Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") (enacted July 21, 2010) generally became effective on July 16, 2011. Since then, the Securities and Exchange Commission ("SEC") has received inquiries and comments from foreign regulators and participants involved in the global security-based swap market. Specifically, these regulators and market participants have voiced concerns over how Title VII (and the SEC's implementing regulations thereunder) will apply to the cross-border activities of U.S. and non-U.S. market participants.

On May 1, the SEC published for public comment proposed rules and interpretive guidance to address the application of the provisions of the Securities Exchange Act of 1934, as amended ("Exchange Act"), that were added by Subtitle B of Title VII of the Dodd-Frank Act to cross-border security-based swap activities. The rules and interpretive guidance are meant, among other things, to inform parties to a security-based swap transaction which regulatory requirements apply when their transaction occurs in part within and in part outside the United States.

The comment period for the proposed rules and interpretive guidance will last for 90 days following their publication in the Federal Register.

According to the SEC, the proposed rules and interpretive guidance reflect a territorial approach to application of Title VII requirements to security-based swap transactions. Generally, under the proposed rules, Title VII will apply to security-based swap transactions involving (i) a U.S. person and a non-U.S. person, (ii) two non-U.S. persons where one or both are located within the United States, or (iii) two non-U.S. persons conducting a security-based swap transaction that otherwise occurs in relevant part within the United States.

The proposed rules and interpretive guidance cover several important topics related to cross-border security-based swap transactions, including the registration and regulation of security-based swap dealers and major security-based swap participants; the registration of security-based swap clearing agencies, data repositories, and execution facilities; and the application of Subtitle B of Title VII to cross-border activities with respect to certain transactional requirements in connection with reporting and dissemination, clearing, and trade execution for security-based swaps.

In recognition that market participants may be subject to conflicting or duplicative compliance obligations in the global derivatives market, the proposed rules and interpretive guidance also set out a framework for "substituted compliance," a policy under which the SEC may permit parties to comply with comparable regulatory requirements in a foreign jurisdiction in substitution for compliance with certain requirements of the Exchange Act. Pursuant to this policy, a foreign market participant would be permitted to comply with the requirements imposed by its own home country so long as those requirements achieve regulatory outcomes comparable with the regulatory outcomes of the relevant provisions of Subtitle B of Title VII. However, if the home country does not have any requirements that achieve comparable regulatory outcomes, substituted compliance would not be permitted and the foreign market participant would be required to comply with the applicable U.S. requirements.