity from the statutory prohibition in Exchange Act Section 15F(b)(6) where an appropriate regulatory authority has previously affirmatively considered and granted relief with respect to the conduct underlying each statutory disqualification of an associated person of the SBS Entity.

106

15 U.S.C. 78c(a)(39)(A)-(F).

107

For example, an associated person of an SBS Entity could potentially be subject to a statutory disqualification for purposes of Exchange Act Section 3(a)(39)(A) through (F), but not for purposes of CEA Section 8a(2) or (3).

Compare

15 U.S.C. 78c(a)(39)(A)-(F), 7 U.S.C. 12a(2), (3).

Proposed Rule of Practice 194(j)(2)(ii) would provide that an SBS Entity may permit a person associated with it that is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on its behalf, without filing an application under proposed Rule of Practice 194, only where the terms and conditions of the association with the SBS Entity are the same in all material respects as those approved in connection with the prior order, notice or other applicable document granting the membership, association, registration or listing as a principal provided for in paragraph (j)(1). In short, to obtain relief from the statutory prohibition in Exchange Act Section 15F(b)(6), the associated person of the SBS Entity must be subject to the same terms and conditions—including, for example, supervisory requirements—as those previously imposed by the agency, an SRO or a registered future association (

i.e.,

the Commission, CFTC, NFA or SRO).

108

See also, e.g.,

Exchange Act Rule 19h-1(a)(3)(i), 17 CFR 240.19h-1(a)(3)(i).

The Commission is proposing this provision so that an associated person subject to a statutory disqualification remains subject to the same terms and conditions with respect to the SBS Entity. For example, where relief previously granted by FINRA includes specific supervisory requirements following an eligibility proceeding, but a person is not subject to the same requirements by the SBS Entity, the Commission believes that it should review whether the terms and conditions of the association with the SBS Entity are appropriate under an application under proposed Rule of Practice 194.

Proposed Rule of Practice 194(j)(2)(iii) would provide that, where an SBS Entity seeks for an associated person that is a natural person to be permitted to effect or be involved in effecting security-based swaps on behalf of the SBS Entity without filing an application pursuant to proposed Rule of Practice 194(j), the SBS Entity would be required to file a notice with the Commission. Specifically, proposed Rule of Practice 194(j)(2)(iii) would require the following information in the notice:

• The name of the SBS Entity;

109

See

proposed Rule of Practice 194(j)(2)(iii)(A).

• The name of the associated person subject to a statutory disqualification;

110

See

proposed Rule of Practice 194(j)(2)(iii)(B).

• The name of the associated person's prospective supervisor(s) at the SBS Entity;

111

See

proposed Rule of Practice 194(j)(2)(iii)(C).

• The place of employment for the associated person subject to a statutory disqualification;

112

and

112

See

proposed Rule of Practice 194(j)(2)(iii)(D).

• The identity of any agency, SRO or registered futures association that has indicated its agreement with the terms and conditions of the proposed association, registration or listing as a principal.

113

See

proposed Rule of Practice 194(j)(2)(iii)(E).

The Commission believes that the information requested by the notice under proposed paragraphs (j)(2)(iii) would aid the Commission and its staff in assessing risk at SBS Entities, including for examination purposes. By knowing the name of the SBS Entity, name and location of the associated person subject to a statutory disqualification, and the name of the supervisor of the associated person, the Commission will obtain information that may be useful for examination purposes, such as determining whether to examine a particular SBS Entity and whom to speak to at the SBS Entity. The identity of an agency, SRO or registered futures association that has indicated its agreement with the terms and conditions of the proposed association could be useful to the Commission because the Commission staff could use the information to confer with or seek information from that agency, SRO or registered futures association, if necessary.

Proposed Rule of Practice 194(j)(2)(iv) would provide that, where an SBS Entity seeks for an associated person that is not a natural person to be permitted to effect or be involved in effecting security-based swaps on behalf of the SBS Entity without filing an application pursuant to proposed Rule

of Practice 194(j), the SBS Entity would be required to file a notice with the Commission. Specifically, proposed Rule of Practice 194(j)(2)(iv), would require the following information in the notice:

• The name of the SBS Entity;

114

See

proposed Rule of Practice 194(j)(2)(iv)(A).

• The name of the associated person that is subject to a statutory disqualification;

115

and

115

See

proposed Rule of Practice 194(j)(2)(iv)(B).

• The identification of any agency, SRO or a registered futures association that has indicated its agreement with the terms and conditions of the proposed association, registration or listing as a principal.

116

See

proposed Rule of Practice 194(j)(2)(iv)(C).

The Commission believes that knowing the name of the statutorily disqualified associated person would aid the Commission and its staff in assessing risk at SBS Entities, including for examination purposes. Additionally, the identity of an agency, SRO or registered futures association that has indicated its agreement with the terms and conditions of the proposed association could be useful to the Commission because the Commission staff could use the information to confer with or seek information from that agency, SRO or registered futures association, if necessary.

10. Note to Proposed Rule of Practice 194

The proposed Note, which is similar to the Preliminary Note to Rule of Practice 193, is designed to advise applicants of the importance of having adequate supervision in place at the SBS Entity so as to minimize the risk of subsequent occurrences of misconduct.

In particular, the Note to proposed Rule of Practice 194 would provide that:

• An application made pursuant to the rule must show that it would be consistent with the public interest to permit the associated person of the SBS Entity to effect or be involved in effecting security-based swaps on behalf of the SBS Entity.

117

See

Section II.C.2,

supra.

• The nature of the supervision that an associated person will receive or exercise as an associated person with a registered entity is an important matter bearing upon the public interest. The Commission believes that this statement would inform applicants that associated persons that are subject to a statutory disqualification should have adequate supervision so as to prevent potential future harm to counterparties, SBS Entities themselves, or other persons. The Commission would generally be less likely to issue an order granting relief under Rule of Practice 194 where the associated person subject to a statutory disqualification is not subject to adequate supervision.

118

Second, there may be an increased risk of harm to counterparties, the SBS Entity and other market participants where the associated person subject to a statutory disqualification supervises other persons—in particular, where the supervision is over other persons that are also subject to a statutory disqualification.

118

See In the Matter of Shupack,

Investment Advisers Act Release No. 1061 (Mar. 23, 1987), 48 SE.C. 697, 700-01 (1987) (“In light of Shupack's record, including the misrepresentation contained in his original Rule 29 [the predecessor to Rule of Practice 193] application, we conclude that he should not be allowed to re-enter the advisory field when no effective supervision would be exercised over his activities.”);

In the Matter of Sample,

Investment Advisers Act Release No. 4021, 2015 SEC LEXIS 466, at *8 (Feb. 4, 2015) (Division of Enforcement, pursuant to delegated authority, rejecting application under Rule of Practice 193 where “[t]he supervision proposed in the application appears to be no different from that exercised over [the barred person] during his prior association with [the registered investment adviser]”).

• In meeting the burden of showing that permitting the associated person to effect or be involved in effecting security based swaps on behalf of the SBS Entity is consistent with the public interest, the application and supporting documentation must demonstrate that the terms or conditions of association, procedures, or proposed supervision (if the associated person is a natural person), are reasonably designed to ensure that the statutory disqualification does not negatively impact upon the ability of the associated person to effect or be involved in effecting security-based swaps on behalf of the SBS Entity in compliance with the applicable statutory and regulatory framework. The Commission is proposing to include this statement to advise applicants of the importance of these items to the Commission's consideration of whether to grant relief.

• Normally, the applicant's burden of demonstrating that permitting the associated person to effect or be involved in effecting security based swaps on behalf of the SBS Entity is consistent with the public interest will be difficult to meet where the associated person is to be supervised by, or is to supervise, another statutorily disqualified individual. The Commission is proposing to include this statement because the Commission believes that there may be a greater risk of harm where a person that is subject to a statutory disqualification is supervising another person that is subject to a statutory disqualification.

• Where the associated person wishes to become the sole proprietor of a registered entity and thus is seeking that the Commission issue an order permitting the associated person who is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on behalf of an SBS Entity notwithstanding an absence of supervision, the applicant's burden will be difficult to meet. The Commission is proposing to include this statement because, as stated, the Commission believes that there is a greater risk of harm where the associated person subject to a statutory disqualification is not subject to adequate supervision.

• The associated person may be limited to association in a specified capacity with a particular registered entity and may also be subject to specific terms and conditions. The Commission is proposing to include this statement to advise applicants that the Commission may consider whether to impose limitations on permitting an associated person subject to a statutory disqualification to effect or be involved in effecting security-based swap transactions on behalf of an SBS Entity. Those terms and conditions may concern, for example, heightened supervisory conditions or other procedures with respect to the associated person subject to a statutory disqualification.

Finally, the proposed Note discusses various procedural aspects of proposed Rule of Practice 194, including the following:

• In addition to the information specifically required by the rule, applications with respect to natural persons should be supplemented, where appropriate, by written statements of individuals who are competent to attest to the associated person's character, employment performance, and other relevant information. This statement is designed to encourage applicants to provide written statements from individuals other than the applicant and the associated person, to help the Commission better assess whether issuing an order granting relief under proposed Rule of Practice 194 is consistent with the public interest.

• In addition to the information required by the rule, the Commission staff may request additional information to assist in the Commission's review. This statement is designed to inform applicants that the Commission staff may request additional information beyond that provided by the SBS Entity in its application. For example, where

the information contained in an application raises additional questions regarding the nature of the conduct resulting in the statutory disqualification, the capacity or position of the associated person, or the terms and conditions of the association with the SBS Entity, the Commission staff may request additional information to assist in the review of the pending application.

• Intentional misstatements or omissions of fact may constitute criminal violations of 18 U.S.C. 1001,

et seq.

and other provisions of law. This proposed statement is designed to help ensure that the Commission receives accurate information in connection with an application under Proposed Rule of Practice 194. In addition, providing a misstatement in an application would weigh against a finding that providing relief by the Commission under Rule of Practice 194 would be consistent with the public interest.

• The Commission will not consider any application that attempts to reargue or collaterally attack the findings that resulted in the statutory disqualification. This statement is designed to advise applicants that Rule of Practice 194 may not be used as an appeals process for the underlying findings. The Commission notes there are other appropriate avenues for challenging decisions.

III. Request for Comment

The Commission is requesting comment regarding all aspects of proposed Rule of Practice 194, including any investor protection or other concerns. The Commission particularly requests comment from entities that intend to register as SBS Entities and that anticipate making an application under proposed Rule of Practice 194, were it to be adopted, as well as counterparties to such SBS Entities. This information will help inform the Commission's consideration of the appropriate process through which SBS Entities could seek relief from the prohibition in Exchange Act Section 15F(b)(6).

119

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

The Commission also seeks comment on the particular questions below. The Commission will carefully consider all comments and information received, and will benefit especially from detailed responses.

Q-1. Is it necessary for the Commission to have a rule that specifies the process, such as that proposed in Rule of Practice 194, for SBS Entities to seek relief for their associated persons who are subject to a statutory disqualification to effect or be involved in effecting security-based swaps? Why or why not?

Q-2. How many SBS Entities are likely to submit applications pursuant to the proposed rule? Please specify the number of applications that would likely relate to an associated person that is a natural person versus an entity.

Q-3. Should the Commission make its determination based on whether it would be consistent with the public interest to permit the 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? Should the Commission adopt a different standard of review? If so, what should it be, and why?

Q-4. Should the Commission look to Rule of Practice 193 and FINRA Forms MC-400 and MC-400A in establishing the form of application in proposed Rule of Practice 194? Please explain why or why not. In addition, if the Commission should not model the proposed rule on Rule of Practice 193 or FINRA Forms MC-400 and MC-400A, what alternatives (if any) should the Commission consider and why?

Q-5. Is the information requested in proposed Rule of Practice 194(c) for natural persons appropriate? Should the Commission request any additional information? If so, what items? Please explain the reasons for excluding any information or including any additional information, as well as the costs and benefits of doing so.

Q-6. With respect to the requirement in proposed Rule of Practice 194(c)(1) and (e)(1) to provide a copy of the order or other applicable document that resulted in the associated person being subject to a statutory disqualification, is there information other than that which would be contained in such order or other applicable document that the Commission should require the applicant to provide (

e.g.,

the record from an underlying proceeding resulting in a statutory disqualification)? If so, please specify what additional information and the reasons for including such information.

Q-7. Proposed Rule of Practice 194(c)(4) and (e)(5) require a copy of a decision, order or other document issued other than with respect to a proceeding resulting in the imposition of disciplinary sanctions or pending proceeding against the associated person issued by a court, state agency, agency, SRO or foreign financial regulator. Is there additional information other than that which would be contained in such documents that the Commission should require the applicant to provide? If so, in what instances? Should the Commission not require documents issued in connection with pending proceedings (

e.g.,

orders instituting proceedings, indictments, informations and other similar documents)?

Q-8. With respect to the requirement in proposed Rule of Practice 194(c)(4) and (e)(5), is five years an appropriate time period with respect to requiring a copy of any decision, order, or document issued by a court, state agency, agency, SRO or foreign financial regulator? Should the Commission require a different time period? If so, please explain why.

Q-9. Are the items required to be addressed by proposed Rule of Practice 194(d) for natural persons appropriate? Should the Commission require that additional items be addressed? If so, what additional items? Please explain the reasons for excluding any item or including any additional item, as well as the costs and benefits of doing so.

Q-10. With respect to the requirement in proposed Rule of Practice 194(d)(6) and (f)(6), should the Commission require the compliance and disciplinary history during the five years preceding the filing of the application of the SBS Entity? Should the Commission limit the requirement, for example, by requiring only the compliance and disciplinary history of an office or location of an SBS Entity?

Q-11. With respect to the requirement in proposed Rule of Practice 194(d)(6) and (f)(6), is five years an appropriate time period with respect to the compliance and disciplinary history of the SBS Entity? Should the Commission require a different time period? If so, please explain why.

Q-12. With respect to the requirement in proposed Rule of Practice 194(d)(10) and (f)(7), is five years an appropriate time period with respect to litigation or unsatisfied judgments concerning investment or investment-related activities? Should the Commission require a different time period? If so, please explain why. Should the request for information with respect to litigation or unsatisfied judgments be limited to those concerning investment or investment-related activities? Should the request for information with respect to litigation or unsatisfied judgments be expanded to those concerning swaps or other financial instruments? If so, please explain why.

Q-13. Are the items requested in proposed Rule of Practice 194(e) for entities appropriate? For example, should the Commission request organizational charts of an associated person entity under proposed paragraph

(e)(3)? Should the Commission request any additional information? If so, what items? Please explain the reasons for excluding any item or including any additional information, as well as the costs and benefits of doing so.

Q-14. Are the items to be addressed in proposed Rule of Practice 194(f) for entities appropriate? Should the Commission request that any additional items be addressed? If so, what additional items? Please explain the reasons for excluding any item or including any additional item, as well as the costs and benefits of doing so.

Q-15. Should the Commission request information regarding prior applications or processes concerning the associated person, as proposed in Rule of Practice 194(g)? If not, why not? Are there any other prior applications or processes concerning associated persons that are relevant that the Commission should request? Proposed paragraph (g) requests information regarding prior applications or processes with respect to market intermediaries, such as broker-dealers. Should the Commission request information regarding prior applications or processes with respect to other types of persons, such as issuers?

Q-16. Are there any restrictions (

e.g.,

state or foreign law) on SBS Entities providing any of the information required to be provided in connection with an application under proposed Rule of Practice 194? If so, please identify the specific restrictions and the potential impact of those restrictions.

Q-17. Is the process set forth in proposed Rule of Practice 194(h) appropriate? Does 30 days provide a sufficient time to provide a written statement in response to a notice of an adverse recommendation by Commission staff? Should the time period set forth in proposed paragraph (h) (30 days for a response by the applicant) be shorter or longer, and, if so, why?

Q-18. Should the Commission provide the temporary exclusion set forth in proposed Rule of Practice 194(i)(1)? Does the temporary exclusion set forth in proposed paragraph (i) adequately consider the interest in providing regulatory certainty and addressing concerns about potential investor or counterparty harm? Is it consistent with the Commission's investor protection mandate? Is it consistent with the Commission's mandates to maintain fair, orderly, and efficient markets and facilitate capital formation? Should the temporary exclusion be modified in any way? If so, please explain how the temporary exclusion should be modified and the benefits and costs of such an approach. For example, should the temporary exclusion be applicable only to associated persons that are not natural persons, as proposed, should it also be applicable to associated persons that are natural persons, or should the temporary exclusion not be provided to any associated person at all?

Q-19. Should the Commission provide for an exclusion from the prohibition in Exchange Act Section 15F(b)(6) with respect to associated person entities for 30 days following the associated person becoming subject to a statutory disqualification or 30 days following the person that is subject to a statutory disqualification becoming an associated person of an SBS Entity, as set forth in proposed Rule of Practice 194(i)(1)(i)?

Q-20. Should the Commission apply the temporary exclusion in proposed paragraph (i)(1) with respect to both filings made within 30 days of an associated person becoming subject to a statutory disqualification and those made within 30 days of a person that is subject to a statutory disqualification becoming an associated person of an SBS Entity?

Q-21. Does 30 days provide a sufficient time period to file an application pursuant to proposed Rule of Practice 194 such that an entity may be able to avail itself of the temporary exclusion set forth in proposed Rule of Practice 194(i)(1)(ii) or (iii)? Should the Commission provide for a process by which an applicant can submit a request for an extension of time? For example, where good cause is shown, should the Commission or its staff be able to extend the 30-day time period provided for in proposed Rule of Practice 194(i)(1) upon request by an SBS Entity? If so, during the time period for consideration of that request, should the SBS Entity be temporarily excluded from the prohibition in Exchange Act Section 15F(b)(6)?

Q-22. As proposed in paragraph (i)(1)(ii), should the Commission provide that an SBS Entity would be excluded from the prohibition in Exchange Act Section 15F(b)(6) for 180 days following the filing of a complete application pursuant to proposed Rule of Practice 194 by an SBS Entity if the application is filed within the time period specified in proposed paragraph (i)(1)(i) (

i.e.,

30 days)? If so, why; if not, why not. If so, is the proposed 180-day time period set forth in proposed paragraph (i)(1)(ii) a reasonable time period for the Commission to appropriately evaluate an application under proposed Rule of Practice 194? Should it be shorter or longer, and, if so, why? For example, should proposed paragraph (i)(1)(ii) instead require that the Commission act on an application within fewer days (

e.g.,

45 or 60 days), with an option for the Commission to extend the temporary exclusion by additional days (

e.g.,

120 or 135 days), if necessary? Alternatively, should the time period afford the Commission additional time to evaluate an application (

e.g.,

210 or 270 days)? Or should the rule not specify a time period and provide that the temporary exclusion will remain in effect during the pendency of the Commission's review of an application under proposed Rule of Practice 194? Do commenters believe that there are circumstances in which the Commission's decision may be delayed beyond 180 days such that the time period should be extended? Should the Commission consider adopting any additional procedures or measures to promote timely consideration of applications?

Q-23. As proposed, if the Commission does not render a decision on the application within 180 days, the temporary exclusion expires and the SBS Entity becomes subject to the statutory prohibition in Exchange Act Section 15F(b)(6). As an alternative, as discussed above in Section II.C.8, should the Commission provide that where the Commission does not render a decision within 180 days following the filing of a complete application pursuant to proposed Rule of Practice 194, the application shall be deemed granted? Please explain why, as well as the costs and the benefits of this alternative approach.

Q-24. Proposed paragraph (i)(1)(iii) provides that an SBS Entity would be excluded from the prohibition in Exchange Act Section 15F(b)(6) for 180 days following the filing of a complete application with, or initiation of a process by, the CFTC, an SRO or a registered futures association with respect to an application or process with respect to the associated person for the membership, association, registration or listing as a principal, where such application has been filed or process started prior to or within the time period specified in paragraph (i)(1)(i) (

i.e.,

30 days). Is the proposed 180-day time period set forth in proposed paragraph (i)(1)(iii) an appropriate time period for an SBS Entity to determine whether it needs to file an application pursuant to proposed Rule of Practice 194 or a notice pursuant to proposed Rule of Practice 194(j) (see Question 33,

infra

)? Should it be shorter or longer (

e.g.,

the length of the proceeding), and, if so, why? What would be the impact of having a 180-day time period? For

example, does the 180-day time period provide a sufficient amount of time for the CFTC, an SRO or a registered futures association to make a determination with respect to membership, association, registration or listing as a principal with respect to a statutorily disqualified associated person entity? Why or why not? Would SBS Entities seek to file applications under proposed Rule of Practice 194 when there is a parallel application pending with the CFTC, an SRO or registered futures association because of the risk that a decision will not be rendered by the CFTC, an SRO or registered futures association within 180 days? If so, how should such parallel applications (and determinations with respect to such applications) be addressed, including any potential inconsistencies in substance or timing between the two?

Q-25. Should the proposed rule provide for either of the 60-day time periods set forth in proposed paragraph (i)(1)(ii) and (iii) to comply to the prohibition set forth in Exchange Act Section 15F(b)(6)? If so, why; if not, why not. Should the Commission provide for a process by which an applicant can submit a request for an extension of time of these time periods? For example, where good cause is shown, should the rule specify that the Commission or its staff may extend the 60-day time period provided for in proposed Rule of Practice 194(i)(1)(ii) and (iii) upon request by an SBS Entity? If so, during the time period for consideration of such request, should the SBS Entity be temporarily excluded from the prohibition in Exchange Act Section 15F(b)(6)?

Q-26. Should the Commission, as proposed in paragraph (i)(2), require that an SBS Entity file a notice with the Commission setting forth the name of the SBS Entity, the name of the associated person that is subject to a statutory disqualification, and attaching as an exhibit to the notice a copy of the order or other applicable document that resulted in the associated person being subject to a statutory disqualification in order to qualify for the temporary exclusion provided in proposed paragraph (i)(1)(ii) and (i)(1)(iii)? Should any information be included or excluded from the notice? If so, please specify what information should be included or excluded.

Q-27. Should the notice required under proposed paragraph (i)(2) be made public? Why or why not? Should any additional information be made public, such as the application and any corresponding exhibits required under proposed paragraphs (c) through (g)?

Q-28. Should the Commission provide that, where the Commission denies an application with respect to an associated person entity, the Commission may provide by order an extension of the temporary exclusion as is necessary or appropriate to allow the applicant to comply with the prohibition in Exchange Act Section 15F(b)(6), as set forth in proposed paragraph (i)(3)? Should the Commission provide by rule a limitation on the maximum time period allowed for any such extension?

Q-29. In addition to providing the Commission with the ability to extend the temporary exclusion when the Commission denies an application, as proposed paragraph (i)(3), should the Commission specify a minimum period of time for such an extension of the temporary exclusion following the issuance of an adverse decision (

e.g.,

30 or 60 days following an adverse decision)? If so, please explain what minimum time period and why.

Q-30. As noted in Section II.B.3, the CFTC rules provide that associated persons of swap dealers and major swap participants are natural persons.

120

As a result, the prohibition in Section 4s(b)(6) of the CEA

121

applies to natural persons associated with a Swap Entity, but not entities associated with the Swap Entity. As discussed above in Section II.C.8, should the Commission similarly limit the scope of the statutory prohibition set forth in Exchange Act Section 15F(b)(6) to natural persons associated with an SBS Entity, beyond the parameters set forth in Exchange Act Rule 15Fb6-1? For example, should the Commission provide, by rule, that an SBS Entity may permit an associated person that is not a natural person that is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on its behalf, without making an application under proposed Rule of Practice 194? What would be the comparative advantages, disadvantages, costs and/or benefits of such an approach?

120

See

Note 42,

supra.

121

See

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

Q-31. If the prohibition set forth in Exchange Act Section 15F(b)(6) were limited to natural persons associated with an SBS Entity, what would be the impact on SBS Entities, counterparties and other market participants? For example, what would be the impact, if any, on the legal and compliance burden on SBS Entities (including any restructuring costs)? What would be the impact, if any, on counterparties' evaluation of the risk of entering into security-based swaps with an SBS Entity that had associated person entities subject to a statutory disqualification? What would be the impact on investor protections and the fair and orderly operation of the security-based swap market?

Q-32. If the prohibition set forth in Exchange Act Section 15F(b)(6) were limited to natural persons associated with an SBS Entity, should the Commission require that an SBS Entity provide a notice to the Commission that would set forth the name of the associated person entity that is subject to a statutory disqualification? Why or why not? What information should any such notice contain or attach (

e.g.,

a copy of the order or other applicable document that resulted in the associated person entity being subject to a statutory disqualification)? Should any such notice be made publicly available? What would be the comparative advantages, disadvantages, costs and benefits of providing such a notice to the public?

Q-33. Proposed paragraph (j) would, in part, permit associated persons that are subject to a statutory disqualification to effect or be involved in effecting security-based swaps on behalf of SBS Entities, without making an application pursuant to the proposed rule, in cases where another regulatory authority (

i.e.,

the CFTC, an SRO or registered futures association) has specifically reviewed the underlying basis for the statutory disqualification and made an affirmative finding, notwithstanding the statutory disqualification. Should the Commission adopt this approach? Why or why not? What would be the comparative advantages, disadvantages, costs and/or benefits of adopting such an approach? For example, how should the Commission consider the impact of such an approach in circumstances where the Commission has not itself reviewed the facts giving rise to the statutory disqualification, nor the steps taken by the SBS Entity with respect to assuring sufficient oversight of the associated person?

Q-34. As an alternative, except with regard to cases where the Commission has previously granted relief under the Commission's Rule of Practice 193 or proposed Rule of Practice 194, should the Commission remove the approach outlined in proposed Rule of Practice 194(j), and require the Commission to make the relevant determination to permit an associated person that is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on behalf of an SBS Entity?

Q-35. Should proposed Rule of Practice 194(j) be limited to only

associated persons that are natural persons? If so, please explain why.

Q-36. Should proposed Rule of Practice 194(j) be limited to only associated persons that are not natural persons (

i.e.,

entities)? If so, please explain why.

Q-37. If the Commission were to provide an exclusion from the prohibition in Exchange Act Section 15F(b)(6) where another regulatory authority has previously made an affirmative finding with respect to the statutory disqualification as proposed in paragraph (j)(1)(

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