On August 5, 2015, the Securities and Exchange Commission (SEC) adopted final registration rules for security-based (SB) swap dealers and major SB swap participants (collectively SBS Entities). Concurrently, the SEC also proposed a process to permit certain persons with statutory disqualifications that are associated persons (APs) of SBS Entities to continue to effect SB swaps on behalf of an SBS Entity. SBS Entities will not need to comply with the final registration rules until a series of additional rules for SBS Entities, including the proposed statutory disqualification process, are adopted or implemented.1

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the SEC is required to issue rules for the registration of SB swap dealers2 and major SB swap participants.3 Furthermore, the Dodd-Frank Act amendments to the Securities Exchange Act of 1934 (Exchange Act) expressly provide that an AP of an SBS Entity4 that is subject to a statutory disqualification5 is prohibited from effecting SB swaps on behalf of an SBS Entity, unless the SEC makes an exception by rule, regulation or order.6 The SEC’s proposed rule addresses this prohibition by providing a process for SBS Entities to apply to the SEC for an order permitting an AP subject to a statutory disqualification that is associated with the SBS Entity to effect or be involved in effecting SB swaps.

Final Rule: Registration for SB Swap Dealers and Major SB Swap Participants

The final rules lay out the mechanics of how to register as an SBS Entity. Unlike the SEC’s broker-dealer registration regime, which the Financial Industry Regulatory Authority administers, the SEC will administer the registration of SBS Entities.7 The final rule for SBS Entity registration does not permit substituted compliance with comparable foreign registration laws in lieu of registration with the SEC.8 The SEC specifically noted its inspection and examination authority over registered SBS Entities as a reason for not permitting substituted compliance.9 The final rule also provides additional requirements for nonresident SBS Entities applying for registration.10

Associated Persons

The Exchange Act defines APs of an SBS Entity to include natural persons and affiliated entities.11 As a result, the Exchange Act prohibits both natural persons and affiliates that are subject to a statutory disqualification from effecting or being involved in effecting SB swaps on behalf of the associated SBS Entity.12 Conversely, the “associated person” definition for swap dealers and major swap participants registered with the CFTC only extends to natural persons.13 The SEC’s final rule provides that unless otherwise ordered by the SEC, when an SBS Entity applies to register, an AP of the SBS Entity that is subject to a statutory disqualification may continue to effect or be involved in effecting SB swaps. However, the person must not be a natural person and the statutory disqualification must have occurred prior to the compliance date of the final rule.14Furthermore, the SBS Entity applying for registration must disclose all such statutorily disqualified entities.15

The final rule references persons that “effect” or are “involved in effecting” SB swaps on behalf of an SBS Entity. The SEC clarified that the latter phrase generally means persons engaged in functions necessary to facilitate the SBS Entity’s SB swap business. Some examples include drafting and negotiating master agreements and confirmations, recommending SB swaps to counterparties, executing an SB swap on a trading desk, pricing SB swap positions and directly supervising persons involved in all of the above mentioned activities.16

In addition to the final registration rules relating to APs, the SEC has simultaneously proposed to establish a process through which an SBS Entity could apply to the SEC for an order permitting an AP subject to a statutory disqualification to effect or be involved in effecting SB swaps.17 Proposed Rule of Practice 194 would apply to both natural persons and entities that are subject to statutory disqualifications. However, the SEC proposes to give only AP entities — not natural person APs — a temporary exclusion to continue to effect or be involved in effecting SB swaps while the application for an order is under consideration.18

Dates for Calculating SB Entity Thresholds

SBS Entities will not be required to begin calculating whether their activities exceed the thresholds to become SB swap dealers or major SB swap participants until two months prior to the registration compliance date.19 Only SB swap positions held on or after this date will count toward determining if an SBS Entity must register.20