SEC Proposes Actions to Improve Cross-Border Application of Security-Based Swap Requirements
The Securities and Exchange Commission today proposed a package of rule amendments and interpretive guidance to improve the framework for regulating cross-border security-based swaps transactions and market participants.
The proposals are intended to improve the regulatory framework by pragmatically addressing implementation issues and efficiency concerns, and in some cases further harmonizing the regulatory regime governing security-based swaps administered by the Commission with the regulatory regime governing swaps administered by the Commodity Futures Trading Commission (CFTC).
“First, I would like to thank Commissioner Peirce for her leadership on this proposing release. Today’s proposals reflect an important step forward in the Commission’s efforts to stand up the Dodd-Frank Title VII regulatory regime. These proposals preserve important investor and market protections, while at the same time addressing several of the practical implementation challenges that have been identified,” said SEC Chairman Jay Clayton. “Also, I want to thank our colleagues at the SEC as well as CFTC Chairman Giancarlo, Commissioner Quintenz and their colleagues for their efforts and commitment to interagency cooperation.”
Today’s proposing release addresses four key areas:
- the use of transactions that have been “arranged, negotiated, or executed” by personnel located in the United States as a trigger for regulating security-based swaps and market participants
- the requirement that non-U.S. resident security-based swap dealers and major security-based swap participants certify and provide an opinion of counsel that the Commission can access their books and records and conduct onsite inspections and examinations
- the cross-border application of statutory disqualification provisions
- the questionnaires or employment applications that security-based swap dealers and major security-based swap participants must maintain with regard to their foreign associated persons
The accompanying fact sheet describes each of these aspects in more detail.
The public comment period will remain open for 60 days following publication of the proposing release in the Federal Register.
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Proposed Rule Amendments and Guidance Addressing Cross-Border Application of Certain Security-Based Swap Requirements
SEC Seriatim Approval
May 10, 2019
The Commission has proposed rule amendments and interpretive guidance to address the cross-border application of certain security-based swap requirements under the Securities Exchange Act of 1934 (Exchange Act) that were added by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).
Specifically, the Commission has:
- Proposed supplemental guidance to address how certain requirements under Title VII of the Dodd-Frank Act — related to security-based swap transactions that have been “arranged” or “negotiated” by personnel located in the United States — apply to transactions involving limited activities by those U.S. personnel.
- Requested comment on two alternative proposals to amend Rule 3a71-3 under the Exchange Act to modify the Commission’s approach to counting certain transactions “arranged, negotiated, or executed” by personnel located in a U.S. branch or office for purposes of the security-based swap dealer de minimis threshold calculations.
- Proposed corresponding technical revisions to Exchange Act Rule 0-13 in conjunction with the proposed amendment to Rule 3a71-3, and requested comment on whether to provide other conditional exceptions for certain other requirements that apply to such “arranged, negotiated, or executed” transactions, including regulatory reporting and public dissemination requirements and security-based swap dealer business conduct requirements.
- Proposed guidance regarding the certification and opinion of counsel requirements in Exchange Act Rule 15Fb2-4, and proposed to amend Exchange Act Rule 15Fb2-1 to provide additional time for a security-based swap dealer or major security-based swap participant (collectively defined in the release as “SBS Entity”) to submit the certification and opinion of counsel required under Rule 15Fb2-4(c)(1).
- Proposed to amend Commission Rule of Practice 194 to exclude an SBS Entity, subject to certain limitations, fr om the prohibition in Exchange Act Section 15F(b)(6) with respect to an associated person who is a natural person who (i) is not a U.S. person and (ii) does not effect and is not involved in effecting security-based swap transactions with or for counterparties that are U.S. persons, other than a security-based swap transaction conducted through a foreign branch of a counterparty that is a U.S. person.
- Proposed certain modifications to proposed Exchange Act Rule 18a-5 to address the questionnaire or application for employment that an SBS Entity is required to make and keep current with respect to certain foreign associated persons.
Application of Title VII of the Dodd-Frank Act to certain transactions “arranged, negotiated, or executed” by U.S. personnel
- The Commission has proposed interpretive guidance regarding the definition of “arranged” or “negotiated” in connection with determining which transactions non-U.S. persons must count against de minimis thresholds to determine whether they must register as security-based swap dealers; certain security-based swap dealer business conduct requirements; and regulatory reporting and public dissemination requirements under Regulation SBSR.
- Under the guidance, Title VII requirements would not be triggered merely because U.S. personnel provide “market color” – in the form of certain background information regarding pricing and market conditions and trends – so long as those U.S. personnel do not receive transaction-based compensation or exercise client responsibility in connection with those transactions.
- The Commission also has proposed two alternative exceptions from the requirement in Exchange Act Rule 3a71-3(b)(1)(iii)(C) that non-U.S. persons count security-based swap dealing transactions with non-U.S. counterparties against the de minimis thresholds associated with the security-based swap dealer registration, when U.S. personnel arrange, negotiate or execute those transactions. Either exception would be subject to conditions that are intended to protect the interests associated with security-based swap dealer regulation under Title VII while reducing potentially negative consequences that otherwise could be associated with the existing counting rule. Those conditions include:
- use of a registered security-based swap dealer or a registered broker (depending in part on the alternative adopted) in connection with the arranging, negotiating and executing activity in the United States
- compliance by the registered entity with certain security-based swap dealer requirements “as if” the entity itself were a counterparty to the transaction
- Commission access to certain books, records and testimony
- disclosures to counterparties regarding the limited applicability of Title VII to the transaction
- the non-U.S. person that is relying on the exception being subject to the margin and capital requirements of a jurisdiction that the Commission has designated as a “listed jurisdiction”
Certification and opinion of counsel requirements
- Exchange Act Rule 15Fb2-4(c)(1), which addresses the registration of non-U.S. resident SBS Entities (known as nonresident SBS Entities), requires that nonresident SBS Entities certify and provide an opinion of counsel that the Commission can access their books and records and conduct onsite inspections and examinations.
- Firms have raised questions concerning the interplay between this certification and opinion of counsel requirement and various foreign blocking laws, privacy laws, secrecy laws and other legal requirements.
- The Commission has proposed guidance to address the application of the certification and opinion of counsel requirement when such potential legal impediments and barriers are present. The proposed guidance would provide that the certification and opinion of counsel:
- need only address the law of the jurisdiction or jurisdictions in which the nonresident SBS Entity maintains the relevant books and records
- need only address books and records related to the “U.S. business” of the nonresident SBS Entity, and for a nonresident SBS Entity subject to the Exchange Act capital and margin requirements, the financial records necessary for the Commission to assess the nonresident SBS Entity’s compliance with Exchange Act capital and margin requirements
- may be predicated on the nonresident SBS Entity obtaining the prior consent of the persons whose information is or will be included in the books and records
- need not address contracts entered into prior to the date on which the SBS Entity submits an application for registration pursuant to Section 15F(b)
- in certain circumstances may account for whether the relevant regulatory authority in the foreign jurisdiction has issued an approval, authorization, waiver or consent, or whether the foreign authority and the Commission have entered into a memorandum of understanding or other arrangement to facilitate the Commission’s direct access to the entity’s books and records located in that jurisdiction
- The proposed guidance, and the certification and opinion of counsel requirement generally, would not affect the independent requirement that nonresident SBS Entities must provide the Commission with direct access to their books and records.
- The Commission also has proposed rule amendments to Exchange Act Rule 15Fb2-1 that would provide additional time for nonresident SBS entities to submit certifications and opinions of counsel. Under the proposed amendments, a nonresident applicant that is unable to provide the required certification and opinion of counsel may conditionally be registered for up to 24 months following the applicable compliance date before being required to submit such certification and opinion of counsel.
Cross-border application of statutory disqualification provisions
- Exchange Act Section 15F(b)(6) makes it unlawful for an SBS Entity to permit an associated person who is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on behalf of the SBS Entity if the SBS Entity knew, or in the exercise of reasonable care should have known, of the statutory disqualification, “[e]xcept to the extent otherwise specifically provided by rule, regulation, or order of the Commission.”
- Commission Rule of Practice 194 provides, among other things, a process by which an SBS Entity could apply to the Commission so that the Commission can assess on a case-by-case basis whether to grant relief from the statutory disqualification prohibition in Exchange Act Section 15F(b)(6).
- The Commission has proposed to amend Rule of Practice 194 to more closely harmonize the Commission’s rules with the CFTC’s approach to the statutory disqualification of non-domestic associated persons of CFTC registered swap entities.
- Proposed new paragraph (c)(2) of Rule of Practice 194 would provide an exclusion from the statutory prohibition in Exchange Act Section 15F(b)(6) for SBS Entities with respect to an associated person who is a natural person who: (i) is a not a U.S. person, and (ii) does not effect and is not involved in effecting security-based swap transactions with or for counterparties that are U.S. persons, other than a security-based swap transaction conducted through a foreign branch of a counterparty that is a U.S. person.
- An SBS Entity would not be able to avail itself of the exclusion provided in proposed Rule of Practice 194(c)(2) if the associated person of that SBS Entity is currently subject to an order—i.e., an affirmative determination by the Commission, the CFTC, a self-regulatory organization (such as the Financial Industry Regulatory Authority), a registered futures association (the National Futures Association), or a foreign financial regulatory authority—that prohibits such associated person from participating in the U.S. financial market, including the U.S. securities or swap market, or foreign financial markets.
Questionnaires and employment applications
- The Commission previously proposed Exchange Act Rule 18a-5 to establish recordkeeping standards for stand-alone and bank SBS Entities. That proposed rule in part would require each SBS Entity to make and keep current a questionnaire or application for employment for each associated person who is a natural person.
- In response to commenter concerns, the Commission has proposed to add the following two exceptions to the rule:
- An SBS Entity need not make or keep current such questionnaires or employment applications if the entity is excluded from the statutory disqualification prohibition in Exchange Act 15F(b)(6) with respect to the associated person (such as due to the proposed amendment to Rule of Practice 194, discussed above).
- A questionnaire or application for employment executed by an associated person that is not a U.S. person need not include certain information if its receipt, or the creation or maintenance of records reflecting that information, would violate applicable law in the jurisdiction wh ere the associated person is employed or located.
The Commission will seek public comment on the proposed rule amendments and interpretive guidance for 60 days following publication of the proposing release in the Federal Register.