Early this month the U.S. Securities and Exchange Commission (“SEC”) released final rules (the “Registration Rules”) for the registration of security-based swap dealers (“SBSDs”).1 The Registration Rules, released more than three years after the release by the U.S. Commodity Futures Trading Commission (“CFTC”) of its parallel rules for the registration of swap dealers,2 set out the formal requirements for SBSD registration and are instructive for financial institutions that may be required to register as SBSDs when such registration comes to be required.
Timing for Registration and for Related Calculations
The Registration Rules have little immediate effect. Their compliance date, when the SBSD registration requirement will go into effect, will occur only after the occurrence of several events that, taken together, have not yet occurred, cannot occur for a minimum of six months, and seem relatively unlikely to occur until after significantly more than six months have passed.3
Moreover, market participants are not required to register as SBSDs until after their security-based swap activity exceeds certain de minimis thresholds.4 The Registration Rules Release states that, for purposes of complying with registration requirements, entities engaging in security-based swaps activities are not required to begin calculating whether their activities meet or exceed such thresholds until two months prior to the compliance date of the Registration Rules.5
An applicant will be conditionally registered if it timely completes and submits (i) the primary application form applicable to it, as described below, and (ii) a certification form, also described below.6 The SEC may deny or grant ongoing registration as a SBSD based on the applicant’s application. The SEC will grant ongoing registration if it finds that applicable requirements are satisfied, and may institute proceedings to determine whether ongoing registration should be denied.7 If information contained in an applicant’s registration materials becomes inaccurate, such applicant must correct such materials.8
Primary Application Forms
The Registration Rules provide that an applicant must file one of three primary forms as part of its application for registration.9 The forms are annexed to the Registration Rules and form part of the rulemaking. The three forms are:
- Form SBSE, for entities that are neither registered or registering with the SEC as a broker-dealer nor registered or registering with the CFTC as a swap dealer or major swap participant;
- Form SBSE-A, for entities that are not registered or registering with the SEC as a broker-dealer but that are registered or registering with the CFTC as a swap dealer or major swap participant; and
- Form SBSE-BD, for entities that are registered or registering with the SEC as a broker or dealer.10
The SEC’s decision to use three different primary application forms is intended to recognize that, if an applicant is registered with the SEC or the CFTC, the SEC can obtain access to certain information regarding such applicant.11 As a result, the three forms request different amounts of information, with the Form SBSE-BD, for entities already registered or registering as a broker or dealer with the SEC, appearing to require significantly less information than the other two forms.
In addition to a primary application form, an applicant must file a Form SBSE-C, which, like the primary application forms, is annexed to the Registration Rules and forms part of the SEC’s rulemaking. Form SBSE-C contains two separate certifications, one by a senior officer of the applicant and the other by the applicant’s chief compliance officer or his or her designee.
A senior officer of the applicant must certify that such officer has:
- after due inquiry, reasonably determined that the applicant has developed and implemented written policies and procedures reasonably designed to prevent violation of federal securities laws and the rules thereunder; and
- documented the process by which he or she reached such determination.12
For these purposes, the term “senior officer” includes only the most senior executives in an organization, such as an applicant’s chief executive officer, chief financial officer, chief legal officer, chief compliance officer, president, or other person at a similar level. In addition, the “senior officer” making the certification must have the legal authority to bind the applicant.13 The development of the written policies and procedures referenced in this certification will likely be among the most time-consuming of the tasks required to register as an SBSD.
Further, the applicant must certify, by its chief compliance officer or his or her designee, that the applicant:
- neither knows, nor in the exercise of reasonable care should have known, that any associated person14 who effects or is involved in effecting security-based swaps on its behalf is subject to a statutory disqualification,15 unless otherwise specifically provided by SEC rule, regulation or order;16 and
- has performed background checks on all of its associated persons who are natural persons17 and who effect or are involved in effecting security-based swaps on its behalf.18
The Registration Rules expressly require the applicant’s chief compliance officer, or his or her designee, to review and sign the questionnaire or application for employment executed by each associated person who is a natural person and who effects or is involved in effecting security based swaps on behalf of such applicant.19 The questionnaire or application must serve as a basis for a background check of the associated person to verify that such person is not subject to statutory disqualification.20
Additional requirements apply to “nonresident security-based swap dealers,” which are defined to include (i) in the case of a corporation, one incorporated in or having its principal place of business in any place not in the United States and (ii) in the case of a partnership or other unincorporated organization or association, one having its principal place of business in any place not in the United States.21
Each nonresident SBSD must:
- appoint an agent for service of process in the U.S.;22
- certify that it can and will provide the SEC with prompt access to its books and records and will submit to onsite inspection and examination by the SEC;23 and
- provide an opinion of counsel to the effect that it can, as a matter of law, provide the SEC with prompt access to its books and records and can, as a matter of law, submit to onsite inspection and examination by the SEC.24
A nonresident SBSD must provide a re-certification within 90 days after any changes in the legal or regulatory framework that would impact a nonresident SBSD’s ability to provide the SEC with prompt access to its books and records. Such re-certification must be accompanied by a revised opinion of counsel describing how, as a matter of law, the nonresident SBSD will continue to meet its obligations to provide the SEC with prompt access to its books and records and to be subject to SEC inspection and examination under the new regulatory regime.25