On August 5, 2015, the U.S. Securities and Exchange Commission (SEC) adopted registration rules and forms (Final Rules) for security-based swap dealers and major security-based swap participants (collectively, SBS Entities).1 The Securities Exchange Act of 1934 (Exchange Act), as amended by the Dodd-Frank Wall Street Reform and the Consumer Protection Act of 2010, requires SBS Entities to register with the SEC.
The Final Rules become effective on October 13, 2015. However, the SEC established a compliance date for the Final Rules (Registration Compliance Date) that is the latest of: (1) six months after the date of publication in the Federal Register of a final rule release adopting rules establishing capital, margin and segregation requirements for SBS Entities; (2) the compliance date of final rules establishing recordkeeping and reporting requirements for SBS Entities; (3) the compliance date of final rules establishing SBS Entity business conduct requirements under Sections 15F(h) and (k) of the Exchange Act; and (4) the compliance date for final rules establishing a process for a registered SBS Entity to make an application to the SEC to permit an associated person who is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on its behalf. The Registration Compliance Date is currently indeterminate because none of the dates on which it depends has been set by the SEC, and it is unknown when they will be set.
The SEC also established an “SBS Entity Counting Date”2 that will be two months prior to the Registration Compliance Date. Firms that have regularly engaged in security-based swap business must determine whether they are required to register with the SEC on the Registration Compliance Date as SBS Entities.3 Such determinations are required to be made based on security-based swap dealing activity and positions from and after the SBS Entity Counting Date.4
Under the Final Rules, SBS Entities must file an application for registration through the SEC’s EDGAR filing system using one of three forms.5 A firm that is not registered or registering with the SEC as a broker-dealer and is not registered or registering with the CFTC as a swap dealer or major swap participant must file its application using Form SBSE. A firm that is an SEC-registered broker-dealer, or is registering as such, must apply for SBS Entity registration using Form SBSE-BD. A CFTC-registered swap dealer or major swap participant, or a firm that is registering as such, must use Form SBSE-A, unless it is also an SEC-registered broker-dealer. Form SBSE-BD should also be used by any firm that is already registered, or is registering, with both the SEC and CFTC in the above-referenced capacities.
Once a firm’s application is filed with the SEC, together with certain senior officer certifications that are required to be made on Form SBSE-C, the firm will automatically become conditionally registered as an SBS Entity. The SEC may subsequently grant or deny the firm’s ongoing registration or institute proceedings to determine whether conditional registration should be denied. An SBS Entity is also required to promptly amend its Form SBSE, SBSE-BD or SBSE-A if the information contained therein becomes inaccurate. The Final Rules also provide processes for the cancellation, revocation and withdrawal of registration of an SBS Entity.
Substituted compliance with the SBS Entity registration requirements is not available for non-U.S. market participants. Nonresident SBS Entities6 are required to obtain an agent in the U.S. for service of process and provide the SEC with information regarding that agent. Each nonresident SBS Entity applying for registration must also provide an opinion of counsel that the applicant can, as a matter of law, provide the SEC with access to its books and records and submit to onsite SEC inspections and examinations.7 The SEC acknowledged that some nonresident SBS Entities may be prevented from registering because they are unable to comply with this requirement. However, the SEC stated that those firms could restructure their security-based swap business to resolve any such issue and that the SEC believes it must be able to directly access registered SBS Entity books and records to inspect and examine them. Providing access through a third party, for example through a foreign regulator, is not sufficient.
Required Certifications (Including as to Disqualifications)
As part of an SBS Entity’s registration process, a senior officer of the SBS Entity must provide two certifications, each supported by specific due diligence.
First, a senior officer must certify that he or she has reasonably determined that the SBS Entity has developed and implemented written policies and procedures reasonably designed to prevent violations of the federal securities laws and that a documented process was used to reach that determination.8
Second, the SBS Entity must also certify, on a form signed by the firm’s Chief Compliance Officer (CCO), or his or her designee, that, unless otherwise specifically provided by an SEC rule, regulation or order, it neither knows nor reasonably should know that any “associated person”9 who effects, or is involved in effecting, security-based swaps on its behalf is subject to any statutory disqualification as described in Sections 3(a)(39)(A)–(F) of the Exchange Act.10To support the certification, the SBS Entity’s CCO, or his or her designee, must review and sign employment questionnaires or applications of associated persons who are natural persons and who will effect or be involved in effecting security-based swap transactions for the firm. SEC Rule 15Fb6-1 provides a limited exception to allow an associated person who is subject to a statutory disqualification to effect or be involved in effecting security-based swap transactions. The exception applies only if the associated person is not a natural person, the disqualification preceded the Registration Compliance Date, and the non-natural person is appropriately identified to the SEC on Schedule C of Form SBS in connection with the firm’s application for SBS Entity registration.11