The SEC adopted rules and forms establishing a process whereby security-based swap dealers and major security-based swap participants can register with the SEC. However, the compliance date for the registration rules may be significantly delayed, depending on when the SEC completes a number of future rulemakings relating to security-based swap dealers and major security-based swap participants that must be completed before compliance with the registration rules will be required.
On August 5, 2015, the U.S. Securities and Exchange Commission ("SEC" or "Commission") adopted final rules and forms ("Final SEC Registration Rules") establishing a process by which security-based swap dealers ("SBSD") and major security-based swap participants ("MSBSP," and together with SBSD, "SBS Entities") can register (and withdraw from registration) with the Commission. The rules and forms were adopted under the Securities Exchange Act of 1934 ("Exchange Act"), as amended by Title VII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act ("Title VII").1 In a related release, the SEC proposed rules governing applications by SBS Entities for an SEC order permitting statutorily disqualified associated persons to effect or to be involved in effecting security-based swaps
("Associated Person Proposal").2
Among other matters, the Final SEC Registration Rules:
Establish the process by which an SBS Entity can apply for registration with the SEC by identifying the forms entities must use to register, how such application must be filed, and the standard the SEC will use to determine whether to grant registration;
- Establish compliance dates for registration and specify when persons are required to begin calculating whether their activities meet or exceed the SBSD and MSBSP registration thresholds;
- Require non-U.S. resident SBS Entities to obtain a U.S. agent for service of process and an opinion of counsel determining that they can, as a matter of law, provide the SEC with access to their books and records and submit to onsite examination;
- Require two separate compliance certifications from senior officers of the SBS Entity, described below as part of the registration process; and
- Provide an SBS Entity registering with the SEC with limited relief to permit non-natural associated persons that are subject to statutory disqualifications to effect or be involved in effecting security-based swaps on its behalf, subject to certain conditions.
Notably, the Final SEC Registration Rules establish a compliance date for registration that is the later of: six months after the date of publication in the Federal Register of final rules relating to capital, margin, and segregation for SBS Entities; the compliance date of final rules establishing recordkeeping and reporting requirements for SBS Entities; the compliance date of final rules establishing business conduct requirements for SBS Entities; and the compliance date for final rules relating to the Associated Person Proposal. As a consequence, an SBS Entity will not be required to register as an SBSD or MSBSP until the SEC substantially completes its Title VII rulemaking relating to SBS Entities.
The Final SEC Registration Rules establish the process by which an SBS Entity can apply for registration with the SEC.3 The approach is largely modeled on the registration regime applicable to broker-dealers (who register with the SEC on Form BD), but also takes into account the CFTC’s registration requirements for swap dealers and major swap participants ("Final CFTC Registration Rules").4 SBS Entities register directly with the SEC because there is no self-regulatory organization ("SRO") for SBS Entities.5
In order to ease the regulatory burden on market participants and avoid unnecessary duplication, the Final SEC Registration Rules permit an SBS Entity that is registered or registering with the SEC as a broker-dealer or with the CFTC as a swap dealer or major swap participant to apply for registration on specially tailored forms (Form SBSE-BD for broker- dealers; Form SBSE-A for swap dealers and major swap participants who are not also broker- dealers). All other SBS Entities must register on Form SBSE, which is necessarily a longerform because the entities would not have already submitted any of the requisite information.6 As part of the application process, an SBS Entity is required to provide two separatecertifications. The first is a certification from a knowledgeable senior officer7 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 "Senior Officer Certification").
The second is a certification from the Chief Compliance Officer ("CCO") of the SBS Entity that it 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 statutory disqualification, unless otherwise specifically provided by rule, regulation or order of the SEC (the "CCO Certification Regarding Associated Persons"). To support the certification, the rule also requires the CCO, or his or her designee, to review and sign the questionnaire or application for employment executed by each of the SBS Entity’s associated persons who are natural persons and effect or are involved in effecting security- based swaps on behalf of the SBS Entity. Both the Senior Officer Certification and the CCO Certification Regarding Associated Persons must be contained in Form SBSE-C and included when the SBS Entity applies for registration (regardless of the type of form that the applicant uses).
Notably the SEC is not at this time adopting licensing requirements for associated persons of SBS Entities, in part because there is no SRO regulatory system for SBS Entities and in part because the SEC thinks the CCO Certification Regarding Associated Persons should provide assurances that associated persons of SBS Entities are not subject to statutory disqualification. An associated person is required, however, to fill out a questionnaire or application for employment, which will be used by the SBS Entity to, among other purposes, verify that the associated person is not subject to a statutory disqualification.8
An applicant will be conditionally registered as an SBS Entity once its complete application is filed with the SEC, which will permit the SBS Entity to continue its operations while the SEC considers the SBS Entity’s application for ongoing registration. The SEC will grant ongoing registration, where warranted by the SBS Entity’s application, if the SEC finds that the requirements of Section 15F(b) of the Exchange Act are satisfied,9 the applicant is not subject to a statutory disqualification (see below), and the SEC is not aware of inaccurate statements in the application or certifications.
The Exchange Act generally prohibits an SBS Entity, except as otherwise permitted by rule, regulation or order of the SEC, from permitting any person associated with the SBS Entity who is subject to a "statutory disqualification"10 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. There are a number of points to note regarding this general prohibition.
First, the term "person associated with" an SBS Entity is defined broadly to include (i) any partner, officer, director, or branch manager of an SBS Entity (or any person occupying a similar status or performing similar functions); (ii) any person directly or indirectly controlling, controlled by, or under common control with an SBS Entity; or (iii) any employee of an SBS Entity.11 Further, the definition of "person" is not limited to natural persons, but extends to both entities and natural persons.12 The term "associated person" generally excludes, however, persons whose functions are solely clerical or ministerial.13
Second, the SEC believes the term "involved in effecting security-based swaps" should be read more broadly than simply "effecting security-based swaps." As such, the SEC interprets "involved in effecting security-based swaps" broadly to mean engaged in functions necessary to facilitate an SBS Entity’s security-based swap business, including, but not limited to the following activities: (1) drafting and negotiating master agreements and confirmations; (2) recommending security-based swap transactions to counterparties; (3) being involved in executing security-based swap transactions on a trading desk; (4) pricing security-based swap positions; (5) managing collateral for the SBS Entity; and (6) directly supervising persons engaged in the activities described in items (1) through (5) above.
Third, the SEC treats the statutory disqualification requirements as applying to an entity as a whole (i.e., an entity-level, as opposed to transaction-level, requirement). Thus, the SEC applies the statutory disqualification requirements to all the associated persons of a registrant, even if those associated persons deal solely with non-U.S. persons outside the United States.14
Finally, the Final SEC Registration Rules provide that, unless otherwise ordered by the SEC, when it files an application to register with the SEC as an SBSD or MSBSP, an SBS Entity may permit a person associated with such SBS Entity that is not a natural person and that is subject to a statutory disqualification, to effect or be involved in effecting security-based swaps on its behalf, provided that the statutory disqualification occurred prior to the compliance date of this rule, and provided that it identifies each such associated person on Schedule C of Form SBSE, Form SBSE-A, or Form SBSE-BD, as appropriate. The SEC states that this requirement is designed to facilitate an orderly registration process by minimizing potential market disruptions that could occur when firms engaged in the security-based swap business trigger the requirements to register with the Commission.15
As noted above, compliance with the Final SEC Registration Rules is not required until the later of: (i) six months after publication in the Federal Register of final rules establishing capital, margin and segregation requirements for SBS Entities;16 (ii) the compliance date of final rules establishing recordkeeping and reporting requirements for SBS Entities;18 (iii) the compliance date of final rules establishing business conduct requirements for SBS Entities; and (iv) the compliance date for final rules establishing a process for a registered SBS Entity to make an application to the SEC to allow an associated person who is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on the SBS Entity's behalf ("Registration Compliance Date").19 The SEC believes that delaying registration requirements in this way will give firms time to make an informed decision whether they wish to continue conducting a security-based swap business in the United States.
Under rules jointly adopted by the CFTC and SEC, an entity must register as an SBSD if its security-based swap dealing activities over the preceding 12 months exceed $3 billion in notional of credit default security-based swaps (subject to a phase-in level of $8 billion in notional), $150 million in notional of other types of security-based swaps (subject to a phase-in level of $400 million in notional) or $25 million in notional in any type of security-based swap with counterparties that are "special entities."20 Similarly, under rules jointly adopted by the CFTC and SEC, a market participant will be deemed to be an MSBSP if its security-based swap positions exceed certain "substantial position" and "substantial counterparty exposure" thresholds.21
Because the SBSD definition takes into account transactions entered into over a 12-month look-back period and the MSBSP definition takes into account all positions over the preceding calendar quarter,22 an unanswered question in the SEC’s implementation of Title VII has been when firms should start counting transactions or positions for purposes of the relevant thresholds in the SBSD and MSBSP definitions. The Final SEC Registration Rules clarify this issue by providing that, for the purposes of complying with the registration requirement, persons are not required to begin calculating whether their activities meet or exceed the thresholds established for SBSD and MSBSP until two months prior to the Registration Compliance Date. This means that with respect to compliance with the registration and other requirements applicable to SBSD and MSBSP, only security-based swap positions connected with the dealing activity in which the person engages on or after this date will count toward determining that person’s status as an SBSD and only positions held on or after this date will count toward determining that person’s status as an MSBSP.
As noted above, the Final SEC Registration Rules establish the process by which persons can register as an SBSD or MSBSP and when persons must begin counting transactions toward the SBSD and MSBSP thresholds. The rules do not otherwise specify who must register as an SBSD or MSBSP. The SEC addressed the cross-border application of the SBSD and MSBSP definitions in another release ("Final SEC Cross-Border Rules").23 Generally, and subject to certain exceptions not discussed here, under the Final SEC Cross-Border Rules, a non-U.S. person24 must count the following transactions toward its SBSD and MSBSP thresholds:25
Toward the SBSD De Minimis Threshold –
- Security-based swap dealing transactions with a U.S. person counterparty (other than transactions with majority-owned affiliates and transactions conducted through the foreign branch of a registered SBSD);26
- Security-based swap dealing transactions with a non-U.S. person counterparty (other than a majority-owned affiliate) if such counterparty has legally enforceable rights of recourse against a U.S. affiliate of the non-U.S. person in connection with its obligations under the security-based swap; and
- All security-based swap dealing activity (other than transactions with a majority-owned affiliate) if the non-U.S. person acts as a "conduit affiliate."27
Toward the MSBSP Thresholds –
- Positions arising from security-based swap transactions with U.S. person counterparties (other than positions arising from transactions with majority-owned affiliates and transactions conducted through the foreign branch of a registered SBSD);
- Positions arising from security-based swap transactions with a counterparty (other than a majority-owned affiliate) that has rights of recourse against a U.S. person in connection with the non-U.S. person’s obligation under the security-based swap, regardless of whether the U.S. person is affiliated with the non-U.S. person; and
- All positions arising from security-based swap transactions (other than transactions with majority-owned affiliates), if a non-U.S. person acts as a "conduit affiliate."28
In addition to the requirements discussed above, the Final SEC Registration Rules also require "nonresident SBS Entities"29 to obtain a U.S. agent for service of process and an opinion of counsel determining that they can, as a matter of law, provide the SEC with access to their books and records and submit to onsite examination and provide this information to the Commission ("Nonresident Certification Requirements").30 While the SEC recognizes that nonresident SBS Entities in jurisdictions with legal barriers could be prevented from registering with the SEC because they are unable to comply with Nonresident Certification Requirements, the SEC believes that these firms also could choose to restructure their respective businesses such that the registered entity can comply with the Nonresident Certification Requirements so that it can register.
In addition, as noted above, the SEC treats the statutory disqualification requirements as entity-level requirements, applicable to registrants as a whole. Thus, the SEC applies the statutory disqualification requirements to all the associated persons of non-U.S. registrants, even if those associated persons deal solely with non-U.S. persons outside the United States. The SEC states that it has taken into consideration the concerns expressed regarding the potential impact of certain foreign privacy laws, but that it is not convinced at this time of a need or basis to provide an exclusion for SBS Entities from the statutory disqualification requirements with respect to certain of its associated persons that are natural persons who effect or are involved in effecting security-based swaps on its behalf.
Finally, it should be noted that the Final SEC Registration Rules do not provide for substituted compliance in respect of a non-U.S. SBS Entity that is in compliance with relevant requirements in its home jurisdiction. The SEC believes that permitting a non-U.S. SBS Entity to satisfy the registration requirements described above (i.e., completing and filing the appropriate form and providing the requirsite certifications), through compliance with the relevant requirements in its home jurisdiction, even with appropriate notice of such compliance to the Commission, may deprive the SEC of the necessary information, including information resulting from inspection and examination of the books and records of a firm engaged in dealing activity at levels above the de minimis threshold.
The Final SEC Registration Rules represent the beginning of the SEC’s adoption of final rules regarding the substantive obligations applicable to SBS Entities. The SEC likely will adopt the remaining proposals governing requirements applicable to SBS Entity in the coming year. Therefore, it could still be some time before the registration requirements for SBS Entities discussed above are triggered. In light of the Final SEC Registration Rules, SBS Entities, particularly non-U.S. SBS Entities, may wish to consider the best way to structure their businesses in light of the final requirements the SEC is slowly, but inevitably, rolling out.
APPENDIX A: COMPARISON OF FINAL SEC AND CFTC REGISTRATION RULES
The table below is intended to provide a high-level comparison of the Final SEC Registration Rules and the Final CFTC Registration Rules. It is summary in nature, details have been omitted that may prove important in particular cases, and the description should not be viewed as a definitive source of legal guidance.
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