# 76 FR 65784: Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants > Federal · Regulations · In force URL: https://www.frixlaw.com/law-library/statutes/FR_PRORULE_2011-26889 ## Section - **Citation:** 76 FR 65784 - **Heading:** Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants - **Jurisdiction:** Federal - **Kind:** Regulations - **Status:** In force - **Text as of:** August 14, 2026 - **Source:** Compiled text - **Location:** Federal Register / Vol. 76 / 76 FR 65784 ## Text SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 240 and 249 [Release No. 34-65543; File No. S7-40-11] RIN 3235-AL05 Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants AGENCY: Securities and Exchange Commission. ACTION: Proposed rule. SUMMARY: Section 764(a) of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) requires the Securities and Exchange Commission (“Commission”) to issue rules to provide for the registration of security-based swap dealers (“SBS Dealers”) and major security-based swap participants (collectively, “SBS Entities”). Pursuant to this requirement, the Commission is proposing new Rules 15Fb1-1 through 15Fb6-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to provide for the registration of SBS Entities. The Commission is also proposing forms to facilitate registration (and withdrawal from registration) of these entities. DATES: Comments should be received on or before December 19, 2011. 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/proposed.shtml ); or • Send an e-mail to rule-comments@sec.gov . Please include File Number S7-40-11 on the subject line; or • Use the Federal eRulemaking Portal ( http://www.regulations.gov ). Follow the instructions for submitting comments. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number S7-40-11. This file number should be included on the subject line if e-mail is used. To help the Commission 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/proposed.shtml ) , 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number S7-40-11. This file number should be included on the subject line if e-mail is used. To help the Commission 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/proposed.shtml ). Comments will also be 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 a.m. and 3 p.m. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. FOR FURTHER INFORMATION CONTACT: David W. Blass, Chief Counsel; Joseph Furey, Assistant Chief Counsel; or Bonnie Gauch, Special Counsel, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-7010. SUPPLEMENTARY INFORMATION: Table of Contents: I. Introduction A. Background B. General Approach to the SBS Entity Registration Process 1. Conditional Registration i. Implementation Plan and the Last Compliance Date ii. Major Security-Based Swap Participant Applicants Registering After the Last Compliance Date 2. Ongoing Registration 3. Solicitation of Comments on the General Approach to the SBS Entity Registration Process II. Proposed Exchange Act Rules and Forms A. Registration Application and Amendment 1. Proposed Rule 15Fb2-1 i. Form of Application ii. Senior Officer Certification iii. Electronic Filing iv. Standards for Granting or Denying Applications v. Request for Comment on Additional Registration Considerations 2. Amendments to Application Forms: Proposed Rule 15Fb2-3 B. Associated Persons 1. Certification 2. Alternative Process C. Termination of Registration 1. Expiration: Proposed Rule 15Fb3-1 2 ed Rule 15Fb2-1 i. Form of Application ii. Senior Officer Certification iii. Electronic Filing iv. Standards for Granting or Denying Applications v. Request for Comment on Additional Registration Considerations 2. Amendments to Application Forms: Proposed Rule 15Fb2-3 B. Associated Persons 1. Certification 2. Alternative Process C. Termination of Registration 1. Expiration: Proposed Rule 15Fb3-1 2. Withdrawal: Proposed Rule 15Fb3-2 3. Cancellation and Revocation: Proposed Rule 15Fb3-3 D. Special Requirements for Nonresident SBS Entities 1. United States Agent for Service of Process 2. Access to Books and Records of Nonresident SBS Entity E. Special Situations 1. Succession: Proposed Rule 15Fb2-5 2. Insolvency: Proposed Rule 15Fb2-6 F. Technical Rules 1. Electronic Signatures 2. Temporary Rule To Facilitate Paper Filing of Forms G. Forms 1. Form SBSE 2. Form SBSE-A 3. Form SBSE-BD 4. Form SBSE-C 5. Form SBSE-W 6. Tagged Data Formats H. Alternative Approaches Considered III. Request for Comment IV. Paperwork Reduction Act A. Summary of Collection of Information B. Proposed Use of Information C. Respondents D. Total Initial and Annual Reporting and Recordkeeping Burdens 1. Burden Associated With Filing Application Forms 2. Burden Associated With Amending Application Forms 3. Burden Associated With Certification 4. Burdens Relating to Associated Persons 5. Burdens on Nonresident SBS Entities 6. Burden Related to Retention of Manually Signed Signature Pages 7. Burden Associated With Filing Withdrawal Form 8. Burden Associated With Proposed Temporary Rule 15Fb2-2T 9. Request for Comment on Burden Estimates E. Retention Period of Recordkeeping Requirements F. Collection of Information Is Mandatory G. Confidentiality H. Request for Comment V. Economic Analysis A. Benefits B. Costs 1. Costs Attributable to Filing the Forms 2. Costs of Certification 3. Costs Relating to Associated Persons 4. Costs to Nonresident SBS Entities 5. Cost of Retaining Manually Signed Signature Pages 6 ment on Burden Estimates E. Retention Period of Recordkeeping Requirements F. Collection of Information Is Mandatory G. Confidentiality H. Request for Comment V. Economic Analysis A. Benefits B. Costs 1. Costs Attributable to Filing the Forms 2. Costs of Certification 3. Costs Relating to Associated Persons 4. Costs to Nonresident SBS Entities 5. Cost of Retaining Manually Signed Signature Pages 6. Costs Associated With Proposed Temporary Rule 15Fb2-2T C. Request for Comment VI. Consideration of Impact on the Economy VII. Regulatory Flexibility Act Certification VIII. Statutory Basis and Text of Proposed Rules I. Introduction A. Background On July 21, 2010, the President signed the Dodd-Frank Act into law. 1 The Dodd-Frank Act was designed to promote, among other things, the financial stability of the United States by improving accountability and transparency in the financial system. 2 Among other measures, the Dodd-Frank Act provides the Commission and the Commodity Futures Trading Commission (“CFTC”) with authority to regulate certain aspects of the over-the-counter (“OTC”) derivatives market, where the recent financial crisis demonstrated a need for enhanced regulation. The Dodd-Frank Act is intended to provide the Commission 1 The Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010). 2 See id., at Preamble. Title VII of the Dodd-Frank Act broadly categorizes covered products as “swaps,” 3 regulated primarily by the CFTC, “security-based swaps,” 4 regulated primarily by the Commission, or “mixed swaps,” jointly regulated by the Commission and the CFTC. 5 Among other things, the Dodd-Frank Act prohibits any person from acting as a “security-based swap dealer” 6 or “major security-based swap participant” 7 without being registered with the Commission, and requires that the Commission issue rules to provide for registration of these SBS Entities. 8 3 Defined in Section 1a of the Commodity Exchange Act (“CEA”) lated by the Commission and the CFTC. 5 Among other things, the Dodd-Frank Act prohibits any person from acting as a “security-based swap dealer” 6 or “major security-based swap participant” 7 without being registered with the Commission, and requires that the Commission issue rules to provide for registration of these SBS Entities. 8 3 Defined in Section 1a of the Commodity Exchange Act (“CEA”). 4 Defined in Section 3(a)(68) of the Exchange Act. All references to the Exchange Act contained in this release refer to the Securities Exchange Act of 1934, as modified by the Dodd-Frank Act. 5 In addition, Section 712(d)(1) of the Dodd-Frank Act directs the Commission and the CFTC, in consultation with the Board of Governors of the Federal Reserve System, to propose rules and interpretative guidance to further define, among other things, the terms “security-based swap,” “swap dealer,” “security-based swap dealer,” “major swap participant,” and “major security-based swap participant.” The Commission and CFTC jointly proposed further rules and guidance with respect to the dealer and participant definitions on December 7, 2010. Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant,” Exchange Act Release No. 63452 (Dec. 7, 2010), 75 FR 80174 (Dec. 10, 2010) (the “Intermediary Definitions Release”). The Commission and CFTC jointly proposed further rules and guidance with respect to the definitions of “swap”, “security-based swap”, and other terms on April 29, 2011. Further Definition of “Swap, ” “Security-Based Swap, ” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, Exchange Act Release No. 64372 (Apr. 29, 2011), 76 FR 29818 (May 23, 2011)) se”). The Commission and CFTC jointly proposed further rules and guidance with respect to the definitions of “swap”, “security-based swap”, and other terms on April 29, 2011. Further Definition of “Swap, ” “Security-Based Swap, ” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, Exchange Act Release No. 64372 (Apr. 29, 2011), 76 FR 29818 (May 23, 2011)). 6 Subject to certain exceptions, Exchange Act Section 3(a)(71)(A) defines “security-based swap dealer” to mean any person who: (i) Holds themself out as a dealer in security-based swaps; (ii) makes a market in security-based swaps; (iii) regularly enters into security-based swaps with counterparties as an ordinary course of business for its own account; or (iv) engages in any activity causing it to be commonly known in the trade as a dealer or market maker in security-based swaps. See also supra note 5. 7 Exchange Act Section 3(a)(67)(A) defines “major security-based swap participant” to mean “any person: (i) who is not a security-based swap dealer; and (ii)(I) who maintains a substantial position in security-based swaps for any of the major security-based swap categories, as such categories are determined by the Commission, excluding both positions held for hedging or mitigating commercial risk and positions maintained by any employee benefit plan (or any contract held by such a plan) as defined in paragraphs (3) and (32) of Section 3 of the Employee Retirement Income Security Act of 1974 (29 U.S.C ty-based swaps for any of the major security-based swap categories, as such categories are determined by the Commission, excluding both positions held for hedging or mitigating commercial risk and positions maintained by any employee benefit plan (or any contract held by such a plan) as defined in paragraphs (3) and (32) of Section 3 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002) for the primary purpose of hedging or mitigating any risk directly associated with the operation of the plan; (II) whose outstanding security-based swaps create substantial counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets; or (III) that is a financial entity that (aa) is highly leveraged relative to the amount of capital such entity holds and that is not subject to capital requirements established by an appropriate Federal banking regulator; and (bb) maintains a substantial position in outstanding security-based swaps in any major security-based swap category, as such categories are determined by the Commission.” See also supra note 5. 8 The Commission has concluded that SBS Entities that were not registered with the Commission as of the July 16, 2011, effective date of Section 15F of the Exchange Act are permitted to lawfully continue their business absent Commission action with respect to the SBS Entity registration regime. See Temporary Exemptions and Other Temporary Relief, Together With Information on Compliance Dates for New Provisions of the Securities Exchange Act of 1934 Applicable to Security-Based Swaps, Exchange Act Release No. 64678 (Jun. 15, 2011), 76 FR 36287, 36299-300 (Jun. 22, 2011) (the “Effective Date Release”) eir business absent Commission action with respect to the SBS Entity registration regime. See Temporary Exemptions and Other Temporary Relief, Together With Information on Compliance Dates for New Provisions of the Securities Exchange Act of 1934 Applicable to Security-Based Swaps, Exchange Act Release No. 64678 (Jun. 15, 2011), 76 FR 36287, 36299-300 (Jun. 22, 2011) (the “Effective Date Release”). The Commission is proposing Rules 15Fb1-1 to 15Fb6-1 under the Exchange Act to establish procedures for an SBS Entity to register with the Commission and additional provisions related to such registration, including: (1) A requirement to amend an inaccurate application for registration; (2) procedures for succession to, or withdrawal from, registration; and (3) procedures for the Commission to cancel or revoke registration. 9 The proposed rules would also establish a requirement for an SBS Entity to certify that none of its associated persons that effect, or are involved in effecting, security-based swaps on the SBS Entity's behalf is subject to statutory disqualification. The Commission is proposing forms to facilitate SBS Entities' registration and withdrawal from registration. 9 The Exchange Act gives the Commission broad authority to craft a registration regime for SBS Entities that helps the Commission accomplish its missions of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation atutory disqualification. The Commission is proposing forms to facilitate SBS Entities' registration and withdrawal from registration. 9 The Exchange Act gives the Commission broad authority to craft a registration regime for SBS Entities that helps the Commission accomplish its missions of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. For example, Section 15F(b)(2) of the Exchange Act states that an application for registration “shall be made in such form and manner as prescribed by the Commission, and shall contain such information as the Commission considers necessary concerning the business in which the applicant is or will be engaged.” In addition, Section 15F(d)(1) of the Exchange Act directs the Commission to “adopt rules for persons that are registered as [SBS Entities] under [Section 15F].” The proposed rules and forms would address additional registration requirements applicable to nonresident SBS Entities, including requirements to appoint a U.S. agent for service of process, and to provide an opinion of counsel regarding the entity's ability to (1) Provide the Commission with prompt access to books and records, and (2) be subject to onsite examinations and inspections by the Commission. In proposing these rules and forms, the Commission is mindful that there are similarities and differences among SBS Entities that hold substantial positions in security-based swaps and dealers and participants that hold substantial positions in other financial products. The Commission also understands that there are similarities and differences between the security-based swap market and the markets for other financial products orms, the Commission is mindful that there are similarities and differences among SBS Entities that hold substantial positions in security-based swaps and dealers and participants that hold substantial positions in other financial products. The Commission also understands that there are similarities and differences between the security-based swap market and the markets for other financial products. The Commission believes that, both over time and as a result of Commission proposals to implement the Dodd-Frank Act, further information concerning the application of existing registration and regulatory regimes to SBS Entities and the development of the security-based swap market may alter certain considerations relating to the registration of SBS Entities. During the process of implementing the Dodd-Frank Act and beyond, the Commission intends to closely monitor developments relating to SBS Entities and the security-based swap markets. In particular, the Commission intends to evaluate further information concerning the range of market participants that may register as SBS Entities, the activities of and services provided by such market participants, whether these activities and services are identical or similar to activities and services already regulated by the federal securities laws or other laws, and how applicable existing registration and regulatory regimes interact with one another and apply to SBS Entities. B. General Approach to the SBS Entity Registration Process The Commission's proposed registration requirements for SBS Entities largely are modeled after the registration regime applicable to broker-dealers, 10 while also taking into account the CFTC's registration requirements for intermediaries existing registration and regulatory regimes interact with one another and apply to SBS Entities. B. General Approach to the SBS Entity Registration Process The Commission's proposed registration requirements for SBS Entities largely are modeled after the registration regime applicable to broker-dealers, 10 while also taking into account the CFTC's registration requirements for intermediaries. 11 We preliminarily believe that because the proposed requirements would closely align with current requirements for our other registrants, and would be similar to the registration regime for CFTC registrants, this approach would provide the Commission and the staff with key information about registrants while leveraging Commission staff experience and standing procedures to facilitate a 12 The proposed approach would seek to ensure that a market participant registered as both an SBS Entity and a broker-dealer is subject to a similar and complementary registration regime. It could therefore both ease the regulatory burden on such entities and help to establish a consistent regime for regulating SBS Dealers and dealers of other securities. 10 This includes rules promulgated under Sections 15(b) and 17(a) of the Exchange Act. 11 17 CFR 3.1 et seq. Futures commission merchants (“FCMs”) and introducing brokers presently register with the CFTC by filing Form 7-R with the National Futures Association. The CFTC has proposed to register swap dealers and major swap participants through this same process. See 75 FR 71379, at 71382 (Nov. 23, 2010). 12 See 15 U.S.C. 78c(a)(5) and 78o(a). As explained below, our proposed approach to the application process would build on our existing broker-dealer registration forms—most notably, Form BD—but also is designed to avoid unnecessary duplication by permitting SBS Entities that are otherwise registered or registering as intermediaries with either the Commission or the CFTC to complete simplified application forms 78c(a)(5) and 78o(a). As explained below, our proposed approach to the application process would build on our existing broker-dealer registration forms—most notably, Form BD—but also is designed to avoid unnecessary duplication by permitting SBS Entities that are otherwise registered or registering as intermediaries with either the Commission or the CFTC to complete simplified application forms. Under this process, SBS Entities registered or registering with the Commission as broker-dealers or with the CFTC as swap dealers or major swap participants would submit a shorter SBS Entity registration form along with a copy of their existing registration form. An SBS Entity would be permitted to file an application for registration as soon as final registration rules and forms are adopted. Further, each SBS Entity would need to be registered (at least conditionally) by the compliance date set forth in the final registration rules. In certain circumstances, SBS Entities would be required to apply for conditional registration, which they could convert to ongoing registration by fulfilling the applicable requirements set forth in the proposed rules. As discussed in more detail below, those requirements would differ depending on whether: (1) The application was filed with the Commission before or after the compliance dates for certain new rules to be adopted pursuant to Section 15F of the Exchange Act; and (2) the applicant is an SBS Dealer or instead is a major security-based swap participant. Conditional registration would expire after a specified time, and a conditionally registered SBS Entity would be required to cease its security-based swap business if it had not satisfied the applicable conditions to convert its registration to an ongoing registration. The Commission could, however, extend any conditional registration for good cause tead is a major security-based swap participant. Conditional registration would expire after a specified time, and a conditionally registered SBS Entity would be required to cease its security-based swap business if it had not satisfied the applicable conditions to convert its registration to an ongoing registration. The Commission could, however, extend any conditional registration for good cause. Although the Commission may be familiar with SBS Entities that are already registered with the Commission ( e.g., broker-dealers or investment advisers), the Commission is mindful that SBS Entities will nonetheless constitute a new class of registrants that may present business models and practices with which the Commission will need to gain experience. Accordingly, the Commission expects that its careful review of each application for registration and each certification on Form SBSE-C (the “Senior Officer Certification” described further below) will not only facilitate the Commission's decision to grant or deny registration to an SBS Entity, but also help to develop this experience and aid in the identification of areas for further inquiry, including, as may be appropriate, examinations of particular firms or business units by the Commission's Office of Compliance Inspections and Examinations (“OCIE”), in order to establish an effective ongoing examination program for such entities. 13 13 In addition to SBS Entities, the Dodd-Frank Act requires the Commission to register for the first time security-based swap execution facilities, security-based swap data repositories, municipal advisors, and certain private fund advisers Commission's Office of Compliance Inspections and Examinations (“OCIE”), in order to establish an effective ongoing examination program for such entities. 13 13 In addition to SBS Entities, the Dodd-Frank Act requires the Commission to register for the first time security-based swap execution facilities, security-based swap data repositories, municipal advisors, and certain private fund advisers. In light of these new categories of registrants, the Commission is presently reviewing the various standards and processes it uses to facilitate registration of the many types of entities required to register with it—including broker-dealers, investment advisers, nationally recognized statistical rating organizations, transfer agents, clearing agencies, exchanges, national securities associations, and others. In this regard, the Commission plans to issue a concept release designed to collect information and evaluate different aspects of these registration standards and processes. In particular, the Commission intends to consider the policy objectives of registration, how best to achieve those policy objectives through registration and other means, and the relative benefits and costs of the various means available. Through such a concept release, the Commission would hope to gain insight into how evolving market practices, technology, and other considerations could affect or be affected by the Commission's approach to the registration processes for various types of entities. Recognizing that the Commission has finite resources to allocate to registration, examination, and enforcement functions, the Commission intends to use the concept release to seek comment as to how it can most effectively and efficiently utilize these registration and other functions to help ensure that entities registered by the Commission to perform important financial intermediary and other functions in the securities markets have the capability to carry out those functions and to fully comply with all applicable regulatory requirements to use the concept release to seek comment as to how it can most effectively and efficiently utilize these registration and other functions to help ensure that entities registered by the Commission to perform important financial intermediary and other functions in the securities markets have the capability to carry out those functions and to fully comply with all applicable regulatory requirements. OCIE currently uses risk-based methodologies to focus Commission examination resources on firms and activities that could pose the greatest risk to investors and the integrity of the markets. Consistent with that general approach, OCIE and the Division of Trading and Markets intend jointly to perform a substantive review of applications and Senior Officer Certifications received for registration of SBS Entities to determine whether additional Commission action is appropriate and to evaluate potential registrants' risk for purposes of prioritizing examinations. 1. Conditional Registration Under the proposed rules, an SBS Entity seeking Commission registration generally would be required to apply for conditional registration by submitting a complete application to the Commission. The Commission would then grant conditional registration if it finds that the SBS Entity's application is complete, except that the Commission may institute proceedings to determine whether the Commission should deny conditional registration if the applicant is subject to a statutory disqualification or the Commission is aware of inaccurate statements in the application. 14 The Commission would notify the entity electronically when conditional registration is granted, and would make information regarding registration status publicly available. 14 Such proceedings would include notice of the grounds for denial under consideration and opportunity for hearing, and that at the conclusion of such proceedings, the Commission would grant or deny such registration. See proposed Rule 15Fb2-1(d)(1) ify the entity electronically when conditional registration is granted, and would make information regarding registration status publicly available. 14 Such proceedings would include notice of the grounds for denial under consideration and opportunity for hearing, and that at the conclusion of such proceedings, the Commission would grant or deny such registration. See proposed Rule 15Fb2-1(d)(1). For an SBS Entity to convert its conditional registration to ongoing registration, it would be required to submit a Senior Officer Certification signed by one of its knowledgeable senior officers. The contents of the Senior Officer Certification and the time frame within which it must be submitted to the Commission are described more fully below and specified in the rule. Generally, however, the Senior Officer Certification would state that, after due inquiry, the senior officer has reasonably determined that the SBS Entity has the operational, financial, and compliance capabilities to act as an SBS Dealer or a major security-based swap participant, as applicable, and has documented the process by which he or she reached such determination. We preliminarily believe that this certification requirement would help to protect both investors and markets from potential problems arising from SBS Entities that may lack the capabilities necessary to operate their businesses in compliance with their regulatory obligations. i. Implementation Plan and the Last Compliance Date After proposing all of the key rules under Title VII, the Commission intends to seek public comment on a detailed implementation plan that will permit a roll-out of the new securities-based swap requirements in a logical, progressive, and efficient manner, while minimizing unnecessary disruption and costs to the markets egulatory obligations. i. Implementation Plan and the Last Compliance Date After proposing all of the key rules under Title VII, the Commission intends to seek public comment on a detailed implementation plan that will permit a roll-out of the new securities-based swap requirements in a logical, progressive, and efficient manner, while minimizing unnecessary disruption and costs to the markets. Among other things, the implementation plan would inform the timing of the requirement for SBS Entities to register with the Commission, including whether such registration requirement would exist prior to the latest date, designated by the Commission, by which SBS Dealers and major security-based swap participants must begin complying with all of the initial rules promulgated under Section 15F of the Exchange Act (“Last Compliance Date”). 15 15 The term “Last Compliance Date” is defined in proposed Rule 15Fb2-1(e). The Commission anticipates that the Last Compliance Date would be clearly stated in the relevant adopting release and prominently announced on the Commission's Web site. The Commission believes it is possible that SBS Entities may be required to register before the Last Compliance Date. 16 For these “transitional” applicants, whether SBS Dealer or major security-based swap participant, there would be a period of time before the Last Compliance Date when the Senior Officer Certification would be either unduly burdensome for registrants ( e.g., a rule has been promulgated by the Commission under Section 15F of the Exchange Act, but compliance with that rule is not yet required) or inappropriate for meeting the goals of the certification ( e.g., the Commission has not yet adopted a significant rule under Section 15F of the Exchange Act, so the certification would not cover compliance in an important regulatory area) or registrants ( e.g., a rule has been promulgated by the Commission under Section 15F of the Exchange Act, but compliance with that rule is not yet required) or inappropriate for meeting the goals of the certification ( e.g., the Commission has not yet adopted a significant rule under Section 15F of the Exchange Act, so the certification would not cover compliance in an important regulatory area). 16 The Commission notes that, regardless of the timing of the Last Compliance Date, a registered SBS Entity would be required to comply with certain self-operative provisions in Exchange Act Section 15F upon registration (conditional or otherwise), absent further Commission action. See Effective Date Release, supra note 8. To address this potential transition issue, we preliminarily believe it is appropriate to propose a conditional registration process that would permit registration without a Senior Officer Certification prior to the Last Compliance Date. This process would be available to all applicants (whether SBS Dealer or major security-based swap participant) and would, among other things, facilitate the identification of existing SBS Entities in advance of the compliance date of certain substantive requirements. Conditional registration would be effective once the Commission grants such conditional registration and would expire on the Last Compliance Date (unless conditional registration was extended pursuant to paragraphs (b) or (c) of proposed Rule 15Fb3-1). Ongoing registration of these conditionally registered SBS Entities would be conditioned on, among other things, the registrant providing the Senior Officer Certification to the Commission on or before the Last Compliance Date. As described above, fulfillment of this requirement by an SBS Entity would provide the Commission with some assurance that the SBS Entity understands and has the ability to undertake its business in compliance with the applicable requirements uld be conditioned on, among other things, the registrant providing the Senior Officer Certification to the Commission on or before the Last Compliance Date. As described above, fulfillment of this requirement by an SBS Entity would provide the Commission with some assurance that the SBS Entity understands and has the ability to undertake its business in compliance with the applicable requirements. Once a registrant submits its Senior Officer Certification, the Commission would consider converting its conditional registration to an ongoing registration. 17 However, whether or not a conditional registrant provides the Senior Officer Certification on or before the Last Compliance Date, the Commission would retain the flexibility to extend conditional registration for good cause. 17 Submission of a Senior Officer Certification also would toll expiration of the SBS Entity's conditional registration for thirty days, if necessary to facilitate the Commission's review, or such longer period as the Commission finds for good cause ( see proposed Rule 15Fb3-1). Once the Last Compliance Date has occurred, the conditional registration process for SBS Dealers would effectively collapse into the ongoing registration process and any SBS Dealer would need to submit its Senior Officer Certification with its application ( i.e., after the Last Compliance Date, SBS Dealers could only apply for ongoing registration). Major securities-based swap participants could still conditionally register (as described below) because of challenges separate and apart from implementation of Section 15F of the Exchange Act. ii ion process and any SBS Dealer would need to submit its Senior Officer Certification with its application ( i.e., after the Last Compliance Date, SBS Dealers could only apply for ongoing registration). Major securities-based swap participants could still conditionally register (as described below) because of challenges separate and apart from implementation of Section 15F of the Exchange Act. ii. Major Security-Based Swap Participant Applicants Registering After the Last Compliance Date As noted in the proposed definition of major security-based swap participant, 18 an entity whose security-based swap portfolio crosses established thresholds in a fiscal quarter would have a two-month grace period following the end of that quarter to submit a complete application for registration as a major security-based swap participant. The Commission preliminarily believes that, while there is likely to be some advance notice of an impending status change due to ongoing monitoring of portfolios in the ordinary course of business, an entity that would likely fall within the definition of a “major security-based swap participant” because of activities in a given fiscal quarter may not have adequate compliance systems in place within two months after the end of the triggering quarter to allow the entity to provide the Commission with a Senior Officer Certification. Therefore, the Commission proposes to conditionally register such new participants based on their filing of a complete application before the expiration of the two-month grace period, subject to a requirement that they provide a Senior Officer Certification to the Commission within four months of the submission of their complete application ( i.e., within six months after the end of the triggering quarter) , the Commission proposes to conditionally register such new participants based on their filing of a complete application before the expiration of the two-month grace period, subject to a requirement that they provide a Senior Officer Certification to the Commission within four months of the submission of their complete application ( i.e., within six months after the end of the triggering quarter). This proposal is intended to balance the additional time a new major security-based swap participant may require to build out its compliance structure with the Commission's strong interest in having new registrants promptly comply with applicable federal securities laws. Such conditional registration would be effective once the Commission grants conditional registration and would expire four months after receipt of that application unless the firm files a Senior Officer Certification with the Commission within that time frame. 18 See Intermediary Definitions Release, supra note 5, at 103. As with conditional registrations granted prior to the Last Compliance Date, once a major security-based swap participant that applies for registration after the Last Compliance Date submits its Senior Officer Certification, the Commission could consider converting its conditional registration to an ongoing registration, as described below. In addition, whether or not a conditionally registered major security-based swap participant provides the Senior Officer Certification within four months after submitting its application, the Commission retains the flexibility to extend the conditional registration for good cause. The Commission notes that the conditional registration mechanism for major security-based swap participants would remain in place even after the Last Compliance Date ( i.e., major security-based swap participants could always avail themselves of a conditional registration period). 2 g its application, the Commission retains the flexibility to extend the conditional registration for good cause. The Commission notes that the conditional registration mechanism for major security-based swap participants would remain in place even after the Last Compliance Date ( i.e., major security-based swap participants could always avail themselves of a conditional registration period). 2. Ongoing Registration The proposed rules would provide for the ongoing registration of all conditionally registered SBS Entities following their fulfillment of the applicable requirements, as well as SBS The Commission would grant ongoing registration if it finds that the requirements of Section 15F(b) of the Exchange Act are satisfied, but the Commission would institute proceedings to determine whether the Commission should deny ongoing registration if the Commission does not make such a finding, if it finds that the applicant is subject to a statutory disqualification, or if it is aware of inaccurate statements in the application or certification. 19 The Commission would notify the entity electronically when ongoing registration is granted, and would make information regarding registration status publicly available. Pursuant to proposed Rule 15Fb3-1(a), ongoing registration would be effective until any cancellation, revocation or withdrawal of the registration or on any other event the Commission determines should trigger expiration. 19 Such proceedings would include notice of the grounds for denial under consideration and opportunity for hearing, and that at the conclusion of such proceedings, the Commission would grant or deny such registration. See proposed Rule 15Fb2-1(d)(2). 3. Solicitation of Comments on the General Approach to the SBS Entity Registration Process We request comment on this approach to the SBS Entity registration process. Q-1 nclude notice of the grounds for denial under consideration and opportunity for hearing, and that at the conclusion of such proceedings, the Commission would grant or deny such registration. See proposed Rule 15Fb2-1(d)(2). 3. Solicitation of Comments on the General Approach to the SBS Entity Registration Process We request comment on this approach to the SBS Entity registration process. Q-1. Should the Commission model the registration regime applicable to SBS Entities more closely after one or more other registration regimes regulated by the Commission ( e.g., securities exchanges or associations, 20 clearing agencies, 21 or investment advisers 22 ), self regulatory organizations (“SROs”), 23 or other regulators? 24 If so, please describe which model should be followed and why. 20 15 U.S.C. 78f(b)(1) and 15 U.S.C. 78o-3(b)(1)-(2). 21 15 U.S.C. 78q-1(b)(3)(A). 22 15 U.S.C. 80b-3(c). 23 See, e.g., National Association of Securities Dealers Rules 1013 and 1014; Chicago Board Options Exchange Rules 3.5(c)(ii), 8.83(b), and 44.12(b); and NYSE Arca Rule 7.22(a). 24 See, e.g., National Futures Association Registration Rules (which can be found at http://www.nfa.futures.org/nfamanual/NFAManualTOC.aspx?Section=8 ). Q-2. Does the conditional process for SBS Entity registration outlined above provide a practicable solution to the potential timing issues raised by the implementation of Section 15F of the Exchange Act? Are there additional or alternative conditions or mechanisms that would be appropriate for addressing those issues? Q-3. Does the conditional process for major security-based swap participant registration outlined above provide a practicable solution to the potential timing issues raised by the look-back features in the proposed definition of “major security-based swap participant” definition? Are there additional or alternative conditions or mechanisms that would be appropriate for addressing those issues? Q-4 3. Does the conditional process for major security-based swap participant registration outlined above provide a practicable solution to the potential timing issues raised by the look-back features in the proposed definition of “major security-based swap participant” definition? Are there additional or alternative conditions or mechanisms that would be appropriate for addressing those issues? Q-4. Should the Commission delay all registrations until the Last Compliance Date instead of adopting a conditional registration process? Why or why not? Q-5. Should the Commission consider granting conditional registration automatically based on the receipt of a completed application or some other or additional documents? If so, why? Q-6. Should the Commission notify the SBS Entity that it has granted conditional or ongoing registration prior to making the SBS Entity's registration status publicly available? If so, why and what should be the timing difference? Q-7. Should the Commission provide additional guidance regarding the process for institution of proceedings? For instance, should the Commission include timeframes within which proceedings would be instituted and/or a decision to grant or deny registration based on those proceedings should be provided ( e.g., Exchange Act Section 15(b)(1))? If so, what timeframes or other guidance would be appropriate and why? Q-8. Is it appropriate to seek to minimize duplication by permitting registered intermediaries to follow a registration process that uses simplified forms? Why or why not? Q-9. Should these intermediaries be required to file their existing registration forms with the Commission as part of this process, or should they be required to authorize the Commission to obtain access to those forms at the relevant repository ( e.g., the Financial Industry Regulatory Authority (“FINRA”) or the National Futures Association (“NFA”))? Q-10 ses simplified forms? Why or why not? Q-9. Should these intermediaries be required to file their existing registration forms with the Commission as part of this process, or should they be required to authorize the Commission to obtain access to those forms at the relevant repository ( e.g., the Financial Industry Regulatory Authority (“FINRA”) or the National Futures Association (“NFA”))? Q-10. Should SBS Entities be afforded more time (beyond the Last Compliance Date) to prepare and provide their Senior Officer Certification? Why or why not? If so, how much additional time would be appropriate? Q-11. Should major security-based swap participants that file applications after the Last Compliance Date be afforded more or less than four months to prepare and provide their Senior Officer Certification? Why or why not? Q-12. What would be the advantages and disadvantages and costs and benefits of the Commission adopting an approach to SBS Entity registration that encompasses a more substantive inquiry concerning the business of an applicant? What would be the impact on market participants, including investors? Q-13. Are there additional or alternative mechanisms that the Commission could employ to better protect markets and market participants and minimize the burden on registrants while meeting the regulatory objectives of a registration scheme for SBS Entities? Commenters are encouraged to identify other possible solutions that would allow the Commission to promptly review and consider SBS Entity registration applications so they would not experience undue interruptions in business while also providing the Commission reasonable assurance that they have the ability to carry out their business and are able to comply with applicable federal securities laws. II. Proposed Exchange Act Rules and Forms A. Registration Application and Amendment 1. Proposed Rule 15Fb2-1 Proposed Rule 15Fb2-1 would set forth the method through which SBS Entities could apply for registration with the Commission iding the Commission reasonable assurance that they have the ability to carry out their business and are able to comply with applicable federal securities laws. II. Proposed Exchange Act Rules and Forms A. Registration Application and Amendment 1. Proposed Rule 15Fb2-1 Proposed Rule 15Fb2-1 would set forth the method through which SBS Entities could apply for registration with the Commission. Essentially, the forms and process for filing applications and other documents electronically with the Commission would be identical for SBS Dealers and major security-based swap participants. This proposed rule also would describe the timing of such filings and the standard of review applied by the Commission in determining whether to grant or deny registration, which may differ slightly for SBS Dealers and major security-based swap participants, depending on the type of registration the firm is seeking. While it may be appropriate for certain rules applicable to SBS Dealers to differ from those applicable to major security-based swap participants, the Commission preliminarily believes that i. Form of Application Paragraph (a) of proposed Rule 15Fb2-1 would provide that an SBS Entity would apply for registration electronically on Form SBSE, Form SBSE-A, or Form SBSE-BD, as appropriate, in accordance with the instructions to the form. In general: • SBS Entities registered or registering with the Commission as broker-dealers would apply for registration using Form SBSE-BD; • SBS Entities registered or registering with the CFTC as swap dealers or major swap participants (and not also registered or registering with the Commission as broker-dealers) would apply for registration using Form SBSE-A; and • SBS Entities that do not fit either of the above categories would apply for registration using Form SBSE. Specifics regarding each of these forms and their differences and uses are discussed in more detail below the CFTC as swap dealers or major swap participants (and not also registered or registering with the Commission as broker-dealers) would apply for registration using Form SBSE-A; and • SBS Entities that do not fit either of the above categories would apply for registration using Form SBSE. Specifics regarding each of these forms and their differences and uses are discussed in more detail below. These forms would be used to register with the Commission regardless of whether an SBS Entity was applying for conditional or ongoing registration. The Commission solicits comment on the use of forms to register with the Commission. Q-14. Would an alternative mechanism be more appropriate for registering SBS Entities? If so, which one and why? Q-15. Should the registration forms differ based on whether the entity is registering as an SBS Dealer or major security-based swap participant? If so, how? ii. Senior Officer Certification Paragraph (b) of proposed Rule 15Fb2-1 would require that each SBS Entity provide the Commission with a certification on Form SBSE-C to facilitate the Commission's review of each firm's application for ongoing registration. A knowledgeable senior officer of the SBS Entity would be required to sign the certification, 25 which is designed to provide the Commission with the applicant's assurance that the applicant has the capabilities necessary to operate as an SBS Entity and, therefore, that the applicant should qualify for registration under Exchange Act Section 15F(b). Accordingly, the certification would assist the Commission in determining whether to grant the SBS Entity ongoing registration. Such an informed determination, based in part on the certification, will help the Commission maintain orderly and efficient markets and protect investors by helping to ensure that the Commission only grants registration to SBS Entities that can attest that they possess the operational, financial, and compliance capabilities to conduct business as an SBS Entity the SBS Entity ongoing registration. Such an informed determination, based in part on the certification, will help the Commission maintain orderly and efficient markets and protect investors by helping to ensure that the Commission only grants registration to SBS Entities that can attest that they possess the operational, financial, and compliance capabilities to conduct business as an SBS Entity. Specifically, under the proposal, each SBS Entity must have a senior officer certify that, after due inquiry, he or she has reasonably determined that the SBS Entity has the operational, 26 financial, 27 and compliance 28 capabilities to act as an SBS Entity. In addition, the proposal would require that the senior officer certify that he or she has documented the process by which he or she reached that determination. While the Commission has required regulated entities to provide a certification in other contexts, 29 a requirement that an applicant or regulated entity certify as to its ability to engage in the business it would be registered to do is relatively new. 30 25 In accordance with Proposed Rule 15Fb1-1(b), the SBS Entity will need to maintain a manually signed copy of this certification as part of its books and records until at least three years after the certification was filed with the Commission. 26 The concept of “operational capability” can be an important regulatory consideration because an SBS Entity with insufficient infrastructure, technology, and human resources presents operational risks that may adversely impact its counterparties and the broader market— e.g., if transactions are inaccurately documented, not documented at all, or if insufficient margin is collected. See Trade Acknowledgment and Verification of Security-Based Swap Transactions, Exchange Act Release No. 63727 (Jan. 14, 2011), 76 FR 3859, at 3860 (Jan cture, technology, and human resources presents operational risks that may adversely impact its counterparties and the broader market— e.g., if transactions are inaccurately documented, not documented at all, or if insufficient margin is collected. See Trade Acknowledgment and Verification of Security-Based Swap Transactions, Exchange Act Release No. 63727 (Jan. 14, 2011), 76 FR 3859, at 3860 (Jan. 21, 2011) (proposing release) (discussing the recognition by various parties of the importance of operational infrastructure in the over-the-counter derivatives market) (the “Trade Acknowledgement Proposing Release”). The Commission expects that a key foundation for the Senior Officer Certification would be the capability of an SBS Entity to comply with the obligations that would be imposed by the Trade Acknowledgment Proposing Release, if adopted, other legal obligations applicable to the operations of an SBS Entity, and the capability of the SBS Entity to conduct its business as represented in the SBS Entity's application for ongoing registration. 27 The concept of “financial capability” can be an important regulatory consideration because of, among other things, the role adequate financing plays in protecting an SBS Entity's counterparties and the broader market by ensuring that the SBS Entity has sufficient working capital and liquidity for its security-based swap business consistent with regulatory requirements and as needed to respond to market conditions. The Commission will separately propose capital rules for SBS Entities, as required by the Dodd Frank Act. 15 U.S.C. 78o-10(e). The Commission expects that the capability of an SBS Entity to comply with these obligations, if adopted, would form a key foundation for the Senior Officer Certification. 28 The concept of “compliance capability” can be an important regulatory consideration because of, among other things, the wholesale creation of a new regulatory regime for security-based swaps under the Dodd-Frank Act -10(e). The Commission expects that the capability of an SBS Entity to comply with these obligations, if adopted, would form a key foundation for the Senior Officer Certification. 28 The concept of “compliance capability” can be an important regulatory consideration because of, among other things, the wholesale creation of a new regulatory regime for security-based swaps under the Dodd-Frank Act. For example, in proposing business conduct rules for SBS Entities, the Commission proposed to require that each SBS Entity “[establish, maintain, and enforce] written policies and procedures addressing the supervision of the types of security-based swap business in which the [SBS Entity] is engaged that are reasonably designed to achieve compliance with applicable securities laws and the rules and regulations thereunder.” Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants, Exchange Act Release No. 64766 (Jun. 29, 2011), 76 FR 42396, (Jul. 18, 2011), as corrected by Exchange Act Release No. 64766, 76 FR 46668 (Aug. 3, 2011) (proposing release). The Commission expects that development and implementation of such a compliance regime, if adopted, would serve as a key foundation for the Senior Officer Certification. 29 See, e.g., 17 CFR 240.15c3-5, 17 CFR 240.13a-14, and 17 CFR 270.30a-2. 30 See, e.g., Registration of Municipal Advisors, Exchange Act Release No. 63576 (Dec. 20, 2010), 76 FR 824, (Jan. 6, 2011) (proposing release) (the “Registration of Municipal Advisors Proposing Release”). The Commission preliminarily believes that receipt of a Senior Officer Certification would provide assurances to the Commission that each SBS Entity has the requisite capabilities to operate in the capacity for which it seeks registration rs, Exchange Act Release No. 63576 (Dec. 20, 2010), 76 FR 824, (Jan. 6, 2011) (proposing release) (the “Registration of Municipal Advisors Proposing Release”). The Commission preliminarily believes that receipt of a Senior Officer Certification would provide assurances to the Commission that each SBS Entity has the requisite capabilities to operate in the capacity for which it seeks registration. The Senior Officer Certification is designed to require a deliberate and thoughtful self-assessment by each SBS Entity of its capabilities and thus should provide assurances to potential investors, customers of, and counterparties to an SBS Entity that the SBS Entity has the requisite capabilities to act in that capacity. Further, this Senior Officer Certification requirement could help prevent disorderly and unstable markets that could result from the failure of a registered SBS Entity that lacks the requisite capabilities to operate its business in a registered capacity. The Senior Officer Certification also may enhance market participants' ability to assess the counterparty credit risk associated with a particular SBS Entity counterparty. In this way, the Senior Officer Certification should help to protect investors and other market participants from SBS Entities that are not competent to engage in that business, lack the financial resources to do so, or are unable or unwilling to comply with applicable law. The Commission thus preliminarily believes that the Senior Officer Certification could help the efficient functioning of the market and enhance the confidence of investors and other market participants rs and other market participants from SBS Entities that are not competent to engage in that business, lack the financial resources to do so, or are unable or unwilling to comply with applicable law. The Commission thus preliminarily believes that the Senior Officer Certification could help the efficient functioning of the market and enhance the confidence of investors and other market participants. The Senior Officer Certification requirement, in other words, is meant to address many of the same considerations that arise during the in-depth review by the Commission and its staff, or, in some cases, SROs, prior to 31 For example, under Sections 6(b) and 19(a) of the Exchange Act, an exchange may not be registered unless the Commission finds that the exchange “is so organized and has the capacity to be able to carry out the purposes of the Exchange Act and to comply, and [* * *] to enforce compliance by its members and persons associated with its members, with the provisions of [the Exchange Act], the rules and regulations thereunder, and the rules of the exchange.” 32 Similarly, under Section 17A of the Exchange Act, a clearing agency may not be registered unless the Commission finds that the agency “has the capacity to be able to facilitate the prompt and accurate clearance and settlement of securities transactions and derivative agreements, contracts and transactions for which it is responsible, to safeguard securities and funds in its custody or control or for which it is responsible, to comply with the provisions of [the Exchange Act] and the rules and regulations thereunder, [and] to enforce [* * *] compliance by its participants with the rules of the clearing agency, and to carry out the purposes of this section.” 33 To this end, the Commission has published a series of standards “that the [staff] will use in reviewing the organizations, capacities and rules of clearing agencies that currently are registered temporarily with the Commission and of clearing agencies that may apply for registration * * *.” 34 ts participants with the rules of the clearing agency, and to carry out the purposes of this section.” 33 To this end, the Commission has published a series of standards “that the [staff] will use in reviewing the organizations, capacities and rules of clearing agencies that currently are registered temporarily with the Commission and of clearing agencies that may apply for registration * * *.” 34 Broker-dealers that register with the Commission under Section 15(b) also must become a member of an SRO, and SRO rules generally incorporate membership application procedures that include, among other things, assessments by the SRO of the broker-dealer's operational, financial, and compliance capabilities. 35 31 See, e.g., 15 U.S.C. 78f(b)(1) (regarding registration of national securities exchanges), and 15 U.S.C. 78q-1(b)(3)(A) (regarding registration of clearing agencies). See also 15 U.S.C. 78o-3(b)(1) and (2) (regarding registration of national securities associations). In addition, the Commission recently proposed rules governing the registration of security-based swap data repositories (“SDRs”), security-based swap execution facilities (“SB SEFs”), security-based swap clearing agencies (“SBS CAs”), and municipal advisors that relate to potential registrants' operational, financial, and compliance capabilities. For example, the proposed registration rules for security-based swap data repositories are intended to, among other things, assure the Commission that “an SDR is so organized, and has the capacity, to be able to assure the prompt, accurate, and reliable performance of its functions as an SDR, comply with any applicable provision of the Federal securities laws and the rules and regulations thereunder, and carry out its functions in a manner consistent with the purposes of Exchange Act.” These proposed rules may also require an SDR to file with the Commission, as a condition of registration or continued registration, a review relating to the SDR's operational capacity and ability to meet its regulatory obli icable provision of the Federal securities laws and the rules and regulations thereunder, and carry out its functions in a manner consistent with the purposes of Exchange Act.” These proposed rules may also require an SDR to file with the Commission, as a condition of registration or continued registration, a review relating to the SDR's operational capacity and ability to meet its regulatory obligations. Such review could be in the form of a report conducted by the SDR, an independent third party, or both. Security-Based Swap Data Repository Registration, Duties, and Core Principles, Exchange Act Release No. 63347 (Nov. 19, 2010), 75 FR 77306 (Dec. 10, 2010) (proposing release). Similarly, the proposed registration rules for security-based swap execution facilities are designed to assure the Commission that a registrant “has adequate financial, operational, and managerial resources to discharge each responsibility of the SB SEF, as determined by the Commission.” Registration and Regulation of Security-Based Swap Execution Facilities, Exchange Act Release No. 63825 (Feb. 2, 2011), 76 FR 10948 (Feb. 28, 2011) (proposing release). Among other things, these rules state in part that “the financial resources of a SB SEF shall be considered to be adequate if the value of the financial resources exceeds the total amount that would enable the SB SEF to cover its operating costs for a one year period.” The Commission also proposed registration rules for security-based swap clearing agencies that require, among other things, registrants to establish, maintain, and enforce written policies and procedures reasonably designed to ensure that their systems provide adequate levels of capacity, resiliency, and security unt that would enable the SB SEF to cover its operating costs for a one year period.” The Commission also proposed registration rules for security-based swap clearing agencies that require, among other things, registrants to establish, maintain, and enforce written policies and procedures reasonably designed to ensure that their systems provide adequate levels of capacity, resiliency, and security. Such policies and procedures shall, at a minimum: (i) Establish reasonable current and future capacity estimates; (ii) conduct periodic capacity stress tests of critical systems to determine such systems' ability to process transactions in an accurate, timely, and efficient manner; (iii) develop and implement reasonable procedures to review and keep current its system development and testing methodology; (iv) review the vulnerability of its systems and data center computer operations to internal and external threats, physical hazards, and natural disasters; and (v) establish adequate contingency and disaster recovery plans. These rules further require that clearing agencies that provide central counterparty (“CCP”) services need to have a qualified person conduct a review of models that are used to set margin levels, along with related parameters and assumptions, in order to assure that the models perform in a manner that facilitates prompt and accurate clearance and settlement of transactions. In determining whether a person is qualified to conduct the model validation, clearing agencies providing CCP services could consider several factors, including the person's experience in validating margin models, expertise in risk management generally, and understanding of the clearing agency's operations and procedures. Clearing Agency Standards for Operation and Governance, Exchange Act Release No. 64017 (Mar. 3, 2011), 76 FR 14472 (Mar. 16, 2011) (proposing release) (the “Clearing Agency Standards Proposing Release”) onsider several factors, including the person's experience in validating margin models, expertise in risk management generally, and understanding of the clearing agency's operations and procedures. Clearing Agency Standards for Operation and Governance, Exchange Act Release No. 64017 (Mar. 3, 2011), 76 FR 14472 (Mar. 16, 2011) (proposing release) (the “Clearing Agency Standards Proposing Release”). Finally, the proposed registration rules for municipal advisors would require municipal advisors to certify that they have: “1) sufficient qualifications, training, experience, and competence to effectively carry out their designated functions; 2) met, or within any applicable timeframe will meet, such standards of training experience, and competence, and such other qualifications, including testing, for a municipal advisor, required by the Commission, the MSRB or any other relevant self-regulatory organization; and 3) the necessary understanding of, and ability to comply with, all applicable regulatory obligations.” Registration of Municipal Advisors Proposing Release, supra note 30. 32 15 U.S.C. 78f(b)(1). 33 15 U.S.C. 78q-1(b)(3)(A). 34 The Commission has established a series of standards “that the [staff] will use in reviewing the organizations, capacities and rules of clearing agencies that currently are registered temporarily with the Commission and of clearing agencies that may apply for registration * * *.” Regulation of Clearing Agencies, Exchange Act Release No. 16900 (Jun. 17. 1980), 45 FR 41920 (June 23, 1980) (emphasis added). See also the Clearing Agency Standards Proposing Release, supra note 30. 35 See, e.g., NASD Rules 1013 and 1014 (membership application review requires a new broker-dealer to, among other things, file a detailed business plan, explain its sources of funding, describe the educational background and experience of its personnel, and undergo a membership interview) (June 23, 1980) (emphasis added). See also the Clearing Agency Standards Proposing Release, supra note 30. 35 See, e.g., NASD Rules 1013 and 1014 (membership application review requires a new broker-dealer to, among other things, file a detailed business plan, explain its sources of funding, describe the educational background and experience of its personnel, and undergo a membership interview). Existing FINRA members that wish to enter into a materially new business, such as dealing in security-based swaps, must also file an application to do so, and those applications are similarly reviewed to determine whether the broker-dealer has the requisite capabilities to conduct the new business. NASD Rule 1017. Exchange Act Rule 15b2-2 requires that a new broker-dealer be examined within six months to evaluate whether the broker-dealer is operating in conformity with applicable financial responsibility rules and again within twelve months to evaluate whether it is also operating in conformity with all other applicable provisions of the Exchange Act and rules thereunder. 17 CFR 240.15b2-2(b) & (c). At this time, although we provide guidance above regarding the factors a senior officer would use to serve as a foundation for the Senior Officer Certification, 36 we are not proposing a specific definition of the term “operational, financial and compliance capabilities.” Instead, we request comment regarding whether and how that phrase should be further defined or interpreted 0.15b2-2(b) & (c). At this time, although we provide guidance above regarding the factors a senior officer would use to serve as a foundation for the Senior Officer Certification, 36 we are not proposing a specific definition of the term “operational, financial and compliance capabilities.” Instead, we request comment regarding whether and how that phrase should be further defined or interpreted. The Commission recognizes that whether an SBS Entity has the operational, financial and compliance capabilities to act as an SBS Entity likely will depend on its particular facts and circumstances, including, among other things: the scope and nature of its security-based swap business; its other related financial and business activities; the extent to which it is subject to other registration and regulatory requirements or other supervisory oversight with respect to its activities; its relationships with, and reliance on, affiliates, service providers, and other parties; and the extent and nature of its historical involvement in security-based swap transactions. Moreover, it may be appropriate to consider the capabilities required for this certification by reference to regulatory standards. For example, attesting to capabilities might include a self-assessment of whether the SBS Entity is capable of communicating in a manner that is based on principles of fair dealing and good faith; 37 whether the SBS Entity has established all contractual or other arrangements and business relationships necessary to conduct its security-based swap business; 38 whether the SBS Entity has or has adequate plans to obtain facilities 39 and whether the SBS Entity is capable of maintaining a level of capital that is adequate to support the SBS Entity's intended business operations on a continuing basis. 40 36 See supra notes 26-28. 37 See Section 15F(h)(3)(C) (providing that business conduct requirements adopted by the Commission shall establish a duty to communicate in a manner “based on principles of fair dealing and good faith”) hether the SBS Entity is capable of maintaining a level of capital that is adequate to support the SBS Entity's intended business operations on a continuing basis. 40 36 See supra notes 26-28. 37 See Section 15F(h)(3)(C) (providing that business conduct requirements adopted by the Commission shall establish a duty to communicate in a manner “based on principles of fair dealing and good faith”). 38 See NASD Rule 1014(a)(4). 39 See NASD Rule 1014(a)(5). 40 See NASD Rule 1014(a)(7). The proposed rules would require that a senior officer of an SBS Entity certify that he or she has reasonably determined that, after “due inquiry,” the security-based swap dealer or major security-based swap participant has the operational, financial, and compliance capabilities to act as an SBS Entity. 41 We believe it is important to make explicit that the senior officer is obligated under the rule to conduct some inquiry to form his or her reasonable determination. However, the Commission does not propose to prescribe any single method a senior officer must use to gain an appropriate level of comfort and information before signing the Senior Officer Certification. In other words, different SBS Entities may utilize different processes to provide a basis for a senior officer's reasonable determination that the SBS Entity has the requisite capabilities. 42 41 This certification must be accurate as of the date the certification is filed with the Commission. An SBS Entity would not be required to have a senior officer update the certification after the SBS Entity has been approved for ongoing registration lize different processes to provide a basis for a senior officer's reasonable determination that the SBS Entity has the requisite capabilities. 42 41 This certification must be accurate as of the date the certification is filed with the Commission. An SBS Entity would not be required to have a senior officer update the certification after the SBS Entity has been approved for ongoing registration. 42 For example, in satisfying other certification requirements some SBS Entities may use a sub-certification process whereby the senior officer will not certify a firm-wide statement unless and until other persons responsible for certain activities in turn certify to the senior officer that the standard has been met, while other SBS Entities may use an internal or external audit-type process whereby a senior officer may choose to employ a third party to review an area subject to a firm-wide certification before submitting the certification. As described in Part I above, the proposed registration process would include conditional and ongoing registration. Pursuant to subparagraph (b)(1)(i) and (ii), respectively, of proposed Rule 15Fb2-1, SBS Entities that register conditionally during the transitional period would need to submit the Senior Officer Certification on or before the Last Compliance Date and major security-based swap participants that file an application after the Last Compliance Date would need to submit the certification within four months after filing an application. The Commission preliminarily believes that these timeframes would provide senior officers of conditionally registered SBS Entities sufficient time to determine that they are able to provide the relevant certification. Pursuant to subparagraph (b)(2), an SBS Dealer that files an application after the Last Compliance Date would need to submit the Senior Officer Certification with its application ipants and other market participants that new SBS Entities have the requisite capabilities to act as SBS Entities? Why or why not? Q-18. Should the Commission only require SBS Dealers, and not major security-based swap participants, to provide a Senior Officer Certification? Why or why not? What would be the comparative advantages, disadvantages, costs and/or benefits of such an approach? Q-19. Alternatively, should the form of Senior Officer Certification an SBS Entity must file be driven by whether the entity is an SBS Dealer or major security-based swap participant? For instance, should an SBS Dealer be required to certify to its capabilities and a major security-based swap participant be required to certify to its policies and procedures? If so, what form of Senior Officer Certification should SBS Dealers be required to file and which form of Senior Officer Certification should major security-based swap participants be required to file? What would be the comparative advantages, disadvantages, costs and/or benefits of requiring dealers and participants to certify using different certification language? Q-20. What alternative forms of Senior Officer Certification should be considered, if any? For example, should the proposed Senior Officer Certification use the language that the Commission proposed with respect to the certification to be made by municipal advisors? 43 Why or why not? What would be the comparative advantages, disadvantages, costs and/or benefits of using the same certification language the Commission has proposed for use by municipal advisors as opposed to the language proposed? 43 See supra note 31, regarding the certification the Commission proposed for use by municipal advisors in the Registration of Municipal Advisors Proposing Release. Q-21. The concept of developing and implementing written policies and procedures has often been used by the Commission to further its regulatory objectives proposed for use by municipal advisors as opposed to the language proposed? 43 See supra note 31, regarding the certification the Commission proposed for use by municipal advisors in the Registration of Municipal Advisors Proposing Release. Q-21. The concept of developing and implementing written policies and procedures has often been used by the Commission to further its regulatory objectives. Should the Senior Officer Certification instead require that a senior officer certify that “to the best of his or her knowledge, after due inquiry, the security-based swap dealer or major security-based swap participant has developed and implemented written policies and procedures reasonably designed to prevent violation of federal securities laws, the rules thereunder, and applicable self-regulatory organization rules?” 44 Why or why not? What would be the impact of the Senior Officer Certification if it did not specifically address operational capability? What would be the comparative advantages, disadvantages, costs and/or benefits of using this language as opposed to the language proposed? 44 See, e.g., Section 15(g) of the Exchange Act (requiring that broker-dealers establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material, non-public information). 15 U.S.C. 78o(g). See also Rule 206(4)-7 of the Investment Advisers Act of 1940 (the “Advisers Act”) (requiring that investment advisers must adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder). 17 CFR 275.206(4)-7. Q-22. Should the Commission more specifically define the term “operational, financial, and compliance capabilities”? If so, how should this term be defined to, among other things, provide greater certainty to market participants about the basis for providing the Senior Officer Certification? Q-23 designed to prevent violations of the Advisers Act and the rules thereunder). 17 CFR 275.206(4)-7. Q-22. Should the Commission more specifically define the term “operational, financial, and compliance capabilities”? If so, how should this term be defined to, among other things, provide greater certainty to market participants about the basis for providing the Senior Officer Certification? Q-23. Should the Commission specifically define the term “capability?” Should the Commission, for example, define the term “capability,” as it relates to the financial, operational, and compliance functions of an SBS Entity, as “having the necessary ability or qualities”? Why or why not? Should the Commission define the term capability in some other way? If so, how and why? Q-24. Alternatively, should the Commission simply adopt the Webster's New World Dictionary definition which 45 Why or why not? Should the Commission instead adopt some other dictionary definition? If so, what other dictionary definition should be used and why? Alternatively, should the Commission define the term capability in some other way? If so, how and why? 45 Websters New World Dictionary 110 (2nd concise ed. 1975). Q-25. Should the Commission determine that a firm may rely on the establishment, maintenance and enforcement of written policies and procedures by an SBS Entity that are reasonably designed to prevent violation of federal securities laws, the rules thereunder, and applicable self-regulatory organization rules as a basis for a senior officer to certify that an SBS Entity has the appropriate “compliance capability?” Why or why not? Q-26. Should the Commission determine that a firm may rely on the establishment, maintenance and enforcement of written policies and procedures by an SBS Entity that are reasonably designed to assure that the SBS Entity complies with applicable capital and margin requirements as a basis for a senior officer to certify that an SBS Entity has the appropriate “financial capability?” Why or why not? Q-27 Should the Commission determine that a firm may rely on the establishment, maintenance and enforcement of written policies and procedures by an SBS Entity that are reasonably designed to assure that the SBS Entity complies with applicable capital and margin requirements as a basis for a senior officer to certify that an SBS Entity has the appropriate “financial capability?” Why or why not? Q-27. If the Commission does not specifically define what would constitute operational, financial, and compliance capabilities, will there still be a sufficient basis for SBS Entities and/or their senior officers to provide the Commission with a Senior Officer Certification? Why or why not? Would any potential uncertainty arising from the decision not to define at this time the terms “operational, financial, and compliance capabilities” and “capabilities” cause difficulties for SBS Entities seeking to register on an ongoing basis? If so, please describe. Q-28. Should SBS Entities be required to provide a Senior Officer Certification as to any capabilities in addition to the three specified? If so, what other capabilities and why? Alternatively, should any of the capabilities be eliminated from the Senior Officer Certification? If so, which one(s) and why? For example, should the certification relating to an SBS Entity's capabilities be confined to operational capability given the regulatory imperative to comply with applicable regulations (including capital rules)? What would be the comparative advantages, disadvantages, costs and/or benefits of adding or eliminating such capabilities? Q-29 nior Officer Certification? If so, which one(s) and why? For example, should the certification relating to an SBS Entity's capabilities be confined to operational capability given the regulatory imperative to comply with applicable regulations (including capital rules)? What would be the comparative advantages, disadvantages, costs and/or benefits of adding or eliminating such capabilities? Q-29. In addition to, or in lieu of the Senior Officer Certification requirement, should the Commission utilize an approach to demonstration of capabilities similar to the one we use to register national securities exchanges under Exchange Act Section 6(b)(1) 46 (which requires that an exchange have the “capacity to be able to carry out the purposes of [the Exchange Act * * *], the rules and regulations thereunder”)? Would such a standard provide additional clarity as to the capabilities to be required of registrants? What would be the advantages and disadvantages and the costs and benefits of such an alternative process? 46 See supra note 32. Q-30. Should the Commission instead utilize an approach to demonstration of capabilities similar to the one we use to register clearing agencies under Exchange Act Section 17A(b)(3)(A) 47 (which requires that an exchange have the “capacity to be able to facilitate the prompt and accurate clearance and settlement of securities transactions and derivative agreements, contracts and transactions for which it is responsible, to safeguard securities and funds in its custody or control or for which it is responsible, to comply with the provisions of [the Exchange Act] and the rules and regulations thereunder, [and] to enforce [* * *] compliance by its participants with the rules of the clearing agency, and to carry out the purposes of this section”)? Would such a standard provide additional clarity as to the capabilities to be required of registrants? What would be the advantages and disadvantages and the costs and benefits of such an alternative process? 47 See supra note 33. Q-31 ions thereunder, [and] to enforce [* * *] compliance by its participants with the rules of the clearing agency, and to carry out the purposes of this section”)? Would such a standard provide additional clarity as to the capabilities to be required of registrants? What would be the advantages and disadvantages and the costs and benefits of such an alternative process? 47 See supra note 33. Q-31. Should the form of Senior Officer Certification an SBS Entity must file be driven by whether the entity is, or is not, already registered with the Commission as a broker-dealer or with the CFTC as a swap dealer or major swap participant? Why or why not? If so, what forms of certification would be appropriate for use by SBS Entities that are already registered with one of the Commission or the CFTC? What would be the comparative advantages, disadvantages, costs and/or benefits of this approach? Q-32. Should SBS Entities already registered with the Commission as a broker-dealer or with the CFTC as a swap dealer or major swap participant be excepted from the requirement to file a Senior Officer Certification? Why or why not? What would be the comparative advantages, disadvantages, costs and/or benefits of this approach? Q-33. If an SBS Entity were also registered with the Commission as a broker-dealer and an SRO were to conduct a “material change in business review” of the SBS Entity's security-based swap business, should the SBS Entity be permitted to rely on the SRO's review and approval of that new business as a basis for its Senior Officer Certification? Would the form of Senior Officer Certification affect the SBS Entity's ability to rely on such a review and approval? If so, how and why? Given that SBS Entities that are also registered as broker-dealers would be required by existing SRO rules to undergo a material change in business review, are there any advantages and disadvantages or costs and benefits associated with reliance on an SRO “material change in business review” and approval as a basis for its Senio 's ability to rely on such a review and approval? If so, how and why? Given that SBS Entities that are also registered as broker-dealers would be required by existing SRO rules to undergo a material change in business review, are there any advantages and disadvantages or costs and benefits associated with reliance on an SRO “material change in business review” and approval as a basis for its Senior Officer Certification? Q-34. Similarly, if an SBS Entity were also involved in swap activity, could that entity use any CFTC, NFA or prudential regulatory agency's review of its swap business to inform its Senior Officer Certification to the Commission? Would the form of Senior Officer Certification affect the SBS Entity's ability to rely on such a review and approval? If so, how and why? Are there any advantages and disadvantages or costs and benefits associated with reliance on a CFTC, NFA or prudential regulatory agency's review of its swap business as a basis for its Senior Officer Certification? Q-35. Would the Senior Officer Certification requirement effectively require an SBS Entity to employ a third party's services to examine or confirm conclusions required for the certification? Why or why not? If third party services were effectively required, what would be the advantages and disadvantages and costs and benefits of such third party services? Q-36. Should we include the due inquiry requirement in the rule? Should we instead specify particular steps a senior officer must take to determine whether the SBS Entity has the requisite capabilities? Q-37. Should the senior officer of an SBS Entity be required to disclose on Form SBSE-C or elsewhere, the nature of the “due inquiry” he or she performed before signing Form SBSE-C and his or her resulting findings and conclusions? Why or why not? Q-38. Should the Commission define its expectations with respect to the “due inquiry” a senior officer should perform Q-39 requisite capabilities? Q-37. Should the senior officer of an SBS Entity be required to disclose on Form SBSE-C or elsewhere, the nature of the “due inquiry” he or she performed before signing Form SBSE-C and his or her resulting findings and conclusions? Why or why not? Q-38. Should the Commission define its expectations with respect to the “due inquiry” a senior officer should perform Q-39. Is the timeframe within which the proposed Senior Officer Certification would need to be filed appropriate? If not, should the timeframe be shorter or longer and why? Q-40. Should the Commission eliminate the requirement that a senior officer certify that he or she has documented the process by which he or she reached his or her determination regarding the SBS Entity's capacity? Why or why not? Should the Commission instead simply require that a senior officer document this process and require that the SBS Entity maintain those documents as part of its books and records? Would a senior officer believe that he or she may be second-guessed if, among other circumstances, the senior officer certifies as to an SBS Entity's capabilities but does not retain documentation demonstrating how he or she reached this determination? iii. Electronic Filing Paragraph (c) of proposed Rule 15Fb2-1 would address the manner in which the application, certification, and any additional registration documents would be filed with the Commission. Proposed paragraph (c)(1) would require applications, certifications, and any additional documents to be filed electronically. The Commission anticipates that the EDGAR system will be expanded to facilitate registration of SBS Entities because it likely would provide the most cost-effective solution. 48 48 To the extent the Commission utilizes the EDGAR system to facilitate registration of SBS Entities, applicants would need to utilize the EDGAR Filer Manual (as defined in 17 CFR 232.11) to facilitate their filing of applications electronically s that the EDGAR system will be expanded to facilitate registration of SBS Entities because it likely would provide the most cost-effective solution. 48 48 To the extent the Commission utilizes the EDGAR system to facilitate registration of SBS Entities, applicants would need to utilize the EDGAR Filer Manual (as defined in 17 CFR 232.11) to facilitate their filing of applications electronically. The EDGAR Filer Manual contains all the technical specifications for filers to submit filings using the EDGAR system. Generally, entities filing documents in electronic format through the EDGAR system must comply with the applicable provisions of the EDGAR Filer Manual in order to assure the timely acceptance and processing of those filings. Proposed paragraph (c)(2) of proposed Rule 15Fb2-1 would specify the effective date of filing of applications and certifications submitted pursuant to the paragraphs (a) and (b). Subparagraph (c)(2)(i) would provide that an SBS Entity's application submitted pursuant to paragraph (a) would be considered filed only when a complete Form SBSE, Form SBSE-A, or Form SBSE-BD, as appropriate, and all required additional documents are filed with the Commission or its designee. Subparagraph (c)(2)(ii) would provide that an SBS Entity's certification submitted pursuant to paragraph (b) would be considered filed when a complete Form SBSE-C is filed electronically with the Commission or its designee. If a technological means to facilitate receipt and retention of applications is not functional by the time final rules are adopted, proposed temporary Rule 15Fb2-2T, described more fully below, would require SBS Entities to file applications and additional documents in paper form. The Commission requests comment on the proposed method for receiving applications. Q-41. Should the Commission not require electronic submission of applications? If not, why? Q-41 lications is not functional by the time final rules are adopted, proposed temporary Rule 15Fb2-2T, described more fully below, would require SBS Entities to file applications and additional documents in paper form. The Commission requests comment on the proposed method for receiving applications. Q-41. Should the Commission not require electronic submission of applications? If not, why? Q-41. Instead of expanding the EDGAR system to receive SBS Entity applications for registration, should the Commission utilize some other system? Please explain. What would be the comparative advantages and disadvantages and costs and benefits of utilizing a system other than EDGAR? Q-43. What would be the advantages and disadvantages and costs and benefits to prospective applicants of expansion of the EDGAR system to receive SBS Entity applications for registration, especially with respect to the varying levels of familiarity that they may have with this system? Q-44. Should the Commission designate another entity to facilitate the electronic receipt of applications? Why or why not? If so, what types of entities should we consider? Q-45. What other issues, if any, should the Commission consider in connection with electronic filing? iv. Standards for Granting or Denying Applications Paragraph (d) of proposed Rule 15Fb2-1 would provide that the Commission may grant or deny an application for registration, and would set forth the standards the Commission would use to make that determination. The grant or denial of a conditional registration would depend principally on the completeness of an application, whether the applicant is subject to a statutory disqualification, and whether the Commission is aware of inaccurate statements in the application. The grant or denial of an ongoing registration would also require that the Commission find that the requirements of Exchange Act Section 15F(b) are satisfied l of a conditional registration would depend principally on the completeness of an application, whether the applicant is subject to a statutory disqualification, and whether the Commission is aware of inaccurate statements in the application. The grant or denial of an ongoing registration would also require that the Commission find that the requirements of Exchange Act Section 15F(b) are satisfied. As noted in Part I above, conditionally registered SBS Entities would need to obtain ongoing registration to continue doing a security-based swap business once their conditional registration expires. 49 49 Proposed Rule 15Fb3-1(b)(1) would provide that conditional registrations granted pursuant to paragraph (d)(1) of Proposed Rule 15Fb2-1 would expire on the Last Compliance Date for SBS Entities that filed a complete application before the Last Compliance Date, unless the SBS Entity files with the Commission a certification on Form SBSE-C or the Commission extends conditional registration for good cause. Proposed Rule 15Fb3-1(b)(2) would provide that conditional registrations granted pursuant to paragraph (d)(1) of Proposed Rule 15Fb2-1 would expire four months after a major security-based swap participant files a complete application, if it filed such application after the Last Compliance Date, unless the major security-based swap participant files with the Commission a certification on Form SBSE-C. In both cases, if the Senior Officer Certification is filed within the given timeframe, conditional registration is extended by 30 days to allow the Commission time to determine whether to grant or deny ongoing registration ication, if it filed such application after the Last Compliance Date, unless the major security-based swap participant files with the Commission a certification on Form SBSE-C. In both cases, if the Senior Officer Certification is filed within the given timeframe, conditional registration is extended by 30 days to allow the Commission time to determine whether to grant or deny ongoing registration. When considering an application for conditional registration, proposed paragraph 15Fb2-1(d)(1) provides that the Commission would grant such registration if it finds that the firm's application is complete, except that the Commission may institute proceedings to determine whether to deny conditional registration if it finds that the applicant is subject to a statutory disqualification or the Commission is aware of inaccurate statements in the application. Such proceedings would include notice of the grounds for denial under consideration and opportunity for hearing. At the conclusion of such proceedings, the Commission would grant or deny such registration. Paragraph (d)(2) would allow the Commission to grant ongoing registration to an SBS Entity. It is contemplated that ongoing registration would be sought by firms that have been conditionally registered with the Commission, as well as by new firms entering the marketplace that have not been conditionally registered ( e.g., an SBS Dealer seeking registration after the Last Compliance Date). Paragraph (d)(2) would specify that the Commission would grant ongoing registration based on a firm's application and certification. Proposed paragraph (d)(2) would provide that if the Commission granted conditional registration to an SBS Entity, the Commission could grant or deny ongoing registration based on the original application submitted by the SBS Entity, as amended, 50 and the certification submitted to the Commission by the SBS Entity pursuant to paragraph (b) istration based on a firm's application and certification. Proposed paragraph (d)(2) would provide that if the Commission granted conditional registration to an SBS Entity, the Commission could grant or deny ongoing registration based on the original application submitted by the SBS Entity, as amended, 50 and the certification submitted to the Commission by the SBS Entity pursuant to paragraph (b). When considering any 50 The SBS Entity may have amended its application to address changes that may have occurred in the intervening period between the date the application was originally filed and the date the Commission evaluates whether ongoing registration should be granted. As discussed above, the Commission would notify the entity electronically when conditional or ongoing registration is granted, and would make information regarding registration status publicly available. The Commission requests comment on these proposed standards of review for granting or denying registration in proposed Rule 15Fb2-1(d). Q-46. Should the Commission consider using different standards of review to grant conditional registration to SBS Entities who apply before the Last Compliance Date than it uses for major security-based swap participants that apply for conditional registration after the Last Compliance Date? Q-47. Would the standard requiring denial of an application if the applicant is subject to statutory disqualification cause undue hardship for any possible applicants? If so, how many applicants are likely to be affected? Should this standard be refined or eliminated? If applicants subject to statutory disqualification should be allowed to register, should they be subject to any additional requirements? Please explain. Q-48. Should the Commission consider broader or more limited standards for granting or denying conditional registration? If so, please describe the standard that should be used and the reasons why it would be more appropriate than the standard proposed. Q-49 bject to statutory disqualification should be allowed to register, should they be subject to any additional requirements? Please explain. Q-48. Should the Commission consider broader or more limited standards for granting or denying conditional registration? If so, please describe the standard that should be used and the reasons why it would be more appropriate than the standard proposed. Q-49. Should the Commission consider using a different standard of review to grant ongoing registration? Q-50. Should the Commission consider broader or more limited standards for granting or denying ongoing registration? If so, please describe the standard that should be used for granting or denying ongoing registration and the reasons why it would be more appropriate than the standard proposed. Q-51. Should the Commission staff base its decision only on a review of a firm's application (including any additional documents) and certification or should an on-site examination or some other type of review be considered? If so, what would be the appropriate scope and timing of such a review? Q-52. Is there a need to lengthen or shorten the proposed timeframes provided for the effectiveness of conditional registration in paragraph (d)(1)? If so, how long should they be? Q-53. Should the Commission provide additional guidance regarding the process for institution of proceedings? For instance, should the Commission include timeframes within which proceedings would be instituted and/or a decision to grant or deny registration based on those proceedings should be provided ( e.g., Exchange Act Section 15(b)(1))? If so, what timeframes or other guidance and why? v. Request for Comment on Additional Registration Considerations The Commission requests comment on what, if any, alternative approaches should be considered to meet the Commission's regulatory objectives in the registration process for SBS Entities and how any such alternative approaches would compare to the current proposal Section 15(b)(1))? If so, what timeframes or other guidance and why? v. Request for Comment on Additional Registration Considerations The Commission requests comment on what, if any, alternative approaches should be considered to meet the Commission's regulatory objectives in the registration process for SBS Entities and how any such alternative approaches would compare to the current proposal. 51 Any such comparison should describe the relative advantages and disadvantages of each alternative, as well as their relative costs and benefits. 51 As described in footnote 12 above, the Commission is presently reviewing the various standards and processes it uses to facilitate registration, and we would expect that any alternative processes suggested by commenters here would inform that review. Q-54. Should the Commission not adopt a Senior Officer Certification requirement, and instead seek to satisfy itself during the registration process, based on documents the SBS Entity may be able to provide to the Commission, that the SBS Entity has the operational, financial, and/or compliance capabilities to act as an SBS Dealer or major security-based swap participant, as applicable? What would be the advantages and disadvantages and the costs and benefits of such an alternative process? Q-55. If the Commission determines to satisfy itself during the registration process, based on documents the SBS Entity may be able to provide to the Commission, that the SBS Entity has the operational, financial, and/or compliance capabilities to act as an SBS Dealer or major security-based swap participant, as applicable, should the Commission identify which documents or categories of documents should be submitted in order to facilitate its review and/or decision? If so, what types of documents ( e.g., business plan, written procedures, or annual audit statements) should the Commission identify to facilitate this review and what would be the costs of obtaining or providing such documents? Q-56 ant, as applicable, should the Commission identify which documents or categories of documents should be submitted in order to facilitate its review and/or decision? If so, what types of documents ( e.g., business plan, written procedures, or annual audit statements) should the Commission identify to facilitate this review and what would be the costs of obtaining or providing such documents? Q-56. Should the Commission not adopt a Senior Officer Certification requirement, and instead require that an SBS Entity obtain and submit to the Commission an independent third-party review of its operational, financial, and compliance capabilities or its written policies and procedures before granting ongoing registration? What practical considerations— e.g., identifying an appropriate independent third party, measuring the time, cost, and reliability of any such review, addressing the types of information to be shared with a third party and the factors to be considered in its review—would inform whether such a review would be appropriate? What would be the advantages and disadvantages and costs and benefits of requiring a third-party review instead of the Senior Officer Certification? Q-57. Should the Commission adopt a Senior Officer Certification requirement, and also require that an SBS Entity employ a third party to independently review its capabilities to provide a basis for that Senior Officer Certification? What would be the advantages and disadvantages and costs and benefits of having an SBS Entity's capabilities independently reviewed? If such a review were required, who could perform such a review, what would such review entail, and should the review be submitted to the Commission along with the certification? What would be the comparative advantages, disadvantages, costs and/or benefits of requiring dealers and participants to have their capabilities independently reviewed? Q-58 Entity's capabilities independently reviewed? If such a review were required, who could perform such a review, what would such review entail, and should the review be submitted to the Commission along with the certification? What would be the comparative advantages, disadvantages, costs and/or benefits of requiring dealers and participants to have their capabilities independently reviewed? Q-58. If the Commission required that SBS Entities obtain and submit an independent third-party review, what types of entities could perform such a review ( e.g., accountants, law firms, consulting firms) and what independence standards should apply for purposes of conducting the review? Could a review or examination by another governmental agency ( e.g., the Federal Reserve Board, the CFTC, the Office of the Comptroller of the Currency) or an SRO constitute an independent third party review for these purposes? If not, why? Are there any practical or legal impediments to obtaining or providing to the Commission a review from a third party Q-59. Are there any other forms of oversight that could or should reinforce or replace the proposed Senior Officer Certification? What would be the comparative advantages, disadvantages, costs and/or benefits of such an approach? Q-60. Are there other approaches to registration the Commission should consider that, in a cost-effective manner, would both fulfill the statutory mandate to protect investors, maintain fair, orderly, and efficient markets, facilitate capital formation, and ensure that the security-based swap market smoothly transitions from a generally unregulated marketplace to one that is regulated and subject to appropriate oversight? If so, please explain which ones and why. Q-61 sider that, in a cost-effective manner, would both fulfill the statutory mandate to protect investors, maintain fair, orderly, and efficient markets, facilitate capital formation, and ensure that the security-based swap market smoothly transitions from a generally unregulated marketplace to one that is regulated and subject to appropriate oversight? If so, please explain which ones and why. Q-61. If the Commission were to consider an approach to registration that required something other than a Senior Officer Certification, would SBS Entities need more time to gather, obtain, or submit any documents, third party review, or other items than we have proposed for submission of the Senior Officer Certification ( i.e., on or before the Last Compliance Date or, for participants that apply after the Last Compliance Date, within four months after it files its completed application)? If so why or why not? In the Intermediary Definitions Release, 52 the Commission acknowledged that the statutory definitions include a provision stating that a person may be designated as a dealer for one or more types, classes or categories of security-based swaps, or activities. Further, that release indicated that one commenter stated that the Commissions should allow a person to register as a swap dealer or SBS Dealer for only a limited set of types, classes or categories of swaps or security-based swaps. 52 Intermediary Definitions Release, supra note 5, at 80182. Q-62. Should the registration process be expanded in any way to allow firms to choose whether they register in a “full” or “limited” capacity? If so, how? Q-63 hat the Commissions should allow a person to register as a swap dealer or SBS Dealer for only a limited set of types, classes or categories of swaps or security-based swaps. 52 Intermediary Definitions Release, supra note 5, at 80182. Q-62. Should the registration process be expanded in any way to allow firms to choose whether they register in a “full” or “limited” capacity? If so, how? Q-63. What additional information should be elicited by the proposed forms to provide the Commission with sufficient information to determine whether limited (as opposed to full) registration is appropriate? Should there be separate forms for firms to apply for limited, as opposed to full, registration? Should there instead be a separate schedule to the forms as proposed? Should the timing differ and, if so, how and why? Q-64. Should an applicant for limited registration be required to provide the Commission with a different senior officer or other certification? If so, how should the certification differ? Q-65. Should the Commission apply a different standard of review when considering whether to grant or deny limited registration to an applicant? If so, which one and why? Q-66. If the Commission were to grant an SBS Entity's application for limited registration and the SBS Entity later determined that it would prefer to be fully registered, how should this transition be effected? Please provide as much detail as possible in commenting on which of the above referenced courses of action should be pursued. Please also provide information regarding possible costs or benefits of each of these alternatives. 2. Amendments to Application Forms: Proposed Rule 15Fb2-3 Proposed Rule 15Fb2-3 would require an SBS Entity to promptly 53 amend its Form SBSE, Form SBSE-A, Form SBSE-BD, as applicable, to correct any information it determines is, or has become, inaccurate for any reason action should be pursued. Please also provide information regarding possible costs or benefits of each of these alternatives. 2. Amendments to Application Forms: Proposed Rule 15Fb2-3 Proposed Rule 15Fb2-3 would require an SBS Entity to promptly 53 amend its Form SBSE, Form SBSE-A, Form SBSE-BD, as applicable, to correct any information it determines is, or has become, inaccurate for any reason. 54 The Commission preliminarily believes this proposed Rule is necessary in order for it to have access to accurate information as part of its ongoing oversight of SBS Entities. 53 For purposes of Rule 15b3-1, the Commission has interpreted the term “promptly” to mean within 30 days. ( In the Matter of First Guarantor Securities, Inc., Exchange Act Release No. 32725, 51 S.E.C. 612 (Aug. 6, 1993), which states, “Absent extraordinary circumstances, an amendment to Form BD filed beyond thirty days from the change in information cannot be considered `promptly' filed in accordance with Rule 15b3-1.”) We preliminarily believe this standard is also appropriate with respect to the use of this term in proposed Rule 15Fb2-3. 54 This proposed rule is based on Exchange Act Rule 15b3-1, which is applicable to registered brokers and dealers and has worked well to assure that broker-dealers promptly amend their applications. The Commission requests comment on all aspects of proposed Rule 15Fb2-3. Q-67. Should the Commission only require SBS Entities to promptly update their Forms SBSE, SBSE-A, and SBSE-BD when they become “materially” inaccurate? Q-68. Should SBS Entities instead be required to periodically update these forms and, if so, what would be an appropriate timeframe for updating ( e.g., monthly, quarterly, annually)? What may be the comparative costs and benefits of periodic updating vs. “prompt” updating? Q-69 uire SBS Entities to promptly update their Forms SBSE, SBSE-A, and SBSE-BD when they become “materially” inaccurate? Q-68. Should SBS Entities instead be required to periodically update these forms and, if so, what would be an appropriate timeframe for updating ( e.g., monthly, quarterly, annually)? What may be the comparative costs and benefits of periodic updating vs. “prompt” updating? Q-69. If the Commission requires SBS Entities to promptly update their Forms SBSE, SBSE-A, and SBSE-BD when they become materially inaccurate, should it also require that all information on the forms be updated periodically? Q-70. Would it be appropriate for the Commission to require that certain information be updated more frequently than other information? If so, please describe what information should be subject to more frequent updates and why, and the frequency with which each such item should be updated. B. Associated Persons 1. Certification Paragraph (b)(6) of Exchange Act Section 15F generally prohibits SBS Entities from permitting any of their associated persons 55 who are subject to a “statutory disqualification” (as defined in Exchange Act Section 3(a)(39)) to effect or be involved in effecting 56 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. To provide SBS Entities with a mechanism to assess their compliance with this provision, paragraph (a) of proposed Rule 15Fb6-1 would require that an SBS Entity certify, on Schedule G of Form SBSE, Form SBSE-A, or Form SBSE-BD, as appropriate, that no person associated with it who effects or is involved in effecting security-based swaps on its behalf is subject to statutory disqualification, as defined in Section 3(a)(39) of the Exchange Act. 57 If an associated person later becomes 55 15 U.S.C ) of proposed Rule 15Fb6-1 would require that an SBS Entity certify, on Schedule G of Form SBSE, Form SBSE-A, or Form SBSE-BD, as appropriate, that no person associated with it who effects or is involved in effecting security-based swaps on its behalf is subject to statutory disqualification, as defined in Section 3(a)(39) of the Exchange Act. 57 If an associated person later becomes 55 15 U.S.C. 78c(a)(70) generally defines the term “person associated with” an SBS Entity to include: (i) Any partner, officer, director, or branch manager of an SBS Entity (or any person occupying a similar status or performing similar functions); (ii) any person directly or indirectly controlling, controlled by, or under common control with an SBS Entity; or (iii) any employee of an SBS Entity. However, it generally excludes persons whose functions are solely clerical or ministerial. 56 The Commission believes that associated persons “involved in effecting” security-based swaps would include, but not be limited to, persons involved in drafting and negotiating master agreements and confirmations, persons recommending security-based swap transactions to counterparties, persons on a trading desk actively involved in effecting security-based swap transactions, persons pricing security-based swap positions and managing collateral for the SBS Entity, and persons assuring that the SBS Entity's security-based swap business operates in compliance with applicable regulations. In short, the term would encompass persons engaged in functions necessary to facilitate the SBS Entity's security-based swap business. 57 Proposed Rule 15Fb1-1(b), described below, would require each SBS Entity to maintain a manually signed copy of this certification as part of its books and records until at least three years after the certification has been replaced or is no longer effective s. In short, the term would encompass persons engaged in functions necessary to facilitate the SBS Entity's security-based swap business. 57 Proposed Rule 15Fb1-1(b), described below, would require each SBS Entity to maintain a manually signed copy of this certification as part of its books and records until at least three years after the certification has been replaced or is no longer effective. To support this certification requirement, paragraph (b) of proposed Rule 15Fb6-1 would require SBS Entities to obtain a questionnaire or application for employment executed by each of its associated persons that effect or are involved in effecting security-based swaps on its behalf; such questionnaire or application would serve as a basis for a background check of the associated person to determine whether the associated person is statutorily disqualified. The questionnaires or applications would be required to contain, at a minimum, the following information: (1) The associated person's name, address, social security number, Central Registration Depository (“CRD”) number (if any), Investment Adviser Registration Depository (“IARD”) number (if any), and the starting date of the associated person's employment or other association with the SBS Entity; (2) the associated person's date of birth; (3) a complete, consecutive statement of all the associated person's business connections for at least the preceding ten years, including whether the employment was part-time or full-time; (4) a record of any denial of membership or registration, and of any disciplinary action taken, or sanction imposed, upon the associated person by any federal or state agency, by any national securities exchange or national securities association, or by a foreign financial regulatory authority including any finding that the associated person was a cause of any disciplinary action or had violated any law; (5) a record of any denial, suspension, expulsion or revocation of membership or registration of any broker, dealer, SBS Dealer, or major sec y federal or state agency, by any national securities exchange or national securities association, or by a foreign financial regulatory authority including any finding that the associated person was a cause of any disciplinary action or had violated any law; (5) a record of any denial, suspension, expulsion or revocation of membership or registration of any broker, dealer, SBS Dealer, or major security-based swap participant with which the associated person was associated in any capacity when such action was taken; (6) a record of any permanent or temporary injunction entered against the associated person or any broker, dealer, SBS Dealer, or major security-based swap participant with which the associated person was associated in any capacity at the time such injunction was entered; (7) a record of any arrest or indictment for any felony, or any misdemeanor pertaining to securities (including security-based swaps), futures or commodities (including swaps), banking, insurance or real estate (including, but not limited to, acting or being associated with a broker-dealer, investment company, investment adviser, futures sponsor, bank, or savings and loan association), fraud, false statements or omissions, wrongful taking of property or bribery, forgery, counterfeiting or extortion, and the disposition of the foregoing; and (8) a record of any other name or names by which the associated person has been known or which the associated person has used. The Commission believes that it is standard in the financial services industry for firms to request this information on employment questionnaires. This information is similar to the information identified in Exchange Act Rule 17a-3(a)(12)(i) and required to be collected by broker-dealers with respect to their associated persons. Additionally, Form U-4 contains all the information needed pursuant to Exchange Act Rule 17a-3(a)(12)(i) and would fulfill the requirement to obtain a questionnaire or application specified in Rule 15Fb6-1(b) naires. This information is similar to the information identified in Exchange Act Rule 17a-3(a)(12)(i) and required to be collected by broker-dealers with respect to their associated persons. Additionally, Form U-4 contains all the information needed pursuant to Exchange Act R [Text truncated at 120,000 characters. 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Check the current official text before relying on it. Not legal advice.