SEC proposes actions to bolster cross-border swap rules

The proposals, in the Commission’s view, “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.”

“The proposals reflect an important step forward in the Commission’s efforts to stand up the Dodd-Frank Title VII regulatory regime. The proposals preserve important investor and market protections, while at the same time addressing several of the practical implementation challenges that have been identified,” SEC Chairman Jay Clayton said in a statement.

The 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 on-site inspections and examinations;
• the cross-border application of statutory disqualification provisions; and
• 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.

An accompanying fact sheet describes each of the proposed changes in more detail. 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 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 to submit the required certification and opinion of counsel required.
• Proposed to amend Commission Rule of Practice 194 to exclude an SBS Entity, subject to certain limitations, from the prohibition in Exchange Act Section 15F(b)(6) with respect to an associated person who is a natural person, not a U.S. person, and does not affect and is not involved in affecting 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.

Under proposed 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.

Compliance by the registered entity with certain security-based swap dealer requirements should be treated “as if” the entity itself were a counterparty to the transaction. The Commission will have access to certain books, records, and testimony disclosures to counterparties regarding the limited applicability of Title VII to the transaction of 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, also requires that nonresident SBS Entities certify and provide an opinion of counsel that the Commission can access their books and records and conduct on-site inspections and examinations.

Firms, however, 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, in response, proposed guidance to address the application of the certification and opinion of counsel requirement.

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;
• 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); and
• 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 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. 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.

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.