SEC Adopts Registration Rules for Security-Based Swap Dealers and Major Security-Based Swap Participants

The Securities and Exchange Commission today adopted new rules to provide a comprehensive, efficient process for security-based swap dealers and major security-based swap participants to register with the SEC.  The new rules mark a significant milestone in the SEC’s final implementation of Title VII of Dodd-Frank Wall Street Reform and Consumer Protection Act. 

“Today’s rules provide the Commission with the fundamental tool to supervise the business operations of dealers who occupy a critical role in the security-based swap market,” said SEC Chair Mary Jo White.  “These rules mark an important new phase in our implementation of a regulatory regime that protects investors and enhances the integrity of this market.”

The new rules address all aspects of the registration regime for security-based swap dealers and major security-based swap participants, setting forth the extensive set of information required to be provided and kept up to date by a registrant.  In addition, the rules require senior officers to make certifications about the registrant’s policies and procedures for compliance with the federal securities laws at the time of registration. The new rules will be effective 60 days after they are published in the Federal Register. 

The Commission also proposed a new rule of practice to create a process for security-based swap dealers and major security-based swap participants to apply to the Commission for permission to continue to have certain persons subject to statutory disqualifications involved in effecting their security-based swap transactions if such continuation is consistent with the public interest.  Comments on the proposal will be due 60 days after the proposal is published in the Federal Register.

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FACT SHEET

Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants

Applications by Security-Based Swap Dealers and Major Security-Based Swap Participants for Statutorily Disqualified Persons to Effect or Be Involved in Effecting Security-Based Swap Transactions

SEC Open Meeting

August 5, 2015

Action 

The Securities and Exchange Commission today will consider adopting rules that provide a process for the registration of security-based swap dealers and major security-based swap participants (SBS Entities) with the Commission.  This rule implements a foundational requirement of the Dodd Frank Act that SBS Entities register with the Commission, which will subject them to the Commission’s regulations and enable the Commission to inspect and examine them.

In addition, the Commission will consider whether to propose Rule of Practice 194, which would provide a process for a registered SBS Entity to apply to the Commission for an order permitting the SBS Entity to continue effecting security-based swaps activities through associated persons subject to certain adverse legal actions, if doing so would be consistent with the public interest. 

Highlights of the New Registration Rules

Process for Registration 

The registration rules and forms would provide a comprehensive and efficient process for registering with the Commission as a security-based swap dealer or major security-based swap participant.  This process would include rules that: 

• Describe the process through which an SBS Entity can apply for registration with the Commission and identify the form of application various types of entities would use to register and how such application would be filed;  

• Require an SBS Entity to file an amendment when information in its registration form becomes inaccurate;  

• Provide a process by which an SBS Entity may withdraw from registration with the Commission; 

• Provide a process by which the Commission may cancel or revoke the registration of an SBS Entity; and  

• Provide several registration forms tailored to address the circumstances of different market participants, such as newly registering entities and entities already registered in some capacity with the CFTC or SEC.

Required Certifications and Due Diligence by Registrants

SBS Entities would be required to provide two separate certifications by senior officers of the organization, and the certifications would be required to be supported by appropriate due diligence. 

• The first certification would require a senior officer of the applicant to certify that, after due inquiry, he or she has reasonably determined that the applicant has developed and implemented written policies and procedures reasonably designed to prevent violations of the federal securities laws and the rules thereunder, and that he or she has documented the process by which he or she reached such determination. 

• The second certification would require that the Chief Compliance Officer (CCO) or his or her designee certify that the CCO neither knows, nor in the exercise of reasonable care should have known, that any person associated with the SBS Entity who effects or is involved in effecting security-based swaps on its behalf is subject to a statutory disqualification, unless otherwise specifically provided by rule, regulation or order of the Commission.  This rule also would require that, to support the certification, the CCO, or his or her designee, must review and sign the questionnaire or application for employment executed by associated persons who are natural persons and who effect or are involved in effecting securities-based swaps on the SBS Entity’s behalf.  

Limited Exception for New Registered Entities

To facilitate an orderly registration process of entities that are currently engaged in the security-based swaps business, the rules would provide a limited exception from the statutory prohibition on an SBS Entity associating with persons subject to certain adverse legal actions and allow them to be involved in effecting the SBS Entity’s security-based swap transactions.  Specifically, when an SBS Entity files an application to register with the Commission, it would be permitted to associate with certain persons that are subject to a statutory disqualification and would be allowed to have such persons be involved in effecting its security-based swap transactions.  However, this limited exemption would only apply to (1) associated persons that are not natural persons and (2) statutory disqualification(s) that occurred prior to the compliance date of the rule.  Further, the SBS Entity would be required to identify each such associated person on its registration form.

Cross-Border Application

The rules would require a nonresident SBS Entity to obtain a U.S. agent for service of process and an opinion of counsel concluding that the SBS Entity can, as a matter of law, provide the Commission with access to the SBS Entity’s books and records and submit to onsite examination.  In addition, each nonresident SBS Entity would be required to provide the Commission with information about its agent for service of process and certify that it can, as a matter of law, and will provide the Commission with access to its books and records and submit to onsite examination.  

Highlights of the Proposed Rule of Practice 194

Proposed Rule of Practice 194 would establish a comprehensive process for SBS Entities to apply to the Commission for permission to continue effecting security-based swaps activities through associated persons that have been subject to a statutory disqualification (i.e., subject to certain adverse legal actions specified by the federal securities laws).  Under the proposed rule, in approving such an application, the Commission would be required to determine that permitting the associated person to effect or be involved in effecting security-based swaps on behalf of an SBS Entity is consistent with the public interest.

General Process

The proposed rule specifies how SBS Entities would apply to the Commission to permit an associated person (whether such person is an entity or natural person) that is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on behalf of an SBS Entity.  The specified process, which is largely based on existing Rule of Practice 193, would include the form of application, the items to be addressed by the applicant, and the standard of review for the Commission.  

Procedural Accommodations

To prevent undue market and business disruptions, the proposed Rule of Practice 194 would permit statutorily disqualified associated persons that are entities to continue effecting security-based swaps activities on behalf of the SBS Entity for a limited period of time while the Commission is evaluating the SBS Entity’s application.  However, a statutorily disqualified associated person that is a natural person and that is subject to a statutory disqualification would not be permitted to effect or be involved in effecting security-based swaps on behalf of an SBS Entity absent Commission action.  

The proposed rules also would recognize the regulatory efforts of the CFTC, National Futures Association, and self-regulatory organizations (as defined in Exchange Act Section 3(a)(26)) with respect to any associated person that is within their jurisdiction.  In lieu of an application, an SBS Entity would be permitted to provide a notice to the Commission if, among other things, the following conditions are met:

• The regulator considered the specific facts and circumstances surrounding the relevant statutory disqualification of the associated person within its jurisdiction;

• The regulator made an affirmative determination concerning such associated person notwithstanding the statutory disqualification; and

• The terms and conditions of the association with the SBS Entity are the same in all material respects as those imposed by the regulator at the time the affirmative determination was made.

Next Steps

If approved for publication by the Commission, the final rules and forms will become effective 60 days after publication in the Federal Register.  These rules also would establish a compliance date for the rules, which would be based on the implementation of the business conduct, financial responsibility, and recordkeeping rule for registered SBS Entities, as well as the finalization of proposed Rule of Practice 194.

If approved for publication by the Commission, proposed Rule of Practice 194 would be published on the Commission’s website and in the Federal Register.  The comment period for proposed Rule of Practice 194 would be 60 days after publication in the Federal Register.

Background

In 2010, Congress passed Title VII of the Dodd-Frank Act, which established a comprehensive framework for regulating the over-the-counter swaps markets.  Section 764 of the Dodd-Frank Act amended the Exchange Act to require SBS Entities to register with the Commission, and authorized the Commission to issue rules setting out the registration process for SBS Entities.  

Section 764 also added Section 15F(b)(6) to the Exchange Act, which makes it unlawful, unless otherwise provided by rule, regulation or order of the Commission, 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.  Section 3(a)(39) of the Exchange Act provides that a person (or entity) is subject to statutory disqualification if the person is subject to, among other things, certain misdemeanor and all felony criminal convictions, a temporary or permanent injunction involving unlawful investment activities, a finding of a willful violation or a failure to supervise by the Commission, CFTC or a self-regulatory organization, a Commission, CFTC or other appropriate regulatory agency bar or suspension, an SRO bar or suspension or certain state securities orders.  

In October 2011, the Commission proposed new Exchange Act Rules 15Fb1-1 through 15Fb6-1 and Forms SBSE, SBSE-A, SBSE-BD, SBSE-C, and SBSE-W to establish a process by which SBS Entities could register (and withdraw from registration) with the Commission.  The Commission also asked questions in the Registration Proposing Release regarding whether it should provide a process for a registered SBS Entity to apply to the Commission for an order permitting them to continue effecting securities-based swaps activities through persons subject to certain adverse legal actions.

In May 2013, the Commission re-opened the comment period for a number of Title VII proposed rulemakings, including the Registration Proposing Release.  On the same day, the Commission also re-proposed Forms SBSE, SBSE-A, and SBSE-BD to add additional questions to those forms.