Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants

SECURITIES AND EXCHANGE
COMMISSION
17 CFR Part 240
[Release No. 34–77617; File No. S7–25–11] RIN 3235–AL10 Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: In accordance with Section 764 of Title VII (‘‘Title VII’’) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the ‘‘Dodd￾Frank Act’’), the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) is adopting new rules under the Securities Exchange Act of 1934 (‘‘Exchange Act’’) that are intended to implement provisions of Title VII relating to business conduct standards and the designation of a chief compliance officer for security-based swap dealers and major security-based swap participants. The final rules also address the cross-border application of the rules and the availability of substituted compliance. DATES: Effective Date: July 12, 2016. Compliance Date: The compliance dates are discussed in Section IV.B of this release. FOR FURTHER INFORMATION CONTACT:
Lourdes Gonzalez, Assistant Chief Counsel—Sales Practices, Joanne Rutkowski, Senior Special Counsel, Cindy Oh, Special Counsel, Lindsay Kidwell, Special Counsel, Stacy Puente, Special Counsel, Devin Ryan, Special Counsel, Office of Chief Counsel, Division of Trading and Markets, at (202) 551–5550, at the Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549. For further information on cross-border application of the rules, contact: Carol McGee, Assistant Director, Richard Gabbert, Senior Special Counsel, Joshua Kans, Senior Special Counsel, and Margaret Rubin, Special Counsel, Office of Derivatives Policy, Division of Trading and Markets, at (202) 551–5550, at the Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549. SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
A. Summary of Final Rules B. Cross-Border Application of the Final Rules
C. Consistency With CFTC Rules
D. Department of Labor ERISA Fiduciary Regulations E. Investment Adviser and Municipal Advisor Status F. Intersection With SRO Rules
II. Discussion of Rules Governing Business
Conduct
A. Scope, Generally
B. Exceptions for Anonymous SEF or Exchange-Traded Transactions
C. Application of the Rules to SBS Dealers
and Major SBS Participants D. Reliance on Representations E. Policies and Procedures Alternative F. Definitions G. Business Conduct Requirements

1. Counterparty Status
2. Disclosure
   a. Disclosure Not Required When the Counterparty Is an SBS Entity or a Swap Entity b. Timing and Manner of Certain Disclosures and Scope of Disclosure Rules
   c. Material Risks and Characteristics of the
   Security-Based Swap d. Material Incentives or Conflicts of Interest e. Daily Mark f. Clearing Rights
3. Know Your Counterparty
4. Recommendations by SBS Dealers
5. Fair and Balanced Communications
6. Obligation Regarding Diligent
   Supervision
   H. Rules Applicable to Dealings With Special Entities
7. Scope of Definition of ‘‘Special Entity’’
8. ‘‘Acts as an Advisor’’ to a Special Entity
9. Definition of ‘‘Best Interests’’
10. Antifraud Provisions
11. SBS Entities Acting as Counterparties to
    Special Entities
12. Qualifications of the Independent
    Representative a. Written or Other Representations Regarding Qualifications b. Sufficient Knowledge To Evaluate Transaction and Risks
    c. No Statutory Disqualification
    d. Undertakes a Duty To Act in the Best Interests of the Special Entity e. Makes Appropriate and Timely Disclosures to Special Entity f. Pricing and Appropriateness g. Subject to ‘‘Pay To Play’’ Prohibitions h. ERISA Fiduciary
    i. Safe Harbor
13. Disclosure of Capacity
14. Exceptions for Anonymous, Special
    Entity Transactions on an Exchange or SEF
15. Certain Political Contributions by SBS
    Dealers
    I. Chief Compliance Officer
    J. Prime Brokerage Transactions K. Other Comments
    III. Cross-Border Application and Availability
    of Substituted Compliance
    IV. Explanation of Dates
    A. Effective Date
    B. Compliance Date
    C. Application to Substituted Compliance
    V. Paperwork Reduction Act
    VI. Economic Analysis
    A. Introduction and Broad Economic Considerations B. Baseline
16. Available Data Regarding Security-Based
    Swap Activity
17. Security-Based Swap Market: Market
    Participants and Dealing Structures a. Security-Based Swap Market Participants b. Participant Domiciles
    c. Market Centers
    d. Common Business Structures for Firms Engaged in Security-Based Swap Dealing Activity e. Current Estimates of Number of SBS Dealers and Major SBS Participants
18. Security-Based Swap Market: Levels of
    Security-Based Swap Trading Activity
19. Global Regulatory Efforts
20. Dually Registered Entities
21. Cross-Market Participation
22. Pay To Play Prohibitions
    C. Costs and Benefits of Business Conduct
    Rules
23. Verification of Status and Know Your
    Counterparty Rules
24. Disclosures and Communications
    a. Risks, Characteristics, and Conflicts of Interest b. Daily Mark
    c. Clearing Rights
25. Suitability
    a. Costs and Benefits b. Institutional Suitability Alternative
26. Special Entities
    a. Scope and Verification b. SBS Entities as Counterparties to Special Entities
    c. SBS Dealers as Advisors to Special
    Entities d. Independent Representation:
    Alternatives e. Reliance on Representations f. Magnitude of the Economic Effects
27. Fraud, Fair and Balanced
    Communications, Supervision a. Antifraud b. Fair and Balanced Communications
    c. Supervision
28. CCO Rules
    a. Annual Compliance Report, Conflicts of Interest, Policies and Procedures b. CCO Removal and Compensation
29. Pay To Play
30. Scope
    a. Inter-Affiliate Transactions b. Opt Out
31. Cross-Border Application
    a. Scope of Application to SBS Entities b. Substituted Compliance D. Effects on Efficiency, Competition and Capital Formation
    VII. Regulatory Flexibility Act Certification
    Statutory Basis and Text of Final Rules
    I. Introduction
    The Commission is adopting Rules 15Fh–1 through 15Fh–6 and Rule 15Fk–1 to implement the business conduct standards and chief compliance officer (‘‘CCO’’) requirements for security-based swap dealers (‘‘SBS Dealers’’) and major security-based swap participants (‘‘Major SBS Participants’’ and, together with SBS

1 Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111–203, 124 Stat. 1376 (2010). 2See Public Law 111–203, Preamble. 3See Business Conduct Standards for Security￾Based Swap Dealers and Major Security-Based Swap Participants, Exchange Act Release No. 64766 (Jun. 29, 2011), 76 FR 42396 (Jul. 18, 2011) (‘‘Proposing Release’’). 4See Reopening of Comment Periods for Certain Rulemaking Releases and Policy Statement Applicable to Security-Based Swaps Proposed Pursuant to the Securities Exchange Act of 1934 and the Dodd-Frank Wall Street Reform and Consumer Protection Act, Exchange Act Release No. 69491 (May 1, 2013), 78 FR 30800 (May 23, 2013) (‘‘Reopening Release’’). 5See letters from Kenneth M. Fisher, Senior Vice President and Chief Financial Officer, Noble Energy, dated July 7, 2011 (‘‘Noble’’); Chris Barnard, dated Aug. 10, 2011 (‘‘Barnard’’); R. Glenn Hubbard, Co-Chair, Committee on Capital Markets Regulation, John L. Thornton, Co-Chair, Committee on Capital Markets Regulation, and Hal S. Scott, Director, Committee on Capital Markets Regulation, dated Aug. 26, 2011 (‘‘CCMR’’); John F. Damgard, President, Futures Industry Association, Robert Pickel, Executive Chairman, International Swaps and Derivatives Association, Inc., and Kenneth E. Bentsen, Jr., Executive Vice President, Public Policy and Advocacy, Securities Industry and Financial Markets Association, dated Aug. 26, 2011 (‘‘FIA/ ISDA/SIFMA’’); Gerald W. McEntee, President, American Federation of State, County and Municipal Employees, dated Aug. 29, 2011 (‘‘AFSCME’’); Mark Hepsworth, President, Institutional Business, Interactive Data Corporation, dated Aug. 29, 2011 (‘‘IDC’’); Sen. Carl Levin, U.S. Senate, dated Aug. 29, 2011 (‘‘Levin’’); Susan N. Kelly, Senior Vice President of Policy Analysis and General Counsel, American Public Power Association, and Noreen Roche-Carter, Chair, Tax and Finance Task Force, Large Public Power Council, dated Aug. 29, 2011 (‘‘APPA’’); Stuart J. Kaswell, Executive Vice President & Managing Director, General Counsel, Managed Funds Association, dated Aug. 29, 2011 (‘‘MFA’’); Dennis M. Kelleher, President & CEO, and Stephen W. Hall, Securities Specialist, Better Markets, Inc., dated Aug. 29, 2011 (‘‘Better Markets (August 2011)’’); Christopher A. Klem and Molly Moore, Ropes & Gray LLP, dated Aug. 29, 2011 (‘‘Ropes & Gray’’); Joanne T. Medero, BlackRock, Inc., dated Aug. 29, 2011 (‘‘BlackRock’’); Joseph Dear, Chief Investment Officer, California Public Employees’ Retirement System, Jennifer Paquette, Chief Investment Officer, Colorado PERA, Keith Bozarth, Executive Director, State of Wisconsin Investment Board, Brian Guthrie, Executive Director, Teacher Retirement System of Texas, and Rick Dahl, Chief Investment Officer, Missouri State Employees’ Retirement System, dated Aug. 29, 2011 (‘‘CalPERS (August 2011)’’); Barbara Roper, Director of Investor Protection, Consumer Federation of America, Marcus Stanley, Policy Director, Americans for
Financial Reform, and Michael Greenberger, Law School Professor and Founder & Director, University of Maryland Center for Health & Homeland Security, dated Aug. 29, 2011 (‘‘CFA’’); American Benefits Council, dated Aug. 29, 2011 (‘‘ABC’’); Jeff Gooch, Chief Executive Officer, MarkitSERV, dated Aug. 29, 2011 (‘‘MarkitSERV’’); Timothy W. Cameron, Esq. Managing Director, Asset Management Group, Securities Industry and Financial Markets Association, dated Aug. 29, 2011 (‘‘SIFMA (August 2011)’’); John D. Walda, President and Chief Executive Officer, National Association of College and University Business Officers, dated Aug. 29, 2011 (‘‘NACUBO’’); Kevin Gould, President, Markit North America, Inc., dated Aug. 29, 2011 (‘‘Markit’’); Daniel F. C. Crowley, Partner, K&L Gates LLP, on behalf of the Church Alliance, dated Aug. 29, 2011 (‘‘Church Alliance (August 2011)’’); Christopher J. Ailman, California State Teachers’ Retirement System, dated Aug. 30, 2011 (‘‘CalSTRS’’); John M. McNally, National Association of Bond Lawyers, dated Sept. 1, 2011 (‘‘NABL’’); Colette J. Irwin-Knott, National Association of Independent Public Finance Advisors, dated Sept. 6, 2011 (‘‘NAIPFA’’); ABA Securities Association, American Council of Life Insurers, Financial Services Roundtable, Futures Industry Association, Institute of International Bankers, International Swaps and Derivatives Association, and Securities Industry and Financial Markets Association, dated Sept. 8, 2011 (‘‘ABA Securities Association’’); Kent A. Mason, Davis & Harman LLP, dated Sept. 15, 2011 (‘‘Mason’’); Senator Tim Johnson, Chairman, U.S. Senate Committee on Banking, Housing, and Urban Affairs, and Representative Barney Frank, U.S. House Committee on Financial Services, dated Oct. 4, 2011 (‘‘Johnson’’); Lawrence B. Patent, K&L Gates LLP, on behalf of the Church Alliance, dated Oct. 4, 2011 (‘‘Church Alliance (October 2011)’’); Joseph Dear, Chief Investment Officer, California Public Employees’ Retirement System et al., dated Oct. 4, 2011 (‘‘CalPERS (October 2011)’’); Susan Gaffney Director, Federal Liaison Center, Government Finance Officers Association, dated Oct. 31, 2011 (‘‘GFOA’’); Jeffery W. Rubin, Chair, Federal Regulation of Securities Committee, American Bar Association Business Law Section and Nir D. Yarden, Chair, Institutional Investors Committee, American Bar Association, dated Dec. 7, 2011 (‘‘ABA Committees’’); Bruce E. Stern, Chairman, Association of Financial Guaranty Insurers, dated Sept. 17, 2012 (‘‘AFGI (September 2012)’’); Financial Services Roundtable, Future Industry Association, Institute of International Bankers, International Swaps and Derivatives Association, Investment Company Institute, Securities Industry and Financial Markets Association, dated May 21, 2013 (‘‘Financial Services Roundtable’’); Bruce E. Stern, Chairman, Association of Financial Guaranty Insurers, dated July 22, 2013 (‘‘AFGI (July 2013)’’); Robert Pickel, Executive Vice Chairman, International Swaps and
Derivatives Association, Inc., dated July 22, 2013 (‘‘ISDA (July 2013)’’); Dennis M. Kelleher, President and CEO, and Stephen W. Hall, Securities Specialist, Better Markets, Inc., dated July 22, 2013 (‘‘Better Markets (July 2013)’’); Dennis M. Kelleher, President and CEO, Better Markets, Inc., dated Oct. 18, 2013 (‘‘Better Markets (October 2013)’’); Angie Karna, Managing Director, Legal, Nomura Global Financial Products Inc., dated Sept. 10, 2014 (‘‘Nomura’’); Kyle Brandon, Managing Director, Securities Industry and Financial Markets Association, dated Aug. 7, 2015 (‘‘SIFMA (August 2015)’’); Kyle Brandon, Managing Director, Securities Industry and Financial Markets Association, dated Sept. 23, 2015 (‘‘SIFMA (September 2015)’’); Kyle Brandon, Managing Director, Securities Industry and Financial Markets Association, dated Nov. 3, 2015 (‘‘SIFMA (November 2015)’’). The comments that the Commission received on the Proposing Release and the Reopening Release are available on the Commission’s Web site at http://www.sec.gov/ comments/s7-25-11/s72511.shtml. 6Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security￾Based Swap Dealers and Major Security-Based Swap Participants, Exchange Act Release No. 69490 (May 1, 2013), 78 FR 30968 (May 23, 2013) (‘‘Cross￾Border Proposing Release’’). 7See letters from Robert Pickel, International Swaps and Derivatives Association, Inc., dated Aug. 14, 2013 (‘‘ISDA (August 2013)’’); Karrie McMillan, General Counsel, Investment Company Institute and Dan Waters, Managing Director, ICI Global, dated Aug. 21, 2013 (‘‘ICI’’); Dennis M. Kelleher, President & CEO, Better Markets, Inc., Stephen W. Hall, Securities Specialist, Better Markets, Inc., and Katelynn O. Bradley, Attorney, Better Markets, Inc., dated Aug. 21, 2013 (‘‘Better Markets (August 2013)’’); Kenneth E. Bentsen, Jr., President, Securities Industry and Financial Markets Association, Walt Lukken, President & Chief Executive Officer, Futures Industry Association; and Richard M. Whiting, Executive Director and General Counsel, The Financial Services Roundtable, dated Aug. 21, 2013 (‘‘SIFMA (August 2013)’’); Matti Leppa¨la¨, Secretary General/CEO, PensionsEurope, dated Sep. 3, 2013 (‘‘PensionsEurope’’). These comment letters are available on the Commission’s Web site at https:// www.sec.gov/comments/s7-02-13/s70213.shtml. Dealers, ‘‘SBS Entities’’) as set forth in Title VII of the Dodd-Frank Act.1 The Commission is also amending Rules 3a67–10 and 3a71–3 and adopting Rule 3a71–6 with respect to the cross-border application of the rules and the availability of substituted compliance. The Dodd-Frank Act was enacted, among other reasons, to promote the financial stability of the United States by improving accountability and transparency in the financial system.2 The 2008 financial crisis highlighted significant issues in the over-the￾counter derivatives markets, which experienced
dramatic growth in the years leading up to the financial crisis and are capable of affecting significant sectors of the U.S. economy. Title VII of the Dodd-Frank Act provides for a comprehensive new regulatory framework for swaps and security-based swaps by, among other things: (1) Providing for the registration and comprehensive regulation of SBS Entities, swap dealers (‘‘Swap Dealers’’), and major swap participants (‘‘Major Swap Participants’’ and, together with Swap Dealers, ‘‘Swap Entities’’); (2) imposing clearing and trade execution requirements for swaps and security￾based swaps, subject to certain exceptions; (3) creating recordkeeping, regulatory reporting, and public dissemination requirements for swaps and security-based swaps; and (4) enhancing the rulemaking and enforcement authorities of the Commission and the Commodity Futures Trading Commission (‘‘CFTC’’). The Commission initially proposed Rules 15Fh–1 through 15Fh–6 and Rule 15Fk–1 in June 2011.3 In May 2013, the Commission re-opened the comment period for all of its outstanding Title VII rulemakings, including the external business conduct rulemaking.4 The Commission received 40 comments on the Proposing Release, of which 9 were comments submitted in response to the Reopening Release.5 Of the comments directed at the Cross￾Border Proposing Release,6 five referenced the proposed external business conduct standards specifically,7 while others addressed cross-border issues generally, such as the application of substituted

8See letters from Stephen Maijoor, Chair, European Securities and Markets Authority, dated Aug. 21, 2013 (‘‘ESMA’’); Stuart J. Kaswell, Executive Vice President & Managing Director, General Counsel, Managed Funds Association and Adam Jacobs, Director, Head of Markets Regulation, Alternative Investment Management Association, dated Aug. 19, 2013 (‘‘MFA/AIMA’’); Marcus Stanley, Policy Director, Americans for Financial Reform, dated Aug. 22, 2013 (‘‘AFR’’); Sarah A. Miller, Chief Executive Officer, Institute of International Bankers, dated Aug. 21, 2013 (‘‘IIB (August 2013)’’); Catherine T. Dixon, Chair, Federal Regulation of Securities Committee, American Bar Association, Business Law Section, dated Oct. 2, 2013 (‘‘ABA (October 2013)’’); Agricultural Retailers Association, Business Roundtable, Financial Executives International, National Association of Corporate Treasurers, National Association of Manufacturers, U.S. Chamber of Commerce, dated Aug. 21, 2013 (‘‘CDEU’’); Futures Options Association, dated Aug. 21, 2013 (‘‘FOA’’); Kevin Nixon, Managing Director, Institute of International Finance, dated August 8, 2013 (‘‘IIF’’); Koichi Ishikura, Executive Chief of Operations for International Headquarters, Japan Securities Dealers Association, dated Aug. 21, 2013 (‘‘JSDA’’); Patrick Pearson, European Commission, dated Aug. 21, 2013 (‘‘EC’’); Jonathan Kindred and Shigesuke Kashiwagi, Japan Financial Markets Council, dated Aug. 15, 2013. The SEC Chair and Commissioners were copied on a comment letter to the CFTC in connection with the CFTC’s own cross-border initiative. See letter from Sherrod Brown, U.S. Senator, Tom Harkin, U.S. Senator, Jeff Merkley, U.S. Senator, Carl Levin, U.S. Senator, Elizabeth Warren, U.S. Senator, Dianne Feinstein, U.S. Senator, to the Honorable Gary Gensler, dated May 22, 2013 (‘‘U.S. Senators’’). 9See Application of Certain Title VII Requirements to Security-Based Swap Transactions Connected with a Non-U.S. Person’s Dealing Activity that are Arranged, Negotiated, or Executed by Personnel Located in a U.S. Branch or Office or in a U.S. Branch or Office of an Agent, Exchange Act Release No. 74843 (Apr. 29, 2015), 80 FR 27443 (May 13, 2015) (‘‘U.S. Activity Proposing Release’’). 10See letters from Kenneth E. Bentsen, Jr., President & CEO, Securities Industry and Financial Markets Association and Financial Services Roundtable and Rich Foster, Senior Vice President & Senior Counsel for Regulatory and Legal Affairs, Financial Services Roundtable, dated July 13, 2015 (‘‘SIFMA/FSR (July 2015)’’); Sarah A. Miller, Chief Executive Officer, Institute of International Bankers, dated July 13, 2015 (‘‘IIB (July 2015)’’); Dan Waters, Managing Director, ICI Global, dated July 13, 2015 (‘‘ICI Global (July 2015)’’); Dennis M. Kelleher, President and CEO, Stephen W. Hall, Securities Specialist, Todd Phillips, Attorney, Better Markets, Inc., dated July 13, 2015 (‘‘Better Markets (July 2015)’’); Timothy W. Cameron, Esq., Managing Director and
Laura Martin, Managing Director and Associate General Counsel, Asset Management Group, Securities Industry and Financial Markets Association, dated July 13, 2015 (‘‘SIFMA–AMG (July 2015)’’); David Geen, General Counsel, International Swaps and Derivatives Association, Inc. (‘‘ISDA (July 2015)’’); Chris Barnard, dated June 26, 2015 (‘‘Barnard (July 2015)’’); Stuart J. Kaswell, Executive Vice President, Managing Director & General Counsel, Managed Funds Association, dated July 13, 2015 (‘‘MFA (July 2015)’’). These comment letters are available on the Commission’s Web site at http://www.sec.gov/comments/s7-06-15/ s70615.shtml. 11 If any of the provisions of these rules, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions or application of such provisions to other persons or circumstances that can be given effect without the invalid provision or application. 12The statutory definition of ‘‘special entity’’ includes federal agencies, states and political subdivisions, employee benefit plans as defined under the Employee Retirement Income Security Act of 1974 (‘‘ERISA’’), governmental plans as defined under ERISA, and endowments. See Rule 15Fh–2(d) (defining ‘‘special entity’’ to include employee benefit plans that are defined in Title I of ERISA but permitting employee benefit plans that are not subject to regulation under Title I of ERISA to elect not to be special entities). 13Rule 15Fh–2(a), as adopted, defines what it means to ‘‘act as an advisor’’ to a special entity, and provides a safe harbor under which the parties can establish that the SBS Dealer is not acting as an advisor to the special entity. compliance,8 without specifically referring to the Proposing Release. Of the comments submitted in response to the U.S. Activity Proposing Release,9 eight addressed the proposed cross￾border application of the business conduct standards.10 The Commission is now adopting Rules 15Fh–1 through 15Fh–6 and Rule 15Fk–1, with certain revisions suggested by commenters or designed to clarify the rules and conform them to the rules adopted by the CFTC. The principal aspects of the rules are briefly described immediately below. A detailed discussion of each rule follows in Sections II.A.–II.J, below.11 A. Summary of Final Rules Rule 15Fh–1, as adopted, defines the scope of Rules 15Fh–1 through 15Fh–6 and Rule 15Fk–1, and provides that an SBS Entity can rely on the written representations of a counterparty or its representative to satisfy its due diligence requirements under the rules, unless it has information that would cause a reasonable person to question the accuracy of the representation. Rule 15Fh–2, as adopted, sets forth the definitions used throughout Rules 15Fh–1 through 15Fh–6. The defined terms are discussed in connection with the rules in which they appear. Rule 15Fh–3, as adopted, defines the business conduct requirements generally applicable to SBS Entities with
respect to: (1) Verification of counterparty status as an eligible contract participant (‘‘ECP’’) or special entity; (2) disclosure to the counterparty of material information about the security-based swap, including material risks, characteristics, incentives, and conflicts of interest; (3) disclosure of information concerning the daily mark of the security-based swap; (4) disclosure regarding the ability of the counterparty to require clearing of the security-based swap; (5) communication with counterparties in a fair and balanced manner based on principles of fair dealing and good faith; and (6) the establishment of a supervisory and compliance infrastructure. Rule 15Fh–3, as adopted, additionally requires an SBS Dealer to: (1) Establish, maintain and enforce written policies and procedures reasonably designed to obtain and retain a record of the essential facts concerning each known counterparty that are necessary to conduct business with that counterparty; and (2) comply with certain suitability obligations when recommending a security-based swap, or trading strategy involving a security￾based swap, to a counterparty. Rule 15Fh–4(a), as adopted, provides that it shall be unlawful for an SBS Entity to: (i) Employ any device, scheme, or artifice to defraud any special entity or prospective customer who is a special entity; (ii) engage in any transaction, practice, or course of business that operates as a fraud or deceit on any special entity or prospective customer who is a special entity; or (iii) to engage in any act, practice, or course of business that is fraudulent, deceptive, or manipulative. Rule 15Fh–4(b), as adopted, sets forth particular requirements for SBS Dealers acting as advisors to special entities.12 Specifically, an SBS Dealer that acts as an advisor to a special entity must act in the ‘‘best interests’’ of the special entity, and make reasonable efforts to obtain information that it needs to determine that the recommendation is in the ‘‘best interests’’ of the special entity.13 Rule 15Fh–5, as adopted, sets forth particular requirements for SBS Entities acting as counterparties to special entities. Under the rule, those SBS Entities must have a reasonable basis to believe that the counterparty has a qualified representative who: (1) Has sufficient knowledge to evaluate the transaction and risks; (2) is not subject to a statutory disqualification; (3) is independent of the SBS Entity; (4) undertakes a duty to act in the best interests of the special entity; (5) makes appropriate and timely disclosures to the special entity of material information concerning the security￾based swap; and (6) provides written representations regarding fair pricing and the appropriateness of the security￾based swap. If the special entity is an employee benefit plan that is subject to regulation under Title I of ERISA (‘‘ERISA plan’’), these requirements are satisfied if the independent representative is a ‘‘fiduciary’’ under ERISA. In addition,
the independent representative must be subject to pay-to￾play regulation if the special entity is a ‘‘municipal entity’’ or a ‘‘governmental plan’’ as defined in Section 3 of ERISA. Rule 15Fh–6, as adopted, imposes certain pay-to-play restrictions on SBS Dealers. The rule generally prohibits an SBS Dealer from engaging in security￾mstockstill on DSK3G9T082PROD with RULES2

14The term ‘‘prudential regulator’’ is defined in
section 1a(39) of the Commodity Exchange Act, 7
U.S.C. 1a(39), and that definition is incorporated by reference in section 3(a)(74) of the Exchange Act, 15 U.S.C. 78c(a)(74). Pursuant to the definition, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Farm Credit Administration, or the Federal Housing Finance Agency (collectively, the ‘‘prudential regulators’’) is the ‘‘prudential regulator’’ of a security-based swap dealer or major security-based swap participant if the entity is directly supervised by that regulator. 15Section 712(a)(2) of the Dodd-Frank Act provides in part that the Commission shall ‘‘consult and coordinate to the extent possible with the Commodity Futures Trading Commission and the prudential regulators for the purposes of assuring regulatory consistency and comparability, to the extent possible.’’ 16For example, senior representatives of authorities with responsibility for regulation of OTC derivatives have met on a number of occasions to discuss international coordination of OTC derivatives regulations. See, e.g., Report of the OTC Derivatives Regulators Group to G20 Leaders on Cross-Border Implementation Issues November 2015 (Nov. 2015), available at: http://www.cftc.gov/ idc/groups/public/@internationalaffairs/ documents/file/odrgreportg20_1115.pdf. 17Commission representatives participate in the Financial Stability Board’s Working Group on OTC Derivatives Regulation (‘‘ODWG’’), both on the Commission’s behalf and as the representative of the International Organization of Securities Commissions (‘‘IOSCO’’), which is co-chair of the ODWG. See Security-Based Swap Transactions Connected with a Non-U.S. Person’s Dealing Activity That Are Arranged, Negotiated, or Executed By Personnel Located in a U.S. Branch or Office or in a U.S. Branch or Office of an Agent; Security-Based Swap Dealer De Minimis Exception, Exchange Act Release No. 77104 (February 10, 2016), 81 FR 8597 n.15 (Feb. 19, 2016) (‘‘U.S. Activity Adopting Release’’), (describing the Commission representative’s role). 18See Section 752(a) of the Dodd-Frank Act (providing in part that ‘‘[i]n order to promote effective and consistent global regulation of swaps and security-based swaps, the Commodity Futures Trading Commission, the Securities and Exchange Commission, and the prudential regulators . . . as appropriate, shall consult and coordinate with foreign regulatory authorities on the establishment of consistent international standards with respect to the regulation (including fees) of swaps.’’). 19A list of Commission staff meetings in connection with this rulemaking is available on the Commission’s Web site under ‘‘Meetings with SEC Officials’’ at http://www.sec.gov/comments/df-title￾vii/swap/swap.shtml and at http://www.sec.gov/ comments/s7-25-11/s72511.shtml. 20See Proposing Release, 76 FR at 42438, supra note 3. 21See Business Conduct Standards for Swap Dealers and Major Swap Participants With Counterparties,
77 FR 9734 (Feb. 17, 2012) (‘‘CFTC Adopting Release’’). 22See Swap Dealer and Major Swap Participant Recordkeeping, Reporting, and Duties Rules; Futures Commission Merchant and Introducing Broker Conflicts of Interest Rules; and Chief Compliance Officer Rules for Swap Dealers, Major Swap Participants, and Futures Commission Merchants, 77 FR 20128 (Apr. 3, 2013) (‘‘CFTC CCO Release’’). based swap transactions with a ‘‘municipal entity’’ within two years after certain political contributions have been made to officials of the municipal entity. As with other pay-to-play rules, Rule 15Fh–6 does not prohibit political contributions. Rule 15k–1, as adopted, requires an SBS Entity to designate a CCO and imposes certain duties and responsibilities on that CCO. B. Cross-Border Application of the Final Rules Rule 3a71–3(c) and related amendments to Rule 3a71–3(a), as adopted, define the scope of application of the business conduct standards described in Section 15F(h) of the Exchange Act, and the rules and regulations thereunder (other than the rules and regulations prescribed by the Commission pursuant to Section 15F(h)(1)(B)) to SBS Dealers. As adopted, these rules require a registered U.S. SBS Dealer to comply with transaction-level business conduct requirements with respect to all of its transactions, except for certain transactions conducted through such dealer’s foreign branch. The rules further require a registered foreign SBS Dealer to comply with transaction-level business conduct requirements with respect to any transaction with a U.S. person (except for a transaction conducted through a foreign branch of the U.S. person) and any transaction that the SBS Dealer arranges, negotiates, or executes using personnel located in the United States. Rule 3a67–10(d) and related amendments to Rule 3a67–10(a), as adopted, define the scope of application of the business conduct standards described in Section 15F(h) of the Exchange Act, and the rules and regulations thereunder (other than the rules and regulations prescribed by the Commission pursuant to Section 15F(h)(1)(B)) to registered Major SBS Participants. As adopted, these rules, like those applicable to registered SBS Dealers, require a registered U.S. Major SBS Participant to comply with transaction-level business conduct requirements with respect to all of its transactions, except for certain transactions conducted through such participant’s foreign branch. The rules further require a registered foreign Major SBS Participant to comply with transaction-level business conduct requirements with respect to any transaction with a U.S. person (except for a transaction conducted through a foreign branch of the U.S. person) but not any transaction with a non-U.S. person. Finally, Rule 3a71–6, as adopted, provides a framework under which foreign SBS Dealers and foreign Major SBS Participants may seek to satisfy certain business conduct requirements under Title VII by means of substituted compliance. In
developing these final rules, including their cross-border application, we have consulted and coordinated with the CFTC and the prudential regulators 14 in accordance with the consultation mandate of the Dodd-Frank Act.15 The Commission also has consulted and coordinated with foreign regulatory authorities through Commission staff participation in numerous bilateral and multilateral discussions with foreign regulatory authorities addressing the regulation of OTC (over-the-counter) derivatives.16 Through these discussions and the Commission staff’s participation in various international task forces and working groups,17 we have gathered information about foreign regulatory reform efforts and their impact on and relationship with the U.S. regulatory regime. The Commission has taken and will continue to take these discussions into consideration in developing rules, forms, and interpretations for implementing Title VII of the Dodd￾Frank Act.18
C. Consistency With CFTC Rules
The Commission and CFTC staffs, prior to the proposal of rules by their respective agency, held approximately 30 joint meetings with interested parties regarding the agencies’ respective business conduct rules to solicit a variety of views.19 As discussed in
Section I.D. below, the agencies’ staffs
also consulted with Department of Labor (‘‘DOL’’) representatives on this rulemaking. In the Proposing Release, the Commission solicited comment on the impact of any differences between the Commission’s and CFTC’s approaches to business conduct regulations, and whether the Commission’s proposed business conduct regulations should be modified to conform to the proposals made by the CFTC.20 Subsequently, in February 2012, the CFTC adopted final rules with respect to the external business conduct standards of Swap Entities that are generally consistent with the Commission’s proposed rules.21 In addition, in April 2013, the CFTC adopted final rules with respect to internal business conduct standards regarding, among other things, the obligation of a Swap Entity to diligently supervise its business.22 These rules also require each Swap Entity to designate a CCO, prescribe qualifications and duties of the CCO, and require that the CCO prepare, sign, and furnish the annual report containing an assessment of the

23 Id.
24 Id.
25See Reopening Release, supra note 4. 26See, e.g., Barnard, supra note 5; FIA/ISDA/ SIFMA, supra note 5; AFSCME, supra note 5; Levin, supra note 5; APPA, supra note 5; Ropes & Gray, supra note 5; BlackRock, supra note 5; Nomura, supra note 5; GFOA, supra note 5; NABL, supra note 5; ISDA (July 2013), supra note 5; AFGI (July 2013), supra note 5; CFA, supra note 5; SIFMA (August 2015), supra note 5; SIFMA (September 2015), supra note 5; SIFMA (November 2015), supra note 5. 27See, e.g., Barnard, supra note 5; FIA/ISDA/ SIFMA, supra note 5; AFSCME, supra note 5; Levin, supra note 5; APPA, supra note 5; Ropes & Gray, supra note 5; BlackRock, supra note 5; Nomura, supra note 5; GFOA, supra note 5; NABL, supra note 5; ISDA (July 2013), supra note 5; AFGI (July 2013), supra note 5; SIFMA (August 2015), supra note 5; SIFMA, supra note 5 (September 2015); SIFMA (November 2015), supra note 5. 28See, e.g., Barnard, supra note 5; Levin, supra note 5; BlackRock, supra note 5; NABL, supra note 5; GFOA, supra note 5. 29See, e.g., SIFMA (August 2011), supra note 5; GFOA, supra note 5; NABL, supra note 5. 30See, e.g., CFA, supra note 5. 31See, e.g., Nomura, supra note 5; GFOA, supra note 5; ISDA (July 2013), supra note 5; SIFMA (August 2015), supra note 5; SIFMA (September 2015), supra note 5; SIFMA (November 2015), supra note 5. Commenters also urged, with respect to supervision and CCO obligations (‘‘internal’’ business conduct standards), that our final rules be informed by industry experience complying with the analogous Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) supervision and CCO rules, as well as the CFTC internal business conduct standards. See SIFMA (September 2015), supra note 5, at 2 (urging the Commission to harmonize its rules with, among other things, ‘‘the FINRA Supervision Rules, [and] the FINRA CCO Rule’’). 32One commenter noted that more than 17,000 entities have already adhered to a multilateral protocol that had been developed in response to the CFTC rules. See SIFMA (November 2015), supra note 5. 33 29 U.S.C. 1001 et seq. See History of EBSA and ERISA, available at http://www.dol.gov/ebsa/ aboutebsa/history.html. 34See, e.g., letter from Kenneth E. Bentsen, Jr., Executive Vice President, Public Policy and Advocacy, Securities Industry and Financial Markets Association and Robert G. Pickel, Executive Vice Chairman, International Swaps and Derivatives Association, Inc. to Elizabeth M. Murphy, Secretary, Commission and David A. Stawick, Secretary, CFTC (Oct. 22, 2010) (‘‘SIFMA/ ISDA 2010 Letter’’), at 8 n.19. This comment letter is available on the Commission’s Web site at http:// www.sec.gov/comments/df-title-vii/swap/ swap.shtml. 35See Proposing Release, 76 FR at 42398, supra note 3. 36See, e.g., ABC, supra note 5; CFA, supra note 5; FIA/ISDA/SIFMA, supra note 5; IDC, supra note 5; MFA, supra note 5; BlackRock, supra note 5; Johnson, supra note 5. 37See, e.g., ABC, supra note 5; FIA/ISDA/SIFMA, supra note 5; IDC, supra note 5;
MFA, supra note 5; BlackRock, supra note 5; Johnson, supra note 5. 38Section 406(b) of ERISA (29 U.S.C. 1106(b)) states that an ERISA fiduciary with respect to an ERISA plan shall not (1) deal with the assets of the plan in his own interest or for his own account, (2) in his individual or in any other capacity act in any transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries, or (3) receive any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan. 39 In addition to other statutory exemptions,
Section 408(a) of ERISA (29 U.S.C. 1108(a)) gives
registrant’s compliance activities to either the board of directors or the senior officer.23 The rules further require the annual report to be furnished to the CFTC.24 In May 2013, in the Reopening Release, the Commission sought comment on certain specific issues, including: (1) The relationship of the proposed rules to any parallel requirements of other authorities, including the CFTC and relevant foreign regulatory authorities; and (2) with respect to the CFTC rules, whether and to what extent the Commission, in adopting its own rules, should emphasize consistency with the CFTC rules versus adopting rules that are more tailored to the security-based swap market, including any specific examples where consistency or tailoring of a particular rule or rule set is more critically important.25 The Commission received numerous comments regarding consistency with the CFTC’s external business conduct rules both before and after the CFTC adopted its final rules.26 Comments specific to individual rules are addressed in the discussions of the respective rules below. As a general matter, these comments had, as an overarching theme, that the Commission should coordinate with the CFTC to achieve consistent regulations.27 Commenters stressed that differences between the regulatory regimes would, among other things, increase regulatory burdens and costs for market participants, delay execution of transactions, and lead to confusion.28 Before the CFTC adopted its final external business conduct rules, commenters were divided as to whether they preferred the Commission’s 29 or the CFTC’s 30 proposed approach to specific issues, in instances in which the CFTC’s proposed approach differed from the Commission’s proposed rules. However, the comments received by the Commission in response to the Reopening Release, which was issued after the CFTC adopted its final rules, overwhelmingly urged the Commission to harmonize its external business conduct rules with those of the CFTC because the CFTC’s rules have already been implemented by the industry.31 A number of these comments have suggested specific and detailed modifications. Where we believe the external business conduct rules, if modified in accordance with these suggestions, will continue to provide the protections (as explained in the context of the particular rule) that the rules are intended to accomplish, we have modified the proposed rules to harmonize with CFTC requirements to create efficiencies for entities that have already established infrastructure for compliance with analogous CFTC requirements.32 D. Department of Labor ERISA Fiduciary Regulations
Section 15F(h)(2)(C) of the Exchange
Act defines the term ‘‘special entity’’ to include ‘‘an employee benefit plan, as defined in section 3 of the Employee Retirement Income Security Act of 1974.’’ 33 Prior to proposing the business conduct standards rules, the Commission received submissions from commenters concerning the interaction with ERISA, DOL’s proposed fiduciary rule, and current regulation regarding the definition of ERISA fiduciaries.34 As noted above, the Commission, CFTC and DOL staffs consulted on issues regarding the intersection of ERISA fiduciary status with the Dodd-Frank Act business conduct provisions, prior to the Commission’s proposing rules in this area.35 The Commission received numerous comments concerning the interaction of ERISA and existing fiduciary regulation with the business conduct standards under the Exchange Act and the Commission’s proposed rules.36 Commenters, including ERISA plan sponsors, dealers and institutional asset managers, stated that although ERISA plans currently use security-based swaps as part of their overall hedging or investment strategy, the statutory and regulatory intersections of ERISA and the external business conduct standards under Title VII of the Dodd-Frank Act could prevent ERISA plans from participating in security-based swap markets in the future, and the proposed business conduct standards rules, if adopted without clarification, could have unintended consequences for SBS Entities dealing with ERISA plans.37 Commenters were primarily concerned that compliance with the business conduct standards under the Exchange Act or the Commission’s proposed rules would cause an SBS Entity to be an ERISA fiduciary to an ERISA plan and thus, subject to ERISA’s prohibited transaction provisions.38 If an SBS Entity were to become an ERISA fiduciary to an ERISA plan, it would be prohibited from entering into a security￾based swap with that ERISA plan absent an exemption.39 One commenter

DOL authority to grant administrative exemptions from prohibited transactions prescribed in Section 406 of ERISA. 40See ABC, supra note 5. 41See, e.g., ABC, supra note 5; FIA/ISDA/SIFMA, supra note 5; IDC, supra note 5; MFA, supra note 5; BlackRock, supra note 5; Johnson, supra note 5. 42See, e.g., ABC, supra note 5; FIA/ISDA/SIFMA, supra note 5; IDC, supra note 5; MFA, supra note 5; BlackRock, supra note 5; Johnson, supra note 5. 43See Letter from Phyllis C. Borzi, Assistant Secretary, Employee Benefits Security Administration, U.S. Department of Labor to The Hon. Gary Gensler et al., CFTC (Jan. 17, 2012), CFTC Adopting Release, Appendix 2—Statement of the Department of Labor, 77 FR 9835, supra note 21. 44See Definition of the Term ‘‘Fiduciary’’; Conflict of Interest Rule—Retirement Investment Advice, 80 FR 21927 (Proposed Rule, Apr. 20, 2015). 45 Id. at 21937. 46See Definition of the Term ‘‘Fiduciary’’; Conflict of Interest Rule—Retirement Investment Advice, 81 FR 20946 (Final Rule, Apr. 8, 2016). 47 Id. at 20985, n. 36. 48See id. at 20984–86 (discussing the swap and security-based swap transactions exception). 49 Id. at 20985. See also id. (explaining that in DOL’s view, ‘‘when Congress enacted the swap and security based swap provisions in the Dodd-Frank Act, including those expressly applicable to ERISA covered plans, Congress did not intend that engaging in regulated conduct as part of a swap or security-based swap transaction with an employee benefit plan would give rise to additional fiduciary obligations or restrictions under Title I of ERISA’’). 50See id. at 20986 (noting that DOL ‘‘does not believe extending the swap and security-based swap provisions to IRA investors is appropriate’’ and, rather, concluding ‘‘that it was more appropriate to address this issue in the context of the ‘independent plan fiduciary with financial expertise’ provision described elsewhere in this Notice’’). asserted that the penalties for violating ERISA’s prohibited transaction provisions would discourage SBS Entities from dealing with ERISA plans.40 Other commenters asserted that compliance by SBS Entities with the following obligations could cause an SBS Entity to be an ERISA fiduciary: (1) Providing information regarding the risks of the security-based swap; (2) providing the daily mark; (3) reviewing the ability of the special entity’s advisor to advise the special entity with respect to the security-based swap; and (4) acting in the best interests of the special entity.41 Accordingly, commenters requested that the Commission and DOL coordinate the respective rules to clarify that compliance with the business conduct standards rules will not make an SBS Entity an ERISA fiduciary.42 DOL staff reviewed the CFTC’s final business conduct standards rules for Swap Entities and provided the CFTC with the following statement:
The Department of Labor has reviewed these final business conduct standards and concluded that they do not require swap dealers or major swap participants to engage in activities that would make them fiduciaries under the Department of Labor’s current five-part test defining fiduciary advice 29 CFR 2510.3–21(c). In the Department’s view, the CFTC’s final business conduct standards neither conflict with the Department’s existing regulations, nor compel swap dealers or major swap participants to engage in fiduciary conduct. Moreover, the Department states that it is fully committed to ensuring that any changes to the current ERISA fiduciary advice regulation are carefully harmonized with the final business conduct standards, as adopted by the CFTC and the SEC, so that there are no unintended consequences for swap dealers and major swap participants who comply with these business conduct standards.43 Thereafter, in April 2015, the DOL reproposed a change to the definition of fiduciary under ERISA.44 The DOL noted that its staff had ‘‘consulted with staff of the SEC.’’ 45 On April 6, 2016, DOL issued its final rule.46 We understand that DOL’s revised definition of ‘‘fiduciary’’ in its final rule is intended to allow SBS Entities to avoid becoming ERISA fiduciaries when acting as counterparties to a swap or security￾based swap transaction. For example, DOL makes the following statement in the preamble to its final rule:
The Department has provided assurances to the CFTC and the SEC that the Department is fully committed to ensuring that any changes to the current ERISA fiduciary advice regulation are carefully harmonized with the final business conduct standards, as adopted by the CFTC and the SEC, so that there are no unintended consequences for swap and security-based swap dealers and major swap and security-based swap participants who comply with the business conduct standards. See, e.g., Letter from Phyllis C. Borzi, Assistant Secretary, Employee Benefits Security Administration, U.S. Department of Labor, to The Hon. Gary Gensler et al., CFTC (Jan. 17, 2012). In this regard, we note that the disclosures required under the business conduct standards, including those regarding material information about a swap or security-based swap concerning material risks, characteristics, incentives and conflicts of interest; disclosures regarding the daily mark of a swap or security-based swap and a counterparty’s clearing rights; disclosures necessary to ensure fair and balanced communications; and disclosures regarding the capacity in which a swap or security￾based swap dealer or major swap participant is acting when a counterparty to a special entity, do not in the Department’s view compel counterparties to ERISA-covered employee benefit plans, other plans or IRAs to make a recommendation for purposes of paragraph (a) of the final rule or otherwise compel them to act as fiduciaries in swap and security-based swap transactions conducted pursuant to section 4s of the Commodity Exchange Act and section 15F of the Securities Exchange Act. This section of this Notice discusses these issues in the context of the express provisions in the final rule on swap and security-based swap transactions and on transactions with independent fiduciaries with financial expertise.47 Furthermore, DOL’s final rule establishes a ‘‘swap and security-based swap transactions’’ exclusion 48 which, in DOL’s view, is intended to establish conditions under which persons acting as SBS Entities, among others, ‘‘do not become investment advice fiduciaries as a result of communications and activities conducted during the course of swap or security-based swap transactions regulated under the Dodd￾Frank Act provisions in the Commodity Exchange Act or the Securities Exchange Act of 1934 and applicable CFTC and SEC implementing rules and regulations.’’ 49 In addition, DOL has stated that its exclusion for ‘‘transactions with independent plan fiduciaries with financial expertise’’ has been significantly adjusted and expanded in the final rule and gives an alternative avenue for parties involved in swap, security-based swap, or other investment transactions to conduct the transaction in a way that would ensure they do not become investment advice fiduciaries under the final rule.50 The Commission staff has continued to coordinate with DOL staff to ensure that the final business conduct standards rules are
appropriately harmonized with ERISA and DOL regulations. DOL staff has provided the Commission with a statement that:
It is the Department’s view that the draft final business conduct standards do not require security-based swap dealers or major security-based swap participants to engage in activities that would make them fiduciaries under the Department’s current five-part test defining fiduciary investment advice. 29 CFR 2510.3–21(c). The standards neither conflict with the Department’s existing regulations, nor compel security-based swap dealers or major security-based swap participants to engage in fiduciary conduct. Moreover, the Department’s recently published final rule amending ERISA’s fiduciary investment advice regulation was carefully harmonized with the SEC’s business conduct standards so that there are no unintended consequences for security-based swap dealers and major security-based swap participants who comply with the business conduct standards. As explained in the preamble to the Department’s final rule, the disclosures required under the SEC’s business conduct rules do not, in the Department’s view, compel counterparties to ERISA-covered employee benefit plans to make investment advice recommendations within the meaning of the Department’s final rule or otherwise compel them to act as ERISA fiduciaries in

51See Letter from Phyllis C. Borzi, Assistant Secretary, Employee Benefits Security Administration, U.S. Department of Labor to The Hon. Mary Jo White et al., SEC (Apr. 12, 2016). 52See, e.g., FIA/ISDA/SIFMA, supra note 5; SIFMA (August 2011), supra note 5. 53See FIA/ISDA/SIFMA, supra note 5; SIFMA (August 2011), supra note 5. 54See Proposing Release, supra note 3, 76 FR at 42424. 55The Dodd-Frank Act amended the Exchange Act definition of ‘‘dealer’’ so that a person would not be deemed to be a dealer as a result of engaging in security-based swaps with eligible contract participants. See Section 3(a)(5) of the Exchange Act, 15 U.S.C. 78c(a)(5), as amended by section 761(a)(1) of the Dodd-Frank Act. The Dodd-Frank Act does not include comparable amendments for persons who act as brokers in swaps and security￾based swaps. Because security-based swaps, as defined in Section 3(a)(68) of the Exchange Act, are included in the Exchange Act Section 3(a)(10) definition of ‘‘security,’’ persons who act as brokers in connection with security-based swaps must, absent an exception or exemption, register with the SEC as a broker pursuant to Exchange Act Section 15(a), and comply with the Exchange Act’s requirements applicable to brokers. As discussed in Section I.F, infra, the Commission has issued temporary exemptions under the Exchange Act in connection with the revision of the ‘‘security’’ definition to encompass security-based swaps. Among other aspects, these temporary exemptions extended to certain broker activities involving security-based swaps. 56See 15 U.S.C. 80b–2(a)(11). 57See 15 U.S.C. 78o–4(e)(4). 58See Registration of Municipal Advisors, Exchange Act Release No. 70462 (Sept. 20, 2013), 78 FR 67468, 67509–11 (Nov. 12, 2013) (‘‘Municipal Advisor Registration Release’’). 59 Id. at 67471. 60See IIB (July 2015), supra note 10, at 13; SIFMA/FSR (July 2015), supra note 10, at 9–10 (due to the possibility of dually registered firms, the Commission and FINRA, ‘‘must work to harmonize existing sales practice requirements’’ because, to the extent requirements differ, ‘‘there may be unnecessary duplication and conflicts that cause a disparate impact on security-based swap dealers acting through broker-dealers as compared to other security-based swap dealers.’’); SIFMA (September 2015), supra note 5, at 2 (urging the Commission to harmonize its rules with, among other things, ‘‘the FINRA Supervision Rules, [and] the FINRA CCO Rule’’). 61See Exchange Act Section 15(b)(8) (generally making it illegal for a registered broker-dealer to effect a transaction in, or induce or attempt to induce the purchase or sale of, any security unless it is a member of a registered securities association or effects transactions in securities solely on a national securities exchange of which it is a member). 15 U.S.C. 78o(b)(8). swap and security-based swap transactions conducted pursuant to section 4s(h) of the Commodity Exchange Act and section 15F of the Securities Exchange
Act of 1934.51 Finally, the Commission has modified its proposed treatment of special entities to take into account the comprehensive regulatory scheme established under ERISA. In particular, as discussed more fully in Section II.H below, if the special entity is an ERISA plan, our rules deem certain requirements satisfied if the plan has an independent representative that is a fiduciary under ERISA. E. Investment Adviser and Municipal Advisor Status In addition to questions about ERISA fiduciary status, commenters also questioned whether compliance with the business conduct standards might cause an SBS Entity to be deemed an investment adviser or, when transacting with a special entity that meets the definition of municipal entity, a municipal advisor.52 Two commenters expressed concern more generally that compliance with the daily mark requirement (in Rule 15Fh–3(c)) might raise questions as to whether an SBS Entity has advisory or fiduciary responsibilities under applicable common law, state law or federal law (e.g., DOL regulations, provisions of the Investment Advisers Act of 1940 (‘‘Advisers Act’’), or the Dodd-Frank Act’s municipal advisor provisions).53 As we noted in the Proposing Release, the duties imposed on an SBS Dealer (or Major SBS Participant) under the business conduct rules are specific to this context, and are in addition to any duties that may be imposed under other applicable law.54 Thus, an SBS Entity must separately determine whether it is subject to regulation as a broker-dealer, an investment adviser, a municipal advisor or other regulated entity.55 For example, an SBS Dealer that acts as an advisor to a special entity may fall within the definition of ‘‘investment adviser’’ under Section 202(a)(11) of the Advisers Act.56 We further stated in the Proposing Release that an SBS Dealer that acts as an advisor to a municipal entity also may be a ‘‘municipal advisor’’ under
Section 15B(e) of the Exchange Act.57
We note, however, that we subsequently adopted rules in 2013 that interpret the statutorily defined term ‘‘municipal advisor’’ and provide a regulatory exemption for persons engaging in municipal advisory activities in circumstances in which a municipal entity or obligated person is otherwise represented by an independent registered municipal advisor with respect to the same aspects of a municipal financial product or an issuance of municipal securities so long as the following requirements are satisfied: (1) The independent registered municipal advisor is registered pursuant to Section 15B of the Exchange Act and the rules and regulations thereunder, and is not, and within at least the past two years was not, associated with the person seeking to rely on the exemption; (2) the person seeking to use the exemption receives from the municipal entity or obligated person a representation in writing that it is represented by, and will rely on the advice of, the independent registered municipal advisor, and such person has a reasonable basis for relying on the representation; and (3) the person seeking to use the exemption provides written disclosure to the municipal entity or obligated person, with a copy to the independent registered municipal advisor, stating that such person is not a municipal advisor and is not subject to the fiduciary duty to municipal entities that the Exchange Act imposes on municipal advisors, and such disclosure is made at a time and in a manner reasonably designed to allow the municipal entity or obligated person to assess the material incentives and conflicts of interest that such person may have in connection with the municipal advisory activities.58 We explained that if a municipal entity or obligated person is represented by a registered municipal advisor, parties to the municipal securities transaction and others who are not registered municipal advisors should be able to provide advice to the municipal entity or obligated person without being deemed themselves to be municipal advisors, so long as the responsibilities of each person are clear.59 F. Intersection With SRO Rules Under the framework established in the Dodd-Frank Act, SBS Entities are not required to be members of self￾regulatory organizations (‘‘SROs’’). Some commenters have, however, urged us to harmonize Title VII business conduct requirements applicable to SBS Entities with relevant SRO requirements applicable to the SRO’s members to avoid unnecessary differences, which they argue could create duplication and conflicts when an SBS Entity is also registered as a broker-dealer, or when an SBS Entity uses a registered broker￾dealer to intermediate its transactions.60 The rules we proposed were designed to implement the business conduct requirements enacted by Congress regarding security-based swap activity of SBS Entities. At the same time, in proposing these rules, we were mindful that an SBS Entity also may engage in activity that will require it to
register as a broker-dealer, and thus become subject to SRO rules applicable to registered broker-dealers that may impose similar business conduct requirements.61 As we noted in the Proposing Release, the existing rules of various SROs served as an important point of reference for our proposed

62We looked, in particular, to the requirements imposed by FINRA, the Municipal Securities Rulemaking Board (‘‘MSRB’’), and the National Futures Association (‘‘NFA’’), in addition to the business conduct standards, both internal and external, adopted by the CFTC. 63Proposed Rule 15Fh–3(e). Cf. FINRA Rule 2090. 64Proposed Rule 15Fh–3(f). Cf. FINRA Rules 2090 and 2111. 65Proposed Rule 15Fh–3(g). See Exchange Act
Section 15F(h)(3)C), 15 U.S.C. 78o–10(h)(3)(C). Cf.
NASD Rule 2210(d)(1)(A).
66Proposed Rule 15Fh–3(h). See Exchange Act
Section 15F(h)(1)(B), 15 U.S.C. 78o–10(h)(1)(B). Cf.
NASD Rules 3010 and 3012.
67Proposed Rule 15Fk–1. See Exchange Act
Section 15F(k), 15 U.S.C. 78o–10(k). Cf. FINRA Rule
3130.
68For example, we provided in the proposed rules for an institutional suitability alternative, which was modeled on FINRA’s institutional suitability rule (Rule 2111(b)) but tailored to take into account the definition of eligible contract participant included in Title VII, which includes, among other persons, individuals with aggregate amounts of more than $10 million invested on a discretionary basis (or $5 million if hedging), and entities with a net worth of at least $1 million that are hedging commercial risk. See discussion in
Section II.G.4, infra. In addition, proposed Rule
15Fh–3(g) would impose obligations regarding fair and balanced communications that are consistent with, but less detailed than, the obligations imposed on registered broker-dealers under FINRA Rule 2210. See Section II.G.5, infra. 69See, e.g., IIB (July 2015), supra note 10. In addition, as noted above, there may instances in which a registered broker-dealer acts on behalf of an SBS Entity, and so both our rules and the SRO business conduct rules may apply to the activity of the broker-dealer in its capacity as agent of the SBS Entity. 70One commenter urged harmonization with SRO (as well as CFTC) rules to allow SBS Entities ‘‘to leverage existing processes and speed implementation.’’ SIFMA (September 2015), supra note 5, at 2. 71 Generally, when a business conduct standard in these proposed rules is based on a similar SRO standard, we would expect—at least as an initial matter—to take into account the SRO’s interpretation and enforcement of its standard when we interpret and enforce our rule. At the same time, we are not bound by an SRO’s interpretation and enforcement of an SRO rule, and our policy objectives and judgments may diverge from those of a particular SRO. Accordingly, we would also expect to take into account such differences in interpreting and enforcing our rules. Proposing Release, 76 FR at 42399, supra note 3. 72See Order Granting Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection With the Pending Revision of the Definition of ‘‘Security’’ Encompass Security-based Swaps, and Request for Comment, Exchange Act Release No. 64795 (Jul. 1, 2011), 76 FR 39927 (Jul. 7, 2011) (the ‘‘Exemptive Release’’). The term ‘‘security-based swap’’ is defined in Section 761 of the Dodd-Frank Act. 15 U.S.C. 78c(a)(68). See also Further Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap Agreement’’; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, Exchange Act Release No. 67453 (Jul. 18, 2012), 77 FR 48208 (Aug. 13, 2012) (‘‘Products Definitions Adopting Release’’) for further discussion regarding the meaning of the term security-based swap. 73FINRA Rule 0180 temporarily limits the application of certain FINRA rules with respect to security-based swaps. See Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Adopt FINRA Rule 0180 (Application of Rules to Security-Based Swaps); File No. SR–FINRA– 2011–033, Exchange Act Release No. 64884 (Jul. 14, 2011), 76 FR 42755 (July 19, 2011) (‘‘FINRA Rule 0180 Notice of Filing’’). See also Notice of Filing and Immediate Effectiveness of a Proposed Rule Change to Extend the Expiration Date of FINRA Rule 0180 (Application of Rules to Security-Based Swaps); File No. SR–FINRA–2016–001, Exchange Act Release No. 76850 (Jan. 7, 2016), 81 FR 1666 (Jan. 13, 2016) (extending until February 11, 2017 the expiration date of the exemptions under FINRA Rule 0180) (‘‘FINRA Rule 0180 Extension Notice’’). In its Exemptive Release, the Commission noted
that the relief is targeted and does not include, for instance, relief from the Exchange Act’s antifraud and anti-manipulation provisions. FINRA has noted that FINRA Rule 0180 is similarly targeted. For instance, paragraph (a) of FINRA Rule 0180 provides that FINRA rules shall not apply to members’ activities and positions with respect to security-based swaps, except for FINRA Rules 2010 (Standards of Commercial Honor and Principles of Trade), 2020 (Use of Manipulative, Deceptive or Other Fraudulent Devices), 3310 (Anti-Money Laundering Compliance Program) and 4240 (Margin Requirements for Credit Default Swaps). See also paragraphs (b) and (c) of FINRA Rule 0180 (addressing the applicability of additional rules); FINRA Rule 0180 Notice of Filing; FINRA Rule 0180 Extension Notice. 74See Order Extending Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection With the Revision of the Definition of ‘‘Security’’ to Encompass Security-Based Swaps, and Request for Comment, Exchange Act Release No. 71485 (Feb. 5, 2014), 79 FR 7731 (Feb. 10, 2014) (‘‘Temporary Exemptions Extension Release’’). See also Extension of Exemptions for Security-Based Swaps, Securities Act of 1933 (‘‘Securities Act’’) Release No. 9545, Exchange Act Release No. 71482 (Feb. 5, 2014), 79 FR 7570 (Feb. 10, 2014) (extending the expiration dates in interim final rules that provide exemptions under the Securities Act, the Exchange Act, and the Trust Indenture Act of 1939 for those security-based swaps that prior to July 16, 2011 were security-based swap agreements and are defined as ‘‘securities’’ under the Securities Act and the Exchange Act as of July 16, 2011 due solely to the provisions of Title VII of the Dodd￾Frank Act). business conduct rules.62 For example, a number of the proposed rules, including those regarding ‘‘know your counterparty,’’ 63 suitability,64 fair and balanced communications,65 supervision,66 and designation of a CCO,67 were patterned on standards that have been established by SROs for their members. However, we tailored the proposed rules to the specifics of the regulatory scheme for security-based swaps under Title VII.68 We recognize, as the commenters noted, that the security-based swap and other securities activities of certain entities may require them to register both as broker-dealers and as SBS Dealers or Major SBS Participants.69 To the extent an entity will be subject to regulation both as a broker-dealer and as an SBS Entity, there may be overlapping regulatory requirements applicable to the same activity. The Commission is mindful of potential regulatory conflicts or redundancies and has sought in adopting these final rules to avoid such conflicts and minimize redundancies, consistent with the statutory business conduct requirements for SBS Entities. As discussed throughout this release, the rules we are adopting today take into account the comments received, both comments specific to the application of the proposed rules to the
security-based swap market and the role that the SBS Entities play in that market, and comments asking us to modify the proposed rules to more closely align with the similar SRO rules applicable to broker-dealers.70 Overall, we believe that the business conduct rules we are adopting today are generally designed to be consistent with the relevant SRO requirements, taking into account the nature of the security￾based swap market and the statutory requirements for SBS Entities.71 On July 1, 2011, the Commission issued a separate order granting temporary exemptive relief (the ‘‘Temporary Exemptions’’) from compliance with certain provisions of the Exchange Act in connection with the revision, pursuant to Title VII of the Dodd-Frank Act, of the Exchange Act definition of ‘‘security’’ to encompass security-based swaps.72 Consistent with the Commission’s action, on July 8, 2011, FINRA filed for immediate effectiveness FINRA Rule 0180, which, with certain exceptions, is intended to temporarily limit the application of FINRA rules with respect to security￾based swaps, thereby helping to avoid undue market disruptions resulting from the change to the definition of ‘‘security’’ under the Act.73 The Commission, noting the need to avoid a potential unnecessary disruption to the security-based swap market in the absence of an extension of the Temporary Exemptions, and the need for additional time to consider the potential impact of the revision of the Exchange Act definition of ‘‘security’’ in light of recent Commission rulemaking efforts under Title VII of the Dodd-Frank Act, issued an order that extended and refined the applicable expiration dates of the previously granted Temporary Exemptions.74 In the Temporary Exemptions Extension Release, the Commission extended the expiration date of the expiring Temporary Exemptions that are not directly linked to pending security-based swap rulemakings until the earlier of such time as the Commission issues an order or rule determining whether any continuing exemptive relief is appropriate for security-based swap activities with respect to any of these Exchange Act provisions or until three years following the effective date of the

75See Temporary Exemptions Extension Release, 79 FR at 7734, supra note 74. These Temporary Exemptions are currently scheduled to expire in February 2017. 76 Id. at 7731. The Commission extended a subset of the Temporary Exemptions until they are addressed within relevant rulemakings relating to:
(i) Capital, margin, and segregation requirements for security-based swap dealers and major security￾based swap participants, (ii) recordkeeping and reporting requirements for security-based swap dealers and major security-based swap participants, (iii) security-based swap trade acknowledgement rules, and/or (iv) registration requirements for security-based swap execution facilities. 77As noted in the FINRA Rule 0180 Extension Notice, FINRA has indicated that it intends to amend the expiration date of Rule 0180 in subsequent filings as necessary such that the expiration date will be coterminous with the termination of relevant provisions of the Temporary Exemptions. 78See Proposing Release, 76 FR at 42401–42402, supra note 3. 79See CFA, supra note 5; ABA Securities Association, supra note 5; FIA/ISDA/SIFMA, supra note 5; SIFMA (August 2011), supra note 5; NABL, supra note 5; AFGI (September 2012), supra note 5; AFGI (July 2013), supra note 5; CalPERS (August 2011), supra note 5; ABC, supra note 5; MFA, supra note 5; CalSTRS, supra note 5; SIFMA (August 2015), supra note 5. 80See CFA, supra note 5. 81See SIFMA (August 2011), supra note 5; FIA/ ISDA/SIFMA, supra note 5; NABL, supra note 5; AFGI (September 2012), supra note 5; AFGI (July 2013), supra note 5; ABC, supra note 5; SIFMA (August 2015), supra note 5. 82See FIA/ISDA/SIFMA, supra note 5; NABL, supra note 5; SIFMA (August 2011), supra note 5. 83See SIFMA (August 2015), supra note 5. 84See FIA/ISDA/SIFMA, supra note 5. 85See AFGI (September 2012), supra note 5; AFGI (July 2013), supra note 5; SIFMA (August 2011), supra note 5. 86See ABA Securities Association, supra note 5; FIA/ISDA/SIFMA, supra note 5; SIFMA (August 2015), supra note 5. 87See ABA Securities Association, supra note 5; FIA/ISDA/SIFMA, supra note 5; SIFMA (August 2015), supra note 5. 88See ABA Securities Association, supra note 5. 89See FIA/ISDA/SIFMA, supra note 5. 90See ABA Securities Association, supra note 5. 91 Id. 92See SIFMA (August 2015), supra note 5. Temporary Exemptions Extension Release.75 The Commission further extended the expiration date for many expiring Temporary Exemptions directly related to pending security￾based swap rulemakings until the compliance date for the related security￾based swap-specific rulemaking.76 In establishing Rule 0180, and in extending the rule’s expiration date,77 FINRA noted its intent, pending the implementation of any Commission rules and guidance that would provide greater regulatory clarity in relation to security-based swap activities, to align the expiration date of FINRA Rule 0180 with the termination of relevant provisions of the Temporary Exemptions provided by the Commission, so as to avoid undue market disruptions resulting from the change to the definition of ‘‘security’’ under the Exchange Act.
II. Discussion of Rules Governing
Business Conduct
A. Scope, Generally

1. Proposed Rule
   Proposed Rule 15Fh–1 would provide that Rules 15Fh–1 through 15Fh–6 (governing business conduct) and Rule 15Fk–1 (requiring designation of a CCO) are not intended to limit, or restrict, the applicability of other provisions of the federal securities laws, including but not limited to Section 17(a) of the Securities Act, Sections 9 and 10(b) of the Exchange Act, and the rules and regulations thereunder. Additionally, it would provide that Rules 15Fh–1 through 15Fh–6 and Rule 15Fk–1 would not only apply in connection with entering into security-based swaps but also would continue to apply, as appropriate, over the term of executed security-based swaps. In the Proposing Release, the Commission solicited comment on the scope of the business conduct rules, including whether the rules should apply to transactions between an SBS Entity and its affiliates, whether any of the rules should apply to security-based swaps that were entered into prior to the effective date of the rules, and to the extent that any of the rules were intended to provide additional protections for a particular counterparty, whether the counterparty should be able to opt out of those protections.78
2. Comments on the Proposed Rule
   a. General
   Eleven commenters addressed the general scope of the proposed business conduct standards.79 One commenter recommended that the Commission apply the proposed rules to security￾based swaps that are offered as well as those that are executed.80 The other commenters addressed: The application of the rules to inter-affiliate transactions, the application of the rules to security-based swaps entered into prior to the effective date, and whether counterparties should be able to opt out of the protections provided by the rules. b. Application to Security-Based Swaps Entered Into Prior to the Effective Date Seven commenters addressed the application of the rules to security￾based swaps that were entered into prior to the compliance date of the rules, and all seven recommended that the rules not apply to such transactions.81 Three further indicated that the rules should not generally apply to amendments to, or other lifecycle events arising under, a security-based swap that was executed before the compliance date of the rules.82 Another commenter also specifically argued that the rules should not apply to either partial or full terminations of security-based swaps executed prior to the compliance date, or the exercise of an option on a security-based swap where the option was executed prior to the compliance date.83 One commenter argued that amendments to existing transactions typically do not alter the risk and other characteristics of a transaction sufficiently to merit application of the rules and that application of the rules in these cases may frustrate their purpose.84 Others believed that any potential retroactive application would be burdensome, noting that it would undermine the expectations that the parties had when entering into the security-based swap.85
   c. Application to Inter-Affiliate
   Transactions
   Three commenters discussed the application of the rules to inter-affiliate transactions.86 All three recommended that the rules generally not apply to security-based swap transactions between affiliates,87 but one recognized that entity-level requirements (such as CCO and supervision responsibilities) will necessarily apply.88 One commenter asserted that the rules are intended to protect investors in arm’s length transactions and therefore, would be irrelevant in inter-affiliate transactions.89 The second commenter similarly argued that because affiliates are not ‘‘external clients’’ of the SBS Entity, the protections afforded by the rules are inapposite.90 The second commenter also suggested that the Commission define ‘‘affiliate’’ to mean an entity that is ‘‘under common control and that reports information or prepares its financial statements on a consolidated basis’’ with another entity, and opined that the definition should be consistently applied across Title VII rulemakings.91 The third commenter also advocated for a common control standard, arguing that the rules should not apply to transactions between an SBS Entity and ‘‘a person controlling, controlled by, or under common control with the [SBS Entity].’’ 92 d. Counterparty Opt-Out Nine commenters addressed whether to permit counterparties to opt out of certain protections provided by the

93See FIA/ISDA/SIFMA, supra note 5; CalPERS (August 2011), supra note 5; SIFMA (August 2011), supra note 5; ABC, supra note 5; MFA, supra note 5; CalSTRS, supra note 5; CFA, supra note 5; Better Markets (August 2011), supra note 5; Levin, supra note 5. 94See FIA/ISDA/SIFMA, supra note 5; CalPERS (August 2011), supra note 5; SIFMA (August 2011), supra note 5; ABC, supra note 5; MFA, supra note 5; CalSTRS, supra note 5. 95See CFA, supra note 5; Better Markets (August 2011), supra note 5; Levin, supra note 5. 96See FIA/ISDA/SIFMA, supra note 5; CalPERS (August 2011), supra note 5; MFA, supra note 5. 97See FIA/ISDA/SIFMA, supra note 5. 98See MFA, supra note 5. 99See ABC, supra note 5; CalSTRS, supra note 5; SIFMA (August 2011), supra note 5. 100See ABC, supra note 5. 101See CalSTRS, supra note 5. 102See SIFMA (August 2011), supra note 5. 103See CFA, supra note 5; Better Markets (August 2011), supra note 5; Levin, supra note 5. 104See CFA, supra note 5. 105See Better Markets (August 2011), supra note 5. 106See Levin, supra note 5. 107We believe that our reading of the term ‘‘counterparty’’ to include a potential counterparty addresses the concerns raised by the commenter that requested that the Commission apply the rules to security-based swaps that are offered as well as those that are executed. See CFA, supra note 5. 108See SIFMA (August 2011), supra note 5; FIA/ ISDA/SIFMA, supra note 5; NABL, supra note 5; AFGI (September 2012), supra note 5; AFGI (July 2013), supra note 5; ABC, supra note 5; SIFMA (August 2015), supra note 5. 109See infra Sections IV.B and C (discussing the compliance dates of these rules). 110See FIA/ISDA/SIFMA, supra note 5; NABL, supra note 5; SIFMA (August 2015), supra note 5. 111See Products Definitions Adopting Release, supra note 72, 77 FR at 48286 (‘‘If the material terms of a Title VII instrument are amended or modified during its life based on an exercise of discretion and not through predetermined criteria or a predetermined self-executing formula, the Commissions view the amended or modified Title VII instrument as a new Title VII instrument.’’). rules.93 Six commenters were in favor of allowing an opt out in at least some circumstances,94 and three were against it.95 Three commenters suggested that the Commission permit institutional or ‘‘sophisticated investors’’ to opt out of provisions intended to protect counterparties.96 Specifically, one endorsed allowing ‘‘qualified institutional buyers’’ as defined in Rule 144A under the Securities Act and institutions with total assets of $100 million or more to opt out, asserting that the costs, delays in execution, and requirements to make detailed representations and disclosure to the SBS Entity may outweigh the benefits that such counterparties would receive.97 Another asserted that ‘‘sophisticated’’ counterparties should be able to opt out of receiving ‘‘material information’’ disclosures and the written disclosures related to clearing rights to lower their hedging
costs and avoid potential trading delays and inefficiencies.98 Three other commenters suggested an opt out for specific types of counterparties.99 One suggested that an ERISA plan should be permitted to opt out because SBS Entities might use the information they receive as a result of compliance with the business conduct standards to disadvantage the ERISA plan.100 A second asserted that pension funds acting as end users should be allowed to opt out of any rules that impose ‘‘heightened fiduciary duties’’ on SBS Dealers because pension funds do not need extra protection, and compliance with the fiduciary duties would only increase costs for SBS Dealers, leading them to either pass the costs along or refrain from entering into transactions with pension funds.101 A third suggested that any entity advised by a qualified independent representative should be able to waive the protections of the rules to avoid execution delays and administrative costs.102 Three commenters opposed allowing counterparties to opt out of the special protections in the rules.103 One commenter noted that a ‘‘theoretically optional opt out would likely become mandatory’’ because SBS Dealers would make it a condition of doing business, and that an opt-out approach could be used to perpetuate abuses the rules are intended to prevent.104 Another commented that an opt-out would ‘‘only add confusion to an already complex regulatory framework and create opportunities for market participants to evade compliance with the much￾needed business conduct standards.’’ 105 A third specifically opposed allowing counterparties to opt out of the disclosure requirements, noting that even sophisticated investors may be misled.106
3. Response to Comments and Final
Rule
After considering the comments, the Commission is adopting Rule 15Fh–1, predesignated as Rule 15Fh–1(a), with certain modifications. a. General The Commission is adopting, as proposed, the provision in final Rule 15Fh–1(a) specifying that Rules 15Fh–1 through 15Fh–6 and Rule 15Fk–1 apply ‘‘in connection with entering into security-based swaps’’ and also will continue to apply, as appropriate, over the term of executed security-based swaps. Many of the rules impose obligations on an SBS Entity with respect to its ‘‘counterparty’’ that must be satisfied before the SBS Entity has actually entered into a security-based swap with that counterparty (e.g., Rule 15Fh–3(a) (verification of counterparty status) and Rule 15Fh–3(b) (disclosure of material risks and characteristics, and material incentives or conflicts of interest)). This is consistent with the language specifying that the rules apply ‘‘in connection with entering into security-based swaps’’ in Rule 15Fh– 1(a). Accordingly, when the rules refer to a ‘‘counterparty’’ of the SBS Entity, the term ‘‘counterparty’’ includes a potential counterparty where compliance with the obligation is required before the SBS Entity and the ‘‘counterparty’’ has actually entered into the security-based swap.107 b. Application to Security-Based Swaps Entered Into Prior to the Effective Date To address concerns raised by commenters,108 the Commission is clarifying that the business conduct rules generally will not apply to any security-based swap entered into prior to the compliance date of the rules, and generally will apply to any security￾based swap entered into after the compliance date of these rules, including a new security-based swap that results from an amendment or modification to a pre-existing security￾based swap.109 In response to commenters’ concerns about applying the business conduct rules to amendments to and other lifecycle events of a security-based swap entered into before the compliance date of these rules,110 the Commission is clarifying that the business conduct rules generally will not apply to amendments or modifications to a pre￾existing security-based swap unless the amendment or modification results in a new security-based swap (and occurs after the compliance date of these rules). The Commission has previously determined that if the material terms of a security-based swap are amended or modified during its life based on an exercise of discretion and not through predetermined criteria or a predetermined self-executing formula, the amended or modified security-based swap is viewed as a new security-based swap.111 Thus, if there is such a material amendment or modification, which could include a change in the economic terms of the transaction that the parties would not have provided for when entering into the security-based swap contract, the Commission will consider the amended or modified security-based swap to be a new

112See SIFMA (August 2015), supra note 5. 113 Id. 114See ABA Securities Association, supra note 5; FIA/ISDA/SIFMA, supra note 5; SIFMA (August 2015), supra note 5. 115See Further Definition of ‘‘Swap Dealer,’’ ‘‘Security-Based Swap Dealer,’’ ‘‘Major Swap Participant,’’ ‘‘Major Security-Based Swap Participant’’ and ‘‘Eligible Contract Participant,’’ Exchange Act Release No. 66868 (Apr. 27, 2012), 77 FR 30596, 30624–30625 (May 23, 2012) (‘‘Definitions Adopting Release’’). 116As one commenter suggested, because affiliates are not ‘‘external clients’’ of the SBS Entity, the protections afforded by these rules may be inapposite. See ABA Securities Association, supra note 5. 117See SIFMA (August 2015), supra note 5; FIA/ ISDA/SIFMA, supra note 5. See also ABA Securities Association, supra note 5 (suggesting an ‘‘affiliated group’’ definition that was considered but not adopted in the Definitions Adopting Release). As noted above, the Commissions instead adopted the exception for ‘‘majority-owned affiliates’’ that we are providing here. See Definitions Adopting Release, supra note 115. 118See Exchange Act Rules 3a71–1(d)(1) and 15Fh–1(a). security-based swap for purposes of the business conduct rules. If that material amendment or modification occurs after the compliance date of these rules, these rules will apply to the resulting new security-based swap. In response to concerns raised by a commenter, the Commission also is clarifying that the rules generally will not apply to either a partial or full termination of a pre-existing security￾based swap.112 In these instances we anticipate that the expectations of the parties will be governed by the pre￾existing terms of the original security￾based swap, and so the business conduct requirements generally will not apply. If, however, the partial termination involves a change in the material terms of the original security￾based swap ‘‘based on an exercise of discretion and not through predetermined criteria or a predetermined self-executing formula’’ the business conduct rules will apply. As requested by a commenter,113 we are clarifying that the business conduct rules generally will not apply to a new security-based swap that results from the exercise of an option on a security￾based swap (whether or not the exercise occurs before or after the compliance date of these rules), as long as the terms upon which a party can exercise the option and the terms of the underlying security-based swap that will result upon the exercise of the option are governed by the terms of the pre￾existing option. If, however, the material terms of either the option or the resulting security-based swap are amended or modified based on an exercise of discretion and not through predetermined criteria or a predetermined self-executing formula, our business conduct rules will apply to the amended or modified option or security-based swap resulting from the exercise of the option (assuming that such amendment or modification occurs
after the compliance date of these rules). We believe it appropriate to apply the rules in this manner to help to ensure that counterparties receive the benefits of the rules in circumstances where they are warranted, while providing firms adequate time to review the business conduct rules being adopted today and make appropriate changes to their operations before they have to begin complying with those rules. The Commission emphasizes that the above clarifications relate to the business conduct rules that by their terms apply when an SBS Entity offers to enter into or enters into a security￾based swap, such as verification of status (Rule 15Fh–3(a)), certain disclosures (Rule 15Fh–3(b) and (d)), requirements for special entities as counterparties (Rule 15Fh–5), and pay￾to-play (Rule 15Fh–6)). Other rules being adopted today are broader in their application, such as those relating to know your counterparty (Rule 15Fh– 3(e)), recommendations of security￾based swaps or trading strategies (Rule 15Fh–3(f)), fair and balanced communications (Rule 15Fh–3(g)), supervision (Rule 15Fh–3(h)), antifraud (Rule 15Fh–4(a)), requirements when an SBS Dealer is acting as an advisor to a special entity (Rule 15Fh–4(b)), and the CCO (Rule 15Fk–1). Thus, if an SBS Entity takes an action after the compliance date that independently implicates one of the business conduct rules, it will need to comply with the applicable requirements. For example, if an SBS Dealer makes a recommendation of a trading strategy that involves termination of a pre-existing security￾based swap, the SBS Dealer would need to comply with the suitability requirements of Rule 15Fh–3(f) regarding such recommendation. In addition, an SBS Entity will need to comply with ‘‘entity level’’ rules relating to supervision and CCO after the compliance date of those rules for all of its security-based swap business.
c. Application to Inter-Affiliate
Transactions
The Commission agrees with the concerns raised by commenters regarding the treatment of inter-affiliate transactions.114 As the Commission noted in the Definitions Adopting Release (defined below), market participants may enter into inter￾affiliate security-based swaps for a variety of purposes, such as to allocate risk within a corporate group or to transfer risks within a corporate group to a central hedging or treasury entity.115 As discussed below, we believe that transactions by SBS Entities with certain of their affiliated persons do not implicate the concerns that the business conduct requirements regarding verification of counterparty status (Rule 15Fh–3(a)), disclosures regarding the product and potential conflicts of interest, daily mark and clearing rights (Rule 15Fh–3(b), (c) and (d)), ‘‘know your counterparty’’ and suitability obligations (Rules 15Fh–3(e) and (f)), and obligations when advising or acting as counterparty to a special entity (Rules 15Fh–4(b) and 15Fh–5) are intended to address (referred to as ‘‘transaction specific obligations’’).116 We therefore are providing in Rule 15Fh–1(a) as adopted that Rules 15Fh– 3(a) through (f), 15Fh–4(b) and 15Fh–5 are not applicable to security-based swaps that SBS Entities enter into with certain affiliates. We are not, however, extending the exception to transactions with all affiliates, as requested by some commenters.117 Rather, the Commission is limiting the exception from the business conduct requirements to security-based swap transactions between majority-owned affiliates. The rule defines ‘‘majority-owned affiliates’’ consistent with the Definitions Adopting Release such that, for these purposes, the counterparties to a security-based swap are majority-owned affiliates if one counterparty directly or indirectly owns a majority interest in the other, or if a third party directly or indirectly owns a majority interest in both counterparties to the security￾based swap, where ‘‘majority interest’’ is the right to vote or direct the vote of a majority of a class of voting securities of an entity, the power to sell or direct the sale of a majority of a class of voting securities of an entity, or the right to receive upon dissolution or the contribution of a majority of the capital of a partnership.118 The transaction-specific obligations outlined above and included in Rule 15Fh–1(a) generally are designed to provide an SBS Entity counterparty with certain information in connection with the security-based swap transaction that would help reduce potential information asymmetries, and to help ensure that the SBS Entity knows its counterparty and acts in a fair manner towards that counterparty, even in the face of potential conflicts of interest. The Commission does not believe that these objectives and

119See Definitions Adopting Release, 77 FR at 30625, supra note 115 (declining to adopt a ‘‘common control’’ standard, noting that, ‘‘[a]bsent majority ownership, we cannot be confident that there would be an alignment of economic interests that is sufficient to eliminate the concerns that underpin dealer regulation.’’). 120See SIFMA (August 2015), supra note 5 (requesting exceptions with respect to Rules 15Fh– 3(a) through (f), 15Fh–4(b) and 15Fh–5). 121See id. 122See FIA/ISDA/SIFMA, supra note 5; CalPERS (August 2011), supra note 5; SIFMA (August 2011), supra note 5; ABC, supra note 5; MFA, supra note 5; CalSTRS, supra note 5; CFA, supra note 5; Better Markets (August 2011), supra note 5; Levin, supra note 5. 123However, as discussed in Section II.H.1.c.iii below, in order to resolve any tension between Exchange Act Sections 15F(h)(2)(C)(iii) and (iv), we are allowing employee benefit plans that are defined in Section 3 of ERISA but not subject to Title I of ERISA to opt out of special entity status. 124 15 U.S.C. 78o–10(h)(7). 125See, e.g., SIFMA (August 2011), supra note 5; BlackRock, supra note 5; FIA/ISDA/SIFMA, supra note 5. 126See Section II.H.8, infra for a discussion of the proposed exceptions from the requirements of Rules 15Fh–4(b) and 15Fh–5. 127Rule 15Fh–6, as proposed, would apply only with respect to transactions ‘‘initiated’’ by a municipal entity. The Commission is modifying the exception under Rule 15Fh–6(b)(2)(iii) to apply to all security-based swap transactions that are executed on a registered national securities exchange or registered or exempt SEF, rather than just with respect to transactions ‘‘initiated by a municipal entity’’ on such exchange or registered SEF (as long as the other conditions of Rule 15Fh– 6(b)(2)(iii) are met). These revisions are consistent with the exceptions to Rules 15Fh–4 and 15Fh–5 for anonymous, exchange-traded or SEF transactions. See Section II.H.9, infra. 128See Section II.G.1, infra. concerns are implicated in the same manner or to the same extent when there is an alignment of economic interests between the SBS Entity and a counterparty, such as is the case when the counterparty is a majority-owned affiliate. However, absent majority ownership, we cannot be confident that there would be an alignment of economic interests that is sufficient to eliminate the concerns that underpin the need for regulation in this area.119 Accordingly, the Commission is modifying Rule 15Fh–1(a) to provide that Rules 15Fh–3(a)–(f), 15Fh–4(b) and 15Fh–5 are not applicable to security￾based swaps that SBS Entities enter into with their majority-owned affiliates. These generally are the transaction specific exceptions requested by a commenter.120 Further, consistent with the commenter’s request, we are not granting an exception for transactions with affiliates with respect to the antifraud requirements of Rule 15Fh– 4(a) or the requirements of Rule 15Fh– 3(g) (fair and balanced communications).121 The exception for
inter-affiliate transactions from the transaction specific obligations discussed above is generally predicated on the assumption that entities with aligned economic interests have an incentive to act fairly when dealing with each other. However, we believe it important to continue to provide the protections of the antifraud and fair and balanced communication rules in situations where an SBS Entity acts in a manner contrary to this assumption. We also are not granting exceptions to the entity-level requirements regarding supervision (Rule 15Fh–3(h)) and CCO obligations (Rule 15Fk–1), which are intended to help to ensure the compliance of SBS Entities in their security-based swap transactions. d. Counterparty Opt-Out The Commission has considered the concerns raised by commenters 122 and determined, on balance, not to permit counterparties generally to opt out of the protections provided by the business conduct rules. As discussed throughout the release in the context of specific rules, the rules being adopted today are intended to provide certain protections for counterparties, including certain heightened protections for special entities. We think it is appropriate to apply the rules so that counterparties receive the benefits of those protections and so do not think it appropriate to permit parties generally to elect to ‘‘opt out’’ of the benefits of those provisions.123 While we are not adopting a general opt-out provision, as discussed below in connection with the relevant rules, the Commission has determined to permit means of compliance with the final rules that should promote efficiency and reduce costs (e.g., Rule 15Fh–1(b) (reliance on representations)) and, where appropriate, allow SBS Entities to take into account the sophistication of the counterparty (e.g., Rule 15Fh–3(f) (regarding recommendations of security￾based swaps or trading strategies)). B. Exceptions for Anonymous SEF or Exchange-Traded Transactions
Section 15F(h)(7) of the Exchange Act
provides a statutory exception ‘‘from the requirements of this subsection’’ for security-based swap transactions that are: ‘‘(A) initiated by a special entity on an exchange or security-based swaps execution facility; and (B) the security￾based swap dealer or major security￾based swap participant does not know the identity of the counterparty to the transaction.’’ 124 More generally, commenters have asked the Commission to provide exceptions to the application of our rules in situations in which an SBS Entity does not know the identity of its counterparty, or where a security￾based swap transaction is executed on a registered national securities exchange or security-based swap execution facility (‘‘SEF’’), without regard to whether the counterparty is a special entity.125

1. Proposal
   Noting that there may be circumstances in which it may be unclear which party ‘‘initiated’’ the communications that resulted in the parties entering into a security-based swap transaction on a registered SEF or registered national securities exchange, the Commission proposed to interpret
   Section 15F(h)(7) to apply to any
   transaction with a special entity on a registered SEF or registered national securities exchange, where the SBS Entity does not know the identity of its counterparty at any time up to and including execution of a transaction. The Commission further proposed to interpret Section 15F(h)(7) to apply with respect to requirements specific to dealings with special entities. Proposed Rule 15Fh–4(b)(3) would provide an exception from the special requirements for SBS Dealers acting as advisors to special entities, including the requirement that an SBS Dealer act in the best interests of a special entity for whom it acts as an advisor, if the transaction is executed on a registered exchange or SEF and the SBS Dealer does not know the identity of the counterparty at any time up to and including execution of the transaction. Under the same circumstances, proposed Rule 15Fh–5(c) would similarly provide an exception from the special requirements for SBS Entities acting as counterparties to special entities, including the qualified independent representative and disclosure requirements of proposed Rule 15Fh–5.126 Proposed Rule 15Fh– 6(b)(2)(iii) would provide an exception from the pay to play rules with respect to transactions on a registered exchange or SEF where the SBS Dealer does not know the identity of the counterparty at any time up to and including execution of the transaction.127 Consistent with Section 15F(h)(7), we also proposed to limit the application of certain other requirements to situations in which the identity of a counterparty (whether a special entity or not) is known to the SBS Entity. The rules as proposed would limit the verification of counterparty status obligations (proposed Rule 15Fh–3(a)),128 and know your counterparty obligations (proposed Rule 15Fh–3(e)) to transactions with

129See Sections II.G.1 and II.G.3, infra. 130See ABC, supra note 5; CFA, supra note 5; SIFMA (August 2015), supra note 5; Better Markets (August 2011), supra note 5; FIA/ISDA/SIFMA, supra note 5. 131See SIFMA (August 2011), supra note 5; MFA, supra note 5; BlackRock, supra note 5; SIFMA (August 2015), supra note 5 132See SIFMA (August 2011), supra note 5 (arguing that parties to exchange-traded security￾based swaps likely know the identity of their counterparty before the transaction, either because the exchange uses a request for quote system (where the participants can seek quotes from specific counterparties) or a single-dealer platform, or because information about the counterparties to the trade is necessary to complete the execution process); BlackRock, supra note 5. 133See SIFMA (August 2011), supra note 5 (‘‘mere knowledge’’); BlackRock, supra note 5 (‘‘mere identification’’). 134See SIFMA (August 2011), supra note 5 (‘‘largely inapplicable’’); BlackRock, supra note 5 (‘‘simply will not be an issue’’). 135See SIFMA (August 2011), supra note 5; BlackRock, supra note 5. 136See BlackRock, supra note 5 (also noting that, conversely, generally ‘‘when a swap or a security￾based swap is cleared and exchange-traded, the counterparty to the trade should be viewed as fungible, rendering compliance with the specific requirements of [the proposed rules] unnecessary’’). 137See SIFMA (August 2015), supra note 5. 138 Id. See Swaps Intended to Be Cleared, CFTC Letter No. 13–70 (Nov. 15, 2013), available at http:// www.cftc.gov/idc/groups/public/@lrlettergeneral/ documents/letter/13-70.pdf. 139 Id. 140See Rules 15Fh–4(b)(3)(ii), 15Fh–5(d)(2) and 15Fh–6(b)(3)(iii). We have similarly modified the verification of special entity counterparty status requirements in Rule 15Fh–3(a)(2), as discussed infra in Section II.G.1. 141See ABC, supra note 5; FIA/ISDA/SIFMA, supra note 5. 142As discussed in Section II.G.3, infra, we are adopting as proposed the exception in Rule 15Fh– 3(e), which limits SBS Dealers’ counterparty obligations under the rule to transactions with ‘‘known’’ counterparties. counterparties whose identity is known to the SBS Entity.129
2. Comments on the Proposal
The Commission received five comment letters that addressed the exception for anonymous, exchange or SEF-traded security-based swaps in the context of special entity-specific requirements,130 and four comment letters that addressed more broadly the issue of an exception for anonymous or SEF and exchange-traded security-based swaps.131 The comment letters that address the exception in the context of the special entity requirements are discussed infra in Sections II.H.8 and II.H.9. The comment letters that address the broader issue of an exception from business conduct requirements for anonymous or SEF and exchange-traded security-based swaps are discussed below. Two commenters asserted that, where a security-based swap is cleared (through registered clearing organizations) and SEF or exchange￾traded, the transaction should not be subject to the requirements of the proposed rules—regardless of whether the identity of the counterparty is known at the time of execution.132 The commenters argued that knowledge or identification of a counterparty’s identity should not compel compliance with the business conduct standards.133 The commenters further argued that the concerns addressed by business conduct standards were largely inapplicable to security-based swaps entered into through registered SEFs, swap execution facilities or registered national securities exchanges.134 The commenters asserted that compliance with the proposed rules would result in delay, additional complexity, individual negotiation and potentially less transparency, which the trading and clearing requirements of the Dodd-Frank Act sought to avoid.135 However, one of the commenters acknowledged that some security-based swaps executed on a SEF or exchange might be bilaterally negotiated, and the SEF or exchange subsequently used to process the trade, in which case it might be appropriate to apply the business conduct standards.136 After adoption of the CFTC’s business conduct standards, one commenter urged the Commission to adopt an exception for exchange-traded security￾based swaps that are intended to be cleared if: (1)(a) The transaction is executed on a registered or exempt SEF or registered national securities exchange; and (b) is of a type that is, as of the date of execution, required to be cleared pursuant to Section 3C of the Exchange Act; or (2) the SBS Entity does not know the identity of the counterparty, at any time up to and including execution of the transaction.137 The commenter argued that these changes would harmonize the scope of the Commission’s requirements with the scope of the parallel requirements under the relief provided by CFTC No-Action Letter 13–70.138 The commenter argued that the considerations on which the CFTC staff based its no-action relief would also apply to the security-based swap market, namely: ‘‘(i) the impossibility or impracticability of compliance with certain rules by a Swap Entity when the identity of the counterparty is not known prior to
execution; (ii) the likelihood that swaps initiated anonymously on a designated contract market or swap execution facility will be standardized and, thus, information about the material risks and characteristics of such swaps is likely to be available from the designated contract market or swap execution facility or other widely available source (including the product specifications of a derivatives clearing organization where the swaps are accepted for clearing); and (iii) the likelihood that such relief would provide an incentive to transact on designated contract markets and swap execution facilities, thus enhancing transparency in the swaps market.’’ 139
3. Response to Comments and Final
Rules
After considering the comments, the Commission has determined to adopt two sets of exceptions from the business conduct requirements. As discussed in Sections II.H.8 and II.H.9, infra, we are adopting exceptions from the requirements of Rules 15Fh–4(b), 15Fh– 5 and 15Fh–6 (collectively, ‘‘special entity exceptions’’) for anonymous transactions executed on a registered national securities exchange or a registered or exempt SEF, where the identity of the special entity is not known to the SBS Entity at a reasonably sufficient time prior to execution of the transaction to permit the SBS Entity to comply with the obligations of the rule.140 In addition to the special entity exceptions, the Commission is adopting a second set of exceptions that are not limited to transactions with special entities, under which certain of the business conduct standards rules will apply only where the SBS Entity knows the identity of the counterparty at a reasonably sufficient time prior to execution of the transaction to permit the SBS Entity to comply with the obligations of the rule.141 These exceptions are intended to address the impracticalities and potential business disruption that could result if an SBS Entity were required to comply with the disclosure requirements in Rule 15Fh– 3(b) (requiring an SBS Entity to disclose material risks and characteristics of a security-based swap and material incentives or conflicts in connection with a security-based swap, prior to entering into that security-based swap with a counterparty) and Rule 15Fh– 3(d) (requiring certain pre-transaction disclosures to counterparties regarding clearing rights), before learning the identity of its counterparty.142 By only applying these rules’ requirements to situations where the counterparty’s identity is known ‘‘at a reasonably sufficient time prior to’’ the execution of a transaction, the rules’ requirements are limited to situations where an SBS

143See SIFMA (August 2015), supra note 5. 144 Id. 145See SIFMA (August 2011), supra note 5; BlackRock, supra note 5. 146See SIFMA (August 2011), supra note 5. 147See Proposing Release, 76 FR at 42400–42401, supra note 3. 148As noted in the Proposing Release, there are exceptions to this principle. We proposed that all SBS Entities be required to determine if a counterparty is a special entity. In addition, Section 3C(g)(5) of the Exchange Act creates certain rights with respect to clearing for counterparties entering into security-based swaps with SBS Entities but does not require disclosure. We proposed a rule that would require an SBS Entity to disclose to a counterparty certain information relating to these rights. See 15 U.S.C. 78c–3(g)(5); Proposing Release, 76 FR at 42401 n.39, supra note 3. 149See CFA, supra note 5; MFA, supra note 5; BlackRock, supra note 5. 150See CFA, supra note 5. 151 Id. 152 Id. 153See MFA, supra note 5. 154 Id. 155 Id. 156See BlackRock, supra note 5. 157 Id. 158See Section 15F(h)(1) (requiring SBS Dealers and Major SBS Participants to conform to business conduct standards as prescribed by Section 15F(h)(3) (regarding duty to verify counterparty status as ECP, required pre-trade disclosures and ongoing daily mark disclosures)); Section 15F(h)(1)(A) (requiring SBS Dealers and Major SBS Participants to comply with standards as may be prescribed by the Commission regarding fraud);
Section 15F(h)(1)(B) (requiring SBS Dealers and
Major SBS Participants to comply with standards as may be prescribed by the Commission regarding diligent supervision of the business of the SBS Dealer or Major SBS Participant); Section 15F(h)(4)(A) (antifraud provisions applicable to both SBS Dealers and Major SBS Participants);
Section 15F(h)(5) (regarding special requirements
Continued
Entity has sufficient time before the execution of the transaction to comply with its obligations under the rules. For this reason, we decline to adopt language, suggested by a commenter, which would apply the exception to circumstances where the identity of the counterparty ‘‘is not known at any time up to and including execution of the transaction.’’ 143 We are not, however, accepting the commenter’s suggestion that we revise our exceptions to provide an exception for transactions intended to be cleared so long as the transaction is either executed on a registered national securities exchange or registered or exempt SEF and required to be cleared pursuant to Section 3C of the Exchange Act, regardless of whether or not the transaction is anonymous.144 Similarly, we reject commenters’ more general assertions that the exceptions should apply to all SEF or exchange-traded transactions, even where the identity of the counterparty is known,145 and that the protections provided by the business conduct standards are unnecessary for security-based swaps that are entered into through registered SEFs, swap execution facilities or registered national securities exchanges.146 The rules being adopted today are intended to provide certain protections for counterparties, and we think it is appropriate to apply the rules, to the extent practicable, so that counterparties receive the benefits of those protections. We have determined not to apply those rules where it may not be possible or practical to do so, specifically where a transaction is executed on a registered exchange or SEF and the identity of the counterparty is not known to the SBS Entity at a reasonably sufficient time prior to execution of the transaction to permit the SBS Entity to comply with the obligations of the rule. However, where the identity of the counterparty is known in a timely manner, we believe that it is appropriate to apply the rules so that the counterparty receives the benefits of the protections provided by the rules, including the assistance of an advisor or qualified independent representative acting in the best interests of a counterparty that is special entity.
C. Application of the Rules to SBS
Dealers and Major SBS Participants

1. Proposal
   As noted in the Proposing Release, in general, where the Dodd-Frank Act imposes a business conduct requirement on both SBS Dealers and Major SBS Participants, we proposed rules that would apply to SBS Dealers and Major SBS Participants.147 Where, however, a business conduct requirement is not expressly addressed by the Dodd-Frank Act, the proposed rules generally applied only to SBS Dealers.148 We solicited comment on whether this approach was appropriate. Specifically, where the Dodd-Frank Act requires that a business conduct rule apply to all SBS Entities, we asked if the rule should impose the same requirements on Major SBS Participants as on SBS Dealers, and where we proposed rules for SBS Dealers that are not expressly addressed by the Dodd-Frank Act, we asked if any of those rules should also apply to Major SBS Participants.
2. Comments on the Proposal
   Three commenters addressed the general application of the rules to SBS Dealers and Major SBS Participants.149 One commenter agreed it may be appropriate, ‘‘in light of their somewhat different roles,’’ to adopt different approaches to rules governing SBS Dealers and Major SBS Participants in certain areas.150 The commenter asserted that absent an affirmative reason to adopt a different approach for SBS Dealers and Major SBS Participants, the Commission should seek to promote consistency and adopt uniformly strong rules.151 The commenter argued that the determining factor should be whether Major SBS Participants are likely to be engaged in conduct that would appropriately be regulated under the relevant standard.152 In contrast, another commenter urged the Commission to consider separate regulatory regimes for SBS Dealers and Major SBS Participants, arguing that they are different, and there are ‘‘different reasons why the Dodd-Frank Act requires additional oversight of each.’’ 153 The commenter recommended that the Commission focus regulation of Major SBS Participants on reducing default risk, and focus regulation of SBS Dealers on market making and pricing and sales practices in addition to reducing default risk.154 The commenter argued that to the extent Major SBS Participants transact at arm’s-length, they will not be advising counterparties and therefore, neither fiduciary duties nor ‘‘dealer-like obligations’’ (regarding ‘‘know your counterparty,’’ suitability and ‘‘pay-to￾play’’ restrictions, for example) should be imposed on them.155 A third commenter generally supported our proposed approach in not applying certain business conduct requirements to Major SBS Participants where the Dodd-Frank Act does not expressly impose such standards.156 In the alternative, if the Commission determines to require Major SBS Participants to disclose ‘‘material information’’ and to provide daily marks to their counterparties, the commenter asked that we make these requirements inapplicable to transactions between a Major SBS Participant and an SBS Dealer, and to allow all other parties to opt out of receiving such disclosures in their dealings with a Major SBS Participant.157
3. Response to Comments and Final
   Rules
   After considering the comments, the Commission has determined to apply the rules to SBS Dealers and Major SBS Participants as proposed. To that end, as discussed below, where a statutory provision encompasses both SBS Dealers and Major SBS Participants,158

for SBS Dealers and Major SBS Participants that enter into a security-based swap with a special entity); and Section 15F(k) (imposing CCO obligations). 159See Rules 15Fh–3(a) (verification of counterparty status), 15Fh–3(b) (pre-trade disclosures), 15Fh–3(c) (daily mark), 15Fh–3(h) (supervision), 15Fh–5 (special requirements for SBS Entities acting as counterparties to special entities) and 15Fk–1 (CCO requirements). 160See discussion infra in Section VI.B. 161See Section II.H.2 (regarding application of ‘‘act as an advisor’’ obligations under Rule 15Fh– 4(b) to SBS Dealers but not Major SBS Participants). 162As noted in the Proposing Release, there are exceptions to this principle. Because an SBS Entity must comply with the requirements of Rule 15Fh– 5 if it is acting as a counterparty to a special entity, the obligation to verify special entity status under Rule 15Fh–3(a)(2) applies to all SBS Entities. See
Section II.G.1. In addition, Section 3C(g)(5) of the
Exchange Act creates certain rights with respect to clearing for counterparties entering into security￾based swaps with SBS Entities but does not require disclosure. As discussed in Section II.G.2.f, infra, Rule 15Fh–3(d) would require all SBS Entities to disclose to a counterparty certain information relating to these clearing rights. 163See Exchange Act Section 3(a)(71), 15 U.S.C. 78c(a)(71), and Rule 3a–71, 17 CFR 240.3a71. 164See Exchange Act Section 3(a)(67), 15 U.S.C. 78c(a)(67), and Rule 3a–67, 17 CFR 240.3a67. 165 In particular, under Section 15F of the Exchange Act, SBS Dealers and Major SBS Participants generally are subject to the same types of margin, capital, business conduct and certain other requirements, unless an exclusion applies. See 15 U.S.C. 78o–10. 166See MFA, supra note 5. 167See CFA, supra note 5. 168See BlackRock, supra note 5. 169See Proposing Release, 76 FR at 42404, supra note 3. 170 Id. we are adopting rules that would apply equally to SBS Dealers and Major SBS Participants.159 We think this is important to ensure that counterparties of Major SBS Participants, as well as counterparties of SBS Dealers, receive the protections the rules are intended to provide. For example, to the extent that Major SBS Participants may be better informed about the risks and valuations of security-based swaps due to information asymmetries, disclosures may help inform counterparties concerning the material risks and characteristics of security-based swaps, and material conflicts of interest of Major SBS Participants entering into security-based swaps.160 Where, however, a business conduct requirement is not expressly addressed by the Dodd-Frank Act or we read the statute to apply a requirement only to SBS Dealers,161 the adopted rules generally would not apply to Major SBS Participants.162 Thus, the obligations under Rules 15Fh–3(e) (know your counterparty), 15Fh–3(f) (recommendations of security-based swaps or trading strategies), 15Fh–4(b) (special obligations when acting as an advisor to a special entity) and 15Fh–6 (pay to play rules) do not apply to a Major SBS Participant. In addition, our rules provide exceptions to Major SBS Participants, as discussed in Section II.G.2.a, from certain disclosure requirements when entering into security-based swaps with an SBS Dealer, another Major SBS Participant, a swap dealer or a swap participant. In determining whether or not to apply certain requirements to Major SBS Participants, as explained in the Proposing Release, we have considered how the differences between the definitions of SBS Dealer and Major SBS Participant may be relevant in formulating the business conduct standards applicable to these entities. The Dodd-Frank Act and our rules define ‘‘security-based swap dealer’’ in a functional manner, by reference to the way a person holds itself out in the market and the nature of the conduct engaged in by that person, and how the market perceives the person’s activities.163 Unlike the
definition of ‘‘security-based swap dealer,’’ which focuses on those persons whose function is to serve as the points of connection in those markets, the definition of ‘‘major security-based swap participant’’ focuses on the market impacts and risks associated with an entity’s security-based swap positions.164 Despite the differences in focus, however, the Dodd-Frank Act applies substantially the same statutory standards to SBS Dealers and Major SBS Participants.165 We explained in the Proposing Release that, in this way, the statute applies comprehensive regulation to entities (i.e., Major SBS Participants) whose security-based swap activities do not cause them to be dealers, but nonetheless could pose a high degree of risk to the U.S. financial system generally. We are mindful, as noted by a commenter, that there are ‘‘different reasons why the Dodd-Frank Act requires additional oversight of each.’’ 166 We have attempted to take into account these differing definitions and regulatory concerns in considering whether the business conduct requirements that we proposed, and that we are adopting, for SBS Dealers should or should not apply to Major SBS Participants as well. Accordingly, as noted, in general, where the Dodd-Frank Act imposes a business conduct requirement on both SBS Dealers and Major SBS Participants, the rules will apply equally to SBS Dealers and Major SBS Participants, and where a business conduct requirement is not expressly addressed by the Dodd-Frank Act, the rules generally will not apply to Major SBS Participants. We believe this approach addresses the concern of the commenter who argued that the determining factor should be the conduct in which a Major SBS Participant is likely to be engaged.167 The external business conduct requirements promulgated under
Section 15F(h) are intended to provide
certain protections for counterparties, and we believe the rules we are adopting today appropriately apply those requirements to SBS Dealers and Major SBS Participants so that counterparties receive the benefit of those protections. At the same time, mindful of the different role to be played by Major SBS Participants (which, by definition, are not SBS Dealers), we have not sought to impose the full range of business conduct requirements on Major SBS Participants. We note that our approach in this regard largely mirrors that of the CFTC, under whose rules Swap Dealers and Major Swap Participants have operated for some time. We believe that this consistency will result in efficiencies for entities that have already established infrastructure to comply with the CFTC standard. We proposed and are adopting limited exceptions (as discussed in connection with the applicable rules) from the disclosure requirements in Rules 15Fh– 3(b), 15Fh–3(c) and 15Fh–3(d) for transactions with an SBS Entity or a Swap Entity.168 We are not, however, adopting the suggestion that we broaden the exceptions to permit other types of counterparties to opt out of the disclosures and other protections provided under the rules when entering into a transaction with a Major SBS Participant. As noted above, the external business conduct requirements promulgated under Section 15F(h) are intended to provide certain protections for counterparties, and we believe the rules we are adopting today appropriately tailor those requirements so that counterparties receive the benefit of those protections. D. Reliance on Representations

1. Proposal
   The Proposing Release solicited input on whether the rules adopted by the Commission should include a standard addressing the circumstances in which an SBS Entity may rely on representations to establish compliance with the business conduct rules.169 We sought comment on two alternative approaches.170 One approach would permit an SBS Entity to rely on a representation from a counterparty

171 Id.
172 Id.
173See CFTC Adopting Release, 77 FR at 9749, supra note 21. 174See CCMR, supra note 5; FIA/ISDA/SIFMA, supra note 5; APPA, supra note 5; BlackRock, supra note 5; SIFMA (August 2011), supra note 5; ABC, supra note 5; ABA Committees, supra note 5; NABL, supra note 5; Better Markets (August 2011), supra note 5; AFSCME, supra note 5; CFA, supra note 5; SIFMA (August 2015), supra note 5. 175See SIFMA (August 2015), supra note 5 (asking the Commission to adopt a reasonable person standard consistent with the standard under the parallel CFTC rules). 176See FIA/ISDA/SIFMA, supra note 5; APPA, supra note 5; BlackRock, supra note 5; SIFMA (August 2011), supra note 5; ABC, supra note 5; ABA Committees, supra note 5; NABL, supra note 5. 177See FIA/ISDA/SIFMA, supra note 5. 178See NABL, supra note 5. 179See SIFMA (August 2015), supra note 5. 180See Better Markets (August 2011), supra note 5; CCMR, supra note 5. See also CFA, supra note 5 (opposing both proposed standards but noting a preference for the reasonable person standard over the actual knowledge standard). 181See Better Markets (August 2011), supra note 5. 182 Id. 183See AFSCME, supra note 5 (recommending requiring written representations that are ‘‘sufficiently detailed and informative to permit reliance,’’ and requiring SBS Entities to have a reasonable basis for believing the representations to be true); CFA, supra note 5 (recommending requiring that the written representations be sufficiently detailed to allow such an assessment). 184See FIA/ISDA/SIFMA, supra note 5. 185See ABC, supra note 5. 186 Id. 187See SIFMA (August 2015), supra note 5. 188 Id. In a subsequent letter, the commenter explained that there is a multilateral protocol that has been adopted by most market participants as a means of complying with the CFTC rules. See SIFMA (November 2015), supra note 5. The commenter noted that the representations contained in this protocol only expressly address market participants’ trading in swaps, but asserted that ‘‘the factual matters addressed by those representations typically do not vary as between trading in swaps and trading in [security-based swaps]. As a result, requiring SBS Entities to obtain separate representations specifically addressing [security-based swaps] would impose additional costs with few, if any, additional benefits.’’ Id. 189SIFMA (November 2015), supra note 5. 190 Id. 191See Proposing Release, 76 FR at 42404, supra note 3. As described infra in Section II.G.0, Rule 15Fh–3(e) will require an SBS Dealer to have policies and procedures reasonably designed to Continued unless it knows that the representation is not accurate (‘‘actual knowledge standard’’).171 The other would permit an SBS Entity to rely on a representation unless the SBS Entity has information that would cause a reasonable person to question the accuracy of the representation (‘‘reasonable person standard’’).172 After the Commission issued its proposed rules, the CFTC in its final rules adopted a
‘‘reasonable person standard’’ that generally permits a Swap Entity to rely on written representations to satisfy its due diligence obligations unless it has information that would cause a reasonable person to question the accuracy of the representation.173
2. Comments on the Proposal
Twelve commenters generally addressed the proposed standards for reliance on counterparty representations.174 With one exception,175 these comments predate the 2012 adoption of the CFTC rules. In 2011, seven commenters supported the actual knowledge standard.176 One asserted its view that the actual knowledge standard would offer greater legal certainty to SBS Entities when making required subjective judgments under the rules (for example, judgments regarding the qualifications of a special entity’s independent representative).177 Another commenter argued that the actual knowledge standard is preferable because the reasonable person standard would require an assessment of what a reasonable person would conclude if such person had the same information as the SBS Entity, which could cause uncertainty and additional cost for market participants.178 One commenter, writing after the CFTC rules were adopted, asked the Commission to adopt a ‘‘reasonable person standard’’ that is ‘‘consistent with the parallel CFTC EBC Rules,’’ which generally permit a Swap Entity to rely on written representations to satisfy its due diligence obligations unless it has information that would cause a reasonable person to question the accuracy of the representations.179 Additionally, two other commenters supported the reasonable person standard in 2011.180 One commenter asserted that the reasonable person standard would help to ensure that SBS Entities are acting on reliable information because of the duty it would impose to verify the accuracy of a representation if the SBS Entity had some reason to question it.181 The commenter also argued that the reasonable person standard would be easier to monitor and enforce because it would be objective rather than subjective.182 Some commenters suggested that the Commission require detailed representations.183 One commenter asked the Commission to clarify that, for purposes of ‘‘red flags,’’ the knowledge test should apply only to individuals with knowledge of the security-based swap transaction; information that may be available to other parts of the SBS Entity organization should not be imputed to those individuals.184 Another commenter requested that the Commission clarify that any representations made by a special entity or its representative to satisfy the rules do not give any party any additional rights, such as rescission or monetary compensation (e.g., if the representations turn out to be incorrect).185 Additionally, the commenter asserted that an SBS Dealer should be permitted to rely on a single set of representations made by a special entity at the beginning of a trading relationship, rather than requiring the SBS Dealer to obtain a new representation with each transaction, if the special entity represents that it will notify the SBS Dealer when the representations become inaccurate.186 More generally, another commenter recommended allowing representations to be contained in counterparty relationship documentation if
agreed to by the counterparties, and requiring counterparties to undertake to update such representations with any material changes.187 The commenter also suggested that an SBS Entity that is also registered with the CFTC as a Swap Entity should be permitted to rely on a counterparty’s written representations with respect to the CFTC’s business conduct rules to satisfy its due diligence requirements under the Commission’s business conduct rules provided that the SBS Entity provides notice of such reliance to the counterparty and the counterparty does not object.188 The commenter argued that this would speed implementation and lower costs without reducing counterparty protections.189 Finally, the commenter recommended including both a general reliance on representations provision and also specific reliance on representations safe harbors in the individual rules that specify what representations the SBS Entity should obtain to satisfy the safe harbor.190
3. Response to Comments and Final
Rule
The Commission is adopting new Rule 15Fh–1(b), which provides that an SBS Entity may rely on written representations to satisfy its due diligence requirements under the business conduct rules unless it has information that would cause a reasonable person to question the accuracy of the representation. Under this standard, if an SBS Entity has in its possession information that would cause a reasonable person to question the accuracy of the representation, it will need to make further reasonable inquiry to verify the accuracy of the representation.191

obtain and retain certain essential facts regarding a known counterparty. As a result, information in the SBS Entity’s possession will include information gathered by an SBS Dealer through compliance with the ‘‘know your counterparty’’ provisions of Rule 15Fh–3(e), as well as any other information the SBS Entity has acquired through its interactions with the counterparty, including other representations obtained from the counterparty by the SBS Entity. 192See Proposing Release, 76 FR at 42404, supra note 3. 193Cf. Exchange Act Rule 3a71–3(4) (permitting reliance on a counterparty representation unless the party seeking to rely on the representation ‘‘knows or has reason to know that the representation is not accurate; . . . a person would have reason to know that the representation is not accurate if a reasonable person should know, under all of the facts of which the person is aware, that it is not accurate’’). See also Application of ‘‘Security-Based Swap Dealer’’ and ‘‘Major Security-Based Swap Participant’’ Definitions to Cross-Border Security￾Based Swap Activities; Final Rule; Republication, Exchange Act Release No. 72472 (Jun. 25, 2014), 79 FR 47277, 47313 (Aug. 12, 2014 (republication)) (‘‘Cross-Border Adopting Release’’) (noting that ‘‘this ‘known or have reason to know’ standard should help ensure that potential [SBS Entities] do not disregard facts that call into question the validity of the representation’’). 194See CFTC Adopting Release, 77 FR at 9749, supra note 21. 195See AFSCME, supra note 5 (recommending requiring written representations that are ‘‘sufficiently detailed and informative to permit reliance,’’ and requiring SBS Entities to have a reasonable basis for believing the representations to be true); CFA, supra note 5 (recommending requiring that the written representations be sufficiently detailed to allow such an assessment). 196See FIA/ISDA/SIFMA, supra note 5; SIFMA (August 2015), supra note 5. 197 Id. In a subsequent letter, the commenter explained that there is a multilateral protocol that has been adopted by most market participants as a means of complying with the CFTC rules. See SIFMA (November 2015), supra note 5. The commenter noted that the representations contained in this protocol only expressly address market participants’ trading in swaps, but asserted that ‘‘the factual matters addressed by those representations typically do not vary as between trading in swaps and trading in [security-based swaps]. As a result, requiring SBS Entities to obtain separate representations specifically addressing [security-based swaps] would impose additional costs with few, if any, additional benefits.’’ Id. 198See SIFMA (August 2015), supra note 5; SIFMA (November 2015), supra note 5. 199See FIA/ISDA/SIFMA, supra note 5 (arguing that information that may be available to other parts of the SBS Entity organization should not be imputed to those individuals involved in the SBS transaction). 200See Proposing Release, 76 FR at
42402, supra note 3. We understand that this is a market in which parties rely heavily on representations both with respect to relationship documentation and the transactions themselves. While both standards we proposed for comment could be workable in this context, we recognize that neither provides the absolute certainty sought by some commenters. As we explained in the Proposing Release, under either approach an SBS Entity could not ignore information in its possession as a result of which the SBS Entity would know that a representation is inaccurate.192 Under an ‘‘actual knowledge’’ standard, however, an SBS Entity can rely on a representation unless it knows that the representation is inaccurate. This alternative could allow SBS Entities to rely on questionable representations insofar as they do not have actual knowledge that the representation is inaccurate, even if they have information that would cause reasonable persons to question their accuracy. As a result, this alternative could potentially reduce the benefits of the verification of status, know your counterparty, suitability and special entity requirements and result in weaker protections for counterparties to SBS Entities. In contrast, the ‘‘reasonable person’’ standard under the rule as adopted should help ensure that SBS Entities do not disregard facts that call into question the validity of the representation.193 Further, this standard also is consistent with the standard adopted by the CFTC under which a Swap Entity cannot rely on a representation if the Swap Entity has information that would cause a reasonable person to question the accuracy of the representation.194 This consistency will result in efficiencies for entities that have already established infrastructure to comply with the CFTC standard. The rule as adopted would permit an SBS Entity to reasonably rely on the representations of a counterparty or its representative to satisfy its due diligence obligations under the business conduct rules, including Rules 15Fh– 2(a) and (d), 15Fh–3(a), (e) and (f), 15Fh–4 and 15Fh–5. We are not requiring a specified level of detail for these representations but note that they should be detailed enough to permit the SBS Entity to form a reasonable basis for believing that the applicable requirement is satisfied.195 Nothing in our rules would prohibit an arrangement under which the parties agree that representations will be provided in counterparty relationship documentation, and that they will update such representations with any material changes, as suggested by commenters.196 We are not accepting the commenter’s suggestion that we provide that in every instance an SBS Entity that is also registered with the CFTC as a Swap Entity will be permitted to rely on a counterparty’s pre-existing written representations with respect to the CFTC’s business conduct rules to satisfy its due diligence requirements under the Commission’s business conduct rules, provided that the SBS Entity
provides notice of such reliance to the counterparty and the counterparty does not object.197 Rule 15Fh–1(b) as adopted sets out the standard pursuant to which an SBS Entity can rely on representations to satisfy its due diligence obligations, and does not speak to the process the SBS Entity will need to undertake to meet the standard. The question of whether reliance on the representations that had been obtained with respect to the CFTC business conduct rules, including the process by which the SBS Entity makes that determination, would satisfy an SBS Entity’s obligations under our business conduct rules will depend on the facts and circumstances of the particular matter.198 We are not adopting the suggestion of one commenter that ‘‘the knowledge test should be applied only to individuals with knowledge of the SBS transaction.’’ 199 In some instances it may be appropriate to look only to the knowledge of persons involved in a security-based swap transaction for purposes of determining whether an SBS Entity reasonably relied on representations. However, the determination whether to impute to the individuals that are involved in a securities-based swap transaction knowledge that may be available in other parts of the SBS Entity will depend on the facts and circumstances of the particular matter. At a minimum, an SBS Entity seeking to rely on representations cannot ignore information that would cause a reasonable person to question the accuracy of those representations. E. Policies and Procedures Alternative

1. Proposal
   The Commission solicited comment on whether an SBS Entity should be deemed to have complied with a requirement under the proposed rules if it has: (1) Established and maintained written policies and procedures, and a documented system for applying those policies and procedures, that are reasonably designed to achieve compliance with the requirement; and (2) reasonably discharged the duties and obligations required by the written policies and procedures and documented system, and did not have a reasonable basis to believe that the written policies and procedures and documented system were not being followed.200

201See CFA, supra note 5.
202 Id.
203 Id.
204 Id.
205See CFA, supra note 5.
206See, e.g., Rule 15Fh–3(f)(3), discussed in
Section II.G.3, infra, under which an SBS Dealer
can generally satisfy its obligations by obtaining representations with respect to certain suitability requirements, and Rule 15Fh–5(b), discussed in
Section II.H.6, infra, under which an SBS Entity can
generally satisfy its obligations with respect to having a reasonable basis to believe that a special entity counterparty has a qualified independent representative. 207See SIFMA (August 2015), supra note 5. 208 Id. 209See CFA, supra note 5; FIA/ISDA/SIFMA, supra note 5; SIFMA (August 2015), supra note 5. 210See CFA, supra note 5; SIFMA (August 2015), supra note 5. 211See CFA, supra note 5. 212 Id. 213See FIA/ISDA/SIFMA, supra note 5. 214 Id. 215See SIFMA (August 2015), supra note 5.
2. Comments on the Proposal
One commenter addressed the policies and procedures alternative.201 The commenter opposed the alternative, arguing that it would reward the process of achieving compliance more than actually achieving compliance.202 However, the commenter asserted that SBS Entities should be required to establish, maintain, document and enforce appropriate policies and procedures, and that the Commission should take them into account when determining the sanctions for violations.203 The commenter argued that the requirement regarding policies and procedures should supplement the requirements or prohibitions in the rules, not supplant them.204
3. Response to Comments and Final
Rule
After taking into consideration the comment, the Commission is not adopting a general policies and procedures safe harbor. The Commission acknowledges the importance of policies and procedures as a tool to achieving compliance with applicable regulatory and other requirements but agrees with the commenter that a general policies and procedures safe harbor could have the unintended effect of rewarding the process towards achieving compliance more than the result of actually achieving compliance.205 As discussed more fully herein, Rule 15Fh–3(h) requires that an SBS Entity establish, maintain and enforce written policies and procedures that are reasonably designed to prevent violations of applicable securities laws, and rules and regulations thereunder. Rule 15Fh–3(h) also provides an affirmative defense to a charge of failure to supervise diligently based, in part, on the establishment and maintenance of these policies and procedures, where the entity has reasonably discharged the duties and obligations required by the written policies and procedures and documented system, and did not have a reasonable basis to believe that the written policies and procedures and documented system were not being followed. In addition, consistent with the approach of the CFTC, we are providing targeted representations￾based safe harbors,206 which should result in efficiencies for entities that have already established infrastructure to comply with the CFTC rules. F. Definitions

1. Proposed Rule
   Proposed Rules 15Fh–2(a), (c), (e) and (f), which would define ‘‘act as an advisor to a special entity,’’ ‘‘independent representative of a special entity,’’ ‘‘special entity,’’ and ‘‘subject to a statutory disqualification,’’ respectively are discussed in Section II.H below in the context of the special entity requirements. Proposed Rule 15Fh–2(b) would define ‘‘eligible contract participant’’ to mean any person defined in Section 3(a)(66) of the Exchange Act. Proposed Rule 15Fh–2(d) would provide that ‘‘security-based swap dealer or major security-based swap participant’’ would include, where relevant, an associated person of the SBS Dealer or Major SBS Participant.
2. Comments on the Proposed Rule
   a. Definitions Relating to the Rules Applicable to Dealings With Special Entities Comments on paragraphs (a), (c), (e) and (f) of proposed Rule 15Fh–2 defining ‘‘act as an advisor,’’ ‘‘independent representative of a special entity,’’ ‘‘special entity’’ and ‘‘subject to a statutory disqualification,’’ respectively are addressed below in
   Section II.H.
   b. Eligible Contract Participant One commenter addressed proposed Rule 15Fh–2(b) defining ‘‘eligible contract participant.’’ 207 The commenter pointed out an error in the cross-reference in the rule to the Exchange Act definition and recommended adding a reference to applicable rules and interpretations of the Commission and the CFTC.208
   c. SBS Dealer or Major SBS Participant
   Three commenters addressed proposed Rule 15Fh–2(d) defining SBS Dealer or Major SBS Participant.209 Two commenters suggested that the Commission adopt a broader definition that would apply the business conduct rules to any person acting on behalf of the SBS Entity, including an associated person, consistent with the CFTC business conduct rules.210 One commenter asserted that this would prevent SBS Entities from ‘‘evad[ing] the business conduct rules by doing through third parties what they would not be permitted to do directly.’’ 211 The commenter also discouraged the Commission from seeking to identify all of the requirements that would apply to an associated person of an SBS Entity, suggesting that the rules should apply in any circumstance where an SBS Entity acts through or by means of an associated person or other party.212 A third commenter recommended that the Commission clarify that associated persons of an SBS Entity should only be directly responsible for complying with the disclosure rules and rules involving interactions with counterparties, and should not be responsible for complying with internal business conduct standards, such as the rules relating to supervision and requiring designation of a CCO.213 The commenter also suggested that the Commission define ‘‘associated person’’ as ‘‘an associated person of an [SBS Dealer] or [Major SBS Participant] through whom the [SBS Dealer] or [Major SBS Participant] acts.’’ 214
3. Response to Comments and Final
   Rule
   The Commission is moving the definition of ‘‘independent representative of a special entity’’ from Rule 15Fh–2 to Rule 15Fh–5 and accordingly, re-designating paragraphs (d) through (f) of Rule 15Fh–2 as paragraphs (c) through (e). The definition of ‘‘independent representative of a special entity’’ and paragraphs (a), (d) and (e) of Rule 15Fh– 2 (defining ‘‘act as an advisor,’’ ‘‘special entity’’ and ‘‘subject to a statutory disqualification,’’ respectively) are addressed below in Section II.H. The Commission is adopting Rule 15Fh–2(b) with two modifications. In response to a suggestion from a commenter,215 the Commission is correcting a typographical error in the cross-reference to the Exchange Act definition of ‘‘eligible contract participant’’ in the proposed rule. The proposed rule referenced ‘‘Section 3(a)(66)’’ of the Exchange Act, but should have referenced Section 3(a)(65) of the Exchange Act, which defines an

216Section 712(d)(1)(A) of the Dodd-Frank Act provides, among other things, that the CFTC and the Commission, in consultation with the Board of Governors, shall further define the term ‘‘eligible contract participant.’’ Public Law 111–203, 124 Stat. 1376 (2010). Moreover, Section 712(d)(4) provides that any interpretation of, or guidance by either Commission regarding, a provision of Title VII of the Dodd Frank Act shall be effective only if issued jointly by the CFTC and the Commission, after consultation with the Board of Governors, if this title requires the Commissions to issue joint regulations to implement the provision. Id. 217See Definitions Adopting Release, supra note 115. 218Section 3(a)(70)(A)(ii) of the Exchange Act, 15 U.S.C. 78c(a)(70)(A)(ii). 219See CFA, supra note 5; SIFMA (August 2015), supra note 5. 220See FIA/ISDA/SIFMA, supra note 5. 221 15 U.S.C. 78o–10(h)(3)(A). 222Proposed Rule 15Fh–3(a)(1). See Section 6(l) of the Exchange Act (making it unlawful to effect a security-based swap transaction with or for a person that is not an ECP unless such transaction is effected on a registered national securities exchange). See also Section 5(e) of the Securities Act of 1933, 15 U.S.C. 77e(e)) (‘‘unless a registration statement meeting the requirements of section 10(a) [of the Securities Act] is in effect as to a security￾based swap, it shall be unlawful for any person . . . to offer to sell, offer to buy or purchase or sell a security-based swap to any person who is not an eligible contract participant’’). See also Registration and Regulation of Security-Based Swap Execution Facilities, Exchange Act Release No. 63825 (Feb. 2, 2011), 76 FR 10948 (Feb. 28, 2011) (‘‘SEF Registration Proposing Release’’) (proposed Rule 809 would limit SEF participation to registered SBS Dealers, Major SBS Participants, brokers and ECPs). 223Proposed Rule 15Fh–3(a)(2). See generally
Section 15F(h)(1)(D) of the Exchange Act, 15 U.S.C.
78o–10(h)(1)(D) (authorizing the Commission to prescribe business conduct standards that relate to ‘‘such other matters as the Commission determines to be appropriate’’). 224See CFA, supra note 5; FIA/ISDA/SIFMA, supra note 5; SIFMA (August 2015), supra note 5. 225See CFA, supra note 5. 226 Id. The commenter also recommended that the Commission conform to the CFTC’s then-pending proposal, which would have required counterparty status verification in any transaction other than anonymous transactions on a swap execution facility. We note, however, that the CFTC subsequently adopted a rule that clarified that the exemption from verification applies to all transactions on a designated contract market (‘‘DCM’’) and to anonymous transactions on a swap execution facility. See CFTC Adopting Release, 77 FR at 9757, supra note 21. 227See CFA, supra note 5. 228See FIA/ISDA/SIFMA, supra note 5; SIFMA (August 2015), supra note 5. 229SIFMA (August 2015), supra note 5. eligible contract participant. Section 3(a)(65) of the Exchange Act, in turn, provides that the term eligible contract participant ‘‘has the same meaning as in
section 1a of the Commodity Exchange
Act.’’ We have also revised the definition in response to the same commenter’s request that we add a reference to applicable rules and interpretations of the Commission and the CFTC to incorporate the joint SEC– CFTC rulemaking adopted in May
2012.216 In this regard, we note that the
Commission and the CFTC jointly further defined the term eligible contract participant by adopting rules and regulations under the Commodity Exchange Act.217 Thus, as adopted, the definition of ‘‘eligible contract participant’’ in Rule 15Fh-2(b) refers to:
‘‘any person as defined in Section 3(a)(65) of the Act and the rules and regulations thereunder and in Section 1a of the Commodity Exchange Act and the rules and regulations thereunder.’’ After considering the comments, the Commission is adopting Rule 15Fh–2(d) as proposed, re-designated as Rule 15Fh–2(c). The statute defines the term ‘‘associated person of a security-based swap dealer or major security-based swap participant’’ to include ‘‘any person directly or indirectly controlling, controlled by, or under common control with’’ an SBS Dealer or Major SBS Participant.218 While the SBS Entity remains ultimately responsible for compliance with the business conduct standards, to the extent that an SBS Entity acts through, or by means of, an associated person of that SBS Entity, the associated person must comply as well with the applicable business conduct standards. The Commission declines to modify the definition, as requested by some commenters, to apply to persons acting on behalf of the SBS Entity.219 We believe it unnecessary to expand the definition because, as noted above, the SBS Entity remains ultimately responsible for compliance with the business conduct standards, whether the SBS Entity is acting through, or by means of, an associated person or other person. In response to the commenter that raised concerns that associated persons should not be responsible for complying with ‘‘internal’’ business conduct standards,220 the Commission notes that Rule 15Fh–2(c) provides that the definition of an SBS Entity includes associated persons of the SBS Entity ‘‘where relevant.’’ Certain rules, including the so-called ‘‘internal’’ business conduct rules (e.g., Rule 15Fh– 3(h) (supervision) and Rule 15Fk–1 (designation of CCO)) may apply to some but not all associated persons of an SBS Entity, and the registrant remains ultimately responsible for compliance with all of the business conduct rules that are the subject of this rulemaking. G. Business Conduct Requirements

1. Counterparty Status
   a. Proposed Rule
   Section 15F(h)(3)(A) of the Exchange
   Act directs that business conduct requirements adopted by the Commission shall establish a duty for an SBS Entity to verify that any counterparty meets the eligibility standards for an ECP.221 Proposed Rule 15Fh–3(a)(1) would require an SBS Entity to verify that a counterparty whose identity is known to an SBS Entity prior to the execution of the transaction meets the eligibility standards for an ECP, before entering into a security-based swap with that counterparty other than on a registered national securities exchange or SEF.222 Proposed Rule 15Fh–3(a)(2) would require an SBS Entity to verify whether a counterparty whose identity is known to the SBS Entity prior to the execution of the transaction is a special entity before entering into a security-based swap with that counterparty, no matter where the transaction is executed.223 b. Comments on the Proposed Rule Three commenters addressed proposed Rule 15Fh–3(a).224 One opposed limiting the application of the rule to known counterparties, noting that this would invite SBS Entities to promote anonymous off-exchange transactions that would allow them to avoid obligations otherwise owed to special entities.225 The commenter asserted that the only exemption from the verification requirement should be for transactions on a registered exchange or SEF, and that for such transactions, if the SBS Entity knows the identity of the counterparty prior to the transaction and has reason to believe it may not be an ECP, the SBS Entity should be required to undertake an additional inquiry to verify the counterparty’s status.226 The commenter also recommended that verification take place before the SBS Entity offers to enter into a transaction, rather than before execution.227 Two commenters recommended that the exception for transactions on a registered exchange or SEF be broadened to apply to the verification of special entity status in addition to the verification of ECP status.228 One commenter also recommended expanding the exception to include exempt SEFs, such as a foreign SEF that the Commission determines to be subject to a comparable home country regime.229 Additionally, as part of a series of recommendations to harmonize with the CFTC’s treatment of employee benefit plans defined in Section 3 of ERISA, the commenter suggested requiring an SBS Entity to verify whether a counterparty is eligible to

230 Id. See also discussion in Section III.H.1, infra. 231FIA/ISDA/SIFMA, supra note 5. 232 Id. 233 Id. 234See Proposing Release, 76 FR at 42403, supra note 5. 15 U.S.C. 78f(l) (‘‘[i]t shall be unlawful for any person to effect a transaction in a security￾based swap with or for a person that is not an eligible contract participant, unless such transaction is effected on a [registered] national securities exchange’’). 235See also Section 5(e) of the Securities Act, 15 U.S.C. 77e(e) (‘‘unless a registration statement meeting the requirements of [section 10(a) of the Securities Act] is in effect as to a security-based swap, it shall be unlawful for any person . . . to offer to sell, offer to buy or purchase or sell a security-based swap to any person who is not an eligible contract participant’’). This rulemaking does not address and has no applicability with respect to the requirements under the Securities Act applicable to security-based swap transactions. 236See Proposing Release, 76 FR at 42404, supra note 5. 237See Section II.B. 238See Proposing Release, 76 FR at 42404, supra note 5. elect to be a special entity, and if so, to notify such counterparty.230 The other commenter also recommended further narrowing the application of the rule by excluding transactions in which the identity of the counterparty is known just prior to execution, arguing that an SBS Entity would have insufficient time to exchange representations with the counterparty or otherwise verify the counterparty’s status in those situations.231 Alternatively, the commenter requested that the Commission require SEFs to adopt rules that would permit verification of the counterparty’s status.232 The commenter also opposed establishing specific documentation requirements regarding counterparty status, asserting that it would not allow for flexible risk management and investment decisions through private contractual negotiation.233
c. Response to Comments and Final
Rule
After considering the comments, the Commission is adopting Rule 15Fh–3(a) with certain modifications. Rule 15Fh–3(a)(1), as adopted, requires an SBS Entity to verify the ECP status of a counterparty before entering into a security-based swap with that counterparty other than a transaction executed on a registered national securities exchange. We are not adopting the further provision of the proposed rule that would have limited the application of the verification requirement to a counterparty ‘‘whose identity is known to the SBS Entity prior to the execution of the transaction.’’ We also are not adopting the provision of the proposed rule that would have provided that the verification requirement does not apply to transactions executed on a SEF. These changes reflect the Commission’s further consideration of the regulatory framework provided by the Dodd-Frank Act. In particular, Section 6(l) of the Exchange Act makes it unlawful to effect a transaction in a security-based swap with or for a person that is not an ECP, unless the transaction is effected on a registered national securities exchange.234 Section 6(l) of the Exchange Act does not provide an exception for transactions effected on SEFs, or for transactions where the identity of a counterparty is not known to the SBS Entity prior to the execution of the transaction. Thus, upon further consideration of the proposed rule in the context of the statute, we are not providing an exception for transactions executed other than on a registered national securities exchange, and we are not limiting the requirement to known counterparties because Section 6(l) of the Exchange Act does not contain a similar exception or limitation, and we do not wish to suggest to SBS Entities that Section 6(l) is similarly limited. In this regard, we note that, even with these modifications, the scope of
Section 6(l) of the Exchange Act
(‘‘unlawful to effect a transaction in a security-based swap’’) is broader than the activity covered by Rule 15Fh– 3(a)(1) (‘‘before entering into a security￾based swap’’), and that SBS Entities, and other market participants, have an independent obligation under Section 6(l) for any action covered by that
section.235
As noted in the Proposing Release, an SBS Entity that has complied with the requirements of Rule 15Fh–3(a)(1) concerning a counterparty’s eligibility to enter into a particular security-based swap fulfills its obligations under the rule for that security-based swap, even if the counterparty subsequently ceases to meet the eligibility standards for an ECP during the term of that security￾based swap.236 However, an SBS Entity will need to verify the counterparty’s status for any subsequent action covered by Rule 15Fh–3(a)(1), (which it could do by relying on written representations from the counterparty, as described above). An SBS Entity could satisfy this obligation by relying on a representation in a master or other agreement that is renewed or ‘‘brought down’’ as of the date of the subsequent action covered by 15Fh–3(a)(1). In this manner, counterparties will be able to make representations about their status at the outset of a relationship, and can undertake to ‘‘bring down’’ that representation for each relevant action involving a security-based swap. In addition, as noted above, market participants have an independent obligation under Section 6(l) of the Exchange Act for any action covered by that section. Rule 15Fh–3(a)(2), as adopted, requires an SBS Entity to verify whether a counterparty is a special entity before entering into a security-based swap transaction with that counterparty, unless the transaction is executed on a registered or exempt SEF or registered national securities exchange and the SBS Entity does not know the identity of the counterparty at a reasonably sufficient time prior to execution of the transaction to permit the SBS Entity to comply with the obligations of the rule. The rule as proposed would have limited the verification of special entity status to counterparties whose identity is known to the SBS Entity prior to the execution of the security-based swap transaction. Because the question of special entity status figures most significantly in connection with the application of the special entity rules (Rules 15Fh–4, 15Fh–5 and 15Fh–6), we have modified the special entity verification rule to track the exceptions to those rules.237 Accordingly, the verification of special entity status requirements will not apply where the transaction is executed on a registered or exempt SEF or registered national securities exchange, and the SBS Entity does not know the identity of the counterparty at a reasonably sufficient time prior to execution of the transaction to permit the SBS Entity to comply with the obligations of the rule. An SBS Entity that has complied with the requirements of Rule 15Fh–3(a)(2) concerning verification whether a counterparty is a special entity before entering into a particular security-based swap with that counterparty fulfills its obligations under the rule for that security-based swap.238 However, an SBS Entity will need to verify the counterparty’s status for any subsequent action covered by
Rule 15Fh–3(a)(2) (which it could do by relying on written representations from the counterparty, as described above). An SBS Entity could satisfy this obligation by relying on a representation in a master or other agreement that is renewed or ‘‘brought down’’ as of the date of the subsequent action covered by 15Fh–3(a)(2). In this manner, counterparties will be able to make representations about their status at the outset of a relationship, and can undertake to ‘‘bring down’’ that

239As explained in Section II.H.1, we are interpreting the definition of ‘‘special entity’’ to distinguish entities that are ‘‘defined in’’ section 3 of ERISA but not ‘‘subject to’’ regulation under Title I of ERISA. Our rules as adopted would include within the ‘‘special entity’’ definition entities such as church plans and plans maintained solely for the purpose of complying with applicable workmen’s compensation laws, unemployment compensation, or disability insurance laws but allow them to elect not to be treated as ‘‘special entities.’’ 240See Section II.H, infra. 241See CFA, supra note 5. 242See Proposing Release, 76 FR at 42403, supra note 3. The Commission separately has proposed rules regarding recordkeeping and reporting requirements for SBS Entities that would require an SBS Entity to keep records of its verification. See Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based Swap Participants, and Broker-Dealers; Capital Rule for Certain Security-Based Swap Dealers, Exchange Act Release No. 71958 (Apr. 17, 2014), 79 FR 25193, 25208 and 25217–25218 (May 2, 2014) (‘‘Recordkeeping Release’’) (proposed Rules 18a– 5(a)(17) and 18a–5(b)(13)). 243 15 U.S.C. 78o–10(h)(3)(B). 244 15 U.S.C. 78o–10(h)(3)(B). 245 7 U.S.C. 6s(h)(3)(B). See Proposing Release, 76 FR at 42405, supra note 3. 246See Better Markets (August 2011), supra note 5; CFA, supra note 5. 247See Better Markets (August 2011), supra note 5. 248See CFA, supra note 5. 249 Id. 250See SIFMA (August 2015), supra note 5. representation for each relevant action involving a security-based swap. Additionally, the Commission is adding a new paragraph (a)(3), special entity election, which requires an SBS Entity, in verifying the special entity status of a counterparty pursuant to Rule 15Fh–3(a)(2), to verify whether a counterparty is eligible to elect not to be a special entity as provided for in the adopted special entity definition in Rule 15Fh–2(d)(4), and if so, notify such counterparty. This change is intended to provide the greatest protections to the broadest categories of special entities, while still allowing them the flexibility to elect not to avail themselves of special entity protections.239 Although the Dodd-Frank Act does not specifically require an SBS Entity to verify whether a counterparty is a special entity or is eligible to elect not to be a special entity, the Commission believes that such verification will help to ensure the proper application of the business conduct rules that apply to SBS Entities dealing with special entities.240 The Commission is not revising the rule, as suggested by a commenter,241 to require that verification of special entity counterparty status take place before an SBS Entity ‘‘offers’’ to enter into a transaction. We agree with the commenter that it is important for an SBS Entity to verify special entity status ‘‘as soon as possible . . . to ensure timely compliance with the other obligations that
accompany transactions with these entities.’’ As explained in
Section II.A, when the rules refer to a
‘‘counterparty’’ of the SBS Entity, the term ‘‘counterparty’’ includes a potential counterparty where compliance with the obligation is required before the SBS Entity and the ‘‘counterparty’’ have actually entered into the security-based swap. The Commission is not specifying the manner of documentation or procedures required for compliance with Rule 15Fh–3(a).242 Among other things, an SBS Entity could rely on representations in accordance with Rule 15Fh–1(b). For example, an SBS Entity could verify that a counterparty is an ECP by obtaining a written representation from the counterparty as to specific facts about the counterparty (e.g., that it has $100 million in assets) to conclude that the counterparty is an ECP, unless the SBS Entity has information that would cause a reasonable person to question the accuracy of the representation. Similarly, an SBS Entity could seek to verify that a counterparty is not a special entity by obtaining a written representation from the counterparty that it does not fall within any of the enumerated categories of persons that are ‘‘special entities’’ for purposes of
Section 15F of the Exchange Act. The
SBS Entity also could seek to obtain a representation in writing from the counterparty if it elects not to be a special entity, as provided for in the special entity definition in Rule 15Fh– 2(d)(4). Consistent with Rule 15Fh–1(b), however, an SBS Entity cannot disregard information that would cause a reasonable person to question the accuracy of the representation.
2. Disclosure
Section 15F(h)(3)(B) of the Exchange
Act broadly requires that business conduct requirements adopted by the Commission require disclosures by SBS Entities to counterparties of information related to ‘‘material risks and characteristics’’ of the security-based swap, ‘‘material incentives or conflicts of interest’’ that an SBS Entity may have in connection with the security-based swap, and the ‘‘daily mark’’ of a security-based swap.243 a. Disclosure Not Required When the Counterparty is an SBS Entity or a Swap Entity
i. Proposed Rules
Section 15F(h)(3)(B) provides that
disclosures under that section are not required when the counterparty is ‘‘a security-based swap dealer, major security-based swap participant, security-based swap dealer, or major security-based swap participant.’’ 244 As explained in the Proposing Release, the Commission believes that the repetition of the terms ‘‘security-based swap dealer and major security-based swap participant’’ in this Exchange Act provision is a drafting error, and that Congress instead intended an exclusion identical to that found in the Commodity Exchange Act, which provides that these general disclosures are not required when the counterparty is ‘‘a swap dealer, major swap participant, security-based swap dealer, or major security-based swap participant.’’ 245 Accordingly, proposed Rule 15Fh–3(b) (information about material risks and characteristics, and material incentives or conflicts of interests), proposed Rule 15Fh–3(c) (the daily mark), and proposed Rule 15Fh– 3(d) (clearing rights) would not apply whenever the counterparty is an SBS Entity or Swap Entity.
ii. Comments on the Proposal
Two commenters submitted comments on the application of the disclosure requirements when the counterparty is an SBS Entity or Swap Entity.246 One commenter asserted that the disclosure requirements should apply even when the counterparty is also an SBS Entity.247 Another commenter agreed with the Commission’s interpretation that Congress intended the exclusion to apply to transactions with other SBS Entities and Swap Entities.248 However, in response to a specific request for comment, the commenter asserted that the Commission should not exempt transactions with other entities (such as banks or broker-dealers) from the disclosure requirements, or otherwise subject them to different disclosure standards, because while more sophisticated banks or brokers may benefit, less sophisticated parties would be left without adequate protections.249 Additionally, as discussed in Section II.B, a commenter advocated for adding exceptions to the disclosure requirements in Rules 15Fh–3(b) and (d) to cover security-based swaps that are intended to be cleared and that are either (1) executed on a registered national securities exchange or registered or exempt SEF and required to be cleared pursuant to Section 3C of the Exchange Act, or (2) anonymous.250 The commenter argued that this would harmonize the scope of the Commission’s disclosure requirements with no-action relief provided by the

251 Id.
252 Id. See Swaps Intended to Be Cleared, CFTC Letter No. 13–70 (Nov. 15, 2013), available at http:// www.cftc.gov/idc/groups/public/@lrlettergeneral/ documents/letter/13-70.pdf. 253Section 15F(h)(3)(B) of the Exchange Act is silent regarding both form and timing of disclosure. See 15 U.S.C. 78o–10(h)(3)(B). 254See ABC, supra note 5; CFA, supra note 5; FIA/ISDA/SIFMA, supra note 5; Better Markets (August 2011), supra note 5; SIFMA (August 2015), supra note 5. 255See FIA/ISDA/SIFMA, supra note 5. 256See ABC, supra note 5. 257See FIA/ISDA/SIFMA, supra note 5. 258 Id. 259 Id. 260See Better Markets (August 2011), supra note 5; CFA, supra note 5. 261See Better Markets (August 2011), supra note 5; CFA, supra note 5. 262See Better Markets (August 2011), supra note 5. 263See CFA, supra note 5. 264 Id. 265See SIFMA (August 2015), supra note 5. 266 Id. 267See CFA, supra note 5. 268See CFA, supra note 5. CFTC with respect to its parallel requirements.251
iii. Response to Comments and Final
Rules
After considering the comments, the Commission is adopting, as proposed, the exceptions from the disclosure requirements under Rule 15Fh–3(b) (information about material risks and characteristics, and material incentives or conflicts of interests), Rule 15Fh–3(c) (the daily mark), and Rule 15Fh–3(d) (clearing rights) for transactions in which the counterparty is an SBS Entity or Swap Entity. We are not adopting the suggestion that disclosure requirements apply even when the counterparty is an SBS Entity or Swap Entity. We believe that an SBS Entity would be well￾positioned to negotiate with another SBS Entity, and nothing in our rules precludes an SBS Entity from requesting such disclosures. In addition, the exceptions under the rules as adopted parallel the exceptions in the analogous CFTC rules. This consistency will result in efficiencies for entities that have already established infrastructure to comply with the CFTC standard. For the reasons discussed in Section II.B, we are not providing additional exceptions for transactions that are intended to be cleared.252 b. Timing and Manner of Certain Disclosures and Scope of Disclosure Rules
i. Proposed Rules
Proposed Rule 15Fh–3(b) would require that disclosures regarding material risks and characteristics and material incentives or conflicts of interest be made to potential counterparties before entering into a security-based swap, but would not mandate the specific manner in which those disclosures are made as long as they are made ‘‘in a manner reasonably designed to allow the counterparty to assess’’ the information being provided.253 Proposed Rule 15Fh–3(d) similarly would require that disclosures regarding certain clearing rights be made before entering into a security￾based swap, but would not mandate the manner of disclosure. To the extent such disclosures were not otherwise provided to the counterparty in writing prior to entering into a security-based swap, proposed Rules 15Fh–3(b)(3) and 15Fh–3(d)(3) would require an SBS Entity to make a written record of the non-written disclosures made pursuant to proposed Rules 15Fh–3(b) and 15Fh– 3(d), respectively, and provide a written version of these disclosures to the counterparty in a timely manner, but in any case no later than the delivery of the trade acknowledgement of the particular transaction.
ii. Comments on Proposed Rules
Timing and Manner of Certain Disclosures Five commenters addressed the timing and manner of required disclosures.254 One commenter recommended allowing disclosure requirements to be satisfied by the execution of a master agreement and provision of a trade acknowledgment.255 Similarly, another commenter urged the Commission to permit all required disclosures to be made upfront at the beginning of a trading relationship, rather than on a transaction-by￾transaction basis.256 Alternatively, if the Commission requires disclosure beyond the master agreement and trade acknowledgment, the first commenter encouraged the Commission to permit the use of standardized disclosures.257 The commenter also recommended that the Commission not dictate the timing of required disclosures and permit SBS Entities to make required disclosures in advance, as opposed to immediately prior to the execution of a trade, so as not to interfere with the parties’ desired timing.258 However, the commenter noted that advance disclosure requirements would be infeasible for transactions executed on a SEF or exchange, or where the counterparty is known only immediately prior to or after execution.259 In contrast, two commenters advocated for more specific requirements with respect to the timing and manner of disclosure.260 Both recommended that disclosure be required in writing and at a ‘‘reasonably sufficient time’’ prior to the execution of the transaction to allow counterparties to evaluate the information before deciding whether to enter the transaction.261 One commenter also asserted that disclosure should be in a clear and intelligible format that permits comparison between derivatives offered by different market participants.262 The other commenter opposed allowing SBS Entities to satisfy disclosure requirements through entry into a master agreement and provision of a trade acknowledgement, arguing that key information could be lost in the fine print of legal documents.263 At a minimum, if a master agreement is used, the commenter recommended that the required disclosures regarding material risks and characteristics and material incentives or conflicts of interest be provided in a clearly labeled, separate narrative incorporated into the overall document, and that all key issues be disclosed before the trade is executed and not in a post-trade acknowledgement.264 Another commenter also recommended that disclosure regarding material risks and characteristics and material incentives or conflicts of interest be required at a ‘‘reasonably sufficient time’’ prior to the execution of the transaction to harmonize with the CFTC’s disclosure requirements.265 Additionally, as discussed in Section II.B, the commenter advocated for adding exceptions to the disclosure requirements in Rules 15Fh–3(b) and (d) to cover security-based swaps that are intended to be cleared and that are either: (1) Executed on a registered national securities exchange or registered or exempt SEF and required to
be cleared pursuant to Section 3C of the Exchange Act, or (2) anonymous.266 Written Records of Non-Written Disclosure One commenter addressed the written record requirements in proposed Rules 15Fh–3(b)(3) and 15Fh–3(d)(3).267 The commenter opposed permitting SBS Entities to make required disclosures orally, asserting that oral disclosure fails to promote pre-trade transparency and makes enforcement more difficult, and that SBS Entities may minimize disclosure of conflicts of interest when making them orally.268 The commenter also argued that the Commission’s approach to permitting oral disclosure ‘‘doesn’t even have the benefit of saving

269 Id.
270See FIA/ISDA/SIFMA, supra note 5. 271See BlackRock, supra note 5; MFA, supra note 5. 272See BlackRock, supra note 5. 273See MFA, supra note 5. 274See Better Markets (August 2011), supra note 5; CFA, supra note 5. 275See Proposing Release, 76 FR at 42406, supra note 3. 276See Trade Acknowledgement and Verification of Security-Based Swap Transactions, Exchange Act Release No. 63727 (Jan. 14, 2011), 76 FR 3859 (Jan. 21, 2011) (proposing Rule 15Fi–1(c)(1), which would require a trade acknowledgement to be provided within 15 minutes of execution for a transaction that has been executed and processed electronically; within 30 minutes of execution for a transaction that is not electronically executed, but that will be processed electronically; and within 24 hours of execution for a transaction that the SBS Entity cannot process electronically). 277See Proposing Release, 76 FR at 42406, supra note 3; FIA/ISDA/SIFMA, supra note 5. 278When SBS Entities rely on electronic media, their counterparties generally should have the capability to effectively access all of the information required by Rule 15Fh–3(b)(3) in a format that is understandable but not unduly burdensome for the counterparty. See generally Use of Electronic Media by Broker-Dealers, Transfer Agents and Investment Advisers for Delivery of Electronic Information, Securities Act Release No. 7288 (May 9, 1996), 61 FR 24644 (May 15, 1996). See also Use of Electronic Media, Exchange Act Release No. 42728 (Apr. 28, 2000), 65 FR 25843 (May 4, 2000). 279See Proposing Release, 76 FR at 42406, supra note 3. 280See FIA/ISDA/SIFMA, supra note 5. 281See Proposing Release, 76 FR at 42406, supra note 3. labor, since the Commission proposes to require after-the-fact written disclosures of any information not made in writing prior to the transaction.’’ 269 Scope of Disclosure Rules If the Commission requires disclosure beyond the master agreement and trade acknowledgment, one commenter encouraged the Commission to exclude from such requirements counterparties that are regulated entities such as banks, broker-dealers, and investment advisers.270 Two other commenters argued that Major SBS Participants should not be subject to the disclosure requirements because they will be transacting with counterparties at arm’s length.271 Alternatively, one commenter suggested exempting transactions between Major SBS Participants and SBS Dealers from the disclosure requirements, and allowing all other counterparties to opt out of certain disclosure requirements, in particular receiving written records of non-written disclosure.272 Similarly, another commenter suggested that ECPs should have the option of opting-out of disclosures.273
iii. Response to Comments and Final
Rules
After considering the comments, the Commission is adopting the rules substantially as proposed, with certain modifications. In response to commenters’ concerns, the Commission is requiring that an SBS Entity make the disclosures required by Rule 15Fh–3(b) regarding material risks and characteristics and material incentives or conflicts of interest at a reasonably sufficient time prior to entering into a security-based swap to allow the counterparty to assess the disclosures. This will also be consistent with the CFTC’s timing requirement for its parallel disclosures rules, resulting in efficiencies for entities that have already established infrastructure to comply with the CFTC standard. With respect to the manner of disclosure, we are not adopting the commenters’ suggestion that we impose more specific requirements with respect to the timing and manner of disclosure.274 Instead, the Commission continues to believe it is appropriate to require only that disclosures regarding material risks and characteristics and material incentives or conflicts of interest be made ‘‘in a manner reasonably designed to allow the counterparty to assess’’ the information being provided pursuant to Rule 15Fh– 3(b). As noted in the Proposing Release, this provision is intended to require that disclosures be reasonably clear and informative as to the relevant material risks or conflicts that are the subject of the disclosure, and is not intended to impose a requirement that disclosures be tailored to a particular counterparty or to the financial, commercial or other status of that counterparty.275 After considering the comments, the Commission is also adopting as proposed the requirements in Rules 15Fh–3(b)(3) and 15Fh–3(d)(3) that an SBS Entity make a written record of any non-written disclosures made pursuant to Rules15Fh–3(b) and 15Fh–3(d), respectively, and provide a written version of these disclosures to the counterparty in a timely manner, but in any case no later than the delivery of the trade acknowledgement 276 of the particular transaction. As noted in the Proposing Release and suggested by commenters, the Commission understands that security-based swaps generally are executed under master agreements, with much of the transaction-specific disclosure provided over the telephone, in instant messages or in confirmations.277 The Commission believes that parties should have the flexibility to make disclosures by various means, including master agreements and related documentation, telephone calls, emails, instant messages, and electronic platforms.278 Similarly, while we acknowledge the commenter’s concern that SBS Entities may minimize disclosure of conflicts of interest when making them orally, we are not persuaded that requiring all disclosures be provided in writing prior to the parties’ entering into a security￾based swap would be necessary to provide protections under the rule as adopted. We further note that Rule 15Fh–3(b)(3), discussed in Section
II.G.2.c, separately requires that an SBS Entity provide a written record of non￾written disclosures no later than the delivery of the trade acknowledgement of the particular transaction. Accordingly, the Commission anticipates that SBS Entities may elect to make certain required disclosures of material information to their counterparties in a master agreement or other written document accompanying such agreement. While certain forms of disclosure may be highly standardized, certain provisions may need to be tailored to the particular transaction, most notably pricing and other transaction-specific commercial terms. As noted in the Proposing Release, the Commission believes this approach is generally consistent with the use of standardized disclosures suggested by industry groups and commenters.279 We do believe, however, that is it is important that the required disclosures be made at a reasonably sufficient time before the execution of the transaction to allow the counterparty to assess the disclosures. While this time may vary depending on the product and the counterparty, we do not believe, as suggested by some commenters, that SBS Entities should be able to rely on trade acknowledgements alone to satisfy certain disclosure requirements.280 As noted in the Proposing Release, however, SBS Entities could rely on trade acknowledgements to memorialize non-written disclosures they made prior to entering into the proposed transaction.281 As discussed in Section II.B above, the Commission is limiting the disclosure requirements in Rules 15Fh– 3(b) and (d) to circumstances where the identity of the counterparty is known to the SBS Entity at a reasonably sufficient time prior to execution of the transaction to permit the SBS Entity to comply with the obligations of the rule. The disclosure requirements in Rules 15Fh–3(b) and (d) will not apply where the identity of the counterparty is not discovered until after the execution of the transaction, or where the SBS Entity learns the identity of the counterparty

282See FIA/ISDA/SIFMA, supra note 5. 283See Section VI.C, infra. 284See Proposing Release, 76 FR at 42409, supra note 3. 285See Barnard, supra note 5; Better Markets (August 2011), supra note 5; CFA, supra note 5; Levin, supra note 5; FIA/ISDA/SIFMA, supra note 5; SIFMA (August 2011), supra note 5; SIFMA (August 2015), supra note 5. 286See Barnard, supra note 5. 287See FIA/ISDA/SIFMA, supra note 5; SIFMA (August 2015), supra note 5. 288See FIA/ISDA/SIFMA, supra note 5. 289 Id. 290 Id. 291See SIFMA (August 2015), supra note 5. 292See Better Markets (August 2011), supra note 5; CFA, supra note 5; Levin, supra note 5. 293See Better Markets (August 2011), supra note 5. 294 Id. 295See CFA, supra note 5. 296See Levin, supra note 5. 297 Id. 298See SIFMA (August 2015), supra note 5. with insufficient time to be able to provide the necessary disclosures to satisfy its obligations under the rule without disrupting or delaying the execution of the transaction. Similarly, for the reasons discussed in Section II.A.3.d, we are not providing additional exceptions or ‘‘opt-out’’ rights. Finally, we are not adopting the suggestion of one commenter that the Commission exclude from the disclosure requirements transactions with counterparties that are regulated entities such as banks, broker-dealers, and investment advisers.282 Because information asymmetries exist in a market for opaque and complex products, even for regulated entities, such disclosures may help inform counterparties concerning the valuations and material risks and characteristics of security-based swaps in the sometimes rapidly changing market environment.283 In this regard, the external business conduct requirements promulgated under
Section 15F(h) are intended to provide
certain protections for counterparties, including information regarding the material risks and characteristics of the security-based swap, any material incentives or conflicts of interest that the SBS Entity may have, and the daily mark of the security-based swap. We believe the rules we are adopting today appropriately apply those requirements so that counterparties receive the benefit of those protections, and so are not providing counterparty exclusions beyond the exception for transactions with SBS Entities and Swap Entities discussed in Section II.G.2.a, infra.
c. Material Risks and Characteristics of
the Security-Based Swap
i. Proposed Rule
Proposed Rule 15Fh–3(b)(1) would require an SBS Entity to disclose the material risks and characteristics of the particular security-based swap, including, but not limited to, the material factors that influence the day￾to-day changes in valuation, the factors or events that might lead to significant losses, the sensitivities of the security￾based swap to those factors and conditions, and the approximate magnitude of the gains or losses the security-based swap would experience under specified circumstances. In the Proposing Release, the Commission also solicited comment regarding whether SBS Entities should be specifically required to provide scenario analysis disclosure.284
ii. Comments on the Proposed Rule
General
Seven commenters addressed the disclosure of material risks and characteristics of security-based swaps.285 One commenter expressed support for the proposed disclosure requirements, agreeing that the disclosure should include any information for which there is a substantial likelihood that a reasonable investor would consider the information to be important in making an investment decision.286 Two commenters argued that the Commission should adopt different or modified disclosure requirements.287 One commenter requested that the Commission clarify in the rule that: (1) The rule only requires disclosure about the material risks and characteristics of the security-based swap itself and not with respect to the underlying reference security or index, and (2) the rule does not require disclosure in relation to any particular counterparty.288 The commenter also asked the Commission to eliminate the proposed requirement that risk disclosures set forth the approximate magnitude of the gains or losses the security-based swap will experience under specified circumstances because this is the functional equivalent of a requirement to provide a scenario analysis, which the commenter does not support (discussed below).289 Additionally, the commenter noted its view that the Commission should not require an SBS Entity to disclose the absence of certain material provisions typically contained in master agreements for security-based swap transactions because master agreements differ and what is ‘‘typical’’ is not clear.290 A second commenter requested a clarification that only material information is required to be disclosed.291 Three commenters argued for additional or modified requirements.292 One asserted that the proposed disclosure obligations are too limited in terms of scope, form, and content.293 The commenter suggested that the disclosure provisions should require ‘‘more complete, timely, and intelligible disclosure of all the risks, costs, and other material information relating to [security-based swap] transactions,’’ including disaggregated prices and risks, listed hedge equivalents, scenario analysis (discussed below), and embedded financing costs.294 Similarly, another commenter requested clarification regarding what material risks and characteristics must be disclosed, arguing that the disclosure should include liquidity risks, the details of (and separate prices for) the standardized component parts of any customized security-based swap, any features of the security-based swap that could disadvantage the counterparty (such as differences in interest rates paid versus those received), and where credit arrangements are built into security-based swaps through forbearance of collateral posting, the embedded credit and its price.295 A third commenter also suggested that the Commission clarify what material risks and characteristics must be disclosed, proposing that SBS Entities be required to disclose any material risk related to the source of a
security-based swap’s assets and any negative view by the SBS Entity itself of the assets’ riskiness.296 The commenter also recommended that SBS Entities be required to disclose the material risks and characteristics not just of the security-based swap itself, but also of any reference securities, indices, or other assets, noting that this disclosure would be particularly important when the security-based swap references unique pools of assets arranged by the SBS Entity.297 Another commenter, writing after the CFTC adopted its final rules, recommended that the Commission harmonize with the CFTC’s requirement to disclose material risks and characteristics.298 Specifically, the commenter requested that, like the CFTC, the Commission describe the material risks and characteristics to be disclosed as including ‘‘market, credit, liquidity, foreign currency, legal, operational, and any other applicable risks,’’ and ‘‘the material economic terms of the security-based swap, the terms relating to the operation of the

299 Id.
300 Id.
301See Barnard, supra note 5; Better Markets (August 2011), supra note 5; CFA, supra note 5; Markit, supra note 5; FIA/ISDA/SIFMA, supra note 5; SIFMA (August 2011), supra note 5; MFA, supra note 5; SIFMA (August 2015), supra note 5. 302See Barnard, supra note 5; Better Markets (August 2011), supra note 5; CFA, supra note 5; Markit, supra note 5. 303See Better Markets (August 2011), supra note 5. 304See Barnard, supra note 5. 305See Markit, supra note 5. 306 Id. 307 Id. 308 Id. 309See FIA/ISDA/SIFMA, supra note 5; SIFMA (August 2011), supra note 5; MFA, supra note 5; SIFMA (August 2015), supra note 5. 310See SIFMA (August 2011), supra note 5. 311 Id. 312 Id. 313See FIA/ISDA/SIFMA, supra note 5. 314 Id. 315The CFTC had proposed to require scenario analysis for ‘‘high-risk complex bilateral swaps’’ but in its final rules determined instead to require scenario analysis only when requested by the counterparty for any swap not ‘‘made available for trading’’ on a designated contract market or swap execution facility. To comply with the CFTC rule, swap dealers must disclose to counterparties their right to receive scenario analysis and consult with counterparties regarding design. See CFTC Adopting Release, 77 FR at 9762–9763, supra note
21. See also 17 CFR 23.431(b).
316See SIFMA (August 2015), supra note 5. 317See MFA, supra note 5. 318 Id. 319By ‘‘market risk,’’ we mean the risk to the value of a security-based swap ‘‘resulting from adverse movements in the level or volatility of market prices.’’ See Proposing Release, 76 FR at 42408 n.82, supra note 3. 320By ‘‘credit risk,’’ we mean the risk that a counterparty to a security-based swap ‘‘will fail to perform on an obligation’’ under the security-based swap. See Proposing Release, 76 FR at 42408 n.80, supra note 3. 321By ‘‘liquidity risk,’’ we mean the risk that a counterparty to a security-based swap ‘‘may not be able to, or cannot easily, unwind or offset a security-based swap, and the rights and obligations of the parties during the term of the security-based swap.’’ 299 The commenter argued that harmonization with the CFTC would help support the continued development of standard disclosures, reducing compliance costs and preventing undue delays in execution, and would reduce the likelihood of inconsistent disclosures for similar products and resulting counterparty confusion.300 Scenario Analysis We sought comment on whether we should require scenario analysis and, if so, what standards should apply. Eight commenters addressed the disclosure of scenario analysis.301 Four commenters supported requiring scenario analysis disclosure to some degree.302 Of these commenters, one suggested that the analysis include specific information about the security-based swap’s liquidity and volatility.303 Another recommended only requiring scenario analysis disclosure for ‘‘high-risk complex security-based swaps,’’ and suggested that the Commission provide additional clarification or a definition for determining what security-based swaps are high-risk and complex.304 A third commenter advocated requiring SBS Entities to notify counterparties of their right to receive a scenario analysis and to provide a scenario analysis at the request of a non-SBS Entity counterparty.305 To reduce the costs associated with providing scenario analyses and to mitigate the disclosure of SBS Entities’ proprietary information, the commenter suggested that the Commission permit SBS Entities to delegate the provision of scenario analyses to qualified third-parties.306 The commenter explained that requiring scenario analysis disclosure on a transaction-by-transaction basis would not be necessary because SBS Entity counterparties are generally sophisticated enough to create their own, more meaningful, portfolio-based analyses, but that scenario analyses could help a less sophisticated counterparty understand the dynamics and potential exposure of security-based swaps on a portfolio-level.307 The commenter also noted that the Commission should encourage all market participants to create or obtain a portfolio-level scenario analysis, in keeping with industry best practices.308 Four commenters opposed requiring disclosure of scenario analysis.309 One noted that requiring scenario analysis
disclosure would have potentially significant adverse consequences for special entities and other counterparties, and urged the Commission to refrain from requiring it.310 Specifically, the commenter explained that requiring scenario analysis would likely delay execution of transactions and expose counterparties to market risk for potentially extended periods of time (including at critical times when the counterparty is seeking to hedge its positions in volatile markets) because the development of scenario analyses depends upon the specific terms agreed by the parties and therefore, cannot be performed until full agreement on the material terms is reached.311 Additionally, the commenter noted that the development of such analyses would cause SBS Entities to incur substantial costs, which ultimately would be passed on to counterparties.312 Another commenter opposed a requirement to provide scenario analysis and asserted that, if a scenario analysis is required, it should only be at the request of the counterparty and only with respect to scenarios based on parameters selected by the counterparty.313 The commenter also expressed concern that providing a scenario analysis could be viewed as a ‘‘recommendation’’ that triggers other requirements under the proposed rules (e.g., suitability requirements).314 A third commenter, writing after the CFTC adopted final rules,315 stated that, in its experience, the CFTC’s scenario analysis requirement has complicated the ability of SBS Dealers to provide different pricing scenarios, either voluntarily or at the request of a counterparty, because it creates ‘‘uncertainty as to when those scenarios must satisfy the requirements for scenario analysis set forth in the CFTC EBC rules.’’ 316 A fourth commenter recommended that, to the extent a Major SBS Participant is transacting with an ECP at arm’s-length, the Commission should explicitly exclude scenario analysis from the information that the Major SBS Participant is required to disclose pursuant to Rule 15Fh–3(b).317 The commenter asserted that scenario analysis disclosure would be costly and redundant since the rule would already require Major SBS Participants to undertake a transaction-specific analysis, and prepare tailored disclosures of a transaction’s loss sensitivities to market factors and conditions, and the magnitude of gains and losses the transaction may experience under specified circumstances.318
iii. Response to Comments and Final
Rule
After considering the comments, the Commission is adopting Rule 15Fh– 3(b)(1) with some modifications requested by commenters to more closely align the requirements of our rules with those of the CFTC. We have revised the descriptions in Rule 15Fh–3(b)(1) of the required disclosures of material risks and characteristics of a security-based swap to harmonize with the descriptions in the parallel CFTC disclosure requirement. As adopted, Rule 15Fh– 3(b)(1) requires an SBS Entity to disclose material information in a manner reasonably designed to allow the counterparty to assess the material risks and characteristics of the particular security-based swap, which may include (1) market risk,319 credit risk,320 liquidity risk,321 foreign

particular position at or near the previous market price because of inadequate market depth or because of disruptions in the marketplace.’’ See Proposing Release, 76 FR at 42408 n.83, supra note 3. 322By ‘‘legal risk,’’ we mean the risk that agreements are unenforceable or incorrectly or inadequately documented. See Proposing Release, 76 FR at 42408 n.85, supra note 3. 323By ‘‘operational risk,’’ we mean the risk that ‘‘deficiencies in information systems or internal controls, [including human error,] will result in unexpected loss.’’ See Proposing Release, 76 FR at 42408 n.84, supra note 3. 324The manner in which and extent of information about the referenced security, index, asset or issuer is disclosed would depend on the particular facts and circumstances, including the public availability of the information. 325See Levin, supra note 5. 326See Proposing Release, 76 FR at 42408 n.88, supra note 3. 327See Proposing Release, 76 FR at 42408 n.87, supra note 3. However, if an SBS Dealer recommends a security-based swap or trading strategy involving a security-based swap, or acts as an advisor to a special entity, for example, Rules 15Fh–3(f) and 15Fh–4, respectively, impose certain counterparty-specific requirements. See Rules 15Fh–3(f) and 15Fh–4, discussed infra in Sections II.G.0 and II.H.3. 328See Section 15F(h)(3)(B)(ii) of the Exchange Act, 15 U.S.C. 78o–10(h)(3)(B)(ii) (providing that business conduct requirements adopted by the Commission shall require disclosure by an SBS Entity of ‘‘any material incentives or conflicts of interest’’ that the SBS Entity may have in connection with the security-based swap). 329See Proposing Release, 76 FR at 42409, supra note 3. 330See Barnard, supra note 5; IDC, supra note 5; CFA, supra note 5; Levin, supra note 5; FIA/ISDA/ SIFMA, supra note 5; SIFMA (August 2015), supra note 5. 331See Barnard, supra note 5. 332See SIFMA (August 2015), supra note 5. 333See IDC, supra note 5; CFA, supra note 5; Levin, supra note 5. 334See IDC, supra note 5. currency risk, legal risk,322 operational risk323 and any other applicable risks, and (2) the material economic terms of the security-based swap, and the rights and obligations of the parties during the term of the security-based swap. These changes are intended to provide an illustrative list of material risks and characteristics. In addition, these changes will harmonize our rule with the requirements of the CFTC rule, which should result in efficiencies for SBS Entities that have already established infrastructure to comply with the CFTC rules, while still achieving the objectives of the rule to provide information to a counterparty to help them assess whether, and under what terms, they want to enter into the transaction. The rule as adopted requires disclosure of ‘‘material’’ information regarding material risks and characteristics and material incentives or conflicts of interests. We believe that this modification will provide for an appropriate level of
disclosure by requiring disclosure of ‘‘material’’ information, that is, the information most relevant to a counterparty’s assessment of whether and under what terms to enter into a security-based swap. In addition, it will harmonize with the CFTC approach, promoting regulatory consistency across the swap and security-based swap markets, particularly among entities that transact in both markets and have already established infrastructure to comply with existing CFTC regulations. In response to comment, the Commission believes that for purposes of evaluating the material risks and characteristics of the particular security-based swap, including its economic terms, material information about the referenced security, index, asset or issuer should be disclosed.324 As one commenter suggested, this disclosure would be particularly important when, for example, the security-based swap references unique pools of assets arranged by the SBS Entity.325 The Commission anticipates that SBS Entities may provide these disclosures through various means, including by providing a scenario analysis, as noted in the Proposing Release.326 We are not, however, adopting any requirements that would require an SBS Entity to provide scenario analysis. Although scenario analysis may prove a valuable analytic tool, it is one means by which information may be conveyed, and we acknowledge the concerns of commenters that a scenario analysis may not be necessary or appropriate in every situation to ensure that appropriate disclosures are made. We note, however, that nothing in our rules would preclude parties from requesting such analysis, even if a security-based swap is ‘‘made available for trading.’’ In this regard, our approach differs from that of the CFTC which requires a Swap Dealer to provide scenario analysis when requested by a counterparty for any swap that is not ‘‘made available for trading’’ on a designated contract market or swap execution facility. We believe, however, that the approaches are consistent because, as noted above, the Commission is not prohibiting counterparties from requesting scenario analysis disclosure. As noted in the Proposing Release, these disclosures are intended to pertain to the material risks and characteristics of the security-based swap, and not the material risks and characteristics of the security-based swap with respect to a particular counterparty.327 d. Material Incentives or Conflicts of Interest
i. Proposed Rule
Proposed Rule 15Fh–3(b)(2) would require the SBS Entity to disclose any material incentives or conflicts of interest that it may have in connection with the security-based swap, including any compensation or other incentives from any source other than the counterparty in connection with the security-based swap to be entered into with the counterparty.328 We explained in the Proposing Release that we preliminarily believed that the term ‘‘incentives’’—which is used in Section 15F(h)(3)(b)(ii) of the Dodd-Frank Act— refers not to any profit or return that the SBS Entity would expect to earn from the security-based swap itself, or from any related hedging or trading activities of the SBS Entity, but rather to any other financial arrangements pursuant to which an SBS Entity may have an incentive to encourage the counterparty to enter into the transaction. This disclosure would include, among other things, information concerning any compensation (e.g., under revenue￾sharing arrangements) or other incentives the SBS Entity receives from any source other than the counterparty in connection with the security-based swap to be entered into with the counterparty, but would not include, for example, expected cash flows received from a transaction to hedge the security￾based swap or that the security-based swap is intended to hedge.329
ii. Comments on the Proposed Rule
Seven commenters addressed the disclosure of material incentives or conflicts of interest.330 One commenter expressed strong support for the proposed rule.331 A second commenter also supported the proposed rule, noting that it is consistent with the CFTC’s parallel requirement, except for the CFTC’s requirement to disclose a pre￾trade mid-market mark, which the commenter argued is of limited benefit and delays execution of transactions.332 Three other commenters expressed support for the proposed rule but also suggested certain revisions to the rule.333 One recommended modifying the rule to include specific disclosures by SBS Entities of any affiliations or material business relationships they may have with any provider of security￾based swap valuation services.334 Another noted that an SBS Entity’s biggest conflict of interest would likely be the difference in compensation between selling a security-based swap (and in particular, a customized security-based swap) versus another

335See CFA, supra note 5.
336 Id.
337 Id.
338See Levin, supra note 5.
339 Id.
340See FIA/ISDA/SIFMA, supra note 5. 341 Id. 342See Proposing Release, 76 FR at 42409, supra note 3. 343See Levin, supra note 5. 344For instance, depending on the facts and circumstances, failure to disclose material conflicts of interest when there is a recommendation by a broker-dealer can be a violation of the antifraud rules. See, e.g., Chasins v. Smith, Barney & Co., 438 F.2d 1167, 1172 (2d Cir. 1970) (explaining that failure to inform a customer fully of a possible conflict of interest in the securities which the broker recommended for purchase was an omission of material fact in violation of Rule 10b–5). See also In the Matter of Richmark Capital Corp., Exchange Act Release No. 48758 (Nov. 7, 2003) (Commission opinion) (‘‘When a securities dealer recommends stock to a customer, it is not only obligated to avoid affirmative misstatements, but also must disclose material adverse facts of which it is aware. That includes disclosure of ‘adverse interests’ such as ‘economic self-interest’ that could have influenced its recommendation.’’) (citations omitted). 345As noted in the Proposing Release, although
Section 15F(h)(3)(B)(iii) of the Exchange Act refers
to a ‘‘derivatives clearing organization,’’ the Commission believes that this was a drafting error and that Congress intended to refer to a ‘‘clearing agency’’ because the Dodd-Frank Act elsewhere requires security-based swaps to be cleared at registered clearing agencies, not derivatives clearing organizations. See Proposing Release, 76 FR at 42410 n.98, supra note 3; Section 17A(g) of the Exchange Act, 15 U.S.C. 78q–1(g). 346See Barnard, supra note 5; Levin, supra note 5; IDC, supra note 5; AFGI (September 2012), supra note 5; AFGI (July 2013), supra note 5; FIA/ISDA/ SIFMA, supra note 5; MFA, supra note 5; BlackRock, supra note 5; SIFMA (August 2011); SIFMA (August 2015), supra note 5. 347See SIFMA (August 2015), supra note 5. 348 Id. product with similar economic terms.335 Accordingly, the commenter recommended that SBS Entities be required to include any differential compensation in their disclosure.336 Additionally, the commenter asserted that if an SBS Entity is entering a trade as part of a trading strategy to move a position off its books, the SBS Entity should be required to disclose that particular conflict of interest and that the security-based swap is recommended to effect that strategy.337 A third commenter suggested coordinating the proposed rule with the conflict of interest prohibitions in Sections 619 and 621 of the Dodd-Frank Act to clarify that those prohibitions cannot be circumvented through application of the business conduct disclosure requirements.338 The commenter also recommended including in these required disclosures any otherwise hidden profits or returns that the SBS Entity expects to make from a security-based swap, related agreement or arrangement, or related hedging or trading activity.339 One commenter objected to any requirement that an SBS Entity disclose its anticipated profit for the security￾based swap.340 The commenter asserted that the best protection for a counterparty is reviewing and selecting the best available pricing.341
iii. Response to Comments and Final
Rule
After considering the comments, the Commission is adopting Rule 15Fh– 3(b)(2) as proposed. As noted in the Proposing Release, the Commission believes that the term ‘‘incentives’’—which is used in Section 15F(h)(3)(b)(ii) of the Dodd-Frank Act— refers not to any profit or return that the SBS Entity would expect to earn from the security-based swap itself, or from any related hedging or trading activities of the SBS Entity, but rather to any other financial arrangements pursuant to which an SBS Entity may have an incentive to encourage the counterparty to enter into the transaction.342 Accordingly, the disclosure required pursuant to Rule 15Fh–3(b)(2) generally should include information concerning any compensation (for example, under revenue-sharing arrangements) or other incentives the SBS Entity receives from any source other than the counterparty in connection with the security-based swap to be entered into with the counterparty but will not include, for example, expected cash flows received from a transaction to hedge the security￾based swap or that the security-based swap is intended to hedge. As discussed above, whether a conflict or incentive is material depends on the facts and circumstances of the particular matter. Although we are not expressly requiring disclosure of differential compensation as requested by the commenter, the difference in compensation an SBS Entity may receive for selling a security-based swap versus another product with similar economic terms may create a material incentive or conflict of interest that would need to be disclosed under the framework discussed above. Similarly, an SBS Entity would need to disclose material information concerning affiliations or material business relationships it may have with any provider of security-based swap valuation providers if those relationships create a material incentive or conflict of interest. Regarding the commenter’s concern that the conflict of interest prohibitions in Sections 619 and 621 of the Dodd-Frank Act might be circumvented through application of the business conduct disclosure requirements,343 nothing in our rules limits or restricts the applicability of other relevant laws.344 e. Daily Mark Exchange Act Section 15F(h)(3)(B)(iii) directs that business conduct requirements adopted by the Commission require an SBS Entity to disclose to a counterparty (other than to another SBS Entity or Swap Entity): (i) For cleared security-based swaps, upon request of the counterparty, the daily mark from the appropriate derivatives clearing organization;345 and (ii) for uncleared security-based swaps, the daily mark of the transaction.
i. Proposed Rule
Proposed Rule 15Fh–3(c) would require an SBS Entity to disclose to its counterparty (other than to another SBS Entity or Swap Entity): (1) For a cleared security-based swap, upon the request of the counterparty, the daily end-of-day settlement price that the SBS Entity receives from the appropriate clearing agency, and (2) for an uncleared security-based swap, the midpoint between the bid and offer, or the calculated equivalent thereof, as of the close of business, unless the parties agree in writing to a different time, on each business day during the term of the security-based swap. Proposed Rule 15Fh–3(c)(2) would specify that the daily mark for an uncleared security￾based swap may be based on market quotations for comparable security￾based swaps, mathematical models or a combination thereof. Proposed Rule 15Fh–3(c)(2) also would require disclosure of the data sources and a description of the methodology and assumptions used to prepare the daily mark for an uncleared security-based swap, as well as any material changes to such data sources, methodology or assumptions during the term of the security-based swap.
ii. Comments on Proposed Rule
Ten comment letters addressed the requirement for SBS Entities to provide a daily mark.346 One commenter suggested modifications to the daily mark requirement to harmonize with the CFTC’s parallel requirement.347 Specifically, for cleared security-based swaps, the commenter recommended that an SBS Entity simply be required to notify a counterparty of its right to receive the daily mark from the appropriate clearing agency upon request.348 The commenter also argued that the CFTC’s description of the clearinghouse’s mark is less

349 Id. 350 Id. 351See AFGI (September 2012), supra note 5; AFGI (July 2013), supra note 5. 352See FIA/ISDA/SIFMA, supra note 5. 353 Id. 354See Barnard, supra note 5. 355See Levin, supra note 5. 356See IDC, supra note 5. 357 Id. 358See SIFMA (August 2015), supra note 5. 359 Id. 360 Id. 361See MFA, supra note 5. 362 Id. 363 Id. 364See BlackRock, supra note 5. 365See Levin, supra note 5; and IDC, supra note 5. 366See Levin, supra note 5. 367 Id. 368See IDC, supra note 5. 369See IDC, supra note 5. 370See Markit, supra note 5; IDC, supra note 5. 371See Markit, supra note 5. prescriptive.349 Additionally, the commenter recommended that the Commission provide guidance clarifying that an SBS Entity will be deemed to satisfy the daily mark requirement for cleared security-based swaps if the counterparty has agreed to receive its daily mark from its clearing member.350 One commenter asserted that requiring SBS Entities to provide daily marks would not further the goal of providing helpful transparency because in most transactions marks are typically either based on internal models or derived from indices with which the transactions are not perfectly matched.351 Another commenter asked the Commission to carefully review and consider the costs of such a requirement before imposing any obligation to provide daily marks, other than those agreed upon for collateral purposes or for which midmarket quotations are observable.352 The commenter also requested that ‘‘sophisticated counterparties’’ be permitted to opt out of this requirement, and recommended that the Commission clarify that where parties have agreed upon a basis for margining uncleared security-based swaps, providing the daily mark used to make the related margin calculation should satisfy the SBS Entity’s daily mark disclosure obligations.353 One commenter suggested that the data sources, methodology and assumptions used to prepare the daily mark should be required to constitute a complete and independently verifiable methodology for valuing each security￾based swap entered into between the parties, noting that this would promote objectivity and transparency, and aid in the resolution of disputes.354 In this regard, a second commenter also expressed support for requiring the provision of a daily mark and specifically for requiring disclosure of any material changes to the data sources, methodology and assumptions used to prepare the daily mark, noting that this should include disclosing if the data sources become unreliable or unavailable and any resulting changes to the valuations.355 A third commenter recommended requiring disclosure as to how the daily mark is calculated, including such information as whether the daily mark was calculated based on inputs related to actual trade activity, using mathematical models, quotes and prices of other comparable securities, and whether those inputs came from third￾party valuation service providers.356 The commenter added, however, that the proposed
disclosure of the data sources and the description of the methodology and assumptions used were not likely to require the disclosure of proprietary information and that a general description of key valuation inputs should be sufficient.357 Likewise, another commenter also recommended that the Commission clarify in rule text that an SBS Entity is not required to disclose confidential, proprietary information about any model it may use to prepare the daily mark.358 This commenter also recommended that an SBS Entity should disclose additional information concerning its daily mark to ensure a fair and balanced communication, including that: (1) The daily mark may not necessarily be a price at which the SBS Entity or counterparty would agree to replace or terminate the security-based swap; (2) calls for margin may be based on considerations other than the daily mark; and (3) the daily mark may not necessarily be the value of the security￾based swap that is marked on the books of the SBS Entity.359 Additionally, this commenter advocated for eliminating the proposed requirement for the SBS Entity to disclose its data sources used to prepare the daily mark to harmonize more closely with the CFTC rule, which requires disclosure of assumptions and methodologies but not data sources.360 One commenter noted that Major SBS Participants, unlike SBS Dealers, will not always have access to sufficient market information to provide a daily mark, particularly if the security-based swap is not actively traded or if there are no current bid and offer quotes.361 The commenter expressed concern that this could cause Major SBS Participants to have to reveal proprietary information about their trading book positions, particularly when providing the methodology and inputs that they used to prepare the daily mark.362 The commenter suggested permitting sophisticated counterparties to opt out of receiving daily marks.363 Another commenter suggested either not requiring Major SBS Participants to provide the daily mark to its counterparties or in the alternative, to exempt transactions between Major SBS Participants and SBS Dealers and allow all other counterparties to opt out of receiving such disclosures.364 Several commenters raised potential conflicts of interest concerns in connection with providing the daily mark for uncleared security-based swaps. Two commenters recommended requiring SBS Entities to use third-party quotations whenever possible to calculate the daily mark for uncleared security-based swaps.365 One commenter suggested allowing use of the midpoint between an SBS Entity’s bid and offer prices only when the SBS Entity’s internal book value falls within the same price range.366 Additionally, this commenter suggested that the Commission consider requiring the SBS Entity to provide clients with actionable quotes or prices at which the SBS Entity would terminate the swap or allow the client to buy more, and with actionable quotes at a significant size as a means
to ensure accuracy.367 Another commenter noted its view that defining the daily mark for uncleared security￾based swaps as the midpoint between the bid and offer prices, or the calculated equivalent thereof, could be problematic because it may present a conflict of interest for SBS Entities, particularly when the security-based swaps are not actively traded or do not have consistent or up-to-date bid and offer quotes.368 This commenter also suggested requiring SBS Entities and their counterparties to have a clearly defined process for resolving any potential valuation disputes. 369 Two commenters addressed the communication of daily marks, supporting the use of web-based methods of communication.370 One commenter advocated for web-based systems to be the preferred method of communication, but noted that since some market participants prefer more traditional methods of communication, web-based systems should not be required.371 The commenter recommended requiring SBS Entities to have policies and procedures in place that reasonably ensure that any non￾electronic means of communication is safe and secure and is otherwise

372 Id.
373 Id.
374See IDC, supra note 5.
375 Id.
376 Id.
377SIFMA (August 2015), supra note 5. 378See SIFMA (August 2015), supra note 5. 379See 17 CFR 23.431(d); and CFTC Adopting Release, supra note 21. 380 If, for example, the security-based swap between the SBS Entity and counterparty is terminated upon novation by the clearing agency, the SBS Entity would no longer have any obligation to provide a daily mark to the original counterparty because a security-based swap no longer exists between them. 381See Barnard, supra note 5; Levin, supra note 5; IDC, supra note 5; SIFMA (August 2015), supra note 5. 382See Proposing Release, 76 FR at 42410, supra note 3. 383See AFGI (September 2012), supra note 5; AFGI (July 2013), supra note 5. 384As noted in the Proposing Release, parties could agree that the daily mark would be computed as of a time other than the close of business but could not agree to waive the requirement that the daily mark be provided on a daily basis, as required by the statute. See Proposing Release, 76 FR at 42411 n.103, supra note 3. comparable to web-based systems.372 Additionally, the commenter generally requested that the Commission provide greater clarity on permissible methods for delivering daily mark disclosures, establish minimum requirements for the communication of daily marks (for instance, that the interfaces used provide counterparties with appropriate tools to initiate, track and close valuation disputes), and require SBS Entities to ensure that the method of communication is designed to protect the confidentiality of the data and prevent any unintentional or fraudulent addition, modification or deletion of a valuation record.373 The second commenter suggested that the use of a secure Web site or electronic platform should be required to enhance data security.374 The commenter noted that such a platform could also be used to provide transparency into the inputs used to determine the daily mark and to initiate inquiries or challenges to the daily mark.375 The commenter also recommended that the Commission require daily mark information to be provided without charge.376
iii. Response to Comments and Final
Rule
After considering the comments, the Commission is adopting Rule 15Fh–3(c) as proposed, with modifications. Cleared Security-Based Swaps In response to concerns raised by a commenter,377 the Commission is modifying the requirement in Rule 15Fh–3(c)(1) concerning delivery of the daily mark for cleared security-based swaps. For cleared security-based swaps, the proposed rule would have required the SBS Entity upon the request of the counterparty to provide the counterparty with the end-of-day settlement price the SBS Entity received from the clearing agency. As adopted, for cleared security-based swaps, Rule 15Fh–3(c)(1) requires an SBS Entity upon the request of the counterparty to provide to the counterparty the daily mark that the SBS Entity receives from the appropriate clearing agency. In response to comments, the Commission is clarifying that to fulfill its obligation to provide the daily mark upon request, the SBS Entity may agree with the clearing agency, a clearing member or another agent, for such clearing agency, clearing member or other agent to provide the daily mark directly to the counterparty.378 The SBS Entity, however, would retain the regulatory responsibility to provide the daily mark upon request. We understand that current market practice is for a clearing agency to provide access to end-of-day settlement prices to the counterparty. We believe that this flexibility is appropriate, as we believe errors in transmission are less likely to occur if the counterparty receives the information directly from the appropriate clearing agency, which is the source of the daily mark for cleared security-based swaps. In addition, these changes will align our rule more closely with the comparable CFTC rule, which allows for the counterparty to receive the daily mark for a cleared swap from access to the derivatives clearing organization or futures commodities merchant or from the Swap Entity, which should result in efficiencies for SBS Entities that have already established infrastructure to comply with the CFTC rule.379 We note that an SBS Entity’s obligation to provide the daily mark, if requested by the counterparty, exists for the life of the security-based swap between the SBS Entity and the counterparty. Depending on the form of clearing that is used to clear the security-based swap, the security-based swap between the SBS Entity and the counterparty may be terminated upon clearing by the clearing agency.380 Rule 15Fh–3(c)(1), as adopted, also requires that the SBS Entity provide the daily mark (as opposed to the end-of￾day settlement price) upon request to the counterparty to allow clearing agencies the flexibility to provide a different calculation of the mark in the future. As noted above, we understand that current market practice is for the clearing agency to provide an end-of￾day settlement price as its mark. In addition, this change will conform our rule more closely to the parallel CFTC rule described above. Uncleared
Security-Based Swaps The Commission is adopting Rule 15Fh–3(c)(2) as proposed. The Commission agrees with commenters 381 that the daily mark for uncleared security-based swaps will provide helpful transparency to counterparties during the lifecycle of a security-based swap by providing a useful and meaningful reference point against which to assess, among other things, the calculation of variation margin for a security-based swap or portfolio of security-based swaps, and otherwise inform the counterparty’s understanding of its financial relationship with the SBS Entity.382 We continue to believe that even if the mark is calculated based on internal models or such indices, its provision by the SBS Entity will further the goal of providing helpful transparency into the SBS Entity’s pricing and valuation of the security￾based swap by providing a helpful reference point that the SBS Entity’s counterparty can take into account when evaluating the pricing and valuation of the SBS. Thus, we disagree with the commenter 383 who believes that providing the daily mark will not enhance transparency. As noted in the Proposing Release, though the daily mark may be used as an input to compute the variation margin between an SBS Entity and its counterparty, it is not necessarily the sole determinant of how such margin is computed. Differences between the daily mark and computations for variation margin may result from adjustments for position size, position direction, credit reserve, hedging, funding, liquidity, counterparty credit quality, portfolio concentration, bid-ask spreads, or other costs. Moreover, we understand that the actual computations may be highly negotiated between the parties. Therefore, we decline to implement the commenter’s suggestion that the basis for margining uncleared security-based swaps would satisfy the daily mark disclosure obligations. For uncleared security-based swaps, Rule 15Fh–3(c)(2) as adopted defines the daily mark as the midpoint between the bid and offer prices for a particular uncleared security-based swap, or the calculated equivalent thereof, as of the close of business unless the parties otherwise agree in writing to a different time.384 The Commission continues to believe that, absent specific agreement by the parties otherwise, the rule will

385See Proposing Release, 76 FR at 42411, supra note 3. 386See Proposing Release, 76 FR at 42411, supra note 3. See also Improving Counterparty Risk Management Practices, Counterparty Risk Management Policy Group (June 1999) at 7 (for use of the term ‘‘mid-market value’’). For a discussion of mid-market value and costs, see also ISDA Research Notes, The Value of a New Swap, Issue 3 (2010), available at http://www.isda.org/ researchnotes/pdf/NewSwapRN.pdf. 387See IDC, supra note 5. 388See SIFMA (August 2015), supra note 5. 389The Commission recognizes that different SBS Entities may produce somewhat different marks for similar security-based swaps, depending on the respective data sources, methodologies and assumptions used to calculate the marks. Thus, the data sources, methodologies and assumptions would provide a context in which the quality of the mark could be evaluated. See Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments, Securities Act Release No. 7386 (Jan. 31, 1997), 62 FR 6044 (Feb. 10, 1997). The Commission understands that industry practice is often to include similar disclosures for margin calls in swap documentation, such as a credit support
annex. See Proposing Release, 76 FR at 42411
n.109, supra note 3.
390See Barnard, supra note 5.
391See Barnard, supra note 5.
392We also note that methodologies and assumptions with respect to various models are disclosed in the context of financial statement reporting in footnotes to publicly available financial statements and Management’s Discussion and Analysis in periodic reports under the Exchange Act without disclosing confidential proprietary information about models. See FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures; 17 CFR 229.303; and 17 CFR 229.305. 393See Barnard, supra note 5. 394See IDC, supra note 5. 395See MFA, supra note 5 (suggesting that Major SBS Participants will have to use proprietary models, which will force the Major SBS Participants to reveal proprietary information about their trading book positions and that such calculations would be sufficient to calculate a fund’s total asset value but should not be relied upon by other market participants) and BlackRock, supra note 5 (arguing that the security-based swaps are arms-length transactions so the Major SBS Participant should not be required to develop systems to deliver the daily mark information, particularly since most transactions will be with an SBS Dealer). As an alternative to eliminating the daily mark requirement for Major SBS Participants, these commenters suggest that sophisticated counterparties should be permitted to opt out of receiving the daily mark. See discussion above regarding the Commission’s reasons for not permitting counterparties to opt out of receiving the daily mark disclosure. result in a daily mark that reflects daily changes in valuation and that is: (a) The same for all counterparties of the SBS Entity that have a position in the uncleared security-based swap, (b) not adjusted to account for holding-specific attributes such as position direction, size, or liquidity, and (c) not adjusted to account for counterparty-specific attributes such as credit quality, other counterparty portfolio holdings, or concentration of positions.385 As noted in the Proposing Release, for actively traded security-based swaps that have sufficient liquidity, computing a daily mark as the midpoint between the bid and offer prices for a particular security-based swap, known as a ‘‘midmarket value,’’ would be consistent with Rule 15Fh–3(c)(2).386 For security￾based swaps that are not actively traded, or do not have up-to-date bid and offer quotes, the SBS Entity may calculate an equivalent to a midmarket value using mathematical models, quotes and prices of other comparable securities, security￾based swaps, or derivatives, or any combination thereof. In this regard, the rule as adopted requires that the SBS Entity disclose its data sources and a description of the methodology and assumptions used to prepare the daily mark, and promptly disclose any material changes to such data sources, methodology and assumptions during the term of the security-based swap. One commenter suggested that the disclosures should include how the daily mark is calculated,
including whether the daily mark is calculated based on inputs related to actual trade activity or using mathematical models, quotes and prices of other comparable securities, and whether those inputs came from third-party valuation service providers.387 We believe that the requirement in the rule to disclose data sources, methodologies and assumptions encompasses this commenter’s suggestion. On the other hand, another commenter has expressed concern that disclosure of data sources, methodology and assumptions would require the SBS Entity to disclose confidential, proprietary information about its models.388 We believe achieving the benefits underlying the statutory daily mark requirement require that each counterparty knows the data sources, methodology and assumptions used to calculate the mark. This information is critical for a counterparty to properly understand how the daily mark was calculated. The Commission believes that such disclosures will provide the counterparty useful context with which it can assess the quality of the mark received.389 The Commission further agrees with the commenter that these disclosures would promote objectivity and transparency.390 This commenter also suggested that this description of data sources, methodologies and assumptions should be required to constitute a complete and independently verifiable methodology for valuing each security.391 To satisfy the duty to disclose the data sources, methodology and assumptions used to prepare the daily mark, SBS Entities may choose to provide to counterparties methodologies and assumptions sufficient to independently validate the output from a model generating the daily mark. The Commission does not foresee that these disclosures would require SBS Entities to disclose confidential, proprietary information about any model it may use to prepare the daily mark.392 With these disclosures, counterparties should not be misled or unduly rely on the daily mark provided by the SBS Entities. Therefore, the Commission’s final rule requires disclosure of the data sources, methodology and assumptions underlying the daily mark for uncleared security-based swaps. A commenter suggested that the daily mark disclosures would assist in resolving valuation disputes during the term of the security-based swap.393 Another commenter suggested requiring SBS Entities and their counterparties to have a clearly defined process for resolving any potential valuation disputes about daily marks for both cleared and uncleared security-based swaps.394 The Commission notes that many market participants separately negotiate a dispute resolution mechanism for disagreements regarding valuations or include standardized language regarding dispute resolution in their agreements. At this time, the Commission declines to require parties to have a process for resolving valuation disputes and leaves the parties the flexibility to include such dispute resolution mechanisms in their negotiations if desired. Two
commenters suggested that Major SBS Participants should not be required to provide the daily mark for uncleared security-based swaps.395 We believe that the benefits of Rule 15Fh–3(c), as discussed above, would inure equally to counterparties that transact with SBS Dealers as well as those that transact with Major SBS Participants. As we have noted above, even with the use of proprietary models to calculate the daily mark, we do not believe that the level of detail required to be disclosed would require an SBS Entity to disclose confidential proprietary information, whether the SBS Entity is an SBS Dealer or a Major SBS Participant. The commenter that expressed concerns regarding the reliability of the daily mark illustrates the necessity of the disclosure of the data sources, methodologies and assumptions underlying the calculation. Counterparties may evaluate the

396See Section II.C., supra.
397See SIFMA (August 2015), supra note 5 (requesting that the Commission insert additional required disclosures into Rule 15h–3(c) to ensure a fair and balanced communication). 398See Section II.G.5, infra. 399See Levin, supra note 5; and IDC, supra note
5. 400 Id. 401See IDC, supra note 5.
402See Proposing Release, 76 FR at 42412, supra note 3. 403See Levin, supra note 5. 404See SIFMA (August 2015), supra note 5. 405Suggestions include: Requiring interfaces that allow the counterparty to initiate, track and close valuation disputes; a method of communication designed to protect the confidentiality of the data and prevent any unintentional or fraudulent addition, modification or deletion of a valuation record; or require the use of a secure Web site or electronic platform. See Markit, supra note 5; IDC, supra note 5. 406See IDC, supra note 5. 407See Markit, supra note 5. calculation and reliability of the daily mark calculation and determine for themselves whether or not to rely on the calculation. Furthermore, we do not find the arms-length nature of relationships with counterparties to be a persuasive argument to eliminate the daily mark requirement. To the extent that Major SBS Participants may be better informed about the valuations of security-based swaps due to significant information asymmetries in a market for opaque and complex products, disclosures may help inform counterparties concerning the valuations and material risks and characteristics of security-based swaps in the sometimes rapidly changing market environment.396 The commenter also states that the vast majority of transactions by a Major SBS Participant would be with an SBS Dealer, in which circumstance, the disclosure is not required. As a result, we are not adopting the commenters’ suggestions to exclude Major SBS Participants from the requirement of providing the daily mark disclosure at this time. The Commission has considered the rationale raised by commenters and decided not to allow counterparties, even ‘‘sophisticated counterparties,’’ to opt-out of the protections afforded by the daily mark disclosures. It is our understanding that counterparties have a range of sophistication and some are unlikely to have their own modeling capabilities or access to relevant data to calculate a daily mark themselves. We think it is appropriate to apply the rule so that counterparties receive the benefits of the daily mark and related disclosures, and do not think it appropriate to permit parties to ‘‘opt out’’ of the benefits of those provisions. A commenter suggested modifying the rule text for uncleared security-based swaps to require that the SBS Entity disclose additional information concerning the daily mark to ensure a fair and balanced communication, including, as appropriate, that: (A) The daily mark may not necessarily be a price at which either the counterparty or the SBS Entity would agree to replace or terminate the security-based swap; (B) depending upon the agreement of the parties, calls for margin may be based on considerations other than the daily mark provided to the counterparty; and (C) the daily mark may not necessarily be the value of the security-based swap that is marked on the books of the SBS Entity.397 While the Commission declines to modify
the rule text in this way, it does note that Rule 15Fh–3(g) as adopted requires an SBS Entity to communicate with its counterparty in a fair and balanced manner.398 As a result, an SBS Entity may generally wish to consider disclosing this information. Against this background, the Commission is not prescribing the means by which an SBS Entity determines the daily mark for an uncleared security-based swap. Commenters have made various suggestions as to additional requirements as to the inputs used for the daily mark calculation, such as requiring independent third-party quotes or limiting the context in which an SBS Entity can use its own bid and offer prices or requiring the daily mark to be an actionable quote.399 At this time, the Commission declines to adopt these additional requirements. We believe that the rule as adopted will provide appropriate flexibility for SBS Entities to determine how to calculate the daily mark while providing disclosure of sufficient information— data sources, methodologies and assumptions, which are designed to allow the counterparty to assess the quality of the marks it receives from the SBS Entity. One of these commenters also suggested that using its own bid and offer prices for the calculation of the daily mark may present a conflict of interest for the SBS Entity.400 If the SBS Entity is presented with a conflict of interest, we believe that the SBS Entity likely would disclose the conflict to the counterparty pursuant to Rule 15Fh– 3(b)(2) if the conflict is material. After receiving such disclosures, the counterparty will be able to factor that information into its assessment of the quality of the marks it receives. Consistent with the considerations outlined above, an SBS Entity may choose to do these calculations in-house or to use independent third-party valuation services, as suggested by a commenter.401 As noted above, Rule 15Fh–3(c)(2) requires an SBS Entity to disclose to the counterparty its data sources and a description of the methodology and assumptions used to prepare the daily mark for an uncleared security-based swap. Additionally, Rule 15Fh–3(c)(2) requires an SBS Entity to promptly disclose any material changes to the data sources, methodology, or assumptions during the term of the security-based swap. As noted in the Proposing Release, an SBS Entity is not required to disclose the data sources or a description of the methodology and assumptions more than once unless it materially changes the data sources, methodology or assumptions used to calculate the daily mark.402 For the purposes of this rule, a material change would generally include any change that has a material impact on the daily mark provided, such as if the data sources become unreliable or unavailable, as requested by one commenter.403 A commenter has requested that we eliminate the requirement to disclose data sources to harmonize more closely with the CFTC.404 We believe that the requirement to disclose data sources is
important for the counterparty to understand and assess the mark being provided. Therefore, we decline to eliminate this requirement. Applicable to Both Cleared and Uncleared Security-Based Swaps Rule 15Fh–3(c) as adopted, does not mandate the means by which an SBS Entity must make the required disclosures and the Commission declines to mandate any particular means at this time. The Commission believes that SBS Entities are best positioned to determine the most appropriate means of communication of the disclosures. Commenters have made several specific suggestions for additional requirements regarding the means of communication of the daily mark.405 One commenter suggested that we require the use of a secure Web site or electronic platform.406 Another commenter requested web-based systems to be the preferred method of communication, but noted that since some market participants prefer more traditional methods of communication, web-based systems should not be required.407 The commenter recommended requiring SBS Entities to have policies and procedures in place that reasonably ensure that any non￾mstockstill on DSK3G9T082PROD with RULES2

408 Id.
409 Id.
410See Proposing Release, 76 FR at 42412, supra note 3. 411See Markit, supra note 5. 412See the discussion of Timing and Manner of Certain Disclosures above in Section II.G.2.b. SBS Entities have to comply with their obligations under
Section 15F(j) and Rule 15Fh–3(h). In addition, as
a practical matter, we believe SBS Entities are likely to have such policies and procedures with respect to both electronic and non-electronic means of communication in the course of prudent business practices. 413See Proposing Release, 76 FR at 42412, supra note 3. 414See IDC, supra note 5. 415For these purposes, providing the daily mark to a third party that is the agent of the counterparty, such as the independent representative of a special entity, for use consistent with its duties to the client, generally should be considered internal use. 416 15 U.S.C. 78o–10(h)(1)(D). 417See Exchange Act 3C(g)(5)(A), 15 U.S.C. 78c– 3(g)(5)(A): With respect to any security-based swap that is subject to the mandatory clearing requirement under subsection (a) and entered into by a security-based swap dealer or a major security￾based swap participant with a counterparty that is not a swap dealer, major swap participant, security￾based swap dealer, or major security-based swap participant, the counterparty shall have the sole right to select the clearing agency at which the security-based swap will be cleared. 418See Exchange Act Section 3C(g)(5)(B), 15 U.S.C. 78c–3(g)(5)(B): With respect to any security￾based swap that is not subject to the mandatory clearing requirement under subsection (a) and entered into by a security-based swap dealer or a major security-based swap participant with a counterparty that is not a swap dealer, major swap participant, security-based swap dealer, or major security-based swap participant, the counterparty— (i) may elect to require clearing of the security￾based swap; and (ii) shall have the sole right to select the clearing agency at which the security￾based swap will be cleared. 419Section 3C(a)(1) of the Exchange Act provides that: ‘‘[i]t shall be unlawful for any person to engage in a security-based swap unless that person submits such security-based swap for clearing to a clearing agency that is registered under this Act or a clearing agency that is exempt from registration under this Act if the security-based swap is required to be cleared.’’ 15 U.S.C. 78c–3(a)(1). electronic means of communication is safe and secure and is otherwise comparable to web-based systems.408 Additionally, the commenter generally requested that the Commission provide greater clarity on permissible methods for delivering daily mark disclosures, establish minimum requirements for the communication of daily marks (for instance, that the interfaces used provide counterparties with appropriate tools to initiate, track and close valuation disputes), and require SBS Entities to ensure that the method of communication is designed to protect the confidentiality of the data and prevent any unintentional or fraudulent addition, modification or deletion of a valuation record.409 The Commission continues to believe that such a method of communication would be an appropriate way for SBS Entities to discharge their obligations with respect to daily marks.410
One commenter suggested that we require an SBS Entity to have policies and procedures to reasonably ensure the safety and security of non-electronic means of communication.411 To provide SBS Entities with flexibility in the manner of disclosure, we have not specified requirements with respect to the safety and security of either electronic or non-electronic communication of the daily mark.412 In the Proposing Release, the Commission stated that the daily mark for both cleared and uncleared security￾based swaps should be provided without charge and with no restrictions on internal use by the counterparty, although restrictions on dissemination to third parties are permissible.413 One commenter supported the requirement that the daily mark disclosure be provided free of charge.414 The daily mark disclosures are relevant to a counterparty’s ongoing understanding and management of its security-based swap positions. We believe that counterparties to whom the SBS Entity provides the daily mark should have the opportunity to effectively use, retain, and analyze the information with respect to such management. Therefore, the Commission continues to believe that effective access to the daily mark information is necessary to ensure a counterparty’s ability to manage its security-based swap positions over the life of the security-based swaps. Charging for provision of the daily mark, or allowing restrictions on the internal use of the daily mark by the counterparty with respect to managing their security-based swap positions, could undermine this objective. Thus, the Commission continues to believe that the daily mark for both cleared and uncleared security-based swaps should be provided without charge and with no restrictions on internal use by the counterparty, although restrictions on dissemination to third parties are permissible.415 Accordingly, the Commission has included these requirements in a new paragraph (3) to Rule 15Fh–3(c), as adopted. f. Clearing Rights
Section 15F(h)(1)(D) of the Exchange
Act authorizes the Commission to prescribe business conduct standards that relate to ‘‘such other matters as the Commission determines to be appropriate.’’ 416 When an SBS Entity enters into a security-based swap with a counterparty that is not an SBS Entity or a Swap Entity, Section 3C(g) of the Exchange Act establishes a right for the counterparty: (i) To select the clearing agency at which the security-based swap will be cleared, if the security￾based swap is subject to the mandatory clearing requirement under Section 3C(a); 417 and (ii) to elect to require the clearing of the security-based swap, and to select the clearing agency at which the security-based swap will be cleared, if the security-based swap is not subject to the mandatory clearing requirement.418
i. Proposed Rule
Proposed Rule 15Fh–3(d) would require an SBS Entity, before entering into a security-based swap with a counterparty, other than an SBS Entity or Swap Entity, to disclose to the counterparty its rights under Section 3C(g) of the Exchange Act concerning submission of a security-based swap to a clearing agency for clearing. The counterparty’s rights, and thus the proposed disclosure obligations, would differ depending on whether the clearing requirement of Section 3C(a) applies to the relevant transaction.419 When the clearing requirements of
Section 3C(a) apply to a security-based
swap, proposed Rule 15Fh–3(d)(1)(i) would require the SBS Entity to disclose to the counterparty the clearing agencies that accept the security-based swap for clearing and through which of those clearing agencies the SBS Entity is authorized or permitted, directly or through a designated clearing member, to clear the security-based swap. Under proposed Rule 15Fh–3(d)(1)(ii), the SBS Entity would also be required to notify the counterparty of the counterparty’s sole right to select which clearing agency is to be used to clear the security-based swap, provided it is a clearing agency at which the SBS Entity is authorized or permitted, directly or through a designated clearing member, to clear the security-based swap. For security-based swaps that are not subject to the clearing requirement under Exchange Act Section 3C(a), proposed Rule 15Fh–3(d)(2) would require the SBS Entity to determine whether the security-based swap is accepted for clearing by one or more clearing agencies and, if so, to disclose to the counterparty the counterparty’s right to elect clearing of the security￾based swap. Proposed Rule 15Fh– 3(d)(2)(ii) would require the SBS Entity to disclose to the counterparty the clearing agencies that accept the security-based swap for clearing and whether the SBS Entity is authorized or permitted, directly or through a designated clearing member, to clear the security-based swap through such

420See CFA, supra note 5; FIA/ISDA/SIFMA, supra note 5; MFA, supra note 5; SIFMA (August 2015), supra note 5. 421See FIA/ISDA/SIFMA, supra note 5. 422 Id. 423See MFA, supra note 5. 424See SIFMA (August 2015), supra note 5. 425 Id. 426 Id. 427 Id. 428See SIFMA (August 2015), supra note 5. 429See Proposing Release, 76 FR at 42413, supra note 3. 430See Section 3C(a)(1) of the Exchange Act, 15 U.S.C. 78c–3(a)(1). 431See MFA, supra note 5. 432See MFA, supra note 5; Proposing Release 76 FR at 42413, supra note 3. 433See Section II.C above. clearing agencies. Proposed Rule 15Fh– 3(d)(2)(iii) would require the SBS Entity to notify the counterparty of the counterparty’s sole right to select the clearing agency at which the security￾based swap would be cleared, provided it is a clearing agency at which the SBS Entity is authorized or permitted, directly or through a designated clearing member, to clear the security-based swap.
ii. Comments on Proposed Rule
Four commenters addressed the required disclosure regarding clearing rights.420 One commenter requested confirmation that a counterparty’s clearing elections could affect the price of the security-based swap so long as this is disclosed to the counterparty at the time of the other disclosures regarding clearing.421 Additionally, the commenter asked for clarification that standardized disclosure could be used to satisfy this requirement.422 Another commenter recommended that the Commission not impose the clearing rights disclosure requirement on Major SBS Participants transacting with counterparties at arm’s length, or alternatively, that the Commission allow ECP counterparties to opt out of receiving such disclosures.423 An additional commenter advocated for harmonizing the clearing rights disclosure requirement with the CFTC’s parallel requirement.424 Specifically, the commenter recommended eliminating the proposed requirements to disclose the names of the clearing agencies that accept the security-based swap for clearing, and through which the SBS Entity is authorized to clear the security-based swap.425 The commenter argued that given the limited number of security-based swap clearing agencies, such additional disclosure is unlikely to be necessary, and that the Commission could always require it at a future date if the number increases.426 Additionally, as discussed in Section II.B, the commenter advocated for adding an exception to the requirements regarding the disclosure of clearing rights to include security-based swaps that are intended to be cleared and that are either (1) executed on a registered national securities exchange or registered or exempt SEF and required to be cleared pursuant to Section 3C of the Exchange Act, or (2) anonymous.427
iii. Response to Comments and Final
Rule
After considering the comments, the Commission is adopting Rule 15Fh–3(d) largely as proposed, but with modifications. First, as discussed above in Section II.B, we are limiting an SBS Entity’s disclosure obligations regarding clearing rights pursuant to Rule 15Fh– 3(d) to counterparties whose identity is known to the SBS Entity at a reasonably sufficient time prior to the execution of the transaction. The Commission is also making a second modification to the proposed rule. We also added the phrase ‘‘subject to Section 3C(g)(5) of the Act,’’ to Rule 15Fh–3(d)(1)(ii) to clarify the source of the counterparty’s right to select which of the clearing agencies described in paragraph (d)(1)(i) shall be used to clear the security-based swap. A commenter suggested that, due to the limited number of security-based swap clearing agencies, disclosure of clearing agencies by name was unnecessary.428 Regardless of the current limited number of clearing agencies for security-based swaps, not every security-based swap will be accepted for clearing at every clearing agency, so the Commission believes that it is still useful for the counterparty to know whether the particular security￾based swap is able to be cleared at a particular clearing agency. Rule 15Fh–3(d) requires that disclosure be made before a transaction occurs. As noted in the Proposing Release, the Commission believes that it would be appropriate for a counterparty to exercise its statutory right to select the clearing agency at which its security-based swaps will be cleared on a transaction-by-transaction basis, on an asset-class-by-asset-class basis, or in terms of all potential transactions the counterparty may execute with the SBS Entity.429 While Rule 15Fh–3(d) does not require an SBS Entity to become a member or participant of a specific clearing agency, an SBS Entity could not enter into security-based swaps that are subject to a mandatory clearing requirement without having some arrangement in place to clear the transaction.430 Consistent with the discussion regarding manner of disclosures above in Section II.G.2.b, the Commission agrees with the commenter that SBS Entities could use standardized disclosure to satisfy Rule 15Fh–3(d). The Commission also recognizes that a counterparty’s clearing elections could affect the price of the security-based swap and recognizes that counterparties may wish to receive disclosures about the effect of clearing on the price. Although the rule does not explicitly require that the SBS Entity provide specific disclosures regarding the effect of clearing on the price of the security￾based swap, the SBS Entity may wish to consider whether their obligations under Rule 15Fh–3(b)(1) to disclose the material risks and characteristics of the particular security-based swap, as well as their obligation pursuant to Rule 15Fh–3(g) to communicate with counterparties in a fair and balanced manner based on principles of fair dealing and good faith (including providing a
sound basis for evaluating the facts with regard to any particular security-based swap or trading strategy involving a security-based swap) may require such disclosure given their particular facts and circumstances. One commenter recommended that the Commission not impose the clearing rights disclosure requirement on Major SBS Participants transacting with counterparties at arm’s length or as an alternative allow ECP counterparties to opt out of receiving the clearing rights disclosure.431 As explained in the Proposing Release, the required disclosure is intended to promote that, wherever possible and appropriate, derivatives contracts formerly traded exclusively in the OTC market are cleared through a regulated clearing agency.432 The Commission has considered the concerns raised by commenters and determined that it is appropriate to require Major SBS Participants to provide such disclosures, and to not to permit counterparties to opt out of the protections provided by the business conduct rules. We believe that the benefits of Rule 15Fh–3(d), as discussed above, would inure equally to counterparties that transact with SBS Dealers as well as those that transact with Major SBS Participants.433 We further believe that allowing counterparties to effectively opt out of the rule would deprive them of the express protections that the rules were intended to provide. As a result, we are not adopting the commenters’ suggestions to allow counterparties to opt out of the clearing rights disclosure

434 15 U.S.C. 78o–10(h)(1)(D).
435Proposed Rule 15Fh–3(e)(1)–(4).
436See CFA, supra note 5; FIA/ISDA/SIFMA, supra note 5; ABC, supra note 5; SIFMA (August 2015), supra note 5. 437See CFA, supra note 5; FIA/ISDA/SIFMA, supra note 5. 438See FIA/ISDA/SIFMA, supra note 5. 439See CFA, supra note 5. 440See ABC, supra note 5. 441 Id. 442 Id. 443 Id. 444See SIFMA (August 2015), supra note 5. 445 Id. 446 Id. 447 Id. 448See SIFMA (August 2015), supra note 5. 449See ABC, supra note 5. 450See SIFMA (August 2015), supra note 5. requirement when transacting with a Major SBS Participant nor to exclude Major SBS Participants from the requirement of providing the clearing rights disclosure at this time.
3. Know Your Counterparty
Section 15F(h)(1)(D) of the Exchange
Act authorizes the Commission to prescribe business conduct standards that relate to ‘‘such other matters as the Commission determines to be appropriate.’’ 434 a. Proposed Rule Proposed Rule 15Fh–3(e) would establish a ‘‘know your counterparty’’ requirement under which an SBS Dealer would be required to establish, maintain and enforce policies and procedures reasonably designed to obtain and retain a record of the essential facts that are necessary for conducting business with each counterparty that is known to the SBS Dealer. For purposes of the proposed rule, ‘‘essential facts’’ would be defined as: (i) Facts required to comply with applicable laws, regulations and rules; (ii) facts required to implement the SBS Dealer’s credit and operational risk management policies in connection with transactions entered into with such counterparty; (iii) information regarding the authority of any person acting for such counterparty; and (iv) if the counterparty is a special entity, such background information regarding the independent representative as the SBS Dealer reasonably deems appropriate.435 b. Comments on the Proposed Rule Four commenters addressed the proposed know your counterparty requirement.436 Two commenters generally supported the proposed rule.437 However, one requested clarification that since the requirement only applies to ‘‘known’’ counterparties, it would not apply to an SBS Dealer transacting on a SEF or other electronic execution platform where such SBS Dealer only learns the identity of the counterparty immediately before the execution and must execute the transaction within a limited time frame after learning the counterparty’s identity.438 The other commenter asserted that the requirement should apply to Major SBS Participants in addition to SBS Dealers.439 A third commenter expressed concern that the proposed rule would inappropriately empower SBS Dealers to adopt and enforce rules and to collect information about independent representatives.440 The commenter asserted that the use of the word ‘‘enforce’’ in the proposed rule suggests that the rule would improperly empower SBS Dealers to adopt policies and procedures that have the force of law with respect to their counterparties.441 Specifically, the commenter asserted that the proposed rule authorizes SBS Dealers to collect unlimited information about the representatives of special entities, as well as proprietary information, which would give dealers an unfair competitive advantage.442 The commenter argued that SBS Dealers should be required to adopt policies that comply with the law, and that these policies should not be binding to the extent they require more than the law requires.443 A fourth commenter recommended eliminating the proposed requirement to collect background information regarding the independent representative of a special entity.444 First, the commenter asserted that this change would harmonize the Commission’s rule with the parallel CFTC requirement.445
Second, the commenter stated that the proposed requirement would be duplicative of the requirements imposed on SBS Entities acting as counterparties to special entities pursuant to Rule 15Fh–5.446 Additionally, as discussed in Section II.B, the commenter advocated for adding an exception to the know your counterparty requirement to cover security-based swaps that are intended to be cleared, executed on a registered national securities exchange or registered or exempt SEF, and of a type that is, as of the date of execution, required to be cleared pursuant to
Section 3C of the Exchange Act.447
c. Response to Comments and Final
Rule
After considering the comments, the Commission is adopting Rule 15Fh–3(e) with two modifications. First, in response to a specific suggestion from a commenter,448 the Commission is eliminating the proposed requirement that an SBS Dealer obtain background information regarding the independent representative of a special entity counterparty, as the SBS Dealer reasonably deems appropriate. The Commission agrees with the commenter that the proposed requirement would have been duplicative of the requirements imposed on SBS Entities acting as counterparties to special entities pursuant to Rule 15Fh–5 (discussed below in Section II.H). Second, the Commission is adding the word ‘‘written’’ before policies and procedures in the rule text to clarify that the policies and procedures required by the rule must be written. The Commission believes that this change clarifies the proposal and reflects the requirement in Rule 15Fh–3(h), discussed in Section II.G.6 below, that an SBS Dealer establish, maintain and enforce written policies and procedures that are reasonably designed to prevent violations of the applicable federal securities laws and rules and regulations thereunder. Thus, as adopted, Rule 15Fh–3(e) requires SBS Dealers to ‘‘establish, maintain and enforce written policies and procedures reasonably designed to obtain and retain a record of the essential facts concerning each counterparty.’’ In response to concerns raised by a commenter,449 the Commission is clarifying that the provision stating that an SBS Dealer shall ‘‘establish, maintain and enforce’’ policies and procedures does not vest such policies and procedures with force of law with respect to their counterparties. An SBS Dealer would, however, have an obligation to enforce (i.e., follow) its internal policies and procedures. We have determined, as proposed, not to apply the rule where an SBS Dealer does not know the identity of its counterparty. We are not adopting the suggestion of one commenter that we provide an additional exception to cover security-based swaps that are intended to be cleared, executed on a registered national securities exchange or registered or exempt SEF, and of a type that is, as of the date of execution, required to be cleared pursuant to
Section 3C of the Exchange Act, even if
not anonymous.450 However, we note that Rule 15Fh–3(e) requires SBS Dealers to establish policies and procedures that are ‘‘reasonably designed to obtain and retain a record of the essential facts concerning each

451See FIA/ISDA/SIFMA, supra note 5. 452The application of the know your counterparty requirement in these circumstances does not affect the application of the other business conduct obligations in Rules 15Fh–3(b) and (d), 15Fh–4(b), 15Fh–5, and 15Fh–6, including the exceptions to the application of those rules where the identity of the counterparty is not known to the SBS Entity at a reasonably sufficient time prior to execution of the transaction, and, in the case of Rules 15Fh–4(b), 15Fh–5 and 15Fh–6, executed on a registered national securities exchange or registered or exempt SEF. 453See Proposing Release, 76 FR at 42414, supra note 3. Cf. FINRA Rule 2090 (‘‘[e]very member shall use reasonable diligence, in regard to the opening and maintenance of every account, to know (and retain) the essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer’’). Supplementary Material .01 to FINRA Rule 2090 defines the ‘‘essential facts’’ for purposes of the FINRA rule to include certain information not required by Rule 15Fh–3(e). For purposes of FINRA Rule 2090, facts ‘‘essential’’ to ‘‘knowing the customer’’ are those required to (a) effectively service the customer’s account, (b) act in accordance with any special handling instructions for the account, (c) understand the authority of each person acting on behalf of the customer, and (d) comply with applicable laws, regulations, and rules. 454See Proposing Release, 76 FR at 42414, supra note 3. 455 Id. 456See CFA, supra note 5. 457 15 U.S.C. 78o–10(h)(1)(D). 458 15 U.S.C. 78o–10(h)(3)(D). [known counterparty] that are necessary for conducting business with such counterparty.’’ Reasonably designed policies and procedures established pursuant to Rule 15Fh–3(e) may address situations in which there are few, if any, essential facts that are necessary for conducting business with a counterparty. For example, if the only security-based swaps that an SBS Dealer enters into with a counterparty are intended to be cleared security-based swaps that are executed on a registered exchange or SEF and of a type that is, as of the date of execution, required to be cleared pursuant to Section 3C of the Exchange Act, then there may be few, if any, essential facts that the SBS Dealer needs to know about such counterparty in that circumstance. In response to a commenter’s request for clarification that since the requirement only applies to ‘‘known’’ counterparties, it would not apply to an SBS Dealer transacting on a SEF or other electronic execution platform where such SBS Dealer only learns the identity of the counterparty immediately before the execution and must execute the transaction within a limited time frame after learning the counterparty’s identity,451 the Commission notes that Rule 15Fh–3(e) does not contain a specific timing requirement. Rule 15Fh– 3(e) requires SBS Dealers to establish policies and procedures that are ‘‘reasonably designed to obtain
and retain a record of the essential facts concerning each [known counterparty] that are necessary for conducting business with such counterparty.’’ To be ‘‘reasonably designed’’ such policies and procedures generally should provide for the collection of counterparty information prior to execution of a transaction with that counterparty. However, if the SBS Dealer does not learn a counterparty’s identity until immediately prior to or subsequent to execution, then it would be reasonable for collection to occur within a reasonable time after the SBS Dealer learns the identity of the counterparty.452 As noted in the Proposing Release, the ‘‘know your counterparty’’ obligations under Rule 15Fh–3(e) are a modified version of the ‘‘know your customer’’ obligations imposed on other market professionals, such as broker-dealers, when dealing with customers.453 Although the statute does not require the Commission to adopt a ‘‘know your counterparty’’ standard, the Commission continues to believe that such a standard is consistent with basic principles of legal and regulatory compliance, and operational and credit risk management.454 Further, the Commission continues to believe that entities that currently operate as SBS Dealers typically would already have in place, as a matter of their normal business practices, policies and procedures that could potentially satisfy the requirements of the rule.455 The Commission is applying the requirements in Rule 15Fh–3(e) to SBS Dealers but declines to apply them to Major SBS Participants, as suggested by a commenter.456 As discussed above in
Section II.C, the Commission has
determined that where a business conduct requirement is not expressly addressed by the Dodd-Frank Act, the rules generally will not apply to Major SBS Participants.
4. Recommendations by SBS Dealers
Section 15F(h)(1)(D) of the Exchange
Act authorizes the Commission to prescribe business conduct standards that relate to ‘‘such other matters as the Commission determines to be appropriate.’’ 457 Additionally, Section 15F(h)(3)(D) of the Exchange authorizes the Commission to establish ‘‘such other standards and requirements as the Commission may determine are appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this Act.’’ 458 a. Proposed Rule
i. General
Proposed Rule 15Fh–3(f) generally would require an SBS Dealer that recommends a security-based swap or trading strategy involving a security￾based swap to a counterparty, other than an SBS Entity or Swap Entity, to have a reasonable basis for believing that the recommended security-based swap or trading strategy is suitable. Specifically, proposed Rule 15Fh–3(f)(1)(i) would require an SBS Dealer to have a reasonable basis to believe, based on reasonable diligence, that the recommended security-based swap or trading strategy is suitable for at least some counterparties. Additionally, proposed Rule 15Fh–3(f)(1)(ii) would require an SBS Dealer to have a reasonable basis to believe that the recommended security-based swap or trading strategy is suitable for the particular counterparty that is the recipient of the SBS Dealer’s recommendation (‘‘customer-specific suitability’’). Under proposed Rule 15Fh–3(f)(1)(ii), to establish a reasonable basis to believe that a recommendation is suitable for a particular counterparty, an SBS Dealer would need to have or obtain relevant information regarding the counterparty, including the counterparty’s investment profile, trading objectives, and its ability to absorb potential losses associated with the recommended security-based swap or trading strategy.
ii. Institutional Suitability Alternative
Proposed Rule 15Fh–3(f)(2) would provide an alternative to the general suitability requirements, under which an SBS Dealer could fulfill its suitability obligations with respect to a particular counterparty if: (1) The SBS Dealer reasonably determines that the counterparty (or its agent) is capable of independently evaluating investment risks with regard to the relevant security-based swap or trading strategy involving a security-based swap; (2) the counterparty (or its agent) affirmatively represents in writing that it is exercising independent judgment in evaluating the recommendations by the SBS Dealer; and (3) the SBS Dealer discloses that it is acting in the capacity of a counterparty, and is not undertaking to assess the suitability of the security￾based swap or trading strategy for the counterparty. The Commission sought comment on whether different categories of ECPs should be treated differently for purposes of suitability

459See Proposing Release, 76 FR at 42417, supra note 3. 460See Section 1a(18)(A)(xi) of the Commodity Exchange Act, 7 U.S.C. 1a(18)(A)(xi). 461See FINRA Rule 2111(b) (referring to FINRA Rule 4512(c)). 462Under FINRA rules, institutional suitability is limited to transactions with so-called ‘‘institutional’’ investors:
(1) A bank, savings and loan association, insurance company or registered investment company; (2) an investment adviser registered either with the SEC under Section 203 of the Investment Advisers Act or with a state securities commission (or any agency or office performing like functions); or (3) any other person (whether a natural person, corporation, partnership, trust or otherwise) with total assets of at least $50 million. See FINRA Rule 4512(c) (regarding definition of ‘‘institutional account’’). 463As discussed below in Section II.H.2, proposed Rule 15Fh–4(b) would impose certain requirements on SBS Dealers acting as advisors to special entities. 464See Levin, supra note 5; GFOA, supra note 5; CFA, supra note 5; Barnard, supra note 5; FIA/ ISDA/SIFMA, supra note 5; SIFMA (August 2015), supra note 5. 465See Levin, supra note 5; GFOA, supra note 5; CFA, supra note 5. 466See Levin, supra note 5. 467See GFOA, supra note 5. 468See CFA, supra note 5. The CFTC subsequently adopted a rule that is similar to proposed Rule 15Fh–3(f). See CFTC Adopting Release, 77 FR at 9771–9774, supra note 21. 469See CFA, supra note 5. 470 Id. 471 Id. The commenter explained that, under the institutional suitability alternative, ‘‘the SBS Dealer wouldn’t even have to have a reasonable basis to believe that the swap was suitable . . . for the particular counterparty to the transaction.’’ The commenter expressed its concern that:
Given the profits at stake, SBS Dealer will have strong incentives to conclude that the counterparty is capable of evaluating the transaction. Counterparties who turn to the derivatives markets out of questionable motives will have equally strong incentives to assert their capacity to independently evaluate investment risk. And even those with purer motives may be reluctant to confess to a lack of expertise. 472See Barnard, supra note 5; FIA/ISDA/SIFMA, supra note 5. 473See Barnard, supra note 5. 474See FIA/ISDA/SIFMA, supra note 5. 475 Id. 476 Id. determinations.459 The Proposing Release noted that, under our proposed rules, an SBS Dealer could rely on the institutional suitability alternative when entering into security-based swaps with any person that qualified as an ECP, a category that includes persons with $5 million or more invested on a discretionary basis that enter into the security-based swap ‘‘to manage risks.’’ 460 In contrast, under FINRA rules, in order to apply an analogous institutional suitability alternative, a broker-dealer must be dealing with a person (whether a natural person, corporation, partnership, trust, or otherwise) with total assets of at least $50 million.461 The Proposing Release asked whether the Commission should apply a different standard of suitability depending on whether the counterparty would be protected as a retail investor under FINRA rules when the SBS Dealer is also a registered broker-dealer.462 More generally, the Commission sought comment on whether the institutional suitability alternative available under proposed Rule 15Fh–3(f)(2) should be limited to counterparties that would not be protected as retail investors under FINRA rules or another category of counterparties.
iii. Special Entity Suitability Alternative
Proposed Rule 15Fh–3(f)(3) would provide another alternative to the general suitability requirements for SBS Dealers transacting with special entity counterparties. Under proposed Rule 15Fh–3(f)(3), an SBS Dealer would be deemed to satisfy its suitability obligations with respect to a special entity counterparty if the SBS Dealer either is acting as an advisor to the special entity and complies with proposed Rule 15Fh–4(b),463 or is deemed not to be acting as an advisor to the special entity pursuant to proposed Rule 15Fh–2(a). b. Comments on the Proposed Rule
i. General
Six commenters addressed the suitability requirements.464 Three commenters recommended expanding the suitability requirements.465 One commenter suggested two changes to the rule: (1) Clarifying that SBS Dealers would be prohibited from recommending to investors financial products that the dealers believe will fail; and (2) requiring that an SBS Dealer making recommendations regarding a certain product or type of product have the background necessary to understand the product.466 Another commenter urged the Commission to consider developing suitability standards for the types of financial products that can be sold to state and local governments, including those products in the swaps arena.467 A third commenter suggested that the Commission conform its requirements to the CFTC’s proposal, noting that the CFTC proposal would have required the dealer to obtain information through reasonable due diligence concerning the counterparty’s financial situation and needs, objectives, tax status, ability to evaluate the recommendation, liquidity needs, risk tolerance or other relevant information.468 The commenter also recommended explicitly requiring SBS Dealers to: (1) Gather information sufficient to make the suitability assessment; and (2) maintain sufficient documents to allow the Commission to effectively enforce compliance.469 Additionally, the commenter asserted that the suitability requirement should apply to all SBS Entities, not just SBS Dealers, noting that the suitability obligation would only be imposed on a Major SBS Participant if the Major SBS Participant makes a recommendation to a non-SBS Entity.470 While the commenter supported the exclusion from the suitability requirement for recommendations to other SBS Entities, it strongly opposed any additional exclusions (e.g., for recommendations to broker-dealers or other market intermediaries who are not SBS Entities). Finally, the commenter also strongly opposed limiting the requirement to recommendations to retail investors.471 Two other commenters recommended narrowing the suitability requirements.472 One commenter suggested that any suitability standard for SBS Dealers be applied at the least granular level (e.g., on a transaction-by￾transaction basis, on an asset-class-by￾asset-class basis, or in terms of all potential transactions between the parties, as appropriate).473 The second commenter opposed the suitability requirement more broadly, stating that Congress did not impose such a requirement.474 The commenter suggested, as an alternative to the proposed rule, that any suitability requirement for recommendations to counterparties other than special entities be imposed through a requirement to adopt and enforce policies and procedures reasonably designed to assess the suitability of recommendations, and that the proposed rule be incorporated as guidance establishing a safe harbor for whether an SBS Dealer’s policies are reasonable.475 The commenter also asserted that the proposed rule
could conflict with the specific suitability rules of other (unidentified) regulators, and accordingly, urged the Commission to clarify that an SBS Dealer that complies with suitability requirements of another qualifying regulator will also be deemed to have adopted and enforced reasonable suitability policies under the Commission’s rule.476 Finally, the commenter recommended allowing sophisticated counterparties to opt out of suitability protection, noting that some counterparties will find the suitability analysis burdensome and intrusive, and that the costs of the

477 Id.
478See SIFMA (August 2015), supra note 5. 479 Id. 480See Levin, supra note 5; CFA, supra note 5; SIFMA (August 2015), supra note 5. 481See Levin, supra note 5; CFA, supra note 5. 482See Levin, supra note 5. 483 Id. 484 Id. 485See CFA, supra note 5. 486 Id. 487See SIFMA (August 2015), supra note 5. 488 Id. 489See BlackRock, supra note 5; GFOA, supra note 5; ABC, supra note 5; SIFMA (August 2015), supra note 5. 490See BlackRock, supra note 5; GFOA, supra note 5; ABC, supra note 5. 491See SIFMA (August 2015), supra note 5. 492See SIFMA (August 2015), supra note 5. The Commission believes this change also responds to another commenter’s concern that the proposed rules could conflict with the CFTC’s suitability rule. See FIA/ISDA/SIFMA, supra note 5. 493See CFTC Adopting Release, 77 FR at 9771– 9774, supra note 21. The new formulation is also consistent with FINRA’s approach to this aspect of suitability. See Supplementary Material .05(a) to FINRA Rule 2111 (effective July 9, 2012) (‘‘[a] member’s or associated person’s reasonable diligence must provide the member or associated person with an understanding of the potential risks and rewards associated with the recommended security or strategy’’). proposed suitability rule for those counterparties will likely outweigh any benefits.477 Finally, a sixth commenter advocated for harmonizing the suitability requirement in proposed Rule 15Fh– 3(f)(1)(i) with the CFTC’s parallel requirement.478 Specifically, the commenter recommended changing the wording of the suitability requirement in proposed Rule 15Fh–3(f)(1)(i) to ‘‘undertake reasonable diligence to understand the potential risks and rewards associated with the recommended security-based swap or trading strategy involving a security￾based swap.’’ 479
ii. Institutional Suitability Alternative
Three commenters submitted comments regarding the institutional suitability alternative in proposed Rule 15Fh–3(f)(2).480 Two commenters expressed concerns regarding the proposed alternative.481 One commenter expressed concern that the counterparty representations upon which the SBS Dealer would rely may become outdated or boilerplate language that is inappropriate for the counterparty to which it is directed.482 Accordingly, the commenter suggested requiring SBS Dealers to conduct routine audits to ensure that these institutional level suitability determinations are not over￾utilized, that they are appropriate for the particular counterparties involved, and that the appropriate written documentation was provided and signed in applicable transactions.483 Additionally, the commenter recommended that as part of that audit process, and to prevent inaccurate determinations, SBS Dealers should be required to test, perhaps on an annual basis, whether counterparties continue to have the personnel and expertise needed to conduct independent evaluations of the security-based swap products being marketed.484 The second commenter strongly opposed the institutional suitability alternative, asserting that the complexity and opacity of structured finance products has made them impenetrable to all but the most sophisticated industry experts.485 At a minimum, the commenter recommended that if the Commission adopts the institutional suitability alternative, it should require an SBS Dealer to have a reasonable basis to believe its counterparty has the capacity to absorb potential losses related to the security-based swap or trading strategy being recommended.486 A third commenter advocated for harmonizing the institutional suitability alternative with the CFTC’s parallel provision, citing potential counterparty confusion.487 Specifically, the commenter recommended that the Commission: (1) Clarify that the institutional suitability alternative only satisfies an SBS Dealer’s customer￾specific suitability obligation in proposed Rule 15Fh–3(f)(1)(ii), not its suitability obligation in proposed Rule 15Fh–3(f)(1)(i); and (2) add a safe harbor providing that an SBS Dealer can satisfy its requirement to make a reasonable determination that the counterparty is capable of independently evaluating investment risks with regard to the security-based swap if the SBS Dealer receives written representations from the counterparty regarding the counterparty’s compliance with appropriate policies and procedures.488
iii. Special Entity Suitability Alternative
Four commenters submitted comments regarding the suitability alternative for special entity counterparties in proposed Rule 15Fh– 3(f)(3).489 Three commenters supported the proposed rule.490 Another commenter recommended adding a requirement to the institutional suitability alternative, in lieu of the special entity suitability alternative, that the SBS Dealer comply with the requirements of Rule 15Fh–4(b) (regarding acting as an advisor to a special entity) if the SBS Dealer’s recommendation to a special entity would cause it to be acting as an advisor to the special entity.491
c. Response to Comments and Final
Rule
i. General
After considering the comments, the Commission is adopting Rule 15Fh– 3(f)(1) with two modifications. The first modification is to rephrase the suitability obligation in proposed Rule 15Fh–3(f)(1)(i), in response to a specific suggestion from a commenter,492 to make it consistent with the CFTC’s parallel suitability requirement in Commodity Exchange Act Rule 23.434(a)(1), which explicitly requires SBS Dealers to understand the risk￾reward tradeoff of their recommendations. We believe that our proposed formulation and the CFTC’s formulation would have achieved the same purpose. However, to alleviate concerns among commenters that compliance with the two rules would require anything different, we are harmonizing the wording of our rule with the CFTC’s parallel suitability obligation.493 As adopted, Rule 15Fh– 3(f)(1)(i) requires an SBS Dealer that recommends a security-based swap or trading strategy involving a security￾based swap to a counterparty, other than an SBS Entity or Swap Entity, to ‘‘undertake reasonable diligence to understand the potential risks and rewards associated with the recommended security-based swap or trading strategy involving a security￾based swap.’’ Consistency with the CFTC standard will result in efficiencies for entities that have already established infrastructure to comply with the CFTC standard. Consistent wording will also allow SBS Entities to more easily analyze compliance with the Commission’s rule against their existing activities to comply with the CFTC’s parallel suitability rule for Swap Entities. The second modification the Commission is making is to add the phrase ‘‘involving a security-based swap’’ to the final line of the customer￾specific suitability obligation in proposed Rule 15Fh–3(f)(1)(ii) to modify ‘‘trading strategy.’’ Accordingly, Rule 15Fh–3(f)(1)(ii), as adopted, requires an SBS Dealer that recommends a security￾based swap or trading strategy involving a security-based swap to a counterparty, other than an SBS Entity or Swap Entity, to have a reasonable basis to believe that a recommended security￾based swap or trading strategy involving a security-based swap is suitable for the counterparty, and to establish a

494See Proposing Release, 76 FR at 42415, supra note 3. See also, e.g., FINRA Rules 2090 and 2111 (effective Jul. 9, 2012); Charles Hughes & Co. v. SEC, 139 F.2d 434 (2d Cir. 1943) (enforcing suitability obligations under the antifraud provisions of the Exchange Act). 495MSRB Rule G–19(c) provides that:
In recommending to a customer any municipal security transaction, a broker, dealer, or municipal securities dealer shall have reasonable grounds: (i) Based upon information available from the issuer of the security or otherwise, and (ii) based upon the facts disclosed by such customer or otherwise known about such customer, for believing that the recommendation is suitable. 496See FINRA Rule 2111. Under FINRA rules, unless a customer is an ‘‘institutional account’’ that meets the requirements of the institutional account exemption, he or she would be entitled to the protections provided by retail suitability obligations in the broker-dealer context. An ‘‘institutional account’’ means the account of a bank, savings and loan association, insurance company, registered investment company, registered investment adviser or any other person (whether a natural person, corporation, partnership, trust, or otherwise) with total assets of at least $50 million. See FINRA Rule 2111(b) (referring to FINRA Rule 4512(c)). 497Some dealers have indicated that they already apply ‘‘institutional suitability’’ principles to their swap business. See, e.g., Letter from Richard Ostrander, Managing Director and Counsel, Morgan Stanley, to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, and David A. Stawick, Secretary, Commodity Futures Trading Commission (Dec. 3, 2010) at 5; Report of the Business Standards Committee, Goldman Sachs (Jan. 2011), http://www2.goldmansachs.com/our￾firm/business-standards-committee/report.pdf. 498See Proposing Release, 76 FR at 42415, supra note 3. 499See FINRA Regulatory Notice 12–25 (May
2012) Q.2 and Q.3 (regarding the scope of
‘‘recommendation’’).
500See FINRA Notice to Members 01–23 (Mar. 19, 2001), and Notice of Filing of Proposed Rule Change to Adopt FINRA Rules 2090 (Know Your Customer) and 2111 (Suitability) in the Consolidated FINRA Rulebook, Exchange Act Release No. 62718 (Aug. 13, 2010), 75 FR 51310 (Aug. 19, 2010), as amended, Exchange Act Release No. 62718A (Aug. 20, 2010), 75 FR 52562 (Aug. 26,
2010) (discussing what it means to make a
‘‘recommendation’’).
501See Proposing Release, 76 FR at 42415, supra note 3. 502See Proposing Release, 76 FR at 42415, supra note 3. 503See Supplementary Material .03 to FINRA Rule 2090. 504Additionally, as discussed in Section I.E, supra, the duties imposed on an SBS Dealer under the business conduct rules are specific to this context, and are in addition to any duties that may be imposed under other applicable law. Thus, an SBS Dealer must separately determine whether it is subject to regulation as a broker-dealer, an investment adviser, a municipal advisor or other regulated entity. 505See Levin, supra note 5. 506See CFA, supra note 5. In response to the commenter’s other concern regarding the Commission requiring SBS Dealers to maintain sufficient documentation to effectively enforce compliance with the suitability rule, we note that the Commission has separately proposed recordkeeping requirements for SBS Dealers. See Recordkeeping Release, 79 FR at 25135, supra note 242. reasonable basis for a recommendation, to have or obtain relevant information regarding the counterparty, including the counterparty’s investment profile, trading objectives, and its ability to absorb potential losses associated with the recommended security-based swap or trading strategy ‘‘involving a security￾based swap.’’ The Commission does not believe that this is a substantive change. It simply clarifies that the term trading strategy as used in the final line of the rule is the same as recommended trading strategy involving a security￾based swap that is referenced earlier in the rule. As noted in the Proposing Release, although suitability is not expressly addressed in Section 15F(h) of the Exchange Act, the obligation to make only suitable recommendations is a core business conduct requirement for broker-dealers and other financial intermediaries.494 Municipal securities dealers also have a suitability obligation when recommending municipal securities transactions to a customer.495 Depending on the scope of its activities, an SBS Dealer may be subject to one of these other suitability obligations, in addition to those under Rule 15Fh–3(f). In particular, an SBS Dealer that also is a registered broker-dealer and a FINRA member, would be subject to FINRA’s suitability requirements in connection with the recommendation of a security￾based swap or trading strategy involving a security-based swap.496 Rule 15Fh– 3(f) is intended to ensure that all SBS Dealers that make recommendations are subject to this obligation, tailored as appropriate in light of the nature of the security-based swap markets.497 The Commission continues to believe that the determination of whether an SBS Dealer has made a recommendation that triggers suitability obligations should turn on the facts and circumstances of the particular situation and, therefore, whether a recommendation has taken place is not susceptible to a bright line definition.498 This follows the FINRA approach to what constitutes a recommendation for
purposes of FINRA’s suitability rule.499 In the context of the FINRA suitability rule, factors considered in determining whether a recommendation has taken place include whether the communication ‘‘reasonably could be viewed as a ‘call to action’ ’’ and ‘‘reasonably would influence an investor to trade a particular security or group of securities.’’ 500 We note that this could include a call to action regarding buying, selling, materially amending or early termination of a security-based swap. The more individually tailored the communication to a specific customer or a targeted group of customers about a security or group of securities, the greater the likelihood that the communication may be viewed as a ‘‘recommendation.’’ The Commission continues to believe that this approach to determining whether a recommendation has taken place should apply in the context of Rule 15Fh–3(f) as well.501 As noted in the Proposing Release, an SBS Dealer typically would not be deemed to be making a recommendation solely by reason of providing general financial or market information, or transaction terms in response to a request for competitive bids.502 Again, this follows the FINRA approach to determining whether a recommendation has occurred.503 Furthermore, compliance with the requirements of the other business conduct rules, in particular, Rules 15Fh–3(a) (verification of counterparty status), 15Fh–3(b) (disclosures of material risks and characteristics, and material incentives or conflicts of interest), 15Fh–3(c) (disclosures of daily mark), and 15Fh– 3(d) (disclosures regarding clearing rights) would not, in and of itself, result in an SBS Dealer being deemed to be making a ‘‘recommendation.’’ 504 We believe that the suitability obligation in Rule 15Fh–3(f)(1)(i) should address one commenter’s concerns about the possibility that an SBS Dealer will recommend a financial product that it believes will fail or that it does not have the necessary background to understand.505 When making recommendations, SBS Dealers are always required to meet their suitability obligation in Rule 15Fh–3(f)(1)(i), regardless of whether they avail themselves of the institutional suitability alternative to meet their customer-specific suitability obligations. In that respect, SBS Dealers will always be required to undertake reasonable diligence to understand the risks and rewards behind any recommended security-based swap. With respect to another commenter’s concerns about SBS Dealers’ gathering sufficient information to make the customer-specific suitability assessment,506 the Commission notes that Rule 15Fh–3(f)(1)(ii) requires an SBS Dealer to ‘‘have a reasonable basis to believe’’ that a recommended security-based swap or trading strategy is suitable for the counterparty. To establish that reasonable basis, the rule requires the SBS Dealer to ‘‘have or obtain relevant information regarding the counterparty, including the counterparty’s investment profile, trading objectives, and
its ability to

507See CFA, supra note 5.
508See Exchange Act Rule 3a61–1(a)(1) (limiting the definition of ‘‘major security-based swap participant’’ to persons that are not security-based swap dealers). 509See Proposing Release, 76 FR at 42416 n.140, supra note 3. See also Definitions Adopting Release, 77 FR at 30618, supra note 115 (‘‘Advising a counterparty as to how to use security-based swaps to meet the counterparty’s hedging goals, or structuring security-based swaps on behalf of a counterparty, also would indicate security-based swap dealing activity.’’). 510See CFA, supra note 5. 511See Barnard, supra note 5. 512See FIA/ISDA/SIFMA, supra note 5. 513See GFOA, supra note 5. 514See, e.g., Order Granting Approval of a Proposed Rule Change, as Modified by Amendment No. 1 and Amendment No. 2, Consisting of Proposed New Rule G–42, on Duties of Non￾Solicitor Municipal Advisors, and Proposed Amendments to Rule G–8, on Books and Records to be Made by Brokers, Dealers, Municipal Securities Dealers, and Municipal Advisors, Exchange Act Release No. 76753 (Dec. 23, 2015), 80 FR 81614 (Dec. 30, 2015); Order Granting Approval of a Proposed Rule Change Consisting of Proposed Amendments to Rule G–20, on Gifts, Gratuities and Non-Cash Compensation, and Rule G–8, on Books and Records to be Made by Brokers, Dealers, Municipal Securities Dealers, and Municipal Advisors, and the Deletion of Prior Interpretive Guidance, Exchange Act Release No. 76381 (Nov. 6, 2015), 80 FR 70271 (Nov. 13, 2015); see also Notice of Filing of a Proposed Rule Change Consisting of Proposed Amendments to Rule G–37, on Political Contributions and Prohibitions on Municipal Securities Business, Rule G–8, on Books and Records, Rule G–9, on Preservation of Records, and Forms G–37 and G–37x, Exchange Act Release No. 76763 (Dec. 23, 2015), 80 FR 81709 (Dec. 30, 2015). 515See SIFMA (August 2015), supra note 5. 516See CFA, supra note 5. absorb potential losses associated with the recommended security-based swap or trading strategy.’’ The list of ‘‘relevant information’’ in the rule is exemplary, not exhaustive. Whether an SBS Dealer has a reasonable basis to believe that a recommended security-based swap or trading strategy is suitable for the counterparty is a determination that depends on the facts and circumstances of the particular situation. The Commission declines to apply Rule 15Fh–3(f) to Major SBS Participants, as suggested by one commenter.507 As discussed above in
Section II.C, where a business conduct
requirement is not expressly addressed by the Dodd-Frank Act, the Commission is generally not applying such a rule to Major SBS Participants. The Commission continues to believe that it is appropriate not to impose suitability obligations on Major SBS Participants, given that, by definition, Major SBS Participants are not engaged in security￾based swap dealing activity at levels above the de minimis threshold.508 However, if a Major SBS Participant is, in fact, recommending security-based swaps or trading strategies involving security-based swaps to a counterparty, this would indicate that the Major SBS Participant is actually engaged in security-based swap dealing activity.509 If a Major SBS Participant engages in such activity above the de minimis threshold in Exchange Act Rule 3a71–2, it would need to register as an SBS Dealer and, as such, would need to comply with the suitability obligations imposed by Rule 15Fh–3(f). Further, Rule 15Fh–3(f) will not impose suitability obligations on an SBS Dealer transacting with an SBS Entity or Swap Entity. The Commission continues to believe that these types of counterparties, which are professional intermediaries or major participants in the swaps or security-based swaps markets, would not need the protections that would be afforded by this rule. However, taking into account the concerns of one commenter,510 the Commission is not adopting any additional exclusions to the rule at this time, nor is the Commission applying the suitability obligations at the least granular level (e.g., on a transaction-by￾transaction basis, on an asset-class-by￾asset-class basis, or in terms of all potential transactions between the parties), as suggested by another commenter.511 The Commission is also not, as suggested by one commenter,512 providing an opt out from the rule or a policies and procedures alternative. As discussed above in Sections II.A.3.d and II.E, the Commission believes that it is appropriate to apply the suitability rule so that counterparties receive the benefits of the protections provided by the rule; permitting parties to ‘‘opt out’’ of the benefits of the rule or providing a policies and procedures alternative would undermine its core purpose of protecting counterparties. However, while we are not adopting an opt out provision or a policies and procedures alternative, the Commission has determined to permit means of compliance with Rule 15Fh–3(f) that should promote efficiency and reduce costs (e.g., reliance on representations pursuant to Rule 15Fh–1(b)) and allowing SBS Dealers to take into account the sophistication of the counterparty by way of the institutional suitability alternative in Rule 15Fh– 3(f)(2) (described below). The Commission is not adopting one commenter’s suggestion to impose additional standards for the types of financial products that can be sold to state and local governments, including security-based swaps.513 We have determined that additional standards are not needed and
that the rules we are adopting appropriately regulate the business conduct of the professional market intermediaries selling these products. We also note that the MSRB is developing a regulatory framework for municipal advisors, including detailed standards of conduct that municipal advisors owe to municipal entities.514
ii. Institutional Suitability Alternative
and Special Entity Suitability Alternative After considering the comments, the Commission is adopting Rules 15Fh– 3(f)(2)–(4) with a number of modifications. First, in response to a specific suggestion from a commenter,515 the Commission is correcting a typographical error in proposed Rule 15Fh–3(f)(2). The institutional suitability alternative in proposed Rule 15Fh–3(f)(2) was intended to provide SBS Dealers with an alternative method to fulfill their customer-specific suitability obligations described in proposed Rule 15Fh– 3(f)(1)(ii), not their suitability obligations described in proposed Rule 15Fh–3(f)(1)(i). Accordingly, the cross￾reference in the proposed rule should have been to ‘‘paragraph (f)(1)(ii),’’ not to ‘‘paragraph (f)(1).’’ The Commission is correcting this cross-reference in the final rules. Second, in response to concerns raised by a commenter,516 the Commission is also limiting the availability of the institutional suitability alternative to recommendations made to ‘‘institutional counterparties.’’ This is a change from the proposed rule under which the institutional suitability alternative would have been available with respect to recommendations made to any counterparty. Rule 15Fh–3(f)(4), as adopted, defines the term ‘‘institutional counterparty’’ for these purposes to mean a counterparty that is an eligible contract participant as defined in clauses (A)(i), (ii), (iii), (iv), (viii), (ix) or (x), or clause (B)(ii) (other than a person described in clause (A)(v)) of Section 1a(18) of the Commodity Exchange Act and the rules and regulations thereunder, or any person (whether a natural person, corporation, partnership, trust or otherwise) with total assets of at least $50 million. This more closely aligns the treatment of the persons who may most need the protections of the suitability requirements with their treatment under FINRA rules, which limit the application of FINRA’s analogous institutional suitability alternative to recommendations to persons (whether a natural person, corporation, partnership, trust or otherwise) with

517See FINRA Rule 2111(b) (referring to FINRA Rule 4512(c)). 518See Rule 15Fh–3(f)(1)(ii). 519See SIFMA (August 2015), supra note 5. See also CFTC Adopting Release, 77 FR at 9771–9774, supra note 21. 520See SIFMA (August 2015), supra note 5 (noting that ‘‘[a]lthough conforming to the [parallel CFTC suitability rule] would impose additional diligence and compliance requirements on the [SBS Dealer], these requirements would not result in material costs because [SBS Dealers] are already complying with the same requirements under the [parallel CFTC rule]’’). However, we note that the CFTC does not limit the availability of its institutional suitability alternative to recommendations to ‘‘institutional counterparties.’’ See Commodity Exchange Act Rule 23.434(b). 521See SIFMA (August 2015), supra note 5. As discussed in Section II.H.2 below, Rule 15Fh–4(b) generally requires an SBS Dealer that acts as an advisor to a special entity to make a reasonable determination that any recommended security￾based swap or trading strategy involving a security￾based swap is in the best interests of the special entity. 522See proposed Rule 15Fh–3(f)(3). 523See Proposing Release, 76 FR at 42416 n.137, supra note 3. 524See SIFMA (August 2015), supra note 5. However, as noted above, the CFTC does not limit the availability of its alternative to recommendations to ‘‘institutional counterparties.’’ See Commodity Exchange Act Rule 23.434(b). The ‘‘institutional counterparty’’ limitation is discussed above. 525See SIFMA (August 2015), supra note 5. total assets of at least $50 million.517 Rule 15Fh–3(f)(2), as adopted, generally provides that an SBS Dealer may rely on the institutional suitability alternative when making recommendations to institutional counterparties. For a counterparty that is not an institutional counterparty, an SBS Dealer will need to have or obtain relevant information regarding the counterparty to establish a reasonable basis to believe that a recommended security-based swap or trading strategy involving a security￾based swap is suitable for the counterparty.518 Third, in response to specific suggestions from a commenter, the Commission is making changes to harmonize the institutional and special entity suitability alternatives with the CFTC’s parallel provisions.519 Specifically, the Commission is eliminating the separate special entity suitability alternative. Accordingly, an SBS Dealer may satisfy its customer￾specific suitability obligations in Rule 15Fh–3(f)(1)(ii) with respect to any institutional counterparty, including a special entity counterparty that meets the $50 million asset threshold described above, by complying with the requirements of the institutional suitability alternative in Rule 15Fh– 3(f)(2). Having a single institutional suitability alternative will result in greater consistency with the CFTC’s parallel rule, which will result in efficiencies for entities that have already established infrastructure to comply with the CFTC
standard.520 However, the Commission is not adopting the commenter’s suggestion to add a new fourth prong to Rule 15Fh–3(f)(2) that requires an SBS Dealer to comply, in addition to the requirements of the first three prongs (as outlined below), with the requirements of Rule 15Fh–4(b) if the SBS Dealer’s recommendation to a special entity would cause it to be acting as an advisor to the special entity.521 The Commission is not making this change because the rules impose independent requirements, and the Commission believes that SBS Dealers should comply with each rule to the extent applicable. The proposed special entity suitability alternative would have provided that an SBS Dealer would be deemed to satisfy its suitability obligations with respect to a special entity counterparty if the SBS Dealer either (1) is acting as an advisor to the special entity and complies with proposed Rule 15Fh–4(b), or (2) is deemed not to be acting as an advisor to the special entity pursuant to proposed Rule 15Fh–2(a).522 With respect to the former, the Commission believes that when an SBS Dealer is acting as an advisor to a special entity, it is appropriate for both the best interests requirements of Rule 15Fh– 4(b) and the suitability requirements of Rule 15Fh–3(f) to apply. As discussed in
Section II.H.3 below, there is some
overlap between the requirements, so an SBS Dealer’s efforts to satisfy one set of requirements may result in satisfaction of the other. With respect to the latter, the Commission continues to believe, as noted in the Proposing Release, that the standards for determining that an SBS Dealer is not acting as an advisor under Rule 15Fh–2(a) are substantially the same as the standards that an SBS Dealer must satisfy to qualify for the institutional suitability alternative under Rule 15Fh–3(f)(2) (with the exception of the new institutional counterparty limitation described above).523 However, the Commission agrees with the commenter that having a single institutional suitability alternative more consistent with the CFTC’s rule will result in efficiencies and a lower likelihood of counterparty confusion.524 Additionally, as we note above, the rules being adopted today are intended to provide certain protections for counterparties, including certain heightened protections for special entities. In this regard, we believe it is important that the rules impose both sets of requirements on SBS Dealers that make recommendations to special entities so that special entities receive the full range of benefits that the rules are intended to provide. Fourth, the Commission is adding the words ‘‘with regard to the relevant security-based swap or trading strategy involving a security-based swap’’ to modify ‘‘recommendations of the [SBS Dealer]’’ in the second prong of the institutional suitability alternative to match the language used in the first prong and clarify that those are the only recommendations to which the rule refers. The Commission is adopting the other two prongs of the institutional suitability alternative as proposed. Accordingly, as adopted, Rule 15Fh– 3(f)(2) provides that when an SBS Dealer makes a recommendation, it may fulfill its customer-specific suitability obligations under Rule 15Fh–3(f)(1)(ii) with respect to an institutional counterparty, if: (1) The SBS Dealer reasonably determines that the counterparty (or its agent) is capable of independently evaluating investment risks with regard to the relevant security-based swap or trading strategy involving a security-based swap; (2) the counterparty (or its agent) affirmatively represents in writing that it is exercising independent judgment in evaluating the recommendations of the SBS Dealer with regard to the relevant security￾based swap or trading strategy involving a security-based swap; and (3) the SBS Dealer discloses that it is acting in the capacity of a counterparty, and is not undertaking to assess the suitability of the security-based swap or trading strategy for the counterparty. If an SBS Dealer cannot rely on the institutional suitability alternative provided by Rule15Fh–3(f)(2), it would need to make an independent determination that the recommended security-based swap or trading strategy involving security-based swaps is suitable for the counterparty. The Commission believes
that the SBS Dealer reasonably could determine that the counterparty (or its agent) is capable of independently evaluating investment risks with regard to the relevant security-based swap or trading strategy for purposes of Rule 15Fh– 3(f)(2)(i) through a variety of means. However, in response to specific suggestions from a commenter 525 and to provide additional clarity, the Commission is adding a safe harbor in Rule 15Fh–3(f)(3) providing that an SBS Dealer can satisfy its requirement under the first prong of the institutional suitability alternative in Rule 15Fh– 3(f)(2) to make a reasonable determination that the counterparty (or

526As discussed in Section II.H.6.i below, Rule 15Fh–5(b) provides a safe harbor under which an SBS Entity can comply with its obligation to have a reasonable basis to believe that its special entity counterparty has a qualified independent representative that, among other things, has sufficient knowledge to evaluate the transaction and risks and undertakes to act in the best interests of the special entity. Rule 15Fh–5(b) specifies the representations that the SBS Entity must obtain from its special entity counterparty and, in some cases, from such counterparty’s representative, to satisfy the safe harbor. 527See Proposing Release, 76 FR at 42416, supra note 3. 528See discussion in Section II.D, supra. 529See Levin, supra note 5. 530As discussed in Section II.D, under Rule 15Fh–1(b), an SBS Dealer can reasonably rely on written representations from a counterparty or its representative to satisfy its due diligence obligations. Because reliance must be reasonable, the question of whether reliance on representations would satisfy an SBS Dealer’s obligations under our business conduct rules will depend on the facts and circumstances of the particular matter. At a minimum, an SBS Dealer seeking to rely on representations cannot ignore information that would cause a reasonable person to question the accuracy of those representations. 531See CFA, supra note 5. 532 15 U.S.C. 78o–10(h)(3)(C). its agent) is capable of independently evaluating investment risks with regard to the relevant security-based swap or trading strategy if the SBS Dealer receives appropriate written representations from its counterparty. As discussed above in Section II.D, an SBS Dealer can rely on a counterparty’s written representations unless the SBS Dealer has information that would cause a reasonable person to question the accuracy of the representation. Under Rule 15Fh–3(f)(3)(i),if the counterparty is not a special entity, the representations must provide that the counterparty has complied in good faith with written policies and procedures reasonably designed to ensure that the persons evaluating the recommendation and making trading decisions on behalf of the counterparty are capable of doing so. Under Rule 15Fh–3(f)(3)(ii), if the counterparty is a special entity, the representations must satisfy the terms of the safe harbor in Rule 15Fh–5(b).526 If an SBS Dealer chooses not to take advantage of the safe harbor provided by Rule 15Fh–3(f)(3), the Commission believes that the SBS Dealer reasonably could determine that the counterparty (or its agent) is capable of independently evaluating investment risks with regard to the relevant security-based swap or trading strategy for purposes of Rule 15Fh–3(f)(2)(i) through a variety of means. For example, an SBS Dealer could comply with this requirement by having a counterparty indicate in a signed agreement or other document that the counterparty is capable of independently evaluating investment risks with respect to recommendations
or an SBS Dealer could call its counterparty, have that discussion, and (if it chooses or circumstances require) document the conversation to evidence the counterparty’s affirmative indication. The Commission continues to believe that parties should be able to make the disclosures and representations required by Rules 15Fh–3(f)(2) and (3) on a transaction-by-transaction basis, on an asset-class-by-asset-class basis, or broadly in terms of all potential transactions between the parties.527 However, where there is an indication that a counterparty is not capable of independently evaluating investment risks, or does not intend to exercise independent judgment regarding, all of an SBS Dealer’s recommendations, the SBS Dealer necessarily will have to be more specific in its approach to complying with the institutional suitability alternative. For instance, in some cases an SBS Dealer may be unable to determine that a counterparty is capable of independently evaluating investment risks with respect to any security-based swap. In other cases, the SBS Dealer may determine that a counterparty is generally capable of evaluating investment risks with respect to some categories or types of security￾based swaps, but that the counterparty may not be able to understand a particular type of security-based swap or its risk. Additionally, the requirements of Rule 15Fh–1(b) will apply when an SBS Dealer is relying on representations from a counterparty or its representative.528 We are not adopting one commenter’s suggestions to require SBS Dealers to conduct routine audits to ensure that the institutional suitability alternative is used appropriately.529 The Commission does not believe that routine audits are the sole means through which an SBS Dealer could supervise its associated persons’ use of the institutional suitability alternative. The Commission thinks that the totality of the supervisory requirements in Rule 15Fh– 3(h) (discussed below) are appropriate to promote effective supervisory systems and believes that SBS Dealers should have the flexibility to determine what means they will use to supervise their associated persons’ use of the institutional suitability alternative. The Commission notes that in supervising the use of the institutional suitability alternative, SBS Dealers should generally consider whether their associated persons’ reliance on representations from counterparties is reasonable. As discussed above and in
Section II.D, an SBS Dealer (or its
associated person) can rely on a counterparty’s written representations unless the SBS Dealer has information that would cause a reasonable person to question the accuracy of the representation. In this context, information that might be relevant to this determination includes whether the counterparty has previously invested in the type of security-based swap or been involved in the type of trading strategy that the SBS Dealer is now recommending, and whether the counterparty (or its representative) appreciates what differentiates the recommended security-based swap from a less complex alternative. If the associated person knows that the recommended security-based swap or trading strategy represents a significant change from the counterparty’s prior investment strategy or knows that the counterparty (or its representative) lacks an appreciation of what differentiates the recommended security-based swap from a less complex alternative, the associated person should generally consider whether it can reasonably rely on the counterparty’s representation that it is capable of independently evaluating the investment risks.530 The Commission is also not adopting another commenter’s suggestion to add a requirement to the institutional suitability alternative that an SBS Dealer have a reasonable basis to believe its counterparty has the capacity to absorb potential losses related to the recommended security-based swap or trading strategy.531 The Commission believes that the requirement in Rule 15Fh–3(f)(2)(i) that an SBS Dealer ‘‘have a reasonable basis to believe’’ that the counterparty is capable of evaluating investment risks independently is appropriate to support the objectives of the institutional suitability alternative, and does not believe it is necessary to specifically require an SBS Dealer to have a reasonable basis to believe its counterparty has the capacity to absorb potential losses related to the recommended security-based swap or trading strategy.
5. Fair and Balanced Communications
Section 15F(h)(3)(C) of the Exchange
Act requires the Commission to adopt rules establishing a duty for SBS Entities to communicate in a fair and balanced manner based on principles of fair dealing and good faith.532

533Proposed Rule 15Fh–3(g)(1)–(3).
534See CFA, supra note 5; Levin, supra note 5; AFGI (September 2012), supra note 5; AFGI (July 2013), supra note 5. 535See CFA, supra note 5; Levin, supra note 5. 536See AFGI (September 2012), supra note 5; AFGI (July 2013), supra note 5. 537See CFA, supra note 5. 538See Levin, supra note 5. 539 Id. 540See AFGI (September 2012), supra note 5; AFGI (July 2013), supra note 5. 541See AFGI (September 2012), supra note 5; AFGI (July 2013), supra note 5. 542See AFGI (September 2012), supra note 5; AFGI (July 2013), supra note 5. 543See Rule 15Fh–1(a). In response to concerns expressed by a commenter, the Commission notes that there are no exceptions to Rule 15Fh–3(g). See CFA, supra note 5. 544See Levin, supra note 5. 545 Id. 546FINRA Rule 2210(d). See NASD IM–2210– 1(1), Guidelines to Ensure That Communications with the Public Are Not Misleading (‘‘Members must ensure that statements are not misleading within the context in which they are made. A statement made in one context may be misleading even though such a statement could be appropriate in another context. An essential test in this regard is the balanced treatment of risks and potential benefits.’’). 547Cf. FINRA Rule 2210(d)(1)(A) (‘‘All member communications with the public shall be based on principles of fair dealing and good faith, must be fair and balanced, and must provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry, or service.’’). 548Cf. FINRA Rule 2210(d)(1)(F) (‘‘Communications may not predict or project performance, imply that past performance will recur or make any exaggerated or unwarranted claim, opinion or forecast.’’). 549Cf. FINRA Rule 2210(d)(1)(D) (‘‘Members must ensure that statements are clear and not misleading within the context in which they are made, and that they provide balanced treatment of risks and potential benefits. Communications must be consistent with the risks of fluctuating prices and the uncertainty of dividends, rates of return and yield inherent to investments.’’) The Commission believes that this requirement addresses concerns raised by a commenter that to be fair and balanced, communications must inform investors of both the potential rewards and risks of their investments. See Levin, supra note 5. 550See Proposing Release, 76 FR at 42418, supra note 3. 551See Sections 9(j) and 15F(h)(4)(A) of the Exchange Act, 15 U.S.C. 78i(j) and 15 U.S.C. 78o– 10(h)(4)(A)). See also Prohibition Against Fraud, Manipulation, and Deception in Connection with Security-Based Swaps, Exchange Act Release No. 63236 (Nov. 3, 2010), 75 FR 68560 (Nov. 8, 2010) (proposing Rule 9j–1 to implement the antifraud prohibitions of Section 9(j) of the Exchange Act). 552See, e.g., 15 U.S.C. 77q and 78i, and, if the SBS Entity is registered as a broker-dealer, 15 U.S.C. 78o. 553See AFGI (September 2012), supra note 5; AFGI (July 2013), supra note 5. a. Proposed Rule Proposed Rule 15Fh–3(g) would require SBS Entities to
communicate with counterparties in a fair and balanced manner based upon principles of fair dealing and good faith. In particular, the rule would require: (1) Communications to provide a sound basis for evaluating the facts with regard to any particular security-based swap or trading strategy involving a security￾based swap; (2) communications not to imply that past performance will recur or make any exaggerated or unwarranted claim, opinion or forecast; and (3) any statement referring to the potential opportunities or advantages presented by a security-based swap to be balanced by an equally detailed statement of the corresponding risks.533 b. Comments on the Proposed Rule Three commenters addressed the fair and balanced communications requirement.534 Two commenters expressed support for the proposed rule,535 and one was opposed.536 One of the commenters supporting the proposed rule stated that there should not be any exceptions to the proposed fair and balanced communications requirement.537 The other commenter asserted that to be fair and balanced, communications must inform investors of both the potential rewards and risks of their investments, and also the SBS Entity’s involvement and interests in the investments, in specific terms.538 Specifically, the commenter noted that all material adverse interests should be disclosed, and that the rule should clarify that it is not enough to inform a customer that the SBS Entity ‘‘may’’ have an adverse interest if that adverse interest already exists.539 The commenter in opposition to the proposed rule asserted that a fair and balanced communications requirement is unnecessary.540 The commenter explained that the proposed rule is not relevant in the context of SBS Entities’ legacy portfolios since the proposed rule would generally prohibit puffery used to induce a counterparty to enter into new transactions.541 Additionally, the commenter noted that due to the sophisticated nature of counterparties in the security-based swaps market, the fair and balanced communications requirement is not critical, particularly where all SBS Entities’ communications are already subject to the antifraud provisions of the Dodd-Frank Act and the Exchange Act.542
c. Response to Comments and Final
Rule
After considering the comments, the Commission is adopting Rule 15Fh–3(g) as proposed. The rule applies in connection with entering into security￾based swaps, and will continue to apply over the term of a security-based swap.543 The Commission does not believe any changes to the rule are necessary to address a commenter’s concern that to be fair and balanced, communications must inform investors of both the potential rewards and risks of their investments because Rule 15Fh–3(g)(3) already provides that ‘‘[a]ny statement referring to the potential opportunities or advantages presented by a security￾based swap shall be balanced by an equally detailed statement of the corresponding risks.’’ 544 With respect to the commenter’s assertion that fair and balanced communications should also include information regarding the SBS Entity’s involvement and interests in the investments,545 the Commission notes that although specific disclosure regarding conflicts of interest is not required by Rule 15Fh–3(g), it is required by Rule 15Fh–3(b)(2) (disclosure of material incentives or conflicts of interest). The standard set forth in Rule 15Fh– 3(g) is consistent with the similarly worded requirement in the FINRA rule on communications.546 Rule 15Fh–3(g) also includes three specific standards, drawn from the FINRA rule, which should clarify the rule requirement. The standards are: (1) Communications must provide a sound basis for evaluating the facts with respect to any security-based swap or trading strategy involving a security-based swap; 547 (2) communications may not imply that past performance will recur, or make any exaggerated or unwarranted claim, opinion, or forecast; 548 and (3) any statement referring to the potential opportunities or advantages presented by a security-based swap or trading strategy involving a security-based swap shall be balanced by an equally detailed statement of the corresponding risks.549 As noted in the Proposing Release, these standards do not represent an exclusive list of considerations that an SBS Entity must take into account in determining whether a communication with a counterparty is fair and balanced.550 In addition to complying with Rule 15Fh– 3(g), SBS Entities should also keep in mind that all their communications with counterparties will be subject to the specific antifraud provisions added to the Exchange Act under Title VII of the Dodd-Frank Act,551 as well as general antifraud provisions under the federal securities laws.552 The Commission declines to eliminate the fair and balanced communications requirement, as suggested by a commenter,553 because we believe the requirement promotes investor protection by prohibiting SBS Entities from overstating the benefits or understating the risks to inappropriately

554 15 U.S.C. 78o–10(h)(1)(B).
555Proposed Rule 15Fh–3(h)(2)(iii).
556Proposed Rule 15Fh–3(h)(2)(iii)(A). 557Proposed Rule 15Fh–3(h)(2)(iii)(B). 558Proposed Rule 15Fh–3(h)(2)(iii)(C). 559Proposed Rule 15Fh–3(h)(2)(iii)(D). 560Proposed Rule 15Fh–3(h)(2)(iii)(E). 561Proposed Rule 15Fh–3(h)(2)(iii)(F). 562Proposed Rule 15Fh–3(h)(2)(iii)(G). 563Proposed Rule 15Fh–3(h)(2)(iii)(H). 564See 15 U.S.C. 78o–10(j). 565Proposed Rule 15Fh–3(h)(3)(i). 566Proposed Rule 15Fh–3(h)(3)(ii). 567See CFA, supra note 5; FIA/ISDA/SIFMA, supra note 5; MFA, supra note 5; NABL, supra note 5; SIFMA (September 2015), supra note 5. 568See NABL, supra note 5. 569 Id. 570See CFA, supra note 5. influence counterparties’ investment decisions.
6. Obligation Regarding Diligent
Supervision
Section 15F(h)(1)(B) of the Exchange
Act authorizes the Commission to adopt rules for the diligent supervision of the business of SBS Entities.554 a. Proposed Rule Proposed Rule 15Fh–3(h)(1) would require an SBS Entity to establish, maintain and enforce a system to supervise, and to diligently supervise, its business and associated persons, with a view to preventing violations of applicable federal securities laws, rules and regulations relating to its business as an SBS Entity. Proposed Rule 15Fh– 3(h)(2) would require an SBS Entity’s supervisory system to be reasonably designed to achieve compliance with applicable securities laws, rules and regulations, and would establish minimum requirements for the supervisory system. Specifically, proposed Rule 15Fh–3(h)(2)(i) would require an SBS Entity to designate at least one person with authority to carry out the supervisory responsibilities of the SBS Entity for each type of business in which it engages for which registration as an SBS Entity is required. Proposed Rule 15Fh–3(h)(2)(ii) would require an SBS Entity to use reasonable efforts to determine that all supervisors are qualified and meet standards of training, experience, and competence necessary to effectively supervise the security-based swap activities of the persons associated with the SBS Entity. Proposed Rule 15Fh–3(h)(2)(iii) would require an SBS Entity to establish, maintain and enforce written policies and procedures addressing the supervision of the types of security￾based swap business in which the SBS Entity is engaged. The policies and procedures would need to be reasonably designed to achieve compliance with applicable securities laws, rules and regulations,555 and include, at a minimum: (1) Procedures for the review by a supervisor of transactions for which registration as an SBS Entity is required; 556 (2) procedures for the review by a supervisor of incoming and outgoing written (including electronic) correspondence with counterparties or potential counterparties and internal written communications relating to the SBS Entity’s business involving security-based swaps; 557 (3) procedures for a periodic review, at least annually, of the security-based swap business in which the SBS Entity engages that is reasonably designed to assist in detecting and preventing violations of, and achieving compliance with, applicable federal securities laws and regulations; 558 (4) procedures to conduct a reasonable investigation regarding the character, business repute, qualifications, and experience of any person prior to that person’s association with the SBS Entity; 559 (5) procedures to consider whether to permit an associated person to establish or maintain a securities or commodities account in the name of, or for the benefit of such associated person, at another SBS Dealer, broker, dealer, investment adviser, or other financial institution, and if permitted, procedures to supervise the trading in such account, including the receipt of duplicate confirmations and statements
related to such account; 560 (6) a description of the supervisory system, including the titles, qualifications and locations of supervisory persons and the specific responsibilities of each person with respect to the types of business in which the SBS Entity is engaged; 561 (7) procedures prohibiting supervisors from supervising their own activities or reporting to, or having their compensation or continued employment determined by, a person or persons they are supervising; 562 and (8) procedures preventing the standards of supervision from being reduced due to any conflicts of interest of a supervisor with respect to the associated person being supervised.563 Additionally, proposed Rule 15Fh–3(h)(2)(iv) would require an SBS Entity to include written policies and procedures reasonably designed, taking into consideration the nature of the SBS Entity’s business, to comply with the duties set forth in Section 15F(j) of the Exchange Act.564 Under proposed Rule 15Fh–3(h)(3), the Commission proposed two mechanisms under which an SBS Entity or associated person would not be deemed to have failed to diligently supervise any other person. The SBS Entity or associated person could demonstrate that: (1) Such person is not subject to his or her supervision, or (2) it meets the terms of a safe harbor. The safe harbor would require the SBS Entity or associated person to satisfy two conditions. The first condition would be that the SBS Entity has established and maintained written policies and procedures, and a documented system for applying those policies and procedures, that would reasonably be expected to prevent and detect, insofar as practicable, any violation of the federal securities laws and the rules and regulations thereunder relating to security-based swaps.565 The second condition would be that the SBS Entity or associated person has reasonably discharged the duties and obligations required by such written policies and procedures and documented system and did not have a reasonable basis to believe that such written policies and procedures and documented system were not being followed.566 Finally, proposed Rule 15Fh–3(h)(4) would require an SBS Entity to promptly amend its written supervisory procedures as appropriate when material changes occur in either applicable securities laws, rules or regulations, or in the SBS Entity’s business or supervisory system, and to promptly communicate any material amendments to its supervisory procedures throughout the relevant parts of its organization. b. Comments on the Proposed Rule Five commenters addressed the proposed supervision rule.567 One commenter supported the requirement in proposed Rule 15Fh–3(h)(2)(iv) that SBS Entities adopt written policies and procedures reasonably designed to ensure compliance with the duties set forth in Section 15F(j) of the Exchange Act.568 The commenter noted that this approach, which does not mandate the inclusion of specific elements or prohibitions, will provide SBS
Entities flexibility in establishing compliance policies appropriate for their management and organizational structure.569 Another commenter argued for additional diligent supervision requirements.570 The commenter recommended requiring supervisory personnel to report to upper management or the board, as appropriate, if they have reason to believe the SBS Entity’s supervisory procedures are not proving effective in

571 Id.
572 Id.
573See FIA/ISDA/SIFMA, supra note 5. 574 Id. 575 Id. 576See MFA, supra note 5. 577 Id. 578See SIFMA (September 2015), supra note 5. Although the Commission modeled proposed Rule 15Fh–3(h) in part on NASD Rules 3010 (Supervision) and 3012 (Supervisory Control System), the Commission subsequently approved new consolidated FINRA Rules 3110 (Supervision) and 3120 (Supervisory Control System), which are largely based on and replace NASD Rules 3010 and 3012, and corresponding provisions of the NYSE Rules and Interpretations. See Order Approving Proposed Rule Change as Modified by Amendment No. 1, Exchange Act Release No. 71179 (Dec. 23, 2013), 78 FR 79542 (Dec. 30, 2013). 579 Id. 580 Id. 581 Id. 582 Id. 583 Id. 584 Id. 585See SIFMA (September 2015), supra note 5; FIA/ISDA/SIFMA, supra note 5. 586As noted above, although the Commission modeled proposed Rule 15Fh–3(h) in part on NASD Rules 3010 (Supervision) and 3012 (Supervisory Control System), the Commission subsequently approved new consolidated FINRA Rules 3110 (Supervision) and 3120 (Supervisory Control System), which are largely based on and replace NASD Rules 3010 and 3012, and corresponding provisions of the NYSE Rules and Interpretations. Among other changes to the rules, the new FINRA rules contain new or modified requirements with respect to: (i) Which personnel can supervise other personnel; (ii) which personnel are permitted to perform office inspections; (iii) review of certain internal communications; and (iv) obligations to monitor for insider trading, conduct internal investigations and provide reports to FINRA regarding such investigations. The new FINRA rule also codified guidance regarding the permissible use of risk-based systems for review of transactions and correspondence. See Order Approving Proposed Rule Change as Modified by Amendment No. 1, Exchange Act Release No. 71179 (Dec. 23, 2013), 78 FR 79542 (Dec. 30, 2013). 587See SIFMA (September 2015), supra note 5. 588See SIFMA (September 2015), supra note 5. preventing violations.571 The commenter also suggested requiring SBS Entities to reevaluate their supervisory procedures when they fail to detect or deter significant violations, and determine whether revisions are needed.572 In contrast, a third commenter requested that the Commission narrow the proposed supervision requirements.573 The commenter suggested that the Commission clarify that when an SBS Entity is already subject to, and complies with, comparable requirements of another ‘‘qualifying regulator’’ (such as risk management standards imposed by a prudential regulator), the SBS Entity’s supervisory policies and procedures will be deemed to be reasonably designed for purposes of the proposed rule.574 The commenter also requested that the Commission clarify that a person committing a violation will not be viewed as being subject to the supervision of another person unless the putative supervisor knew or should have known that he or she had the authority and
responsibility to exercise control over the other person that could have prevented the violation.575 A fourth commenter opposed the application of the proposed rule to Major SBS Participants.576 The commenter asserted that the proposed rule imposes burdensome and costly supervisory procedures on Major SBS Participants that are not appropriate given their non-dealer role in the marketplace, and that the potential costs of compliance would be without any meaningful offsetting benefit for other market participants or the financial markets as a whole.577 A fifth commenter recommended harmonizing the Commission’s supervision requirements with FINRA Rule 3110 to enable SBS Entities that are also broker-dealers to make use of their existing supervisory systems and to minimize confusion.578 Specifically, the commenter suggested eliminating the proposed requirements in proposed Rule 15Fh–3(h)(1) to ‘‘enforce’’ a system to supervise and to diligently supervise ‘‘the business’’ (as opposed to the associated persons) of the SBS Entity, and changing the description of the supervisory system from ‘‘with a view to preventing violations of’’ to ‘‘reasonably designed to ensure compliance with’’ the provisions of applicable federal securities laws and the rules and regulations thereunder relating to its business as an SBS Entity.579 The commenter also recommended eliminating the redundant description of the supervisory system in proposed Rule 15Fh–3(h)(2), and making a number of changes to the wording of the minimum requirements listed in sub￾section (h)(2) to align them with FINRA Rule 3110.580 The commenter also asked that the Commission modify the rule text to reflect that security-based swaps are not necessarily traded in an ‘‘account’’ but rather pursuant to a bilateral trading relationship.581 Additionally, the commenter recommended adding a provision allowing an SBS Entity that cannot comply with the requirement in proposed Rule 15Fh–3(h)(2)(iii)(G) (preventing a supervisor from supervising his or her own activities or reporting to a person he or she is supervising) to document its determination that compliance is not possible because of the firm’s size or a supervisory person’s position within the firm and document how the supervisory arrangement otherwise complies with proposed Rule 15Fh–3(h)(1).582 The commenter also requested that the Commission provide guidance regarding risk-based reviews that is consistent with FINRA supplementary material on the topic.583 Finally, the commenter recommended wording changes to the maintenance of written supervisory procedures requirement in proposed Rule 15Fh–3(h)(4) to harmonize with FINRA Rule 3110, including eliminating the proposed requirement to update the written supervisory procedures when material changes occur to the ‘‘business,’’ as opposed to the supervisory system.584
c. Response to Comments and Final
Rule
After considering the comments, the Commission is adopting Rule 15Fh–3(h) With certain modifications. In response to commenters’ concerns regarding SBS Entities that will also be registered as broker-dealers or Swap Entities being subject to overlapping requirements with respect to their supervisory systems,585 the modifications (discussed below) are primarily intended to make the final rule more consistent with FINRA Rule 3110 and the CFTC’s supervision rule for Swap Entities while continuing to provide protections intended to help ensure that SBS Entities have effective supervisory systems.586 While, as discussed throughout this release, we are making changes to many of the business conduct rules that are intended to make the final rules more consistent with the parallel CFTC requirements, for the supervision and CCO rules, in particular, we agree with a commenter that consistency with the parallel FINRA rules is also important because many SBS Entities have already established infrastructure to comply with those rules in the context of broader supervisory and compliance programs across their security-based swap and related securities and swaps businesses.587 This consistency will result in efficiencies for SBS Entities that have already established supervisory systems to comply with the FINRA and/or CFTC standards. Consistent wording will also allow SBS Entities to more easily analyze compliance with the Commission’s rule against their existing activities to comply with FINRA Rule 3110 and the CFTC’s supervision rule for Swap Entities. First, in response to a specific suggestion made by a commenter,588 the

589Cf. FINRA Rule 3110(a) (‘‘Each member shall establish and maintain a system to supervise the activities of each associated person. . .’’); Commodity Exchange Act Rule 23.602(a) (‘‘Each [Swap Entity] shall establish and maintain a system to supervise, and shall diligently supervise, all activities relating to its business performed by its partners, members, officers, employees, and agents (or persons occupying a similar status or performing a similar function) . . .’’). 590See SIFMA (September 2015), supra note 5. 591This formulation tracks the requirement in Exchange Act Rule 15Fb2–1(b) that a senior officer of the SBS Entity certify on Form SBSE–C that ‘‘[a]fter due inquiry, he or she has reasonably determined that the [SBS Entity] has developed and implemented written policies and procedures reasonably designed to prevent violation of federal securities laws and the rules thereunder.’’ Cf. FINRA Rule 3110(a) (‘‘Each member shall establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules.’’); Commodity Exchange Act Rule 23.602(a) (‘‘Each [Swap Entity] shall establish and maintain a system to supervise... Such system shall be reasonably designed to achieve compliance with the requirements of the Commodity Exchange Act and [CFTC] regulations.’’). 592See SIFMA (September 2015), supra note 5. 593Cf. FINRA Rule 3110(a)(6) (‘‘A member’s supervisory system shall provide . . . for . . . [t]he use of reasonable efforts to determine that all supervisory personnel are qualified, either by virtue of experience or training, to carry out their assigned responsibilities.’’). 594Cf. FINRA Rule 3110(b)(1) (‘‘Each member shall establish, maintain, and enforce written procedures to supervise the types of business in which it engages and the activities of its associated persons . . .’’). 595Cf. FINRA Rule 3110(e) (‘‘Each member shall ascertain by investigation the good character . . . of an applicant before the member applies to register that applicant with FINRA . . .’’). Commission is making several wording changes to the description of the general requirement to establish a supervisory system in Rule 15Fh–3(h)(1). The Commission is deleting the words ‘‘and enforce’’ from the description and adding the modifying language ‘‘the activities of’’ before associated persons so that it requires an SBS Entity to ‘‘establish and maintain a system to supervise, and [to] diligently supervise, its business and the activities of its associated persons.’’ 589 Rule 15Fh– 3(h)(2)(iii) (discussed below) includes an express requirement to enforce supervisory policies and procedures, making the additional language regarding enforcing the system to supervise unnecessary. Accordingly, the Commission believes that the rule, as adopted with these wording changes, will continue to establish requirements to help ensure that SBS
Entities have effective supervisory systems, consistent with the proposed rule. At the same time, the changes will make the wording of the rule more consistent with the corresponding FINRA and CFTC requirements, as requested by a commenter. This consistency will result in efficiencies for SBS Entities that have already established supervisory systems to comply with the FINRA and/or CFTC standards, as discussed above. Second, the Commission is making further wording changes to the descriptions of the required supervisory system in Rule 15Fh–3(h)(1) and (2) in response to concerns raised by a commenter regarding the redundancy of the descriptions.590 Proposed Rule 15Fh–3(h)(1) would require SBS Entities to ‘‘establish . . . a system to supervise... with a view to preventing violations of the provisions of applicable federal securities laws and the rules and regulations thereunder relating to its business [as an SBS Entity],’’ and proposed Rule 15Fh– 3(h)(2) would specify that the required system be ‘‘reasonably designed to achieve compliance with applicable securities laws and the rules and regulations thereunder.’’ The Commission does not believe that the two descriptions (‘‘prevent violations’’ and ‘‘achieve compliance’’) are substantively different, nor did we intend to give the appearance of creating two different standards for what is essentially the same requirement. Accordingly, the Commission is changing and consolidating the description of the supervisory system in Rule 15Fh–3(h)(1) to state that an SBS Entity’s supervisory system ‘‘shall be reasonably designed to prevent violations of applicable federal securities laws and the rules and regulations thereunder relating to its business [as an SBS Entity],’’ and eliminating the redundant description in Rule 15Fh–3(h)(2).591 Additionally, the Commission is making parallel changes to Rules 15Fh–3(h)(2)(iii) and 15Fh–3(h)(2)(iii)(C). Specifically, the Commission is changing the requirement in Rule 15Fh–3(h)(2)(iii) that the supervisory system provide for the establishment, maintenance and enforcement of certain written policies and procedures from policies and procedures that are ‘‘reasonably designed to achieve compliance with’’ to policies and procedures that are ‘‘reasonably designed to prevent violations of applicable federal securities laws and the rules and regulations thereunder.’’ The Commission is also changing the requirement in Rule 15Fh–3(h)(2)(iii)(C) that an SBS Entity’s supervisory policies and procedures include procedures for a periodic review of the SBS Entity’s security-based swap business by eliminating the redundant requirement that the review be reasonably designed to assist in ‘‘achieving compliance with’’ applicable federal securities laws and regulations and conforming the remaining language. Accordingly, as adopted, Rule 15Fh–3(h)(2)(iii)(C) requires an SBS Entity’s written supervisory policies and procedures to include ‘‘[p]rocedures for a periodic review, at least
annually, of the security￾based swap business in which the [SBS Entity] engages that is reasonably designed to assist in detecting and preventing violations of applicable federal securities laws and the rules and regulations thereunder.’’ Third, in response to concerns raised by a commenter,592 the Commission is changing the wording of the minimum requirements for a supervisory system listed in Rule 15Fh–3(h)(2) to more closely align the requirements of our rule with those of FINRA Rule 3110, and to reflect the fact that security-based swaps are not necessarily traded in an ‘‘account’’ but rather pursuant to a bilateral trading relationship. Specifically, the Commission is: (1) Changing the description of the requirement that supervisors be qualified in Rule 15Fh–3(h)(2)(ii) from ‘‘qualified and meet standards of training, experience, and competence necessary to effectively supervise the security-based swap activities of the persons associated with the [SBS Entity]’’ to ‘‘qualified, either by virtue of experience or training, to carry out their assigned responsibilities;’’ 593 (2) adding ‘‘and the activities of its associated persons’’ to the policies and procedures requirement in Rule 15Fh–3(h)(2)(iii) so that it requires ‘‘written policies and procedures addressing the supervision of the types of security-based swap business in which the [SBS Entity] is engaged and the activities of its associated persons;’’ 594 (3) adding ‘‘good’’ to the description of the requirement to have procedures for background investigations on associated persons in Rule 15Fh–3(h)(2)(iii)(D) so that it requires ‘‘procedures to conduct a reasonable investigation regarding the good character’’ of an associated person; 595 (4) adding ‘‘or a trading relationship’’ to the description of the requirement to have procedures for considering whether to allow an associated person to conduct trading for his or her own benefit at another financial institution in Rule 15Fh– 3(h)(2)(iii)(E) so that it requires ‘‘procedures to consider whether to permit an associated person to establish or maintain a securities or commodities account or a trading relationship;’’ and (5) changing the description of the

596Cf. FINRA Rule 3110(b)(6)(D) (‘‘The supervisory procedures... shall include... procedures reasonably designed to prevent the supervisory system required pursuant to paragraph (a) of this Rule from being compromised due to the conflicts of interest that may be present with respect to the associated person being supervised, including the position of such person, the revenue such person generates for the firm, or any compensation that the associated person conducting the supervision may derive from the associated person being supervised, including the position of such person, the revenue such person generates for the firm, or any compensation that the associated person conducting the supervision may derive from the associated person being supervised.’’). 597See Order Approving Proposed Rule Change to Adopt FINRA Rule 3210 (Accounts at Other Broker￾Dealers and Financial Institutions), as Modified by Partial Amendment No. 1 and Partial Amendment No. 2, in the Consolidated FINRA Rulebook, Exchange Act Release No. 77550 (Apr. 7, 2016), 81 FR 21924 (Apr. 13, 2016) (‘‘Proposed FINRA Rule 3210(c) would require an executing member, upon written request by the employer member, to transmit duplicate copies of confirmations and statements, or the transactional data contained therein, with respect to an account subject to the rule.’’). 598See SIFMA (September 2015), supra note 5. 599See SIFMA (September 2015), supra note 5. 600Section 15F(g)(1) of the Exchange Act provides that each SBS Entity shall maintain daily trading records of the security-based swaps of the SBS Entity and all related records (including related cash or forward transactions) and recorded Continued requirement to have conflicts of interest procedures in Rule 15Fh–3(h)(2)(iii)(H) from ‘‘procedures preventing the standards of supervision from being reduced due to any conflicts of interest of a supervisor with respect to the associated person being supervised’’ to ‘‘procedures reasonably designed to prevent the supervisory system required by paragraph (h)(1) from being compromised due to the conflicts of interest that may be present with respect to the associated person being supervised, including the position of such person, the revenue such person generates for the [SBS Entity], or any compensation that the associated person conducting the supervision may derive from the associated person being supervised.’’ 596 The Commission believes that the rule, as adopted with these changes, will continue to provide protections intended to help ensure that SBS Entities have effective supervisory systems, consistent with the proposed rule. At the same time, the changes will make the wording of the rule more consistent with the parallel FINRA requirement, resulting in efficiencies for SBS Entities that have already established supervisory systems to comply with the FINRA standard, as discussed above. In addition to the wording changes described above, the Commission is making two other sets of changes
to the minimum requirements for a supervisory system listed in Rule 15Fh– 3(h)(2). First, the Commission is eliminating the specific requirement in proposed Rule 15Fh–3(h)(2)(iii)(E) that the supervision of trading in an associated person’s securities or commodities account at another financial institution ‘‘includ[e] the receipt of duplicate confirmations and statements related to such accounts.’’ This change is intended to more closely align our requirement with the analogous FINRA rule, which was amended after our proposal.597 The amended FINRA rule replaced the requirement to receive duplicate confirmation and statements with a more flexible standard by which firms can determine the data source(s) that are the most effective means to review trading activity. Likewise, this change is also intended to provide SBS Entities reasonable flexibility to craft appropriate supervisory policies and procedures relevant to their business model and to ascertain the means to obtain the necessary data for effective supervision. The Commission notes that the rule, in permitting flexibility, does not limit the SBS Entity’s discretion to request from the associated person such transaction and account information as the SBS Entity deems necessary to fulfill its supervisory obligations (including confirmations and statements related to the account or trading relationship), and SBS Entities may consider the availability of such information and whether activity in the account can be properly monitored when determining whether to provide consent to an associated person to open or maintain an account or trading relationship at another financial institution. Second, in response to concerns raised by a commenter,598 the Commission is modifying Rule 15Fh– 3(h)(2)(iii)(G) to address circumstances where an SBS Entity is unable to comply with the supervisory requirements due to the SBS Entity’s size or supervisor’s position within the SBS Entity. Pursuant to final Rule 15Fh–3(h)(2)(iii)(G), an SBS Entity that cannot comply with the requirement in Rule 15Fh–3(h)(2)(iii)(G) (preventing a supervisor from supervising his or her own activities or reporting to a person he or she is supervising) will be required to document its determination that compliance is not possible because of the firm’s size or a supervisory person’s position within the firm, document how the supervisory arrangement otherwise complies with Rule 15Fh–3(h)(1), and include a summary of such determination in the annual compliance report prepared by the SBS Entity’s CCO pursuant to Rule 15Fk–1(c). This change is designed to address concerns raised by a commenter that due to the size or structure of some SBS Entities, it may not always be possible to prohibit an associated person who performs a supervisory function at an SBS Entity from supervising his or her own activities or reporting to a person whom he or she is supervising.599 The Commission believes adding the provision described above will make the
supervisory requirements more operationally workable by providing flexibility, in particular for supervision of very senior SBS Entity personnel, while still maintaining appropriate investor protection through the requirement to document how the supervisory arrangement otherwise complies with Rule 15Fh–3(h)(1). The Commission notes that SBS Entities relying on this provision will also be subject to the other requirements of Rule 15Fh–3(h), including the requirement in Rule 15Fh–3(h)(2)(iii)(H) to have procedures reasonably designed to prevent the supervisory system from being compromised due to the conflicts of interest that may be present with respect to the associated person being supervised, including the position of such person, the revenue such person generates for the SBS Entity, or any compensation that the associated person conducting the supervision may derive from the associated person being supervised. The Commission notes that the minimum requirements for a supervisory system listed in Rule 15Fh– 3(h)(2) are not an exhaustive list. SBS Entities should keep in mind their overarching obligation in Rule 15Fh– 3(h)(1) to establish and maintain a supervisory system that is reasonably designed to prevent violations of applicable federal securities laws and the rules and regulations thereunder relating to the SBS Entity’s business as an SBS Entity. For instance, although Rule 15Fh–3(h)(2)(iii)(B) only requires procedures ‘‘for the review by a supervisor of incoming and outgoing written (including electronic) correspondence with counterparties or potential counterparties and internal written communications relating to the [SBS Entity’s] business involving security-based swaps,’’ if an SBS Entity records oral communications with counterparties or potential counterparties, the SBS Entity generally should consider providing for the supervisory review of such communications.600 Similarly, if an SBS

communications, including electronic mail, instant messages, and recordings of telephone calls, for such period as may be required by the Commission by rule or regulation. See 15 U.S.C. 78o–10(g)(1). To implement Section 15F(g)(1) of the Exchange Act, the Commission has proposed to amend the preservation requirement in paragraph (b)(4) of Exchange Act Rule 17a–4 to include ‘‘recordings of telephone calls required to be maintained pursuant to [Section 15F(g)(1) of the Exchange Act].’’ Under this proposed requirement, a broker-dealer SBS Entity would be required to preserve for three years telephone calls that it chooses to record to the extent the calls are required to be maintained pursuant to Section 15F(g)(1) of the Exchange Act. The Commission has also proposed a parallel requirement for stand-alone SBS Entities. See Recordkeeping Release, 79 FR at 25213–25214, supra note 242. 601See SIFMA (September 2015), supra note 5. 602Cf. FINRA Rule 3110(b)(7) (‘‘Each member shall promptly amend its written supervisory procedures to reflect changes in applicable securities laws or regulations, including FINRA rules, and as changes occur in its supervisory system. Each member is responsible for promptly communicating its written supervisory procedures and amendments to all associated persons to whom such written supervisory procedures and amendments are relevant based on their activities and responsibilities.’’). 603See SIFMA (September 2015), supra note 5. 604This guidance is intended to respond to a request from a commenter to provide guidance regarding risk-based reviews that is consistent with Supplementary Material .05 and .06 to FINRA Rule
3110. See SIFMA (September 2015), supra note 5.
605 15 U.S.C. 78o–10(j).
606The Commission has separately proposed to require every SBS Entity for which there is not a prudential regulator (‘‘Non-bank SBS Dealers’’) to comply, with certain exceptions, with the requirements of Rule 15c3–4 under the Exchange Act ‘‘as if it were an OTC derivatives dealer with respect to all of its business activities.’’ See Exchange Act Rule 18a–1(g). See also Capital, Margin, and Segregation Requirements for Security￾Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Entity chooses to provide certain disclosures required by Rule 15Fh–3(b) orally, the SBS Entity should consider how it will supervise these oral communications. In response to a specific suggestion made by a commenter,601 the Commission is modifying the maintenance of written supervisory procedures requirement in Rule 15Fh– 3(h)(4) to harmonize with FINRA Rule
3110. Specifically, we are changing the
requirement to promptly communicate material amendments to an SBS Entity’s supervisory procedures from ‘‘throughout the relevant parts of its organization’’ to ‘‘to all associated persons to whom such amendments are relevant based on their activities and responsibilities.’’ 602 We believe that the new formulation will be more effective at achieving its intended result by targeting the communications to the associated persons to whom such amendments are relevant. The Commission believes that under the proposed formulation, potential interpretations of the phrase ‘‘relevant parts of its organization’’ may have resulted in communications to a broader than necessary group. The Commission declines to adopt the commenter’s suggestion to eliminate the proposed requirement in Rule 15Fh–3(h)(4)(i) for an SBS Entity to update its written supervisory procedures when material changes occur to its ‘‘business,’’ in addition to its supervisory system.603 Rule 15Fh–3(h)(1) requires an SBS Entity to diligently supervise its business. Implicit in that obligation is a requirement that the SBS Entity update its supervisory system as necessary to accommodate changes to its business. The Commission does not want to create confusion regarding this obligation by eliminating the explicit requirement in Rule 15Fh–3(h)(4)(i) for an SBS Entity to update its supervisory procedures when material changes occur to its business. In addition to the modifications discussed above, the Commission is making several clarifying changes to the rule. First, the Commission is correcting a typographical error in Rule 15Fh– 3(h)(2). The cross-reference in the proposed rule should have been to ‘‘paragraph (h)(1),’’ not to ‘‘paragraph (g)(1).’’ The Commission is correcting this cross-reference in the final rule. Second, the Commission also is making two other changes to the rule to clarify that Rule 15Fh–3(h) does not require multiple sets of written supervisory policies and procedures. Specifically, the Commission is: (1) Re￾designating proposed Rule 15Fh– 3(h)(2)(iv) as Rule 15Fh–3(h)(2)(iii)(I); and (2) clarifying that the written policies and procedures referred to in Rule 15Fh–3(h)(3) are those required by Rule 15Fh–3(h)(2)(iii) by adding the modifying language ‘‘as required in § 240.15Fh–3(h)(2)(iii)’’ after ‘‘written policies and procedures’’ in Rule 15Fh– 3(h)(3)(i), and by changing the references in Rule 15Fh–3(h)(3)(ii) from ‘‘the written policies and procedures’’ to ‘‘such written policies and procedures.’’ Rule 15Fh–3(h) establishes supervisory obligations that incorporate principles from both Exchange Act
Section 15(b) and existing SRO rules.
The concept of diligent supervision in these rules is consistent with business conduct standards for broker-dealers that have historically been established by SROs for their members, subject to Commission approval. As with diligent supervision by a broker-dealer, the Commission believes that it generally would be appropriate for an SBS Entity to use a risk-based review system to satisfy its supervisory obligations under Rule 15Fh–3(h) instead of conducting detailed reviews of every transaction or every communication, so long as the SBS Entity uses a risk-based review system that is reasonably designed to provide the entity with sufficient information to allow it to focus on the areas that pose the greatest risks of federal securities law violations.604 Use of a risk-based system allows SBS Entities the flexibility to establish their supervisory systems in a manner that reflects their business models, and based on those models, focus on areas where heightened concern may be warranted. Rule 15Fh–3(h)(2)(iii)(I), as adopted, requires an SBS Entity to adopt written policies and procedures reasonably designed, taking into consideration the nature of such SBS Entity’s business, to comply with the duties set forth in
Section 15F(j) of the Exchange Act.
Section 15F(j) of the Exchange Act
requires an SBS Entity to comply with obligations concerning: (1) Monitoring of trading to prevent violations of applicable position limits; (2) establishing sound and professional risk management systems; (3) disclosing to regulators information concerning its trading in security-based swaps; (4) establishing and enforcing internal systems and procedures to obtain any necessary information to perform any of the functions described in Section 15F of the Exchange Act, and providing the information to regulators, on request; (5) implementing conflict-of-interest systems and procedures; and (6) addressing antitrust considerations such that the SBS Entity does not adopt any process or take any action that results in any unreasonable restraint of trade or impose any material anticompetitive burden on trading or clearing.605 While the requirements of Section 15F(j) are self-executing, we highlight in particular the duty of an SBS Entity under Section 15F(j)(2) to ‘‘establish robust and professional risk management systems adequate for managing the day-to-day business’’ of the SBS Entity. Any risk management system established by an SBS Entity should be effective to manage the risks of the SBS Entity within the risk tolerance limits to be determined for each type of risk. We have separately proposed a rule regarding the requirement for an SBS Entity for which there is not a prudential regulator to establish, document, and maintain controls to assist it in managing the risks associated with its business activities, including market, credit, leverage, liquidity, legal, and operational risks.606

Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, Exchange Act Release No. 68071 (Oct. 18, 2012), 77 FR 70214, 70250–70251 (Nov. 23, 2012), explaining that application of Rule 15c3–4 would require a Non￾bank SBS Entity to ‘‘establish, document, and maintain a system of internal risk management controls to assist in managing the risks associated with its business activities, including market, credit, leverage, liquidity, legal, and operational risks.’’ Rule 15c3–4 identifies a number of elements that must be part of the risk management system including, among other things: A risk control unit that reports directly to senior management and is independent from business trading units; separation of duties between persons responsible for entering into a transaction and those responsible for recording the transaction on the dealer’s books; and periodic reviews (which may be performed by internal audit staff) and annual reviews (which must be conducted by independent certified public accountants) of the dealer’s risk management systems. Id. 607See FIA/ISDA/SIFMA, supra note 5. 608See MFA, supra note 5. 609One commenter requested clarification that a person committing a violation will not be viewed as subject to the supervision of another person unless such other person knew or should have known that he or she had authority and responsibility to exercise control over the violator that could have prevented the violation. See FIA/ ISDA/SIFMA, supra note 5. The Commission notes that if the conditions of the safe harbor in Rule 15Fh–3(h)(3) are not met, liability for failure to supervise would be a facts and circumstances determination, which would take into account the factors described by the commenter. 610We are not adopting a commenter’s recommendation that our rules expressly require supervisory personnel to ‘‘report up’’ to upper management of the board, and require an SBS Entity to reevaluate its supervisory procedures if they fail to detect or deter significant violations. See CFA, supra note 5. We note that Rule 15Fh–3(h) provides a baseline for an effective supervisory system, but, as noted in the Proposing Release, a particular system may need additional elements to be effective. See Proposing Release, 76 FR at 42419, supra note 3. For that reason, Rule 15Fh–3(h)(2) states that it establishes only minimum requirements. Id. 611See Proposing Release, 76 FR at 42420, supra note 3. With respect to broker-dealers, the Commission’s policy regarding failure to supervise is well established. See 15 U.S.C. 78o(b)(4)(E) and 15 U.S.C. 78o(b)(6)(A). As the Commission has explained in other contexts:
The Commission has long emphasized that the responsibility of broker-dealers to supervise their employees is a critical component of the federal regulatory scheme . . . In large organizations it is especially imperative that those in authority exercise particular vigilance when indications of irregularity reach their attention. The supervisory obligations imposed by the federal securities laws require a vigorous response even to indications of wrongdoing. Many of the Commission’s cases involving a failure to supervise arise from situations where supervisors were aware only of ‘‘red flags’’ or ‘‘suggestions’’ of irregularity, rather than situations where, as here, supervisors were explicitly informed of an illegal act. Even where the knowledge of supervisors is limited to ‘‘red flags’’ or ‘‘suggestions’’ of irregularity, they cannot discharge their supervisory obligations simply by relying on the unverified representations of employees. Instead, as the Commission has repeatedly emphasized, ‘‘[t]here must be adequate follow-up and review when a firm’s own procedures detect irregularities or unusual trading activity. . . .’’ Moreover, if more than one supervisor is involved in considering the actions to be taken in response to possible misconduct, there must be a clear definition of the efforts to be taken and a clear assignment of those responsibilities to specific individuals within the firm. John H. Gutfreund, Exchange Act Release No. 31554 (Dec. 3, 1992) (report pursuant to Section 21(a) of the Exchange Act) (footnotes omitted). See Proposing Release, 76 FR at 42419 n.158, supra note 3. 612See Section II.D.2.a, infra. 613 15 U.S.C. 78o–10(h)(4)–(5). 614Section 501(c)(3) of the Internal Revenue Code of 1986 includes, in its list of ‘‘exempt organizations’’:
Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. 26 U.S.C. 501(c)(3). We are not adopting a commenter’s 607 suggestion that when an SBS Entity is already subject to, and complies with, comparable requirements of another ‘‘qualifying regulator’’ (such as risk management standards imposed by a prudential regulator), the SBS Entity’s supervisory policies and procedures will be deemed to be reasonably designed for purposes of Rule 15Fh– 3(h). Exchange Act Section 15F(h)(1)(B) directs the Commission to adopt rules relating to the diligent supervision of SBS Entities’ business. Although we have closely conformed our supervision rule to parallel SRO requirements and believe it is also consistent with parallel CFTC requirements, we do not believe it is appropriate to defer to other regulators’ rules, other than as discussed below in Section III. In addition, we are not excluding Major SBS Participants from the scope of the rule, as one commenter suggested.608 We note that Exchange Act Section 15Fh(1)(B) explicitly contemplates that Major SBS Participants, as well as SBS Dealers, will have obligations to supervise diligently their security-based swap business. As discussed above in Section II.C, where the Dodd-Frank Act imposes a business conduct requirement on both SBS Dealers and Major SBS Participants, the rules will apply to both entities. Rule 15Fh–3(h)(3), as adopted, provides that SBS Entities and associated persons will not be liable for failure to supervise another person if either the other person is not subject to the SBS Entity’s or associated person’s supervision, or if the safe harbor described in the rule is satisfied.609 The safe harbor contains two conditions. First, the SBS Entity must have established policies and procedures, and a system for applying those policies and procedures, which would reasonably be expected to prevent and detect, to the extent practicable, any violation of the federal securities laws and the rules and regulations thereunder relating to security-based swaps. Second, the SBS Entity or associated person must have reasonably discharged the duties and obligations incumbent on it by reason
of such procedures and system without a reasonable basis to believe that such procedures were not being followed.610 Both conditions must be met in order for an SBS Entity to satisfy the safe harbor. However, as noted in the Proposing Release, the inability to rely on the safe harbor would not necessarily mean that an SBS Entity or associated person failed to diligently supervise any other person.611 H. Rules Applicable to Dealings With Special Entities Sections 15F(h)(4) and (5) of the Exchange Act provide certain additional protections for ‘‘special entities’’—such as municipalities, federal and state agencies, pension plans, and endowments 612—in connection with security-based swaps.613 Special entities, like other market participants, may use swaps and security-based swaps for a variety of purposes, including risk management and portfolio adjustment. In adopting the special entity provisions of the Exchange Act, the Commission seeks to implement the statute, while not impeding special entities’ access to security-based swaps.

1. Scope of Definition of ‘‘Special
   Entity’’ a. Proposed Rule Exchange Act Section 15F(h)(2)(C) defines a ‘‘special entity’’ as: (i) A Federal agency; (ii) a State, State agency, city, county, municipality, or other political subdivision of a State; (iii) any employee benefit plan, as defined in
   Section 3 of ERISA; (iv) any
   governmental plan, as defined in
   Section 3 of ERISA; or (v) any
   endowment, including an endowment that is an organization described in
   Section 501(c)(3) of the Internal
   Revenue Code of 1986.614 Proposed Rule 15Fh–2(e) defines a ‘‘special entity’’ as: (i) A Federal agency; (ii) a State, State agency, city, county, municipality, or other political

615See CFA, supra note 5. See also Exchange Act
Section 15F(h)(2)(C).
616Proposing Release, 76 FR 42421, n. 176, supra note 3 (citing Section 3(a)(68) of the Exchange Act). 617See SIFMA (August 2015), supra note 5. 618 Id. 619 15 U.S.C. 78o–10(h)(2)(C)(iii). 620See generally 29 U.S.C. 1002(1)–(2). 621See 29 U.S.C. 1003(b). 622SIFMA/ISDA 2010 Letter at 2, supra note 34. 623Proposing Release, 76 FR at 42422 n.182, supra note 3. 624See Church Alliance (August 2011), supra note 5. See also Church Alliance (October 2011), supra note 5. 625 Id. 626See CalPERS (August 2011), supra note 5. 627See FIA/ISDA/SIFMA, supra note 5. 628 Id. 629See SIFMA (August 2015), supra note 5. subdivision of a State; (iii) any employee benefit plan, as defined in
Section 3 of ERISA; (iv) any
governmental plan, as defined in
Section 3(32) of ERISA; or (v) any
endowment, including an endowment that is an organization described in
Section 501(c)(3) of the Internal
Revenue Code of 1986.
The Proposing Release noted that commenters had raised questions about the scope of the ‘‘special entity’’ definition. The Commission requested comment regarding: (1) Whether to interpret the phrase ‘‘employee benefit plan, as defined in Section 3’’ of ERISA to mean a plan that is subject to regulation under ERISA; (2) whether the phrase ‘‘governmental plan’’ should include government investment pools or other plans, programs or pools of assets; (3) the definition of the term ‘‘endowment;’’ (4) the treatment of collective investment vehicles in which one or more special entities are invested; (5) the treatment of foreign entities; and (6) the treatment of master trusts holding the assets of one or more funded plans of a single employer and its affiliates. b. Comments on the Proposed Rule One commenter argued that the term ‘‘special entity’’ was adequately defined in the Exchange Act, and that it ‘‘should not require extensive clarification.’’ 615 However, most commenters requested that the Commission exclude or include specific groups from the ‘‘special entity’’ designation. These comments are addressed below.
i. Federal Agency
We received no comments regarding the inclusion of federal agencies within the special entity definition. In the Proposing Release, we noted that the definition of ‘‘security-based swap’’ excludes an ‘‘agreement, contract or transaction a counterparty of which is a Federal Reserve bank, the Federal Government, or a Federal agency that is expressly backed by the full faith and credit of the United States.’’ 616
ii. State and Municipal Entities
One commenter suggested that we modify the description of state and municipal entities to include ‘‘any instrumentality, department, or a corporation of or established by a State or political subdivision of a State.’’ 617 According to the commenter, this modification would harmonize the SEC’s definition of ‘‘special entity’’ with that of the CFTC.618
iii. Employee Benefit Plans and
Governmental Plans
As stated above, Exchange Act
Section 15F(h)(2)(C)(iii) defines ‘‘special
entity’’ to include ‘‘any employee benefit plan, as defined in Section 3 of [ERISA].’’ 619 Section 15F(h)(2)(C)(iv) separately adds ‘‘any governmental plan, as defined in Section 3 [ERISA]’’ to the special entity definition. Section 3 of ERISA defines the term ‘‘employee benefit plan’’ to include plans, such as most private sector employee benefit plans, that are subject to regulation under Title I of ERISA.620 However,
Section 3 of ERISA also defines the
following additional categories of employee benefit plans that are not subject to’’ ERISA regulation: (1) Governmental plans; (2) church plans; (3) plans maintained solely for the purpose of complying with applicable workmen’s compensation laws or unemployment compensation or disability insurance laws; (4) plans maintained outside the U.S. primarily for the benefit of persons substantially all of whom are nonresident aliens; or (5) unfunded excess benefit plans. 621 These latter categories of employee benefit plans, including governmental plans, are therefore ‘‘defined in’’ ERISA, but not ‘‘subject to’’ regulation under ERISA. Commenters asked the Commission at the proposing stage to limit the scope of
Section 15F(h)(2)(C)(iii) to employee
benefit plans that are subject to regulation under ERISA, and not to extend the definition of ‘‘special entity’’ to plans that are merely ‘‘defined in’’ ERISA, ‘‘unless they are covered by another applicable prong of the ‘‘special entity’’ definition (e.g., governmental plans).’’ 622 As the commenters noted, Exchange Act Section 15F(h)(2)(C)(iv) separately defines ‘‘special entity’’ to include any governmental plan, as defined in Section 3 of ERISA. Mindful of the redundancy that would result if the statute were interpreted to include governmental plans twice in the definition of ‘‘special entity,’’ the Commission therefore requested comment regarding whether to interpret the phrase ‘‘employee benefit plan, as defined in Section 3 of [ERISA]’’ in Exchange Act Section 15F(h)(2)(C)(iii), or to mean a plan that is ‘‘subject to’’ regulation under ERISA.623 Seven comment letters addressed this issue. One commenter argued that the expansive language of the statute suggested that any employee benefit plan ‘‘defined in’’ ERISA, including a church plan, should be treated as a special entity, and that, as a matter of policy, church plans should not be treated differently than ERISA or governmental plans when entering into security-based swaps with SBS Entities.624 This commenter recommended that the Commission revise the proposed special entity definition to clarify that church plans are special entities, or that the Commission permit church plans to ‘‘opt in’’ to special entity status, since opting in would provide potential counterparties greater certainty regarding whether a church plan was, in fact, a special entity.625 Another commenter recommended that the Commission cover plans ‘‘defined in’’ ERISA.626 A collective group of three commenters argued that the definition of special entity should include only employee benefit plans that are ‘‘subject to’’ ERISA.627 This group asserted that, ‘‘[s]ince Congress included a separate ‘governmental plans’ prong in the definition of special entity, the ‘employee benefit plan’ prong necessarily excludes governmental plans (both domestic and foreign) and should be read narrowly to include only employee benefit plans ‘‘subject to’’ ERISA.’’ 628 However, one of these commenters later independently submitted a comment after the CFTC adopted business conduct rules, and expressed its support for an ‘‘opt in’’ approach.629 This commenter asserted that the special entity definition should be limited to employee benefit plans that are ‘‘subject to’’ ERISA, although other employee benefit plans defined in ERISA, such as church plans, should be allowed to opt in to special entity status. According to this commenter, these modifications would harmonize the SEC and CFTC special entity definitions. One commenter suggested treating plans subject to ERISA and government plans subject to ERISA similarly, so long as both are acting as end-users and are

630See CalSTRS, supra note 5.
631See CFA, supra note 5.
632See ABC, supra note 5.
633 Id.
634 Id.
635See FIA/ISDA/SIFMA, supra note 5; Church Alliance (August 2011), supra note 5; SIFMA (August 2015), supra note 5. 636See FIA/ISDA/SIFMA, supra note 5. 637See SIFMA (August 2015), supra note 5. 638See Church Alliance (August 2011), supra note 5. 639See ABC, supra note 5; SIFMA (August 2011), supra note 5; ABA Committees, supra note 5; FIA/ ISDA/SIFMA, supra note 5; BlackRock, supra note 5; MFA, supra note 5; NACUBO, supra note 5; SIFMA (August 2015), supra note 5. 640 Id. 641See SIFMA (August 2015), supra note 5. 642See ABA Committees, supra note 5; NACUBO, supra note 5. 643See FIA/ISDA/SIFMA, supra note 5; BlackRock, supra note 5. 644See FIA/ISDA/SIFMA, supra note 5; NABL, supra note 5; NACUBO, supra note 5; ABA Committees, supra note 5; SIFMA (August 2015), supra note 5. 645See FIA/ISDA/SIFMA, supra note 5; NABL, supra note 5; NACUBO, supra note 5. 646See FIA/ISDA/SIFMA, supra note 5; NABL, supra note 5. 647See NACUBO, supra note 5. 648See SIFMA (August 2015), supra note 5. 649 Id. 650See ABA Committees, supra note 5. 651 Id. 652See ABA Committees, supra note 5. otherwise complying with their fiduciary obligations.630 Another commenter suggested including governmental plans as special entities, arguing that ‘‘the taxpayers and government workers who stand behind government pensions are precisely the sort of constituents Congress sought to protect through the heightened protections of special entities.’’ 631 More broadly, one commenter recommended that the business conduct standards should only apply to certain governmental special entities, and that they should not apply to ERISA plans— since these plans already have similar or greater protections under ERISA.632 The commenter argued that, by applying these standards to all special entities, the SEC ‘‘has extended its regulatory reach significantly beyond the scope of the statute,’’ resulting in ‘‘redundant’’ or ‘‘overlapping’’ regulations.633 The commenter recommended that the proposed rules be modified to exclude ERISA plans with security-based swap advisors that are ‘‘already sufficiently regulated.’’ 634
iv. Master Trusts
The Commission additionally requested comment regarding whether to include a master trust that holds the assets of one or more funded plans of a single employer and its affiliates within the special entity definition. Three commenters supported the treatment of master trusts as special entities.635 One comment letter suggested that the term ‘‘special entity’’ should be modified to include master trusts holding the assets of one or more funded plans of a single employer.636 Another comment letter urged the Commission to clarify that master trusts would be treated as special entities, noting that, by making this clarification, the SEC would harmonize the interpretation of its rules with that of the CFTC.637 One commenter urged the Commission to include church benefit boards that hold the assets of multiple church plans, church endowments, and other church-related funds on a commingled basis within the special entity definition, arguing that the functions of church benefit boards are similar to those of tax-exempt trusts, or master trusts established by several multiple-employer pension plans, and that such a definition would reflect the close relationship—recognized in ERISA—between church benefit boards and their constituent church plans.638
v. Collective Investment Vehicles
The Commission requested comment regarding whether to interpret ‘‘special entity’’ to include a collective investment vehicle in which one or more special entities had invested. All eight commenters that commented on this question opposed the designation of collective investment vehicles as special entities, even where such collective investment vehicles have special entity investors.639 Commenters generally argued that requiring SBS Entities to investigate or ‘‘look through’’ their collective investment vehicle counterparties to determine whether they held special entity investments would create uncertainty in the market, increase compliance costs, disrupt the gains of special entity investors, and restrict special entities’ access to security-based swaps—since collective investment vehicle managers may either limit or reject investments by special entities to avoid limitations on their security-based swap trading activities.640 One commenter asked the Commission to clarify that it would not ‘‘look through’’ collective investment vehicles to align its interpretation of the special entity definition with that of the CFTC.641 Two commenters argued to exclude collective investment vehicles because these vehicles are almost always passive investors, and that including them within the adopted rules would serve no regulatory purpose, since Congress’ intent was to protect special entities as defined within the statute.642 Lastly, two commenters urged the Commission to exclude hedge funds, even where a special entity invests in that hedge fund.643
vi. Endowments
The Commission requested comment regarding how to apply the special entity definition to endowments, and whether certain organizations that qualify as endowments should be included in that definition. The five commenters addressing this issue suggested that the Commission limit the definition of endowments in the special entity context, with various caveats.644 Three commenters suggested limiting the definition of ‘‘endowments’’ to endowments that, themselves, enter into swaps.645 Two of these commenters urged the Commission to clarify that the term ‘‘endowments’’ would not include non-profit organizations whose assets might include funds designated as an endowment,646 while another asked that the Commission exclude organizations that use endowment assets to pledge, maintain, enhance or support the organization’s collateral obligations.647 Another commenter similarly requested that the Commission interpret the definition of endowment to exclude charitable organizations that enter into security-based swaps for which their counterparties have recourse to the organizations’ endowment.648 The commenter noted that, by making this clarification, the SEC would bring its interpretation of the rules into harmony with that of the CFTC.649 The last commenter requested clarification that private foundations would not be included within the special entity definition.650 The commenter argued that these foundations are, by statute, non-profit organizations that are not publicly supported, and that ‘‘no evidence’’ exists that Congress intended to treat private foundations as ‘‘endowments’’ under Dodd-Frank.651 Similarly, this same commenter suggested that ‘‘institutional investor organizations’’ (such as large non-profits and ‘‘sophisticated’’ endowments) with over $1 billion of net assets under management should be excluded from the special entity definition, since large ‘‘sophisticated’’ endowments employ professional money managers already subject to oversight and review.652 The commenter argued that a special entity designation for these organizations could reduce the number of SBS Entities willing to trade in security-based swaps,

653See ABC, supra note 5; SIFMA (August 2011), supra note 5; Johnson, supra note 5; BlackRock, supra note 5; CFA, supra note 5; PensionsEurope, supra note 7. 654See Johnson, supra note 5. This same commenter argued that Congress limited the territorial scope of Title VII to activities within the United States, and that extraterritorial application of these laws should only apply when international activities of U.S. firms have a ‘‘direct and significant connection with or effect on U.S. commerce,’’ or are designed to evade U.S. rules. Id. For further discussion, see Cross Border Application and Availability of Substituted Compliance, Section III. 655See ABC, supra note 5; BlackRock, supra note 5; SIFMA (August 2011), supra note 5. 656One commenter urged the Commission to only apply the business conduct standards to security￾based swap transactions involving U.S. counterparties. See PensionsEurope, supra note 7, discussed in Section III below. 657See SIFMA (August 2015), supra note 5; and SIFMA (November 2015), supra note 5 (asking the Commission to clarify that an instrumentality, department, or a corporation of, or established by, a State or political subdivision of a State is a special entity). This is consistent as well with the ECP definition for governmental entities, which includes ‘‘an instrumentality, agency, or department’’ of a State or political subdivision of a State. See Section 3(a)(65) of the Exchange Act, referring to Section 1a(18)(A)(vii)(III) of the CEA. 658See Municipal Advisor Registration Release, 78 FR at 67483, supra note 5. 659See Exchange Act Section 15B(e)(8), 15 U.S.C. 78o–4(e)(8) (defining ‘‘municipal entity’’ to include ‘‘any agency, authority, or instrumentality of the States, political subdivision, or municipal corporate entity’’). 660See SIFMA (August 2015), supra note 5; and SIFMA (November 2015), supra note 5. 661Astoria Fed. Sav. & Loan Assn. v. Solimino, 501 U.S. 104, 112 (1991). 662See FIA/ISDA/SIFMA, supra note 5. given the increased compliance costs associated with evaluating the qualifications of an independent representative.
vii. Foreign Plans, Foreign Entities
The Commission requested comment on whether to exclude from the definition of ‘‘special entity’’ any foreign entity. Six commenters responded to this issue.653 All six commenters asserted that foreign entities should not be deemed special entities, although one commenter recommended that the U.S. reserve the right to extend application of its business conduct standards to foreign entities if international regulatory efforts fail.654 Four other commenters objected to the inclusion of foreign pension and employee benefit plans within the special entity definition on the grounds that the statutory language reflected a lack of Congressional intent to provide special protection for such plans under Dodd-Frank, and that extending the SEC’s authority outside the United States would create the potential for conflict with other nations’ regulatory regimes.655 These commenters requested that the Commission revise the proposed definition of ‘‘special entity’’ to specifically exclude foreign entities.656
c. Response to Comments and Final
Rule
After consideration of all comments, the Commission has determined to modify the scope of the special entity definition as described below.
i. Federal Agency
As noted above, the Commission did not receive any comments on the inclusion of federal agencies within the special entity definition. The Commission continues to believe it is appropriate to include federal agencies within the special entity definition, and is therefore adopting Rule 15Fh–2(e)(1) as proposed, renumbered as Rule 15Fh– 2(d)(1).
ii. State and Municipal Special Entities
After further consideration and in light of the comment received, the Commission is modifying proposed Rule 15Fh–2(e)(2), adopted as Rule 15Fh–2(d)(2), to further define state and municipal entities to include ‘‘any instrumentality, department, or a corporation of or established by a State or political subdivision of a State.’’ 657 As the Commission explained in another context, states may delegate powers to their political subdivisions, including the power to create corporate instrumentalities.658 Similarly, the Commission believes a department or a corporation organized as a municipal corporate instrumentality of a state’s political subdivision should be considered a municipal corporate instrumentality of a state. Corporate instrumentalities, departments, or corporations created by states or their political subdivisions are therefore taxpayer-backed institutions. Consequently, the Commission believes it is important to include ‘‘any instrumentality, department, or a corporation of or established by a State or political subdivision of a State’’ within the special entity definition to provide heightened protections for taxpayer-backed institutions that transact in security-based swaps. In addition, the inclusion of this language will conform the special entity definition to that of a ‘‘municipal entity’’ in the Exchange Act, as well as to the CFTC’s definition of State and municipal special entities, thereby providing all categories of municipal entities with heightened protections,659 as well as addressing the commenter’s concern regarding the need for a consistent definition across the security￾based swaps and swaps markets.660 This consistency should result in efficiencies for entities that transact in security￾based swaps, particularly where such entities have already established a compliance infrastructure that satisfies the requirements of the existing CFTC business conduct standards.
iii. Employee Benefit Plans and
Governmental Plans
Upon further consideration and in light of the comments received, the Commission is modifying proposed Rule 15Fh–2(e)(3), which stated ‘‘any employee benefit plan defined in
Section 3 of [ERISA]’’ to state in
adopted Rule 15Fh–2(d)(3) ‘‘any employee benefit plan subject to Title I of [ERISA].’’ Under this modification, Rule 15Fh(2)(d)(3) only includes employee benefit plans that are subject to regulation under Title I of ERISA. Furthermore, proposed Rule 15Fh– 2(e)(4), renumbered as Rule 15Fh– 2(d)(5), is being adopted as proposed, to include ‘‘any governmental plan, as defined in section 3(32) of [ERISA].’’ In reaching this determination, we believe that Exchange Act Sections 15F(h)(2)(C)(iii) (employee benefit plans defined in Section 3 of ERISA) and 15F(h)(2)(C)(iv) (governmental plans defined in Section 3 of ERISA) should be read together ‘‘to avoid rendering superfluous’’ any statutory language of the Exchange Act.661 As discussed above in Section II.H.1.b.3, Exchange Act Section 15F(h)(2)(C)(iii), read literally as any employee benefit plan ‘‘defined in’’ Section 3 of ERISA, would render Section 15F(h)(2)(C)(iv) superfluous, since governmental plans ‘‘defined in’’ ERISA are specifically designated as special entities under
Section 15F(h)(2)(C)(iv). The
Commission therefore agrees with the commenter that Congress’ separate inclusion of governmental plans within the special entity definition supports a narrower reading of Section 15F(h)(2)(C)(iii), such that the definition only includes employee benefit plans ‘‘subject to’’ regulation under ERISA.662 We recognize that this interpretation of ‘‘special entity’’ would exclude other types of employee benefit plans ‘‘defined in’’ Section 4(b) of ERISA, including church plans and workmen’s compensation plans. Therefore, upon further consideration, and in response to commenters who support a broader interpretation of the term ‘‘special entity,’’ including those commenters who assert that a church plan should be treated as a special entity, the

663See Church Alliance (August 2011), supra note 5; CalPERS (August 2011), supra note 5; Church Alliance (October 2011), supra note 5; SIFMA (August 2015), supra note 5. 664See Church Alliance (August 2011), supra note 5. 665See Section II.G.1.b, supra. 666See Church Alliance (August 2011), supra note 5. 667See CFTC Adopting Release, 77 FR at 9774, supra note 21. 668 77 FR at 9776. 669See SIFMA (August 2015), supra note 5. 670See ABC, supra note 5. 671See, e.g., Section II.H.2.c.ii, infra. 672See FIA/ISDA/SIFMA, supra note 5; Church Alliance (August 2011), supra note 5; SIFMA (August 2015), supra note 5. See also Section 403(a) of ERISA (in general, ‘‘assets of an employee benefit plan shall be held in trust by one or more trustees’’) (29 U.S.C. 1103(a)); DOL Regulation 29 CFR 2520.103–1(e) (requiring the plan administrator of a Plan which participates in a master trust to file an annual report on IRS Form 5500 in accordance with the instructions for the form relating to master trusts); see also IRS Form 5500 Instructions, at 9 (‘‘For reporting purposes, a ‘master trust’ is a trust . . . in which the assets of more than one plan sponsored by a single employer or by a group of employers under common control are held.’’). 673See Church Alliance (August 2011), supra note 5. 674See generally 29 U.S.C. 1003(b). 675See SIFMA (August 2015), supra note 5. See also CFTC Adopting Release, 77 FR at 9776, supra note 21. Commission has determined to include an additional prong to the special entity definition.663 Specifically, Rule 15Fh– 2(d)(4), as adopted, defines a special entity to include ‘‘[a]ny employee benefit plan defined in Section 3 of [ERISA] and not otherwise defined as a special entity, unless such employee benefit plan elects not to be a special entity by notifying a security-based swap dealer or major security-based swap participant of its election prior to entering into a security-based swap with the particular security-based swap dealer or major security-based swap participant.’’ The Commission believes that the inclusion of this additional provision appropriately resolves any tension between Exchange Act Sections 15F(h)(2)(C)(iii) and (iv), while granting broad coverage under the enhanced business conduct protections for special entities provided by the Dodd Frank Act. Under Rule 15Fh–2(d)(4), as adopted, an employee benefit plan that is ‘‘defined in’’ Section 3 of ERISA but not ‘‘subject to’’ regulation under ERISA is included within the special entity definition, although it may elect to opt out of special entity status by notifying an SBS Entity counterparty of its election to opt out prior to entering into a security-based swap. Therefore, for example, under Rule 15Fh–2(d)(4), any church plan, as defined in Section 3(33) of ERISA, would be considered a special entity unless it elected to opt out of special entity status.664 It is also consistent with Rule 15Fh–3(a)(3), which requires an SBS Entity to verify whether a counterparty is
eligible to elect not to be a special entity, and if so, to notify the counterparty of its right to make such an election.665 Further, by requiring employee benefit plans to notify SBS Entities of their decision to opt out, the provision will provide SBS Entities greater clarity regarding their counterparty’s election to be treated as a special entity, as requested by a commenter.666 We note that the special entity definition the Commission is adopting today differs from the CFTC’s special entity definition, which instead includes an opt-in provision for plans ‘‘defined in’’ ERISA.667 While we agree with the CFTC’s objective of ‘‘providing protections broadly,’’ 668 we have determined that inclusion of an opt-out provision will afford the maximum protections to the broadest categories of special entities, while still allowing them the flexibility to elect not to be special entities when they do not wish to avail themselves of those protections. In making this determination, we acknowledge the commenter’s request that we conform our special entity definition to that of the CFTC.669 However, we believe that the practical effect of an opt-out versus an opt-in regime should be minimal since, in either case, the SBS Entity will need to advise the counterparty of its option to be treated as a special entity. The result should be greater clarity for SBS Entities regarding the regulatory status of their counterparties. Lastly, we disagree with the commenter’s assertions that the SEC ‘‘has extended its regulatory reach’’ beyond the statute by applying the business conduct rules to ERISA plans, and that the resulting regulations would overlap with the preexisting regulations established under ERISA.670 As noted above, the plain language of Exchange Act Section 15F(h)(2)(C)(iii) includes ERISA plans within the special entity definition, and we continue to believe that such plans are deserving of the heightened protections of the business conduct rules specific to special entities. Moreover, wherever practical, we have adopted bifurcated rules that acknowledge the existing federal regulatory framework for ERISA plans, thereby minimizing the tension that may arise between that framework and the business conduct standards adopted today.671
iv. Master Trusts
The Commission agrees with commenters that master trusts should be treated as special entities, where a master trust holds the assets of more than one ERISA plan, sponsored by a single employer or by a group of employers under common control.672 In this regard, the Commission clarifies that, if a master trust holds the assets of an ERISA plan, the SBS Entity may satisfy the business conduct requirements being adopted today by treating the master trust as a special entity, rather than applying the business conduct rules to each underlying ERISA plan in a master trust. The Commission understands that a single employer or a group of employers under common control may sponsor multiple ERISA plans that are combined into a master trust to achieve economies of scale and other efficiencies. In such cases, the Commission does not believe that any individual ERISA plan within the master trust would receive any additional protection if the SBS Dealer or Major SBS Participant had to separately comply with the final rules with respect to each ERISA plan whose assets are held in the master trust. The Commission similarly agrees with the commenter that, where a church benefit board holds the assets of multiple church plans as defined in
Section 3(33) of ERISA, the function of
the church benefit board is similar to that of a master trust.673 Because church plans are recognized in ERISA, and a church benefit board holds only the assets of constituent church plans,674 a church benefit board that holds the assets of church plans will be deemed a special entity under final Rule 15Fh￾2(d)(4), although it will have the ability to opt out of special entity protections. Lastly, this clarification addresses the commenter’s request that the Commission interpret the special entity definition in harmony with the CFTC, as the CFTC also includes master trusts as special entities where a master trust holds the assets of more than one ERISA plan, sponsored by a single employer or by a group of employers under common control.675 Such uniformity will help establish regulatory consistency across the security-based swap and swap markets, thereby creating efficiencies for SBS entities that transact in security￾based swaps and swaps.
v. Collective Investment Vehicles
The Commission requested comment on whether to interpret ‘‘special entity’’ to include collective investment vehicles in which one or more special entities had invested. After

676See ABC, supra note 5; SIFMA (August 2011), supra note 5; ABA Committees, supra note 5; FIA/ ISDA/SIFMA, supra note 5; BlackRock, supra note 5; MFA, supra note 5; NACUBO, supra note 5; SIFMA (August 2015), supra note 5. See ABC, supra note 5; SIFMA (August 2011), supra note 5; ABA Committees, supra note 5; FIA/ISDA/SIFMA, supra note 5; BlackRock, supra note 5; MFA, supra note 5; NACUBO, supra note 5; SIFMA (August 2015), supra note 5. For clarification, and in response to commenters, the term ‘‘collective investment vehicle’’ in our discussion includes, but is not limited to, hedge funds that hold the assets of special entity investors. See FIA/ISDA/SIFMA, supra note 5; BlackRock, supra note 5. 677 Id. 678See SIFMA (August 2015), supra note 5. 679See FIA/ISDA/SIFMA, supra note 5; NABL, supra note 5; NACUBO, supra note 5. 680See NACUBO, supra note 5; SIFMA (August 2015), supra note 5. 681See ABA Committees, supra note 5. 682 Id. 683See CFTC Adopting Release, 77 FR at 9776, supra note 21 (‘‘The Commission agrees with commenters that the Special Entity prong with respect to endowments is limited to the endowment itself. Therefore, the endowment prong of the Special Entity definition under Section 4s(h)(2)(C)(v) and § 23.401(c)(5) applies with respect to an endowment that is the counterparty to a swap with respect to its investment funds. The definition would not extend to charitable organizations generally. Additionally, where a charitable organization enters into a swap as a counterparty, the Special Entity definition would not apply where the organization’s endowment is contractually or otherwise legally obligations to make payments on the swap . . . .’’). 684See SIFMA (August 2015), supra note 5. 685 Id. 686See Proposing Release, 76 FR at 42401, supra note 3. consideration of the comments, the Commission has determined not to interpret ‘‘special entity’’ in that way. The Commission agrees with commenters that uniformly urged the Commission not to treat a collective investment vehicle as a special entity, solely because the collective investment vehicle may have one or more special entity investors.676 Unlike master trusts, formed for the purpose of holding assets of ERISA plans, a collective investment vehicle may be formed for a variety of reasons and only incidentally accept investments from special entities. We share the concerns of commenters that requiring SBS Entities to investigate or ‘‘look through’’ their collective investment vehicle counterparties to determine whether they held special entity investments could create uncertainty in the market, and could potentially increase compliance costs, disrupt the gains of special entity investors, and restrict special entities’ access to security-based swaps—since collective investment vehicle managers may either limit or reject investments by special entities to avoid application of the special entity requirements.677 At the same time, we recognize the potential benefits of applying
heightened protections to special entities that have invested in collective investment vehicles, either by applying those protections to the collective investment vehicle itself or requiring the SBS Entity to ‘‘look through’’ the collective investment vehicle. After further consideration, we have determined that it would neither be appropriate to treat the entire collective investment vehicle as a special entity, nor to require an SBS Dealer to ‘‘look through’’ the collective investment vehicle to determine whether any of its investors qualify as special entities. While the special entity has made the decision to invest in the collective investment vehicle, it is the collective investment vehicle that enters into the security-based swap—not the special entity. In light of the foregoing, we do not believe that collective investment vehicles should be included within the special entity definition. Lastly, our decision not to include collective investment vehicles in the special entity definition will address the commenter’s suggestion that we harmonize the Commission’s special entity definition with that of the CFTC to increase regulatory consistency across the security-based swap and swap markets.678
vi. Endowments, Non-Profit
Organizations, and Private Foundations The Commission requested comment regarding application of the special entity definition to endowments. After taking into consideration the comments, the Commission has determined to interpret the term ‘‘endowment,’’ as used in Section 15F(h)(2)(C)(v) of the Exchange Act, not to include entities or persons other than the endowment itself. The Commission therefore agrees with commenters that special entity status should be limited to endowments that are, themselves, counterparties to security-based swaps.679 Accordingly, the Commission does not interpret the term ‘‘endowment’’ to include organizations that use endowment assets to pledge, maintain, enhance or support the organization’s collateral obligations, or situations where a counterparty has recourse to the organization’s endowment.680 For clarification, and in response to comment,681 a private foundation will be subject to special entity protections where the private foundation qualifies as an endowment under applicable state laws, rules, or regulations, including the Uniform Prudent Management of Institutional Funds Act. Although we acknowledge the commenter’s assertion that private foundations typically derive their financial support through private donations,682 we do not agree that public funding is a prerequisite to special entity status, or that private funding should necessarily exclude a foundation from qualifying for special entity status. As noted above in Section II.G.1.b, Rule 15Fh–3(a)(2) generally requires an SBS Entity to verify whether its counterparty is a special entity before entering into the security-based swap with that counterparty. Such verification should generally include a determination whether the counterparty may be deemed an endowment under applicable state law, as described above. However, as discussed in Section II.G.1.b, supra, counterparties may make representations about their status as special entities at the outset of a relationship with an SBS Entity, and can ‘‘bring down’’ that representation for each relevant action involving a security-based swap. Also, as with collective investment vehicles, we believe that a more expansive interpretation of the special entity definition would require a burdensome ‘‘look through’’ process to determine whether endowment funds had, for instance, been invested or used as collateral in a particular security￾based swap, and could ultimately restrict the ability of entities that are neither themselves endowments nor special entities (such as organizations described in section 501(c)(3) of the Internal Revenue Code of 1986 whose assets merely include funds designated as an endowment) to transact in security-based swaps. By making the foregoing clarifications, the Commission more closely aligns its interpretation of the term ‘‘endowment’’ with that of the CFTC.683 This consistency in the definition will address the commenter’s concern regarding the need to promote regulatory clarity, and
result in operational efficiencies for entities that have been operating under the CFTC’s business conduct regime since 2012.684 Lastly, as discussed in more detail above in Section II.A.2.d., we decline the commenter’s suggestion to permit endowments to opt out of special entity status.685 As stated in the Proposing Release, Congress created heightened protections to mitigate the potential for abuse in SBS transactions with special entities, as the financial sophistication of special entities varies greatly.686 As discussed above in Section II.A, the rules being adopted today are intended to provide certain protections for counterparties, including certain

687See Application of ‘‘Security-Based Swap Dealer’’ and ‘‘Major Security-Based Swap Participant’’ Definitions to Cross-Border Security￾Based Swap Activities; Final Rule; Republication, 79 FR 47278, 47306 n.234 (Aug. 12, 2014) (‘‘Consistent with the proposal, ‘special entities,’ as defined in Section 15F(h)(2)(C) of the Exchange Act, are U.S. persons because they are legal persons organized under the laws of the United States’’). 688See ABC, supra note 5; SIFMA (August 2011), supra note 5; BlackRock, supra note 5. For a more detailed discussion on the cross-border application of U.S. business conduct standards, see Section III, infra. 689Under proposed Rule 15Fh–4(b), an SBS Dealer that ‘‘acts as an advisor’’ to a special entity regarding a security-based swap must: (1) Act in the best interests of the special entity; and (2) make reasonable efforts to obtain such information that the SBS Dealer considers necessary to make a reasonable determination that a security-based swap or trading strategy involving a security-based swap is in the best interests of the special entity. See Section II.H.3, infra. 690See Proposing Release, 76 FR at 42424, supra note 3. 691 Id. 692Proposed Rule 15Fh–2(a)(1). 693Proposed Rule 15Fh–2(a)(2). 694See also discussion on SBS Entities acting as counterparties to special entities, Section II.H.5, infra. 695Proposed Rule 15Fh–2(a)(3). 696See NABL, supra note 5. 698See Better Markets (August 2011), supra note 5; CFA, supra note 5; Ropes & Gray, supra note 5; APPA, supra note 5; FIA/ISDA/SIFMA, supra note 5; NACUBO, supra note 5; SIFMA (August 2011), supra note 5; SIFMA (August 2015), supra note 5. 699See Better Markets (August 2011), supra note 5. 700 Id. Under the commenter’s approach, the SBS Dealer need not receive compensation for the advice to be deemed acting as an advisor. See also FIA/ISDA/SIFMA, supra note 5. heightened protections for special entities. We think it is appropriate to apply the rules so that counterparties receive the benefits of those protections and do not think it is appropriate to permit parties to ‘‘opt out’’ of those provisions. Furthermore, we note that the CFTC’s adopted rules do not contain such an opt-out provision, and that Swap Entities and their special entity counterparties have been operating under this regime since 2012. For all of the foregoing reasons, and to achieve regulatory consistency across the security-based swap and swap markets, we decline to adopt an opt-out provision for endowments in the final rules.
vii. Foreign Plans and Foreign Entities
The Commission requested comment on whether to exclude from the definition of ‘‘special entity’’ any foreign entity. After considering the comments, all of which asserted that foreign entities should not be deemed special entities, the Commission is declining to include foreign entities within the definition of ‘‘special entity.’’ The Commission believes that, as stated in the Cross-Border Adopting Release, the term ‘‘special entity’’ applies to ‘‘legal persons organized under the laws of the United States.’’ 687 This reading addresses the concerns raised by commenters regarding the need for clarification concerning the application of the rules as they relate to special entity-specific provisions.688
2. ‘‘Acts as an Advisor’’ to a Special
Entity a. Proposed Rule
As discussed below in Section II.H.3,
Section 15F(h)(4)(B) of the Exchange
Act imposes a duty on an SBS Dealer acting ‘‘as an advisor’’ to a special entity to act in the best interests of the special entity.689 The Dodd-Frank Act does not define the term ‘‘advisor,’’ nor does it establish specific criteria for determining when an SBS Dealer is acting as an advisor within the meaning of Section 15F(h)(4). The Commission proposed Rule 15Fh–2(a), which states that an SBS Dealer ‘‘acts as an advisor to a special entity when it recommends a security￾based swap or a trading strategy that involves the use of a security-based swap to the special entity.’’ We explained in the Proposing Release that, for these purposes, to ‘‘recommend’’ has the same meaning as that discussed in connection with Rule 15Fh–3(f).690 While the Dodd-Frank Act does not preclude an SBS Dealer from acting as both advisor and counterparty, the Commission recognized in the Proposing Release that it could be impracticable for an SBS Dealer acting as a counterparty to a special entity to meet the ‘‘best interests’’ standard imposed by Section 15F(h)(4) if it were deemed to be acting as an advisor to the special entity.691 Proposed Rule 15Fh– 2(a) would therefore provide a three￾pronged safe harbor for an SBS Dealer to establish that it is not acting as an advisor. To qualify for the safe harbor, the SBS Dealer’s special entity counterparty must first represent in writing that it will not rely on the SBS Dealer’s recommendations, but that it will instead rely on advice from a ‘‘qualified independent representative.’’ 692 Second, the SBS Dealer must have a ‘‘reasonable basis’’ to conclude that the special entity is being advised by a qualified independent representative.693 Toward this end, the SBS Dealer could rely on the special entity’s written representations unless the SBS Dealer has information that would cause a reasonable person to question the accuracy of the representation.694 Third, the SBS Dealer must disclose that it is not undertaking to act in the special entity’s best interests, as would otherwise be required under Section 15F(h)(4).695 b. Comments on the Proposed Rule The Commission received numerous comments in response to the definition of ‘‘acts as an advisor’’ to a special entity in proposed Rule 15Fh–2(a). One commenter asserted that the meaning of the phrase ‘‘acts as an advisor to a special entity’’ was critical to several regulatory rulemakings, and that this term should be applied as consistently as possible.696 That commenter and another recommended that, in developing recommendations for the final rules, the Commission staff coordinate with the Commission staff working on rules regarding municipal advisors, as well as the MSRB and the CFTC.697 The commenter urged the Commission to work with the CFTC and the MSRB to make the definition as consistent as possible across regulatory regimes. However, the majority of comment letters addressing proposed Rule 15Fh– 2(a) related to: (1) The use of the term ‘‘recommends’’ when defining the
phrase ‘‘acts as an advisor to a special entity;’’ and (2) the safe harbor from acting as an advisor to a special entity set forth in proposed Rule 15Fh–2(a)(1)– (3). These comments are summarized below.
i. ‘‘Recommends’’ an SBS or Related
Trading Strategy to a Special Entity Eight comment letters addressed whether an SBS Dealer should be deemed to act as an advisor if it ‘‘recommends’’ a security-based swap or trading strategy to a special entity.698 One commenter argued that the definition of ‘‘acting as an advisor’’ was too narrow, and should be expanded to include not only making recommendations, but also providing ‘‘more general information and opinions.’’ 699 That commenter and another recommended that the definition of ‘‘act as an advisor’’ should parallel that of an ‘‘investment adviser,’’ such that the definition would encompass advising special entities as to the value of a security-based swap or as to the advisability of a security-based swap or trading strategies involving security-based swaps.700 The second commenter asserted that this definition would more closely conform the definition of ‘‘act as an advisor’’ to the definition of ‘‘investment adviser’’ under the Advisers Act, as well as to the definition of ‘‘commodity trading

701See FIA/ISDA/SIFMA, supra note 5. 702See CFA, supra note 5. 703 Id. 704See FIA/ISDA/SIFMA, supra note 5. 705 Id. 706See SIFMA (August 2015), supra note 5. As the commenter stated, these modifications would harmonize the SEC and CFTC standards for determining when a Swap Dealer or SBS Dealer is acting as an advisor to a special entity. In addition, the commenter argued that this modification would align the definition with applicable guidance under the Advisers Act. 707See Ropes & Gray, supra note 5. 708 Id. 709See SIFMA (August 2011), supra note 5; APPA, supra note 5 (arguing that special entities would suffer the economic impact of the uncertainty resulting from a ‘‘facts and circumstances’’ test). 710 Id. 711See Better Markets (August 2011), supra note 5. 712See CFA, supra note 5. 713See SIFMA (August 2011), supra note 5. 714See ABC, supra note 5; GFOA, supra note 5; NABL, supra note 5; NACUBO, supra note 5; APPA, supra note 5; FIA/ISDA/SIFMA, supra note 5; Ropes & Gray, supra note 5; Black Rock, supra note 5; SIFMA (August 2015), supra note 5; SIFMA (November 2015), supra note 5. 715See Better Markets (August 2011), supra note 5; CFA, supra note 5; AFSCME, supra note 5. 716See NABL, supra note 5; APPA, supra note 5; FIA/ISDA/SIFMA, supra note 5; NACUBO, supra note 5. 717See ABC, supra note 5. The commenter expressed concern that such a veto power could render the Department of Labor’s Prohibited Transaction Class Exemption 84–14 for Qualified Professional Asset Managers (‘‘QPAMs’’) unavailable, and make ERISA plan representatives hesitant to vigilantly represent the plan’s interests for fear of a future veto. The commenter also argued that, through this same provision, an SBS Dealer acting as an ERISA plan counterparty could learn confidential information regarding the plan or its representative. 718 Id. 719See BlackRock, supra note 5. Section 406(a) of ERISA generally prohibits the fiduciary of a plan from causing the plan to engage in various transactions with a ‘‘party in interest’’ (as defined in Section 3(14) of ERISA), unless a statutory or administrative exemption applies to the transaction. Prohibited Transaction Exemption 84–14 (the ‘‘QPAM Exemption’’), an administrative exemption, permits certain parties in interest to engage in transactions involving plan assets if, among other conditions, the assets are managed by a ‘‘qualified professional asset manager’’ (QPAM), which is independent of the parties in interest. Prohibited Transaction Exemption 96–23 (the ‘‘INHAM Exemption’’) provides similar conditional prohibited transaction relief for certain transactions involving plan assets that are managed by an in￾house asset management affiliate of a plan sponsor. advisor’’ under the CEA, while preserving the benefits of the Commission’s proposed safe harbor.701 A third commenter generally supported our proposed approach, noting that ‘‘defining recommendations as advice is consistent . . . with congressional intent.’’ 702 The commenter,
however, would narrow the definition of advice to ‘‘recommendations related to a security￾based swap or a security-based swap trading strategy that are made to meet the objectives or needs of a specific counterparty after taking into account the counterparty’s specific circumstances.’’ 703 Another commenter suggested that the term ‘‘recommendation’’ exclude communications to groups of customers or to investment managers with multiple clients, unless the communication was tailored to a member of the group or to a specific client known to the SBS Dealer.704 According to the commenter, the Commission should clarify that a recommendation must be tailored to the circumstances of a known special-entity counterparty before giving rise to advisor status, because, without this clarification, general communications to investment advisers (that potentially have special entity clients) might result in the SBS Dealer unknowingly ‘‘acting as an advisor.’’ 705 In 2015, after the CFTC adopted its final business conduct rules, a commenter similarly proposed that the Commission narrow the scope of the definition of ‘‘act as an advisor to a special entity’’ to include only recommendations that are ‘‘tailored to the particular needs or characteristics of the special entity.’’ 706 Another commenter argued that a definition premised on an SBS Dealer’s ‘‘recommend[ing]’’ a security-based swap or related trading strategy was ‘‘overly broad and unwise,’’ and that acting as an advisor ‘‘requires a more formal, acknowledged agency, as part of a relationship of trust and confidence.’’ 707 This commenter expressed concern that a definition based on recommendations could chill communications, including informal ‘‘market chatter.’’ 708 Two other commenters similarly urged the Commission to adopt a bright line, objective standard, where an explicit agreement by the parties would determine whether the SBS Dealer acts as advisor to the special entity.709 Under this approach, unless the special entity and SBS Dealer agree that information provided by the SBS Dealer would form the primary basis for an investment decision, the SBS Dealer’s communications would not be considered a ‘‘recommendation’’ under proposed Rule 15Fh–2(a).710 Several commenters requested that the Commission clarify whether certain communications constitute ‘‘acting as an advisor.’’ One commenter was concerned that an SBS Dealer could provide a counterparty with data, analysis, and opinions that constituted recommendations in fact, but were not labeled or characterized as such.711 A second commenter suggested the Commission clarify that the phrase ‘‘acting as an advisor’’ does not include providing general transaction, financial or market information to the special entity.712 A third commenter recommended the final rule clarify that an SBS Dealer’s ‘‘customary product explanations and marketing activities, provision of general market information, quotes in response to requests, and information pursuant to
requirements in the business conduct rules would not constitute ‘acting as an advisor’ to a special entity.’’ 713
ii. Safe Harbor
The Commission received a number of comment letters on the proposed rule’s safe harbor provisions. Ten comment letters generally supported the safe harbor, subject to various suggestions or objections.714 Three commenters objected to the safe harbor.715 Commenters supporting the adoption of safe harbor provisions that would protect an SBS Dealer from being deemed an advisor to a special entity, argued that market participants would benefit from greater certainty provided by the safe harbor, which would enable contracting parties to specify the nature of their relationship.716 A number of commenters, however, expressed concern about the possible interaction of the proposed safe harbor with ERISA. One commenter, for example, generally agreed with the proposed safe harbor but expressed concern that requiring an SBS Dealer to have a ‘‘reasonable basis’’ to believe a special entity was being advised by a qualified independent representative could allow the SBS Dealer’s opinion of an ERISA plan representative to ‘‘trump’’ that of the ERISA plan fiduciary.717 For these reasons, the commenter urged the Commission to prohibit an SBS Dealer that acts as a counterparty to an ERISA plan from vetoing the plan’s choice of representative.718 Another commenter suggested the proposed safe harbor be revised to provide that either: (1) The special entity will rely on advice from a qualified independent representative, or (2) if the special entity or its representative is relying on the Qualified Professional Asset Manager (‘‘QPAM’’) or In-House Asset Manager (‘‘INHAM’’) Exemption, the decision to enter into the transaction will be made by a QPAM or INHAM.719 One commenter expressed concern with the proposed safe harbor’s requirement that the special entity represent it is not

720See Ropes & Gray, supra note 5.
721 Id.
722 Id.
723See SIFMA (August 2015), supra note 5. 724See SIFMA (November 2015), supra note 5. 725 Id. 726 Id. 727 Id. 728See Better Markets (August 2011), supra note 5. 729See CFA, supra note 5. 730 Id. 731See AFSCME, supra note 5. 732Although Section 15F(h)(2)(A) of the Exchange Act generally requires all SBS Entities to comply with the requirements of Section 15F(h)(4), the specific requirements of Sections 15F(h)(4)(B) and (C), by their terms, apply only to SBS Dealers that act as advisors to special entities. 733See CFA, supra note 5 (arguing that the determining factor in whether a rule should apply to a Major SBS Participant is whether it is engaged in conduct that would appropriately be regulated under the relevant standard). 734See MFA, supra note 5. 735See Section II.C.3 (discussing bases for applying certain requirements to SBS Dealers but not to Major SBS Participants). 736See Proposing Release, 76 FR at 42416 n.140, supra note 3. See also Definitions Adopting Release, 77 FR at 30618, supra note 108 (‘‘Advising a counterparty as to how to use security-based swaps to meet the counterparty’s hedging goals, or structuring security-based swaps on behalf of a counterparty, also would indicate security-based swap dealing activity.’’). 737Although we are adopting Rule 15Fh–2(a), as proposed, we are adopting the safe harbor under proposed rule 15Fh–2(a)(1)–(3) with various modifications, as discussed in Section II.H.2.c.ii, infra. 738See Section II.G.4, infra. ‘‘relying’’ on recommendations from the SBS Dealer.720 As the commenter explained, since reliance is one of the essential elements of a securities fraud action, an SBS Dealer could seek to rely on the special entity’s representation that it did not ‘‘rely’’ on the SBS Dealer’s recommendation in defense of a subsequent securities fraud action against the SBS Dealer.721 Instead, the commenter suggested ‘‘as a purely technical matter’’ that the safe harbor instead require a special entity to acknowledge that the SBS Dealer is not acting as advisor to the special entity.722 In August 2015, another commenter suggested modifying the proposed rule to harmonize with the CFTC’s approach by creating a second separate safe harbor for employee benefit plans subject to Title I of ERISA that ‘‘recognizes the unique fiduciary regime already applicable to such special entities.’’ 723 In addition to recommending a safe harbor for ERISA plans, the commenter requested two changes to the non-ERISA safe harbor:
(1) Adding a requirement that an SBS Dealer may not express an opinion as to whether a special entity should enter into the recommended security-based swap or related trading strategy; and (2) eliminating the safe harbor condition that an SBS Dealer have a reasonable basis to believe that the special entity is advised by a qualified independent representative.724 The commenter noted that the ‘‘reasonable basis’’ provision is absent from the parallel CFTC business conduct rule, and argued that the provision is unnecessary in light of the fact that the SBS Dealer will already receive a written representation that the special entity will rely on advice from the independent representative.725 The commenter explained that its suggested modifications were generally intended to bring the Commission’s safe harbor provisions into conformity with those of the CFTC.726 The same commenter subsequently urged the Commission to either (i) permit SBS Entities to reasonably rely on written representations that satisfy the CFTC’s safe harbor, or (ii) adopt a parallel safe harbor.727 Three commenters opposed the proposed safe harbor, arguing that it would erode the statutory protections for special entities. For instance, one commenter argued that the safe harbor would effectively allow SBS Dealers to give advice that might not be in the best interests of the special entity.728 A second commenter opposed the safe harbor on the grounds that it would cause special entities to waive their right to ‘‘best interest’’ recommendations as a condition of transacting with SBS Dealers, and force them to rely solely on an independent representative that might be ‘‘financially beholden to the security-based swap industry.’’ 729 The commenter also expressed concern that ‘‘in any transaction involving a customized swap, the special entity will by definition be relying on the swap dealer’s assertion that the customization was designed with the particular needs of the special entity in mind,’’ and if the SBS Dealer knows or has reason to know that the swap is not in the best interests of the special entity, the SBS Dealer ‘‘should be precluded from doing the transaction regardless of what representations the special entity provides about who it may be relying on.’’ 730 Similarly, a third commenter characterized the safe harbor as permitting ‘‘an SBS Dealer to escape the critical responsibilities associated with ‘acting as an advisor’ by having Special Entities waive this right,’’ and expressed concern that special entities would be forced to sign ‘‘boilerplate’’ waivers to enter into a security-based swap.731
c. Response to Comments and Final
Rule
As stated above, proposed Rule 15Fh– 2(a) defined what it means for an SBS Dealer to act as an advisor to a special entity, and proposed Rule 15Fh–4 imposed certain requirements on SBS Dealers acting as advisors. Thus, the proposed rules would not impose these obligations on Major SBS Participants.732 One commenter stated its view that it is appropriate to impose Rule 15Fh–4(b)’s heightened standards of conduct on professional market participants that are likely to be acting as advisors to special entities,733 and another commenter stated that the ‘‘dealer-like obligations’’ of Rule 15Fh– 4(b) should not be imposed on Major SBS Participants, transacting at arm’s￾length, as they will not likely advise special entities with respect to security￾based swap transactions.734 The Commission continues to believe that it is appropriate not to impose the heightened obligations when acting as an advisor to a special entity on Major SBS Participants, given the nature of their participation in the security-based swap markets.735 However, if a Major SBS Participant is, in fact, recommending security-based swaps or trading strategies involving security￾based swaps to a special entity, this could indicate that the Major SBS Participant is actually engaged in security-based swap dealing activity.736 A Major SBS Participant that engages in such activity above the de minimis threshold in Exchange Act Rule 3a71–2 would need to register as an SBS Dealer and comply with the obligations imposed on SBS Dealers, including the obligations imposed by Rule 15Fh–4(b) when an SBS Dealer is acting as an advisor to a special entity. Upon review and consideration of the comments, the Commission is adopting Rule 15Fh–2(a) as described below.
i. ‘‘Recommends’’ an SBS or Related
Trading Strategy to a Special Entity We are adopting, as proposed, Rule 15Fh–2(a), under which an SBS Dealer is defined to ‘‘act as an advisor to a special entity’’ when it recommends a security-based swap or a trading strategy that involves a security-based swap to a special entity.737 For these purposes, to ‘‘recommend’’ has the same meaning as discussed in connection with Rule 15Fh–3(f).738 The determination of whether an SBS Dealer has made a ‘‘recommendation’’ turns on the facts and circumstances of the particular situation and, therefore, whether a

739See Proposing Release, 76 FR at 42415, supra note 3. As discussed in Section II.G.4, supra, this is consistent with the FINRA approach as to what constitutes a recommendation. 740See Better Markets (August 2011), supra note 5. 741See, e.g., Ropes & Gray, supra, note 5. 742Our approach here is consistent with that of the CFTC. See CFTC Adopting Release, 77 FR at 9783, n. 699, supra note 22. 743 Id. at n. 698. 744See CFA, supra note 5; SIFMA (August 2011), supra note 5. See also Proposing Release, 76 FR at 42415, supra note 3. 745See SIFMA (August 2011), supra note 5. 746See CFA, supra note 5. 747See FIA/ISDA/SIFMA, supra note 5. 748See Section II.G.4, supra. 749See Ropes & Gray, supra note 5; SIFMA (August 2011), supra note 5; APPA, supra note 5. 750The CFTC has taken the same approach in its treatment of swap dealers. See CFTC Adopting Release, 77 FR at 9785, supra note 22. 751See Better Markets (August 2011), supra note 5. 752See Better Markets (August 2011), supra note 5; FIA/ISDA/SIFMA, supra note 5. 753See Proposing Release, 76 FR at 42424, supra note 13. 754See FIA/ISDA/SIFMA, supra note 5. recommendation has taken place is not susceptible to a bright line definition.739 The Commission is not expanding the definition of ‘‘recommendation’’ to encompass ‘‘more general information and opinions,’’ as suggested by a commenter.740 Such a broad definition could have the unintended consequence of chilling commercial communications, restricting customary commercial interactions, and generally reducing market information shared with special entities regarding security-based swaps.741 As we discussed in Section II.G.4, the Commission continues to believe that the meaning of the term ‘‘recommendation’’ is well-established and familiar to intermediaries in the financial services industry, including broker-dealers that rely on institutional suitability determinations, and we believe that the same meaning should be ascribed to the term in this context. As explained in Section II.G.4, the factors considered in determining whether a recommendation has taken place include whether the communication ‘‘reasonably could be viewed as a ‘call to action’ ’’ and ‘‘reasonably would influence an investor to trade a particular security or group of securities.’’ 742 The more individually tailored the communication to a specific customer or a targeted group of customers about a security or group of securities, the greater the likelihood that the communication may be viewed as a ‘‘recommendation.’’ 743 Thus, in response to commenters’ requests for clarification, an SBS Dealer typically would not be making a recommendation—and would therefore not be ‘‘acting as an advisor’’ to a special entity with a duty to act in the ‘‘best interests’’ of a special entity— solely by reason of providing general financial or market information or transaction terms in response to a request for competitive bids.744 Furthermore, provision of information pursuant to the requirements of the
business conduct rules will not, in and of itself, result in an SBS Dealer being viewed as making a ‘‘recommendation,’’ as suggested by one commenter.745 Rather, as stated above, the determination of whether providing information about the valuation of a security-based swap, or concerning the advisability of a security-based swap or a trading strategy, involving a security￾based swap constitutes a ‘‘recommendation’’ turns on the particular facts and circumstances. To avoid unnecessarily narrowing the definition of ‘‘recommendation,’’ we decline to limit the definition of ‘‘act as an advisor’’ to recommendations that are designed to meet the needs of a specific counterparty after taking into account the counterparty’s individual circumstances.746 We also decline to exclude from the definition of ‘‘recommendation’’ communications to groups of customers or to investment managers with multiple clients.747 We believe that such an exclusion could unnecessarily deprive groups or special entity investors of the intended protections of the rules when there are communications regarding a particular security-based swap or trading strategy to a targeted group of special entities that share common characteristics, e.g., school districts. As stated above, such communications should be evaluated based on whether, in light of all the facts and circumstances, the communications could ‘‘reasonably could be viewed as a ‘call to action’ ’’ and ‘‘reasonably would influence an investor to trade a particular security or group of securities.’’ 748 We also note that the number of recipients of a given communication does not necessarily change the characteristics of the communication. Furthermore, we are not limiting the definition of ‘‘act as an advisor’’ to a special entity to situations in which parties affirmatively contract or otherwise establish ‘‘more formal, acknowledged agency relationships that are part of a relationship of trust and confidence’’ 749 We believe this could limit the scope of the obligations and corresponding protections for special entities when an SBS Dealer ‘‘acts as an advisor’’ in a manner that is not consistent with the intended objectives of the rule. In short, the rule could be stripped of its intended protections if those protections only applied when the regulated entity agreed to be regulated.750 For the same reason, SBS Dealers may not avoid making a ‘‘recommendation’’ as defined in this context through disclaimer, or simply by not characterizing or labeling a recommendation as such.751 An interpretation that would permit an SBS Dealer to disclaim its ‘‘best interests’’ duty, irrespective of the SBS Dealer’s conduct, could essentially relieve SBS Dealers of their obligations and deprive special entities of the corresponding protections intended by Rule 15Fh–4. Rather than require the affirmative agreement of the parties to establish an advisory relationship, we are providing a safe harbor, as described in Section II.H.2.c.ii, infra, by
which the parties can agree that an SBS Dealer is not ‘‘acting as an advisor’’ to a special entity where certain conditions are met— specifically, where the special entity agrees to rely on the advice of an ERISA fiduciary or other qualified, independent representative with respect to a security-based swap transaction. We reject the commenters’ suggestion that we conform the definition of an SBS Dealer that ‘‘acts as an advisor’’ to a special entity to the definition of ‘‘investment adviser’’ under the Advisers Act, or to the definition of ‘‘commodity trading advisor’’ under the CEA.752 We do not agree that either definition is necessarily tailored to the specific attributes of security-based swap transactions or the unique relationships between SBS Dealers and their special entity counterparties; therefore we believe that those definitions would not necessarily provide special entities that trade in security-based swaps with the protections the business conduct rules are intended to provide. The Commission continues to believe that the duties imposed on an SBS Dealer that ‘‘acts as an advisor’’ (as well as the definition of ‘‘act as an advisor’’ under Rule 15Fh–2(a)) are supplemental to any duties that may be imposed under other applicable law.753 In particular, we acknowledge the commenter’s suggestion that the Commission coordinate with the MSRB regarding the definition of ‘‘acts as an advisor.’’ 754 As explained in Section

755See Municipal Advisor Registration Release, supra note 54. 756See NABL, supra note 5; FIA/ISDA/SIFMA, supra note 5. 757 17 CFR 23.440(a). 758See ABC, supra note 5; BlackRock, supra note 5; SIFMA (August 2015), supra note 5. 759 Id. 760See SIFMA (August 2015), supra note 5. See also CFTC Adopting Release, 77 FR at 9784, n. 701, supra note 22. 761ERISA fiduciaries are required to act with both loyalty (see Section 404(a)(1)(A)) and prudence (see
Section 404(a)(1)(B)) when evaluating a transaction
for an ERISA plan. In addition, ERISA fiduciaries are subject to statutory prohibitions against entering into certain categories of transactions between a plan and a ‘‘party in interest’’ (see Section 406(a)), and prohibitions against self-dealing and other conflicts of interest (see Section 406(b)). See supra note 38. I.E, supra, we have adopted rules that provide an exemption from ‘‘municipal advisor’’ status for persons providing advice with respect to municipal financial products or the issuance of municipal securities where certain conditions are met, such as where the municipal entity is represented by an independent registered municipal advisor.755 More generally, as discussed in Section I.E, supra, the duties imposed on an SBS Dealer under the business conduct rules are specific to this context, and are in addition to any duties that may be imposed under other applicable law. Thus, an SBS Dealer must separately determine whether it is subject to regulation as a broker-dealer, an investment adviser, a municipal advisor or other regulated entity. Lastly, the Commission considered and agrees with the comment that the definition of ‘‘acting as an advisor’’ to a special entity should be applied as consistently as possible across various rulemakings, and that the Commission should coordinate with the CFTC with respect to this definition.756 As noted in
Section I.C, the staffs of the Commission
and the CFTC extensively coordinated and consulted in connection with their respective rulemakings in an effort to establish a consistent rule regime across the swap and security-based swap markets. These efforts are reflected in the rules adopted today. We note that the Commission’s definition of ‘‘acts as an advisor’’ to a special entity under Rule 15Fh–2(a) differs slightly from the CFTC’s parallel rule, under which a swap dealer is deemed to be an advisor when it ‘‘recommends a swap or trading strategy involving a swap that is tailored to the particular needs or characteristics of the Special Entity.’’ 757 While we agree that the more individually tailored the communication to a specific counterparty or a targeted group of counterparties about a swap, group of swaps or trading strategy involving the use of a swap, the greater the likelihood that the communication may be viewed as a ‘‘recommendation,’’ we do not agree that a security-based swap communication must be so tailored to constitute a recommendation for purposes of Rule 15Fh–2(a). In adopting this more expansive definition of ‘‘acts as an advisor’’ to a special entity, the Commission believes that it will better provide the intended protections of the statute to groups of special entity investors that may be treated similarly by SBS Dealers, such as school districts.
ii. Safe Harbor
After the Commission issued the Proposing Release, the CFTC adopted final rules that provide two safe harbors from the definition of ‘‘acts as an advisor to a special entity.’’ The first provides a safe harbor for communications between a swap dealer and an ERISA plan that has an ERISA fiduciary, and the second provides a safe harbor for communications between a swap dealer and any special entity (including a special entity that is an ERISA plan). Qualifying for either safe harbor requires specified representations in writing by the swap dealer and special entity. In response to requests from commenters, and upon further consideration, we are adopting an approach that similarly recognizes the use of ERISA fiduciaries by ERISA plans, thereby avoiding the potential conflict or confusion that may result where the existing ERISA rules intersect with the business conduct rules adopted today.758 In adopting a separate safe harbor for ERISA plans, we recognize that Congress has already established a comprehensive federal regulatory framework for ERISA plans. Such recognition of the existing federal regulatory framework for ERISA plans maintains statutory protections for ERISA plans, while addressing the potential conflict, recognized by commenters, between the ERISA rules and the business conduct standards we are adopting today.759 Lastly, in adopting a bifurcated approach that provides a safe harbor specifically for ERISA plans and another that is available with respect to all special entities, we are responding to the commenter’s request that we more closely align the Commission’s rules with those of the CFTC to promote regulatory consistency and operational efficiency for entities that have been operating under the CFTC’s business conduct regime since 2012.760 Under Rule 15Fh–2(a)(1), as adopted, an SBS Dealer may establish that it is not acting as an advisor to a special entity that is an ERISA plan if the special entity is represented by a qualified independent representative that meets the standard for an ERISA fiduciary. Specifically, the rule provides that an SBS Dealer will not be acting as an advisor to an ERISA special entity if:
(i) The ERISA plan represents in writing that it has an ERISA fiduciary; (ii) the ERISA fiduciary represents in writing that it acknowledges that the SBS Dealer is not acting as an advisor; and (iii) the ERISA plan represents in writing that:
(A) It will comply in good faith with written policies and procedures reasonably designed to ensure that any recommendation the special entity receives from the SBS Dealer involving a security-based swap transaction is evaluated by an ERISA fiduciary before the transaction is entered into; or (B) any recommendation the special entity receives from the SBS Dealer involving a security-based swap transaction will be evaluated by an ERISA fiduciary before that transaction is entered into. Allowing the ERISA plan to either make written representations about its policies and procedures or represent in writing that the security-based swap transaction will be evaluated by an ERISA fiduciary provides the ERISA plan greater flexibility in structuring its relationship with the SBS Dealer. Moreover, these requirements, taken together, are designed to ensure that the ERISA fiduciary, not the SBS Dealer, is evaluating the security-based swap transaction on behalf of the ERISA plan. As an ERISA fiduciary is already required by statute to, among other things, act with prudence and loyalty when evaluating a transaction for an ERISA plan,761 the Commission believes it is appropriate to provide the safe harbor for when an SBS Dealer would not be deemed to be acting as an advisor to the ERISA plan for purposes of this rule. Under Rule 15Fh–2(a)(2), as adopted, an SBS Dealer can establish it is not acting as an advisor to any special entity (including a special entity that is an ERISA plan) when the special entity is relying on advice from a qualified independent representative that satisfies specific criteria. An SBS Dealer will not be ‘‘acting as an advisor’’ to any special entity (including a special entity that is an ERISA plan) if: (i) The special entity represents in writing that it acknowledges that the SBS Dealer is not acting as an advisor, and that the special entity will rely on advice from a qualified independent representative; and (ii) the SBS Dealer discloses that it

762However, as noted above in Section II.G.4.c.ii, an SBS Dealer that makes a recommendation to a special entity will still need to have a reasonable basis to believe that a recommended security-based swap or trading strategy involving a security-based swap is suitable for the special entity. 763See NABL, supra note 5; APPA, supra note 5; FIA/ISDA/SIFMA, supra note 5; NACUBO, supra note 5. 764Rule 15Fh–1(b). 765See Ropes & Gray, supra note 5. 766 In addition, the safe harbor as adopted continues to require that the SBS Dealer disclose to the special entity that it is not undertaking to act in the best interest of the special entity. See Rule 15Fh–2(a)(2)(ii). 767See SIFMA (November 2015), supra note 5. 768See ABC, supra note 5. See also Section II.H.5, infra. 769See Better Markets (August 2011), supra note 5; CFA, supra note 5; AFSCME, supra note 5. 770See CFA, supra note 5; AFSCME, supra note 5. 771See 17 CFR 23.440(b)(1)(ii), (b)(2)(ii)(A). 772See 17 CFR 23.440(b)(1)(iii)(A)–(B). 773See 17 CFR 23.440(b)(1)(iii). 774Cf. 17 CFR 23.440(b)(2)(i). 775See Ropes & Gray, supra note 5. is not undertaking to act in the best interests of the special entity.762 In adopting the safe harbor, the Commission agrees with commenters that the provisions in Rule 15Fh– 2(a)(1)–(2) will reduce uncertainty regarding the role of an SBS Dealer when transacting with a special entity.763 Requiring special entities (or their fiduciaries) to affirm in writing that they acknowledge the SBS Dealer is not acting as an advisor, and that they will instead obtain advice from a qualified independent representative, will help ensure that the parties are aware of their respective rights and obligations regarding a security-based swap transaction. While our rules would permit an SBS Dealer to rely on the special entity’s (or its fiduciary’s) written representations, the SBS Dealer’s reliance must still be reasonable, as required under Rule 15Fh–1(b). Specifically, the SBS Dealer may not rely on a representation if the SBS Dealer has information that would cause a reasonable person to question the accuracy of the representation.764 The requirement that a special entity or its fiduciary represents in writing that it acknowledges the SBS Dealer is not acting as an advisor differs from the proposed safe harbor, which would have required the special entity to represent that it would not rely on the SBS Dealer’s recommendations. The Commission is making this change in response to a commenter’s concern.765 The Commission does not intend to affect the rights of parties in private actions. The safe harbor under 15Fh–2(a)(2), as adopted, also differs from the proposed rule, which would have required that an SBS Dealer must have a reasonable basis to believe that the special entity is advised by a qualified independent representative. Rather, under adopted Rule 15Fh–2(a)(2)(i), the safe harbor requires written representations from the special entity that it will rely on advice from a qualified
independent representative.766 The Commission agrees with the commenter that requiring special entities to make representations to SBS Dealers in writing that they are relying on advice from a qualified independent representatives addresses the proposed rule’s underlying policy concern—i.e., that the special entity is represented by a qualified independent representative.767 Moreover, we believe that requiring special entities to effectively confirm that they have qualified independent representatives addresses the commenter’s concern that the proposed rule would allow SBS Dealers to evaluate the qualifications of a special entity’s independent representative and vest SBS Dealers with the authority to ‘‘trump’’ the special entity’s choice of representative.768 An SBS Dealer could rely on the special entity’s written representations unless the SBS Dealer has information that would cause a reasonable person to question the accuracy of the representation, including the representation that the special entity is relying on advice from a qualified independent representative. While we acknowledge commenters’ concerns that the safe harbor might erode the statutory protections for special entities,769 we also have considered the inherent tensions that arise where SBS Dealers have concurrent, potentially conflicting roles as advisor and counterparty to special entities. On the one hand, the SBS Dealer as advisor is subject to a duty to act in the ‘‘best interests’’ of the special entity. On the other hand, a broad application of the ‘‘best interests’’ standard could have the unintended consequences of chilling commercial communications, restricting customary commercial interactions, reducing market information shared with special entities, as well as reducing the ability of special entities to engage in security￾based swaps. In adopting the safe harbor, we acknowledge the tension between the SBS Dealer’s potentially conflicting roles as advisor and counterparty by recognizing that the special entity may be separately advised by a fiduciary or other qualified independent representative, who will act in the special entity’s best interests. We disagree with commenters that adoption of the safe harbor could cause special entities to waive their right to ‘‘best interests’’ standards or sign ‘‘boilerplate agreements’’ as a condition of transacting with SBS Entities.770 Rather, the safe harbor reflects an approach that is conditioned upon the involvement of an ERISA fiduciary or other qualified independent representative that is otherwise required to act in the best interests of the special entity. Although the safe harbor the Commission is adopting today largely aligns with that of the CFTC, it differs from that of the CFTC in four respects:
(1) Rules 15Fh–2(a)(1)(ii) and 15Fh– 2(a)(2)(i)(A) require the special entity or its fiduciary to represent in writing that it acknowledges the SBS Dealer is not acting as an advisor, whereas the CFTC requires the special entity or its fiduciary to represent it will not rely on the SBS Dealer’s recommendations; 771 (2) Rules 15Fh–2(a)(1)(iii)(A) and (B) apply to any recommendation the special entity receives from the security￾based swap dealer ‘‘involving’’ a security-based swap transaction, while the parallel CFTC rules apply to recommendations ‘‘materially affecting’’ a security-based swap transaction; 772 (3) Rule 15Fh–2(a)(1)(iii) requires a security-based swap transaction to be evaluated by a fiduciary before the transaction ‘‘is entered into,’’ whereas the CFTC’s safe harbor requires a swap transaction to be evaluated by fiduciary before the transaction ‘‘occurs’’; 773 and (4) the safe harbor in Rule 15Fh–2(a) does not prohibit an SBS Dealer acting as an advisor from expressing an opinion as to whether a special entity should enter into a recommended security-based swap or trading strategy.774 The Commission believes it is appropriate to differ from the CFTC in these three discrete areas for the following reasons. First, as discussed above, the Commission believes that replacing the requirement that the special entity or its fiduciary represent it will not ‘‘rely’’ on the SBS Dealer’s recommendations with the requirement that the special entity or its fiduciary represent in writing that it acknowledges that the SBS Dealer is not ‘‘acting as an advisor’’ will afford special entities the same statutory protections. As noted above, the Commission is making this change in response to a commenter’s concern.775 The Commission does not intend to affect the rights of parties in private actions.

776See, e.g., Rule 15Fh–1 (‘‘Sections 240.15h–1 through 240.15Fh–6, and 240.15Fk–1 apply, as relevant in connection with entering into security￾based swaps . . .’’); Rule 15Fh–3(a)(1), (2) (‘‘. . . before entering into a security-based swap . . .’’); Rule 15Fh–3(b) (‘‘At a reasonably sufficient time prior to entering into a security-based swap . . .’’); Rule 15Fh–6(b)(1) (‘‘It shall be unlawful for a security-based swap dealer to offer to enter into, or enter into, a security-based swap . . .’’) (emphasis added). 777See generally CFTC Adopting Release, 77 FR at 9784, supra note 22. 778Section 15F(h)(5) of the Exchange Act also requires an SBS Entity that is a counterparty to a special entity to have a ‘‘reasonable basis’’ to believe the special entity has an independent representative that undertakes to act in the best interests of the special entity. 779We have stated that an adviser must deal fairly with clients and prospective clients, seek to avoid conflicts with its clients and, at a minimum, make full disclosure of any material conflict or potential conflict. See Amendments to Form ADV, Investment Advisers Act Release No. 3060 (Jul. 28, 2010), 75 FR 49234 (Aug. 12, 2010), citing SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 191–194 (1963) (holding that investment advisers have a fiduciary duty enforceable under Section 206 of the Advisers Act, that imposes upon investment advisers the ‘‘affirmative duty of ‘utmost good faith, and full and fair disclosure of all material facts,’ as well as an affirmative obligation to ‘employ reasonable care to avoid misleading’’’ their clients and prospective clients). 780See, e.g., Exchange Act Section 15B(b)(2)(L), 15 U.S.C. 78o–4(b)(2)(L) (requiring the MSRB to prescribe means reasonably designed to prevent acts, practices, and courses of conduct that are not consistent with a municipal advisor’s fiduciary duty to its municipal entity clients). In April 2015, the MSRB filed proposed Rule G–42 with the Commission for approval, which rule would establish core standards of conduct for municipal advisors when engaging in municipal advisory activities, other than municipal advisory solicitation activities. The rule was published in the Federal Register on May 8, 2015. See Exchange Act Release No. 74860 (May 4, 2015), 80 FR 26752. See also Exchange Act Release Nos. 75628 (Aug. 6, 2015), 75737 (Aug. 19, 2015), and 76420 (Nov. 10, 2015). The rule was approved, with amendments, on December 23, 2015. See Exchange Act Release No. 76753 (Dec. 23, 2015). 781See, e.g., 29 U.S.C. 1104(a)(1)(A) (‘‘a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and for the exclusive purpose of: (i) Providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan’’) and 29 U.S.C. 1104(a)(1)(B) (a fiduciary must act ‘‘with the care, skill, prudence, and diligence under the circumstances then
prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims’’). Second, the Commission has determined to replace the phrase ‘‘materially affecting’’ with the word ‘‘involving’’ in relation to the recommendations that a special entity receives from an SBS Dealer. We believe that further clarification is needed in the context of Rule 15Fh–2(a)(1) to make clear that all recommendations made by the SBS Dealer are covered by this provision. Third, the Commission has determined to use the phrase ‘‘is entered into,’’ as it is consistently used throughout the business conduct rules being adopted today.776 However, because we also believe that the CFTC’s usage of the word ‘‘occurs’’ was intended to have the same meaning as the phrase ‘‘is entered into,’’ we expect the practical effect of CFTC Regulation 23.440(b)(1)(iii) to be substantially the same as Rule 15Fh–2(a)(1)(iii).777 Fourth, the Commission declines to adopt the provision in CFTC Regulation 23.440(b)(2)(i), under which Swap Dealers seeking to avail themselves of the safe harbor would be precluded from ‘‘expressing an opinion’’ as to whether the special entity should enter into a recommended security-based swap or trading strategy. Under the rules adopted today, the determination of whether an SBS Dealer has provided advice to a special entity turns on whether a communication is considered a ‘‘recommendation,’’ not whether the SBS Dealer has ‘‘expressed an opinion.’’ Unlike the word ‘‘recommendation,’’ the phrase ‘‘express an opinion’’ is not defined or described in the federal securities laws in this context, and therefore may have other meanings that could cause confusion. Further, we also believe the concern that underlies the CFTC’s provision (i.e., that the special entity obtain advice regarding a security-based swap from an ERISA fiduciary or other qualified independent representative) is sufficiently addressed by the requirement in Rules 15Fh– 2(a)(1)–(2) that the special entity or its fiduciary represent that it acknowledges that the SBS Dealer is not acting as an advisor. It is therefore the Commission’s view that prohibiting SBS Dealers from ‘‘expressing an opinion’’ would neither increase regulatory clarity regarding whether an SBS Dealer’s conduct falls within the safe harbor, nor provide a corresponding increase in protection for special entities.
3. Definition of ‘‘Best Interests’’
Exchange Act Section 15F(h)(4)(B) imposes on an SBS Dealer that ‘‘acts as an advisor’’ to a special entity a duty to act in the ‘‘best interests’’ of the special entity. In addition, Section 15F(h)(4)(C) requires the SBS Dealer that ‘‘acts as an advisor’’ to a special entity to make ‘‘reasonable efforts to obtain such information as is necessary to make a reasonable determination’’ that any swap recommended by the SBS Dealer is in the ‘‘best interests’’ of the special entity.778 The term ‘‘best interests’’ is not defined in the Dodd-Frank Act, and the Commission did not propose to define ‘‘best interests.’’ In the Proposing Release, we noted that the ‘‘best interests’’ duty for an SBS Dealer acting as an advisor to a special entity ‘‘goes beyond and encompasses the general suitability requirement of proposed Rule 15Fh–3(f).’’ We sought comment on whether we should define the term ‘‘best interests,’’ and if so, whether such definition should use formulations based on the standards applied to investment advisers,779 municipal advisors,780 ERISA fiduciaries,781 or some other formulation. a. Proposed Rules Proposed Rule 15Fh–4(b)(1) would generally require an SBS Dealer that acts as an advisor regarding a security-based swap to a special entity to act in the ‘‘best interests’’ of the special entity. Proposed Rule 15Fh–4(b)(2) would require the SBS Dealer to make ‘‘reasonable efforts’’ to obtain the information necessary to make a reasonable determination that a security-based swap or trading strategy involving a security-based swap is in the best interests of the special entity, and that such information shall include but not be limited to: (i) The authority of the special entity to enter into a security-based swap; (ii) the financial status of the special entity, as well as future funding needs; (iii) the tax status of the special entity; (iv) the investment or financing objectives of the special entity; (v) the experience of the special entity with respect to entering into security-based swaps, generally, and security-based swaps of the type and complexity being recommended; (vi) whether the special entity has the financial capability to withstand changes in market conditions during the term of the security-based swap; and (vii) such other information as is relevant to the particular facts and circumstances of the special entity, market conditions and the type of security-based swap or trading strategy involving a security-based swap being recommended.

782See Better Markets (August 2011), supra note 5; CFA, supra note 5; Johnson, supra note 5; ABC, supra note 5; BlackRock, supra note 5; SIFMA (August 2015), supra note 5. 783See Better Markets (August 2011), supra note 5 (noting that Congress expressly described the standard as ‘‘best interest’’ in Exchange Act Sections 15F(h)(2)(A) and (B), 15F(h)(4) and 15F(h)(5)). 784 Id. 785See CFA, supra note 5. 786 Id. 787 Id. 788 Id. 789 Id. 790See Johnson, supra note 5. 791See ABC, supra note 5; BlackRock, supra note 5. 792See ABC, supra note 5. 793See BlackRock, supra note 5. 794 Id. 795See Section II.G.5, supra. 796 Id. 797See SIFMA (August 2015), supra note 5. 798 Id. 799 Id. 800 Id. 801 Id. 802 Id. b. Comments on the Proposed Rules The Commission received six comment letters on the imposition of a ‘‘best interests’’ standard.782 One commenter argued that the Commission should define what it means to act in the ‘‘best interests,’’ and proposed that the definition must ‘‘be at least as strong as the concept of ‘best interest’ [that] has evolved under the fiduciary principles applicable to investment [advisers].’’ 783 The commenter additionally requested that the Commission acknowledge ‘‘that the best interest standard intended by Congress is a fiduciary concept that goes well beyond suitability.’’ 784 Similarly, a second commenter supporting a best interests standard stated it did not believe it was ‘‘necessary, or even appropriate,’’ to strictly define best interests.785 The commenter asked the Commission to provide guidance on how to apply the standard in particular circumstances. This commenter asserted that Congress did not intend to apply the ERISA fiduciary standard, and argued that the intended model for the ‘‘heightened standard’’ was the Advisers Act fiduciary duty.786 The commenter stated that Congress did not seek to eliminate all conflicts of interest but to ensure that such conflicts of interest would be appropriately managed and fully disclosed.787 The commenter urged that in providing guidance in this area, it is important for the Commission to clarify that not all suitable recommendations would satisfy a best interest standard and that the best interest standard would impose a ‘‘heightened duty beyond mere suitability’’ and would require SBS Dealers to ‘‘recommend from among the various suitable options the approach they believe to be best for the special entity.’’ 788 In addition, the commenter stated that the guidance should ‘‘clarify that the best interest standard is consistent with various different methods of compensation and with proprietary trades, but that it requires the full disclosure of any conflicts of interest.’’ In the context of an SBS Dealer acting as an advisor and serving as a counterparty, the commenter suggested that the Commission clarify that it would not be inconsistent with the SBS Dealer’s duty to act in the best interests of the special entity if the SBS Dealer, as principal, earned a reasonable profit or fee
from transacting with the special entity.789 A third commenter asserted that Congress rejected the imposition of a fiduciary duty on SBS Dealers as incompatible with their role as market makers and asked the Commission to ‘‘respect Congressional intent’’ to protect the ability of end users and pension plans to transact in security￾based swaps in a cost-effective manner by rejecting such a duty.790 Two additional commenters argued that an SBS Dealer that ‘‘acts as an advisor to a special entity’’ and complies with the ‘‘best interest’’ requirements might become an ERISA fiduciary under the DOL’s proposed redefinition of the term ‘‘fiduciary.’’ 791 Accordingly, one of these commenters requested that the Commission clarify that compliance with the business conduct standards would not transform an SBS Dealer into a fiduciary under ERISA or under the final DOL regulation.792 One of these commenters also opposed the best interest requirement, and recommended that it be omitted from the final rules.793 The commenter expressed its concern that ‘‘[r]equiring that an SBS Dealer act in the best interests of a counterparty who is a special entity would confuse the roles of the parties and have an adverse impact on the flow of information regarding investment and trading strategies.’’ 794 Additionally, if the requirement is retained, the commenter recommended that the term ‘‘best interests’’ be defined as complying with proposed Rule 15Fh– 3(g) (fair and balanced communications),795 and NASD Rule 2010(d), which would require that communications be based on principles of fair dealing and good faith, be fair and balanced, and provide a sound basis for evaluating the transaction.796 After the CFTC adopted its rules in 2012, one commenter asserted that ‘‘to promote legal certainty and the ability of SBS dealers to continue to trade with special entities, the SEC should provide guidance clarifying the nature of an SBS Dealer’s ‘best interests’ duty.’’ 797 Specifically, the commenter asserted that, to harmonize with CFTC guidance, the Commission should clarify that the best interest duty is not a fiduciary duty, but is rather a duty for the SBS Dealer to: (1) Comply with the requirement to make a reasonable effort to obtain necessary information; (2) act in good faith and make full and fair disclosure of all material facts and conflicts of interest with respect to the recommended security-based swap or related trading strategy; and (3) employ reasonable care that any recommendation made to the special entity be designed to further the special entity’s stated objectives.798 The commenter also suggested that, consistent with the CFTC’s guidance, a recommendation need not represent the best of all possible alternatives to meet the best interest standard. Additionally, the commenter stated that the determination whether a recommendation is in a special entity’s best interest should be based on the information known to the SBS Dealer at the time a recommendation was
made.799 Furthermore, according to the commenter, the best interest duty should not impede an SBS Dealer from negotiating the terms of a transaction in its own interests, or from making a reasonable profit in a transaction; nor should it impose an ongoing obligation on the SBS Dealer to act in the best interest of the special entity.800 This commenter also suggested deleting the requirement under Rule 15Fh–4(b)(i) that the SBS Dealer ‘‘make reasonable efforts to obtain information regarding ‘the authority of the special entity to enter into a security based swap.’ ’’ 801 Toward this end, the commenter argued that the CFTC eliminated this requirement as it was ‘‘duplicative’’ of the know your customer requirement under the CFTC’s business conduct rules. As the commenter stated: ‘‘Since proposed Rule 15Fh3(e)(3) would require an SBS dealer to obtain this information, we believe the same considerations support eliminating that requirement here.’’ 802 Moreover, the commenter proposed a bifurcated treatment of ERISA and non-ERISA special entities under Rule 15Fh–5(a) to recognize the ‘‘unique fiduciary regime’’ already applicable to ERISA special entities, as well as to ‘‘reduce costs for special entities since most of them have

803 Id.
804See SIFMA (August 2015), supra note 5. 805Proposed Rule 15Fh–4(b)(1) generally required an SBS Dealer to ‘‘act in the best interests of the special entity.’’ 806See, e.g., Better Markets (August 2011), supra note 5; CFA, supra note 5; Johnson, supra note 5; ABC, supra note 5; BlackRock, supra note 5. 807 In the Senate bill, the business conduct standards provision provided that ‘‘a security-based swap dealer that provides advice regarding, or offers to enter into, or enters into a security-based swap with [a Special Entity] shall have a fiduciary duty to the [Special Entity], as appropriate.’’ Restoring American Financial Stability Act of 2010, H.R. 4173, Section 764 (May 20, 2010) (Public Print version as passed in the Senate of the United States May 27 (legislative day, May 26, 2010) (proposed amendments to Section 15F(h)(2)(A) and (B) of the Exchange Act), available at https:// www.congress.gov/bill/111th-congress/house-bill/ 4173/text/pp). Instead, Congress adopted the following best interests standard: ‘‘Duty.—Any security-based swap dealer that acts as an advisor to a Special Entity shall have a duty to act in the best interests of the Special Entity.’’ H.R. Rep. No. 111–517, 111th Cong., 2d Sess., p. 423 (June 29,
2010) (Dodd-Frank Act Conference Report). See also
Section 15F(h)(4)(B) of the Exchange Act.
808See Better Markets (August 2011), supra note 5; CFA, supra note 5. See also Proposing Release, 76 FR at 42417, supra note 3. This is the case even if the SBS Dealer is not acting as counterparty to the special entity for which it is acting as an advisor. 809Also, as stated above, to comply with its customer-specific suitability obligations under Rule 15Fh–3(f)(1)(ii), an SBS Dealer must have a reasonable basis to believe that a recommended security-based swap or trading strategy involving a security-based swap is suitable for the counterparty. To establish a reasonable basis for a recommendation, an SBS Dealer must have or obtain relevant information regarding the special entity, including its investment profile, trading objectives, and its ability to absorb potential losses associated with the recommended security-based swap or trading strategy involving a security-based swap. Furthermore, where an SBS Dealer’s reasonable efforts to obtain necessary information result in limited or incomplete information, the SBS Dealer must assess whether it is able to make a reasonable determination that a particular recommendation is in the best interests of the special entity. 810The Commission believes that to ‘‘act in good faith’’ in this context generally involves taking steps to manage material conflicts of interest in addition to disclosing them. 811See note 809, supra and Rule 15Fh–4(b)(2). An SBS Dealer generally should consider evaluating ‘‘best interests’’ in accordance with policies and procedures that are reasonably designed to prevent violations of the requirement that a recommended swap is in the best interests of the special entity. See Rule 15Fh–3(h)(2)(iii) (requiring SBS Entities to have supervisory policies and procedures that are reasonably designed to prevent violations of applicable federal securities laws and the rules and regulations thereunder). Furthermore, the Commission has separately proposed that SBS Dealers be required to make and keep current a record that demonstrates their compliance with Rule 15Fh–4, among others, as applicable. See Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based Swap Participants, and Broker-Dealers; Capital Rule for Certain Security-Based Swap Dealers; Proposed Rules, Exchange Act Release No. 34–71958, 79 FR 25194 at 25208 (May 2, 2014). 812Exercising reasonable care would also require, among other things, undertaking reasonable diligence to understand the potential risks and rewards associated with the recommended security￾based swap or trading strategy. See Rule 15Fh– 3(f)(1)(i). 813See CFA, supra note 5; SIFMA (August 2015), supra note 5. already conformed their relationships with their representatives to satisfy the CFTC’s qualification criteria.’’ 803
c. Response to Comments and Final
Rules
Upon consideration of commenters’ views, the Commission is adopting Rules 15Fh–4(b)(1) and (2), regarding the ‘‘best interests’’ obligation for an SBS Dealer that acts as an advisor to a special entity regarding a security-based swap, with certain modifications. Under Rule 15Fh–4(b)(1), as adopted, an SBS Dealer that acts as an advisor to a special entity will have a ‘‘duty to make a reasonable determination that any security-based swap or trading strategy involving a security based swap recommended by the security based swap dealer is in the best interests of the special entity.’’ We believe that this language, suggested by a commenter,804 appropriately interprets the statutory requirements imposed on an SBS Dealer that is acting as an advisor to a special entity.805 While the Commission is not specifically defining the term ‘‘best interests,’’ it is providing further guidance below regarding how an SBS Dealer that acts as an advisor to a special entity can comply with the duty to make a reasonable determination that a security-based swap or security-based swap trading strategy is in the ‘‘best interests’’ of the special entity. Under Rule 15Fh–4(b)(2), as adopted, the advisor will be obligated to ‘‘make reasonable efforts to obtain such information that the security-based swap dealer considers necessary to make a reasonable determination that a security-based swap or trading strategy involving a security-based swap is in the best interests of the special entity.’’ Whether a recommended security-based swap or trading strategy is in the best interests of the special entity is based on information known to the advisor (after it has employed its reasonable efforts under Rule 15Fh–4(b)(2)) at the time the recommendation is made. Various commenters questioned whether the ‘‘best interest’’ duty was tantamount to, or would give rise to, a ‘‘fiduciary duty.’’ 806 The Commission has considered commenters’ views and the legislative history in regard to whether Section 15Fh–4 imposes a fiduciary duty.807 As noted above, Rule 15Fh–4(b)(1), as adopted, requires that an SBS Dealer ‘‘make a reasonable determination that any security-based swap or trading strategy involving a security based swap recommended by the security based swap dealer is in the best interests of the special entity.’’ In response to comments, and for clarification, the determination whether a recommended security-based swap or trading strategy is in the ‘‘best interests’’ of the special entity will turn on the facts and circumstances of the particular recommendation and particular special entity. In response to a commenter, and as stated in the Proposing Release, we continue to believe that the ‘‘best interests’’ obligation for an SBS Dealer acting as an advisor to a special entity goes beyond and encompasses the general suitability requirements of Rule 15Fh–3(f).808 The Commission generally believes that it would be difficult for an SBS Dealer acting as an advisor to a special entity to
fulfill its obligations under Rule 15Fh–4(b)(1), as adopted, unless the SBS Dealer, at a minimum:
(1) Complies with the requirement of Rule 15Fh–4(b)(2) that it make a reasonable effort to obtain necessary information to make a reasonable determination that a security-based swap or related trading strategy is in the best interests of the special entity; 809 (2) acts in good faith and makes full and fair disclosure of all material risks and characteristics of and any material incentives or conflicts of interest with respect to the recommended security￾based swap; 810 and (3) employs reasonable care that any recommendation made to a special entity is suitable taking into account the information collected by the SBS Dealer pursuant to Rules 15Fh–3(f)(1)(ii) and 15Fh–4(b)(2), including the special entity’s objectives.811 In taking reasonable care that any recommendation made to a special entity is suitable, an SBS Dealer acting as an advisor to a special entity should consider, among other things, the fair pricing and appropriateness of the security-based swap or trading strategy, and must act without regard to its own financial or other interests in the security-based swap transaction or trading strategy.812 As discussed below, this does not prevent an SBS Dealer from negotiating commercially reasonable terms or earning a profit. In response to commenters’ requests for clarification, we do not believe that, to act in the best interests of a special entity, an SBS Dealer acting as an advisor would be required to recommend the ‘‘best’’ of all possible alternatives that might exist.813 The

814See CFA, supra note 5.
815See SIFMA (August 2015), supra note 5. For example, the SBS Dealer may negotiate appropriate provisions relating to collateral and termination rights to manage its risks related to the security￾based swap. 816See CFA, supra note 5. Furthermore, as noted throughout this release, the duties imposed on an SBS Dealer under these business conduct rules are specific to this context, and are in addition to any duties that may be imposed under other applicable law. Thus, an SBS Dealer must separately determine whether it is subject to regulation as a broker-dealer, an investment adviser, a municipal advisor or other regulated entity. 817See SIFMA (August 2015), supra note 5. 818See Better Markets (August 2011), supra note 5; CFA, supra note 5. 819See BlackRock, supra note 5. We interpret BlackRock’s comment as referring to FINRA Rule 2010, (or its predecessors, NYSE Rule 2010 or NASD Rule 2110) which states: ‘‘A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.’’ 820Compare Exchange Act Section 15F(h)(3)(C) (requiring business conduct requirements to ‘‘establish a duty for security-based swap dealer or major security-based swap participant to communicate in a fair and balanced manner based on principles of fair dealing and good faith’’) with Exchange Act Section 15F(h)(4)(B) (‘‘Any security￾based swap dealer that acts as an advisor to a special entity shall have a duty to act in the best interests of the special entity’’). 821See SIFMA (August 2015), supra note 5. determination whether a recommended security-based swap is in the ‘‘best interests’’ of the special entity must be based on information known to the SBS Dealer, acting as an advisor, (after it has employed its reasonable efforts under Rule 15Fh–4(b)(2)) at the time the recommendation is made. We believe that a broader requirement could introduce legal uncertainty into the determination of what an SBS Dealer must do to fulfill its obligation under the rule, given the broad range of objectives for which a security-based swap might be used, and how such objectives may vary for different transactions. The Commission believes, however, that generally an SBS Dealer should consider, based on the information about existing alternatives known to the SBS Dealer, any reasonably available alternatives in fulfilling its best interests obligations. For further clarification in response to comments, we believe that the ‘‘best interests’’ duty would not necessarily preclude an SBS Dealer from acting as a counterparty.814 However, an SBS Dealer acting in both capacities would be required to comply with the full range of requirements under Rules 15Fh–4 and 15Fh–5, applicable to SBS Dealers acting as advisors and as counterparties to special entities. In addition to the substantive requirements, Rule 15Fh–5(c) would require that the SBS Dealer disclose to the special entity in writing the capacities in which is it acting, and
the material differences between its capacities as advisor and counterparty to the special entity. We also do not believe that the ‘‘best interests’’ duty would prevent an SBS Dealer from negotiating commercially reasonable security-based swap terms in its own interest,815 or that it would preclude an SBS Dealer from making a reasonable profit or fee from a transaction with a special entity.816 We do not believe that the profit motive inherent in any security-based swap transaction necessarily precludes an SBS Dealer, acting as an advisor, from fulfilling its ‘‘best interests’’ duty to a special entity, although it raises the potential for material conflicts that would need to be disclosed— particularly when the SBS Dealer is acting as both an advisor and a counterparty to the special entity. A prohibition on receipt of reasonable profits or fees would likely reduce SBS Dealers’ willingness to act as advisors to and transact with special entities at the same time, and therefore could limit special entities’ access to security-based swap transactions that might be necessary to their particular objectives. As additional guidance in response to comments,817 the ‘‘best interests’’ duty would not require the SBS Dealer acting as an advisor to undertake an ongoing obligation to act in the ‘‘best interests’’ of the special entity, unless such obligation is established through contract or other arrangement or understanding (e.g., a course of dealing). As noted above, Rule 15Fh–4(b), as adopted, requires an SBS Dealer to make a reasonable determination, after making reasonable efforts to obtain the necessary information, that a recommended security-based swap or related trading strategy is in the best interests of the special entity. Thus, the ‘‘best interests’’ duty applies only to recommendations by the SBS Dealer. For example, if an SBS Dealer makes a recommendation in connection with a material amendment to a security-based swap or a recommendation to terminate a security-based swap early, the ‘‘best interests’’ duty would apply. However, we note that an SBS Dealer would have an ongoing ‘‘best interests’’ duty if it were to assume the additional responsibility of monitoring a special entity’s security-based swap transaction on an ongoing basis. Commenters have suggested that we apply principles applicable to investment advisers under the Advisers Act in the ‘‘best interests’’ standard of Rule 15Fh–4(b).818 As noted above in
Section II.H.2.c.i., we believe that the
protections included in the business conduct rules address the relationships between SBS Dealers and their special entity counterparties for which they act as advisors, so long as their activities are limited to those that would not, under the facts and circumstances, implicate other applicable law. However, as discussed in Section I.E, supra, the duties imposed on an SBS Dealer under the business conduct rules are specific to this context, and are in addition to any duties that may be imposed under other applicable law. Thus, an SBS Dealer must separately determine whether it is subject to regulation as a broker-dealer, an investment adviser, a municipal advisor or other regulated entity. We also decline to adopt a commenter’s suggestion that we either omit the term ‘‘best interests’’ from the final rules, or state that ‘‘best interests’’ means complying with the fair and balanced communications requirements of Rule 15Fh–3(g) and FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade).819 We do not believe that either approach would be consistent with the statute, which uses the terms ‘‘fair and balanced communications,’’ ‘‘fair dealing,’’ and ‘‘good faith’’ in separate provisions, indicating that they impose duties separate and apart from ‘‘best interests.’’ 820 The Commission also has modified the information that an SBS Dealer must ‘‘make reasonable efforts to obtain’’ and consider in making its reasonable determination that a security-based swap or security-based swap strategy is in the ‘‘best interests of the special entity.’’ Specifically, Rule 15Fh–4(b)(2) now includes the special entity’s hedging, investment, financing, or other stated objectives as information that shall be considered by the SBS Dealer in making this determination. The addition of ‘‘hedging’’ and ‘‘other’’ objectives in Rule 15Fh–4(b)(2)(iii) addresses a commenter’s suggestion that these terms be included,821 and recognizes that there may be a broader set of objectives for a special entity to enter into a security-based swap. The added language expressly recognizes special entities’ use of security-based swaps to mitigate risk, as well as other possible uses for security-based swaps that might be necessary for a special entity to achieve these objectives. We believe that requiring an SBS Dealer to make reasonable efforts to obtain information about a wider array of possible investment objectives of special entities will allow SBS Dealers to more accurately determine a special entity’s

822 Id. CFTC Regulation § 23.440(c)(2)(iii) states that: ‘‘Any swap dealer that acts as an advisor to a Special Entity shall make reasonable efforts to obtain such information as is necessary to make a reasonable determination that any swap or trading strategy involving a swap recommended by the swap dealer is in the best interests of the Special Entity, including . . . information relating to . . . the hedging, investment, financing, or other objectives of the Special Entity.’’ See CFTC Adopting Release, 77 FR at 9825, supra note 22. 823See SIFMA (August 2015), supra, note 5. 824See Section II.G.3, supra. 825See ABC, supra note 5; BlackRock, supra note 5; CFA, supra note 5. 826See Letter from Phyllis C. Borzi, Assistant Secretary, Employee Benefits Security Administration, U.S. Department of Labor to The Hon. Mary Jo White et al., SEC (Apr. 12, 2016). 827See Barnard, supra note 5; SIFMA (August 2015), supra note 5. 828See Barnard, supra note 5. See also Prohibition Against Fraud, Manipulation, and Deception in Connection With Security-Based Swaps, Exchange Act Release No. 34–63236, 75 FR 68560 (Nov. 8, 2011). 829See SIFMA (August 2015), supra note 5. 830 Id. 831 Id. objectives in entering into a security￾based swaps, which is one of the factors it must consider when making a best interest determination (as discussed above). Furthermore, as requested by a commenter, this change conforms the obligation under our rules with that under the rules of the CFTC.822 Such conformity promotes regulatory consistency across the swap and security-based swap markets, particularly among entities that transact in both markets and have already established infrastructure to comply with existing CFTC regulations. Furthermore, we reject the commenter’s request to delete the requirement under proposed Rule 15Fh–4(b)(2)(i) that an SBS Dealer make reasonable efforts to obtain ‘‘information regarding the authority of the special entity to enter into a security-based swap.’’ 823 In so doing, we disagree with the commenter’s assertion that the requirement under Rule 15Fh–4(b)(2)(i) is ‘‘duplicative’’ of the ‘‘know your counterparty’’ requirement of Rule 15Fh–3(e)(3), which, according to the commenter, already imposes an obligation on SBS Dealers to obtain information about the authority of the special entity to enter into a security￾based swap. To the contrary, the know your customer requirements of Rule 15Fh–3(e)(3) require an SBS Dealer to learn ‘‘information regarding the authority of any person acting for such counterparty.’’ A determination regarding the authority of any person acting for a counterparty (under Rule 15Fh–3(e)(3)) is different from a determination regarding the authority of the counterparty itself to enter into a security-based swap itself (under Rule 15Fh–4(b)(2)(i)). The SBS Dealer’s duty to act in the best interests of a special entity would encompass the requirement to ensure that a special entity has the requisite authority to enter into an SBS
transaction. Moreover, the ‘‘know your counterparty’’ requirements of Rule 15Fh–3(e)(3) only apply to known counterparties.824 Also, the ‘‘know your counterparty’’ requirements apply only to counterparties, whereas the requirements imposed on SBS Dealers that ‘‘act as an advisor’’ to special entities are not limited to special entities that are counterparties. Accordingly, we continue to believe that requiring SBS Dealers to obtain information regarding the authority of a special entity to enter into a security￾based swap is not duplicative, but is necessary to achieving the overarching purpose of the rule: Determining whether a recommended security-based swap or related trading strategy is in the best interests of the special entity. Lastly, as noted above, commenters requested that we clarify that an SBS Dealer that ‘‘acts as an advisor to a special entity’’ and complies with the ‘‘best interests’’ requirements of these business conduct standards will not necessarily become an ERISA fiduciary under the DOL’s proposed (now final) redefinition of the term ‘‘fiduciary.’’ 825 As discussed in Section I.D, supra, DOL staff has provided the Commission with a statement that:
It is the Department’s view that the draft final business conduct standards do not require security-based swap dealers or major security-based swap participants to engage in activities that would make them fiduciaries under the Department’s current five-part test defining fiduciary investment advice. 29 CFR 2510.3–21(c). The standards neither conflict with the Department’s existing regulations, nor compel security-based swap dealers or major security-based swap participants to engage in fiduciary conduct. Moreover, the Department’s recently published final rule amending ERISA’s fiduciary investment advice regulation was carefully harmonized with the SEC’s business conduct standards so that there are no unintended consequences for security-based swap dealers and major security-based swap participants who comply with the business conduct standards. As explained in the preamble to the Department’s final rule, the disclosures required under the SEC’s business conduct rules do not, in the Department’s view, compel counterparties to ERISA-covered employee benefit plans to make investment advice recommendations within the meaning of the Department’s final rule or otherwise compel them to act as ERISA fiduciaries in swap and security-based swap transactions conducted pursuant to section 4s(h) of the Commodity Exchange Act and section 15F of the Securities Exchange Act of 1934.826
4. Antifraud Provisions
a. Proposed Rule 15Fh–4(a) Proposed Rule 15Fh–4(a) would track the language of Section 15F(h)(4)(A) of the Exchange Act, and prohibit an SBS Entity from: (1) Employing any device, scheme, or artifice to defraud any special entity or prospective customer who is a special entity; (2) engaging in any transaction, practice, or course of business that operates as a fraud or deceit on any special entity or prospective customer who is a special entity; or (3) engaging in any act, practice, or course of business that is fraudulent, deceptive, or manipulative. The first two provisions are specific to an SBS Entity’s interactions with special entities, while the third applies more generally. b. Comments on the Proposed Rule The Commission received two comment letters on this issue.827 The first commenter argued that the antifraud provisions of proposed Rule 15Fh–4(a) would be duplicative in light of the general antifraud and anti￾manipulation provisions of the existing federal securities laws and proposed Rule 9j–1.828 The second commenter argued that, because the antifraud prohibitions of proposed Rule 15Fh–4(a)(3) were modeled on language in the Advisers Act applicable to conduct by investment advisers, and SBS Entities do not typically act as advisers to their counterparties, the SEC should include an affirmative defense against alleged violations of the antifraud prohibitions in its final rules.829 Specifically, the commenter suggested that the Commission establish an affirmative defense for an SBS Entity that: (1) Did not act intentionally or recklessly in connection with such alleged violation; and (2) complied in good faith with written policies and procedures reasonably designed to meet the particular requirement that is the basis for the alleged violation.830 The commenter noted that the CFTC included such a provision in its parallel business conduct rules, and urged the Commission to rely on the same considerations that led the CFTC to adopt its affirmative defense.831
c. Response to Comments and Final
Rule
After considering the comments, the Commission is adopting Rule 15Fh–4(a) as proposed. However, we are re-titling Rule 15Fh–4 ‘‘Antifraud provisions and

832This language mirrors the language in Sections 206(2) and 206(4) of the Advisers Act, which does not require scienter to prove liability. See SEC v. Steadman, 967 F.2d 636, 647 (D.C. Cir. 1992). The court in Steadman analogized Section 206(4) of the Advisers Act to Section 17(a)(3) of the Securities Act, which the Supreme Court had held did not require a finding of scienter. See id., citing Aaron
v. SEC, 446 U.S. 680 (1980). The Steadman court
concluded that: ‘‘[S]ection 206(4) uses the more neutral ‘act, practice, or course or business’ language. This is similar to [Securities Act] section 17(a)(3)’s ‘transaction, practice, or course of business,’ which ‘quite plainly focuses upon the effect of particular conduct . . . rather than upon the culpability of the person responsible.’ Accordingly, scienter is not required under section 206(4), and the SEC did not have to prove it in order to establish the appellants’ liability . . . .’’ SEC v. Steadman, 967 F.2d at 647 (internal citations omitted). The Steadman court observed that, similarly, a violation of Section 206(2) of the Adviser Act could rest on a finding of simple negligence. Id. at 642 note 5. 833See CFTC Adopting Release, 77 FR at 9752, supra note 21 (‘‘Even if the Commission were to limit the rule to require proof of scienter and apply the rule only when a swap dealer is acting as an advisor to a Special Entity, that would not restrict a court from taking a plain meaning approach to the language in Section 4s(h)(4) in a private action under Section 22 of the CEA’’). 834See also Proposing Release, 76 FR 42401, fn. 44, supra note 3 (‘‘Section 15F(h) of the Exchange Act does not, by its terms, create a new private right of action or right of rescission, nor do we anticipate that the proposed rules would create any new private right of action or right of rescission’’). 835See 15 U.S.C. 78o–10(h)(5)(A). 836See NAIPFA, supra note 5. 837See Proposing Release, 76 FR at 42426, supra note 3. special requirements for security-based swap dealers acting as advisors to special entities. We also are re-titling Rule 15Fh–4(a) ‘‘Antifraud provisions’’ and Rule 15Fh–4(b) ‘‘Special requirements for security-based swap dealers acting as advisors to special entities.’’ Rule 15Fh–4(a) codifies the statutory requirements of Exchange Act Section 15F(h)(4)(A).832 Inclusion of the rule in the business conduct standards will provide SBS Entities and their counterparties with easy reference to the antifraud provisions that Congress expressly provided under Section 15F(h)(4) of the Exchange Act. These requirements, which by their terms are applicable to all SBS Entities, apply in addition to those prohibitions imposed by Section 9(j) of the Exchange Act— along with any rules the Commission may adopt thereunder, and any other applicable provisions of the federal securities laws and related rules and regulations. The Commission is not adopting the commenter’s recommendation that the final rules incorporate an affirmative ‘‘policies and procedures defense.’’ We recognize that the CFTC adopted an express, affirmative defense in its parallel antifraud rules, in part in response to concerns that the statute may impose non-scienter liability for fraud in private rights of action.833 The Exchange Act, however, does not contain a parallel provision.834 Moreover, the Commission has considered the concerns raised by commenters and determined not to provide a similar
safe harbor from liability for fraud on behalf of SBS Entities. As discussed throughout the release in the context of specific rules, the rules being adopted today are intended to provide certain protections for counterparties, including certain heightened protections for special entities. We think it is appropriate to apply the rules so that counterparties receive the benefits of those protections, and therefore we do not think it would be appropriate to provide the safe harbor requested by the commenter from liability for fraud. While we are not adopting a safe harbor from liability for fraud, as discussed below in connection with the relevant rules, the Commission has adopted rules that permit reasonable reliance on representations (e.g., Rule 15Fh–1(b)) and, where appropriate, allow SBS Entities to take into account the sophistication of the counterparty (e.g., Rule 15Fh–3(f) (regarding recommendations of security-based swaps or trading strategies)).
5. SBS Entities Acting as Counterparties
to Special Entities a. Scope of Qualified Independent Representative Requirement
i. Proposed Rules
Under Exchange Act Section 15F(h)(5)(A), an SBS Entity that offers to enter into or enters into a security-based swap with a special entity must comply with any duty established by the Commission requiring the SBS Entity to have a ‘‘reasonable basis’’ to believe the special entity has an ‘‘independent representative’’ that meets certain qualifications. Proposed Rules 15Fh– 2(c) and 15Fh–5(a) would implement this provision. In particular, proposed Rule 15Fh–2(c) would define an ‘‘independent representative,’’ and proposed Rule 15Fh–5(a) would require an SBS Entity that ‘‘offers to enter into’’ or enters into a security-based swap with a special entity to have a ‘‘reasonable basis’’ to believe that the special entity has a ‘‘qualified independent representative.’’
ii. Comments on the Proposed Rule
Application to SBS Dealers and Major SBS Participants Under proposed Rule 15Fh–5(a), an SBS Dealer or a Major SBS Participant that offers to enter into or enters into an SBS with a special entity must have a reasonable basis to believe that the special entity has a qualified independent representative. Although Exchange Act Section 15F(h)(2)(B) only imposes an express obligation on SBS Dealers to comply with the requirements of Section 15F(h)(5), we proposed to apply the qualified independent representative requirement to Major SBS Participants as well as SBS Dealers because the specific requirements under Section 15F(h)(5)(A) apply by their terms to both a ‘‘security-based swap dealer and major security-based swap participant that offers to or enters into a security￾based swap with a special entity.’’ 835 The sole commenter on this issue supported the proposed Rule, and agreed that it should apply to both SBS Dealers and Major SBS Participants.836 Application to Any Special Entity In proposed Rule 15Fh–5(a), we proposed to apply the qualified independent representative requirements to transactions with all special entities. In the Proposing Release, we explained that while Exchange Act Section 15F(h)(5)(A) provides broadly that an SBS Entity that offers to or enters into a security-based swap with a special entity must comply with the requirements of that section,
Section 15F(h)(5)(A)(i) on its face would
apply these requirements only to dealings only with ‘‘a counterparty that is an eligible contract participant within the meaning of subclause (I) or (II) of clause (vii) of section 1a(18) of the Commodity Exchange Act.’’ A reliance on Section 15Fh(5)(A)(i) read in isolation would lead to an anomalous result in which special entity obligations could apply with respect to entities such as multinational and supranational government entities, which are ECPs ‘‘within the meaning of subclause (I) or (II) of clause (vii) of
section 1a(18) of the Commodity
Exchange Act,’’ but that do not fall within the definition of special entity in
Section 15F(h)(2)(C). Conversely,
Section 15Fh(5)(A)(i) read in isolation
could lead to special entity obligations not being applied with respect to dealings with state agencies, which are special entities as defined in Section 15Fh(2)(C) but are not ECPs as defined in Section 1a(18)(A)(vii)(I) and (II) of the CEA.837 To resolve the ambiguity in the statutory language, we proposed to apply the qualified independent requirement under Section 15F(h)(5) to

838 Id. See also proposed Rule 15Fh–5(a). 839See H.R. Conf. Rep. 111–517 (June 29, 2010) (‘‘When acting as counterparties to a pension fund, endowment fund, or state or local government, dealers are to have a reasonable basis to believe that the fund or governmental entity has an independent representative advising them.’’) (emphasis added). 840See Section 15F(h)(1)(C)(iii) of the Exchange Act. 841See Ropes & Gray, supra note 5. 842 Id. The commenter suggested two other possible alternatives for resolving the statutory ambiguity: ‘‘(i) interpreting the de facto independent representative requirements as applying to both those referenced governmental entities that are special entities and those that are not, (ii) interpreting the independent representative requirement to be generally inapplicable (as clearly most special entities were not intended to be covered in the reference)’’ but expressed a preference for including governmental entities that are special entities ‘‘absent clarification from Congress.’’ 843See Proposing Release, 76 FR at 42426, supra note 3. 844See APPA, supra note 5; FIA/ISDA/SIFMA, supra note 5; SIFMA (August 2015), supra note 5. 845See APPA, supra note 5. 846 Id. 847See FIA/ISDA/SIFMA, supra note 5. 848See SIFMA (August 2015), supra note 5. 849See MFA, supra note 5; GFOA, supra note 5; CalPERS, supra note 5. 850See GFOA, supra note 5. 851See CalPERS, supra note 5. This commenter therefore recommended an approach that would permit a special entity to choose between either relying on the Commission’s proposed framework, or relying on an alternative approach under which it would be permitted to enter into off-exchange security-based swap transactions with an SBS Entity if the special entity had a representative, whether internal or a third party, that had been certified as able to evaluate security-based swap transactions. The commenter contemplated that the certification process would involve passage of a proficiency examination to be developed by the Commission or FINRA ‘‘or another recognized testing organization.’’ A certified independent representative would be required to complete periodic continuing education. Id. 852See NAIPFA, supra note 5. 853 Id. 854See BlackRock, supra note 5. 855See SIFMA (August 2011), supra note 5. The commenter asserted that requiring an SBS Dealer to Continued security-based swap transactions or offers to enter into security-based swap transactions between an SBS Entity and any counterparty that is a ‘‘special entity’’ as defined in Section 15F(h)(1)(C). This approach would address the statutory ambiguity by including dealings with a special entity that is an ECP within the meaning of subclause (I) or (II) of clause (vii) of Commodity Exchange Act Section 1a(18).838 The Proposing Release noted that this reading would be consistent with the categories of special entities mentioned in the legislative history.839 It also would give meaning to the requirement of Section 15F(h)(5)(A)(i)(VII)
concerning ‘‘employee benefit plans subject to ERISA,’’ that are not ECPs within the meaning of subclause (I) or (II) of clause (vii) of section 1a(18) of the Commodity Exchange Act but are included in the category of retirement plans identified in the definition of special entity.840 The Commission received one comment letter that addressed the question of whether proposed Rule 15Fh–5(a) should apply to security￾based swap transactions with any special entity.841 According to the commenter, proposed Rule 15Fh–5(a) was overly broad in scope and ignored the limiting language of Section 15F(h)(5)(A). This commenter suggested interpreting the requirement as applying to only those referenced governmental entities that are special entities.’’ 842 Application to ‘‘Offers’’ As stated above, proposed Rule 15Fh– 5(a) would apply to an SBS Dealer or Major SBS Participant that ‘‘offers to enter into’’ or enters into a security￾based swap with a special entity. The Commission requested comment regarding whether the phrase ‘‘offers to enter into’’ a security-based swap was sufficiently clear, and if not, how the requirement should be clarified.843 Three commenters responded to this request.844 One commenter suggested that the ‘‘offer’’ stage of a security-based swap transaction would often be too early for the counterparty to ensure that the independent representative requirement was satisfied.845 Instead, the commenter argued that the independent representative requirement should be satisfied if the counterparty had an independent representative at the time the transaction was executed.846 A second commenter recommended that the Commission exclude preliminary negotiations from the definition of ‘‘offer,’’ and that the communication of an interest in trading a security-based swap should only be viewed as an ‘‘offer’’ when, based on the relevant facts or circumstances, the communication was ‘‘actionable’’ or ‘‘firm.’’ 847 A third commenter asked that the Commission, like the CFTC, clarify the term ‘‘offer’’ to mean an ‘‘offer to enter into an SBS that, if accepted, would result in a binding contract under applicable law.’’ 848 ‘‘Reasonable Basis’’ The Commission additionally sought comment regarding the degree of inquiry required for an SBS Entity to form a ‘‘reasonable basis’’ to believe the special entity was represented by a qualified independent representative. Three commenters expressed concern with the additional duties of inquiry and diligence imposed on SBS Entities under proposed Rule 15Fh–5(a).849 One of these commenters argued that the CFTC’s proposed requirement that a Swap Dealer perform substantial diligence to confirm a swap advisor’s qualifications could pose a serious conflict of interest, give the Swap Dealer too much power, and ultimately interfere with, prove more costly for, and be problematic to state or local governments.850 Another commenter similarly argued that an inherent conflict of interest existed in granting one party to a
transaction the authority to effectively determine who has the requisite qualifications to represent the other party.851 The second commenter would impose additional due diligence obligations on SBS Entities before they could rely on special entities’ representations regarding the qualifications of representatives, even where the SBS Entity does not have information that would cause a reasonable person to question the accuracy of the representations.852 The commenter conceded that requiring such additional diligence might limit the willingness or ability of SBS Entities to provide special entities with access to security-based swaps. However, it argued that, in the absence of such diligence, special entities’ access to security-based swaps should be limited to the extent suitability is in question.853 Other commenters expressed a range of views in response to our request for comment on whether an SBS Entity should be able to rely on representations to form the necessary ‘‘reasonable basis’’ for believing that a special entity counterparty is represented by a qualified independent representative. One commenter argued that no particular level of specificity should be required in the representations, and that the SBS Dealer should not be required to conduct further diligence before relying on the special entity’s representations, as ‘‘any such diligence would interfere with the relationship between the special entity and its independent advisor and could result in the SBS Dealer second-guessing the special entity’s choice of representative.’’ 854 Another commenter argued that an SBS Dealer should be required to rely on the representations of a special entity concerning the qualifications of its independent representative, absent actual knowledge of facts that clearly contradict material aspects of the representative’s purported qualifications.855

undertake an independent due diligence investigation into representative’s qualifications would impose upon the SBS Dealer a duty to second-guess the special entity’s own assessment of its representative and provide the SBS Dealer with the ability to trump a special entity’s choice of asset manager. According to the commenter, this could result in a reduced number of security-based swap counterparties for special entities, as SBS Dealers would likely limit transactions with special entities to avoid the potential liability, cost, delay, and uncertainty arising from this added responsibility. 856See ABA Committees, supra note 5. That presumption would be voidable only if one or more senior representatives of the SBS Entity with expertise in security-based swap transactions possessed actual knowledge that a representation regarding the independent representative’s qualifications was false. In that situation, the Special Entity’s senior representative must present his or her determination promptly in writing to the special entity’s Chief Investment Officer and Chair of the Board, or equivalent person. 857See APPA, supra note 5; BlackRock, supra note 5. 858See APPA, supra note 5. 859See BlackRock, supra note 5. 860See ABC, supra note 5. According to the commenter, without such a bright-line rule, SBS Dealers might face litigation initiated by ERISA plans for approving a representative who is subsequently determined to lack needed expertise, or by the representatives whom they have chosen to disqualify. This potential liability would ultimately discourage SBS Dealers from transacting with ERISA plans altogether. 861See CCMR, supra note 5. 862 Id. 863 Id. 864 Id. 865See FIA/ISDA/SIFMA, supra note 5. 866See NAIPFA, supra note 5. 867For example, the requirements under Exchange Act Section 15F(h)(4)(B) apply only to an SBS Dealer that acts as an advisor to a special entity, a distinction that is reflected in Rule 15Fh– 4(b). 868See 15 U.S.C. 78o–10(h)(5)(A). 869See Ropes & Gray, supra note 5. 870See Proposing Release, 76 FR at 42426, supra note 3. See also H.R. Conf. Rep. 111–517 (Jun. 29,
2010) (‘‘When acting as counterparties to a pension
fund, endowment fund, or state or local government, dealers are to have a reasonable basis to believe that the fund or governmental entity has an independent representative advising them.’’) (emphasis added). One commenter suggested adopting a presumption that the special entity’s selection of independent representative was acceptable if the special entity represents to the SBS Entity that the representative satisfies the criteria in Exchange Act Section 15F(h)(5)(A)(i).856 Two other commenters supported the actual knowledge standard because they believe the reasonable person standard in practice could require an SBS Entity to perform substantial due diligence to rely on representations.857 One commenter noted that this additional due diligence could reduce the number of SBS Entities willing to contract with special entities, and could increase the cost of security-based swaps for those persons.858 The other expressed concern that additional due diligence, in the context of the qualifications of a special entity’s independent representative, would be intrusive, time consuming and unnecessary, and would ‘‘come very close to having the SBS Dealer ‘approve’ the special entity’s representative.’’ 859 A third commenter expressed similar concerns, noting that absent actual knowledge that a representation is incorrect, SBS Dealers should not be able to second-guess a special entity’s selection of a representative.860 Another commenter supported permitting an SBS Dealer to rely on a special entity’s representation that its independent representative met the statutory and regulatory requirements, unless the SBS Dealer had reason to believe that the special entity’s representations with respect to its independent representative were inaccurate.861 After the adoption of the CFTC’s final rules, one commenter urged the Commission to adopt the CFTC’s reasonable person approach, under which an SBS Entity would be deemed to have a reasonable basis to believe the special entity has a qualified independent representative when it relies on written representations that the special entity’s representative meets the criteria for a qualified independent representative.862 Alternatively, in the ERISA context, the commenter suggested that an SBS Entity be deemed to have a reasonable basis to believe a special entity subject to ERISA has a representative that satisfies the requirements for a qualified independent representative when it relies on written representations that the representative is a fiduciary as defined in Section 3 of ERISA.863 The commenter’s suggested modifications were intended to harmonize the SEC’s standard with that adopted by the CFTC.864 Another commenter requested that the Commission clarify that any representations made by a special entity or its representative to satisfy the rules do not give any party any additional rights, such as rescission or monetary compensation (e.g., if the representations turn out to be incorrect).865
iii. Response to Comments and Final
Rule
After consideration of the comments, we are adopting Rule 15Fh–5(a), subject to the modifications described below. Application to SBS Dealers and Major SBS Participants As a preliminary matter, we continue to believe and agree with the commenter that Rule 15Fh–5(a) should apply to both SBS Dealers and Major SBS Participants.866 As discussed in Section II.C. above, in making this determination, the Commission recognizes that the statutory language of the business conduct standards generally does not distinguish between SBS Dealers and Major SBS Participants. Where the statute does make that distinction, the Commission also makes that distinction in the corresponding rule.867 Here, we believe Congress intended to impose the independent representative requirement equally with respect to SBS Dealers and Major SBS Participants, since the specific requirements under Section 15F(h)(5)(A) of the Exchange Act apply by their terms to both ‘‘security-based swap dealer[s] and major security-based swap participant[s] that offer[ ] to or enter[ ] into a security-based swap with a special entity.’’ 868 We also believe that the protections of Rule 15Fh–5 should inure equally to those special entities that transact with SBS Dealers as well as those that transact with Major SBS Participants. Application to Any Special Entity Moreover, the Commission continues to believe that the qualified independent representative requirements in Rule 15Fh–5 should apply whenever an SBS Entity acts as a counterparty to any special entity. We acknowledge the commenter’s suggestion that the Commission ‘‘give appropriate effect to the limiting language in Exchange Act Section 15F(h)(5)(A)’’ regarding the types of special entities to which the independent representative requirement applies.869 However, given the ambiguity between the language of Sections 15F(h)(2)(C) and 15F(h)(5)(A)(i), we believe that our interpretation is appropriate and promotes a more consistent reading of both provisions of the statute, providing protections to all special entities.870 This interpretation also gives meaning to the requirement of Section 15F(h)(5)(A)(i)(VII) concerning ‘‘employee benefit plans subject to ERISA.’’ Although these benefit plans are not ECPs within the meaning of subclause (I) or (II) of clause (vii) of
section 1a(18) of the Commodity
Exchange Act, they are included in the category of plans identified as special entities in Exchange Act section 15F(h)(2)(C). For these reasons, we believe Rule 15Fh–5(a) should apply to any special entity as counterparty.

871See APPA, supra note 5.
872 Id.
873See FIA/ISDA/SIFMA, supra, note 5. See also SIFMA (August 2015), supra note 5. 874See SIFMA (August 2015), supra note 5. 875See CFTC Adopting Release at 9741. 876See FIA/ISDA/SIFMA, supra, note 5. 877See MFA, supra note 5; GFOA, supra note 5. 878See Rule 15Fh–1(b). 879See e.g., CalPERS (August 2011) supra note 5. 880See CalPERS, supra note 5. 881However, to the extent that such a proficiency examination were created, the results of the examination could inform the SBS Entity’s assessment of the qualifications of the independent representative. Application to Offers The Commission continues to believe that, consistent with statutory language, the independent representative requirement of the business conduct rules should be triggered when an ‘‘offer’’ to enter into a security-based swap is made. We disagree with the commenter that applying Rule 15Fh– 5(a) at the offer stage is premature.871 The rules are intended to provide benefits to special entities by, among other things, requiring that a special entity has a qualified independent representative that undertakes a duty to act in its best interests in determining whether to enter into a security-based swap. The benefits of these protections could be lost if the rule were to require only that the special entity counterparty have an independent representative at the time the transaction is executed.872 Some commenters argued that the appropriate definition of the term ‘‘offer’’ should be consistent with contract law, and that a communication should only be considered an offer when, based on the relevant facts and circumstances, it is ‘‘actionable’’ or ‘‘firm.’’ 873 The Commission agrees with the commenter that the term ‘‘offer’’ for purposes of the independent representative requirement of these business conduct rules means an ‘‘offer to enter into a security-based swap that, if accepted, would result in a binding contract under applicable law.’’ 874 Given that the relationship between the SBS Entity and the counterparty is defined and shaped by contract (e.g., generally a master agreement and credit documents), we believe that the contractual interpretation is the appropriate interpretation in this context. This interpretation is also the same as the CFTC’s interpretation of an offer to enter into a swap and would harmonize the scope of the term offer for purposes of the independent representative requirement of these business conduct rules.875 We believe that this harmonization will result in efficiencies for entities that have already established infrastructure to comply with the CFTC standard. Whether preliminary negotiations would be deemed an ‘‘offer’’ will depend upon the facts and circumstances and details of the communication.876 For example, if the preliminary communication contains enough details (or if taken in the context of several communications) that, if accepted, would result in a binding contract, it likely may be an ‘‘offer’’ under the rule. Reasonable Basis The Commission
recognizes and believes it appropriate that Rule 15Fh– 5(a) imposes on SBS Entities a duty of inquiry to form a reasonable basis to believe the special entity has a qualified independent representative. The amount of due diligence the SBS Entity must perform to form a reasonable basis to believe the independent representative meets a particular qualification will depend upon the particular facts and circumstances. For example, if the SBS Entity has no prior dealings or familiarity with the particular independent representative, it will likely require more diligence on the
part of the SBS Entity than a transaction
with an independent representative that the SBS Entity has had numerous recent dealings in various different contexts. Furthermore, if the SBS Entity has dealt with the independent representative in other contexts, but not necessarily in the context of a security-based swap, it may require some limited diligence to form a reasonable basis regarding the requisite qualifications. The Commission agrees, however, with the concerns of commenters that requiring SBS Entities to perform substantial due diligence regarding the qualifications of independent representatives may provide SBS Entities with the ability to second guess or negate the special entity’s choice of independent representative, which may generally increase transaction costs for security-based swaps with special entities, and allow SBS Entities to exert undue influence over the special entity’s selection of an independent representative.877 To address these concerns, final Rule 15Fh–1(b), as discussed in Section II.D, allows SBS Entities to reasonably rely on written representations regarding the qualifications and independence of special entities’ representatives.878 This generally comports with an SBS Entity’s heightened standard of care when transacting with special entities, while avoiding the potential conflict of interest and increased transaction costs that could result if SBS Entities effectively second-guessed special entities’ choice of independent representatives. In addition, we are adopting safe harbors as discussed below, pursuant to which an SBS Entity will be deemed to have a reasonable basis to believe that the special entity has a representative that meets the qualification and independence requirements of Rule 15Fh–5(a). We believe the availability of the safe harbor also addresses the concerns of certain commenters that SBS Entities not exert undue influence on the special entity’s selection of representative.879 The Commission acknowledges one commenter’s recommended approach that would permit a special entity to choose between either: (1) Relying on the Commission’s proposed framework regarding a reasonable basis to believe the qualifications of the independent representative; or (2) relying on an alternative approach under which it would be permitted to enter into off￾exchange security-based swap transactions with an SBS Entity if the special entity had a representative, whether internal or a third party, that had been certified as able to evaluate security-based swap transactions. The commenter contemplated that the certification process would involve the development and implementation of a proficiency examination by the Commission or FINRA ‘‘or another recognized testing organization,’’ and that a certified independent representative would be required to complete periodic continuing education.880 We do not believe that this suggested alternative would appropriately provide the protections to special entities that the statute and our proposed Rule 15Fh–5 were
designed to provide. First, we believe that this alternative would effectively permit special entities to opt out of the express protections that the rules are intended to provide. In addition, we are not aware of the existence of a certification process as described by the commenter, and we did not propose and are not adopting such a process.881 As with final Rule 15Fh–2(a), we have determined to adopt Rule 15Fh–5(a) in a bifurcated format to avoid potential conflict with ERISA and DOL regulations, as well as to more closely harmonize with existing CFTC business conduct rules. Rule 15Fh–5(a)(1), as adopted, requires an SBS Entity that offers to enter into or enters into a security-based swap with a special entity other than an ERISA special entity to form a reasonable basis to believe that the special entity has a

882See Section I.D., supra. See also ABC, supra note 5; FIA/ISDA/SIFMA, supra note 5; IDC, supra note 5; MFA, supra note 5; BlackRock, supra note 5; Johnson, supra note 5. 883See Section 15F(h)(5)(A)(i)(VII) of the Exchange Act, 15 U.S.C. 78o–10(h)(5)(A)(i)(VII). See note 225, supra and related text regarding an SBS Entity’s reliance on a representation from the special entity to form this reasonable basis. 884See notes 99, 198 and 189, supra regarding the DOL’s proposal to amend definition of ‘‘fiduciary’’ for purposes of ERISA. 885See ABA Committees, supra note 5; ABC, supra note 5; BlackRock, supra note 5; Mason, supra note 5; SIFMA (August 2011), supra note 5; SIFMA (August 2015), supra note 5. 886See ABC, supra note 5; BlackRock, supra note 5; Mason, supra note 5. 887See ABC, supra note 5. 888See ABA Committees, supra note 5. 889 Id. 890See SIFMA (August 2015), supra note 5. 891 Id. 892 Id. 893 29 U.S.C. 1002. qualified independent representative. Rule 15Fh–5(a)(2), as adopted, requires an SBS Entity that offers to enter into or enters into a security-based swap with an ERISA special entity to have a reasonable basis to believe that the special entity has a fiduciary, as defined in Section 3 of ERISA. By adopting separate criteria for the independent representatives of ERISA and non￾ERISA special entities, the Commission is addressing the concerns of numerous commenters that the business conduct standards, if adopted without regard for the potential regulatory intersections of ERISA, could cause confusion and unintended consequences for SBS Entities dealing with ERISA plans.882 In addition, this change will provide greater consistency with the parallel CFTC rule, which will result in efficiencies for SBS Entities that have already established infrastructure to comply with the CFTC rule. The newly bifurcated rule, detailing the requisite criteria for an SBS Entity to form a reasonable basis to believe that ERISA and non-ERISA special entities have qualified independent representatives, is discussed in greater detail below. b. Qualified Independent Representative
i. Proposed Rule
Proposed Rule 15Fh–5(a)(6) would require an SBS Entity to have a reasonable basis to believe that, in the case of a special entity that is an employee benefit plan subject to ERISA, the independent representative was a ‘‘fiduciary’’ as defined in section 3(21) of that Act (29 U.S.C. 1002).883 The proposed rule was not intended to limit, restrict, or otherwise affect the fiduciary’s duties and obligations under ERISA.884 The Proposing Release solicited feedback regarding any specific requirements that should be imposed on SBS Entities with respect to this obligation, as well as what other independent representative qualifications might be deemed satisfied if an independent representative of an employee benefit plan subject to ERISA, is a fiduciary as defined in section 3 of ERISA.
ii. Comments on the Proposed Rule
The Commission received six comment letters advocating a presumption of qualification for ERISA plan fiduciaries, since ERISA already imposes fiduciary duties upon the person who decides whether to enter into a security-based swap on behalf of an ERISA plan, and imposes on this person a statutory duty to act in the best interests of the plan and its participants, thereby prohibiting certain self-dealing transactions.885 According to these commenters, the Commission’s proposed standards would be unnecessary, redundant, would overlap with ERISA’s standards, and would only serve to increase the administrative burden and cost on SBS Entities without any corresponding benefit.886 To address the potential conflict with ERISA standards, one commenter suggested that the Commission’s definition of ‘‘independent representative’’ should be inapplicable to ERISA plans, and that the Commission should merely cross￾reference the requirements under ERISA for ERISA representatives.887 Another commenter supported the presumptive qualification for ERISA plan fiduciaries, provided that the plan satisfied a minimum $1 billion net asset requirement for institutional investor organizations.888 The commenter asserted that no public policy objective would be achieved by permitting an SBS Entity to reject a risk manager fiduciary selected by a sophisticated institutional investor organization with over $1 billion in net assets, which did not require the protections of the rules.889 Since the adoption of the CFTC’s final rules, another commenter recently advocated for the separate treatment of independent representatives of special entities subject to ERISA.890 Under this commenter’s proposal, an SBS Entity that transacts with a special entity subject to Title I of ERISA must have a reasonable belief that the qualified independent representative is a fiduciary, as defined in Section 3 of ERISA.891 An SBS Entity that transacts with a non-ERISA special entity would be required to form a reasonable belief that the special entity has a qualified independent representative, defined by specific criteria. The commenter’s proposed modification recognizes ‘‘the unique fiduciary regime already applicable to such special entities,’’ and harmonizes the Commission’s criteria for qualified independent representatives with those of the CFTC.892
iii. Response to Comments and Final
Rule
After consideration of the comments, the Commission is reformulating the rules to reflect a separate treatment for transactions with special entities subject to ERISA, and transactions with special entities other than those subject to ERISA. Toward this end, we have bifurcated Rule 15Fh–5(a) into parts (a)(1) (applicable to dealings with special entities other than those subject to ERISA), and (a)(2) (applicable to dealings with special entities subject to ERISA). Under Rule 15Fh–5(a)(1), as adopted, an SBS Entity that transacts with a special entity that is not subject to ERISA must have a reasonable basis to believe that the special entity has a qualified independent representative. As defined in the rule, a qualified independent representative is a representative who: Has sufficient knowledge to evaluate the transaction and risks; is not subject to a statutory disqualification; undertakes a duty to act in the best interests of the special entity; makes appropriate and timely disclosures to the special entity of material information concerning the security-based swap; will provide written representations to the special entity regarding fair pricing and the appropriateness of the security-based swap; in the case of a special entity defined in 15Fh–2(2) or (5), is subject to pay to play rules of the Commission, the CFTC, or a SRO subject to the jurisdiction of the Commission or the CFTC; and is independent of the SBS Entity. These qualifications are addressed, separately, in Section II.H.7, infra. Under new Rule 15Fh–5(a)(2), (formerly proposed Rule 15Fh–5(a)(6)), an SBS Entity that transacts with a special entity subject to ERISA must have a reasonable basis to believe that the special entity has a representative that is a fiduciary, as defined in Section 3 of ERISA.893 In this regard, the SBS Entity need not undertake further inquiry into the ERISA fiduciary’s qualifications. Such a presumption is based on the pre-existing,

894See 29 U.S.C. 1001 et seq.; History of EBSA and ERISA, available at http://www.dol.gov/ebsa/ aboutebsa/history.html. 895See ABA Committees, supra note 5; ABC, supra note 5; BlackRock, supra note 5; Mason, supra note 5; SIFMA (August 2011), supra note 5; SIFMA (August 2015), supra note 5. 896See supra notes 786 and 799 and accompanying text. 897See ABC, supra note 5; BlackRock, supra note 5; Mason, supra note 5. 898See SIFMA (August 2015), supra note 5. 899See, e.g., ABC, supra note 5; FIA/ISDA/ SIFMA, supra note 5; IDC, supra note 5; MFA, supra note 5; BlackRock, supra note 5; Johnson, supra note 5. 900See ABA Committees, supra note 5. 901See APPA, supra note 5; Ropes & Gray, supra note 5; BlackRock, supra note 5; GFOA, supra note 5; ABA Committees, supra note 5. 902See APPA, supra note 5. 903See ABA Committees, supra note 5. comprehensive federal regulatory regime governing ERISA fiduciaries.894 The Commission agrees with commenters that ERISA fiduciaries should be presumptively deemed qualified as special entity representatives,895 particularly because an ERISA fiduciary is already required by statute and regulations to, among other things, act with prudence and loyalty when evaluating a transaction for an ERISA plan.896 Moreover, as several commenters noted, to overlap existing ERISA standards with the business conduct standards would be unnecessary, redundant, and would unnecessarily increase administrative costs for SBS Entities.897 This bifurcated rule is designed to address the commenter’s concerns regarding the need to align the Commission’s treatment of ERISA plans with that of the CFTC,898 and will reflect the potential intersection of the business conduct rules with the comprehensive framework of regulation under ERISA. Specifically, as discussed above in Section I.D., supra, the bifurcated format of the rule addresses the concerns of numerous commenters that the intersection between ERISA’s existing fiduciary regulation and the business conduct standards could lead to conflict and unintended consequences for SBS Entities transacting with ERISA special entities, up to and including the preclusion of ERISA plans from participating in security-based swap markets in the future.899 By providing separate means for SBS Entities to comply with the rules when transacting with ERISA and non-ERISA special entities, the final rule will avoid the potential conflict between the comprehensive framework of regulation under ERISA and business conduct rule regimes. However, the Commission declines the commenter’s suggestion to exclude ERISA plans with a minimum net asset requirement from the requirements of the rule.900 Rule 15Fh–5 is designed to ensure that special entities are represented by a qualified independent representative pursuant to the statutory requirement. The Commission does not believe that it is appropriate in this context to provide an exception to ERISA plans from the protections of representation by a qualified and independent
representative based on a net asset threshold. Different entities will have differing levels of understanding of the security-based swap market, which may or may not be impacted by the amount of their net assets. More generally, the rules are intended to provide certain protections to special entities, and we think it appropriate to apply the rules so that special entities receive the benefits of those rules.
c. Definition of ‘‘Independent
Representative’’
i. Proposed Rule
As noted above, an SBS Entity must have a reasonable basis to believe that a special entity has a ‘‘qualified independent representative.’’ Proposed Rule 15Fh–2(c) would establish parameters for the term ‘‘independent representative’’ of a special entity. For instance, proposed Rule 15Fh– 2(c)(1) would generally require that a representative of a special entity be ‘‘independent’’ of the SBS Entity that is the counterparty to a proposed security￾based swap. Proposed Rule 15Fh–2(c)(2) would provide that a representative of a special entity is ‘‘independent’’ of an SBS Entity if the representative does not have a relationship with the SBS Entity, whether compensatory or otherwise, that reasonably could affect the independent judgment or decision￾making of the representative. In the Proposing Release, the Commission noted that the SBS Entity should obtain the necessary information to determine if, in fact, a relationship existed between the SBS Entity and the independent representative that could impair the independence of the representative in making decisions that affect the SBS Entity. Proposed Rule 15Fh–2(c)(3) would deem a representative of a special entity to be independent of an SBS Entity where two conditions are satisfied: (i) The representative is not and, within one year, was not an associated person of the SBS Entity; and (ii) the representative had not received more than ten percent of its gross revenues over the past year, directly or indirectly, from the SBS Entity. This latter restriction would apply, for example, with respect to revenues received as a result of referrals by the SBS Entity. It was intended to encompass situations where a representative was hired by the special entity as a result of a recommendation by the SBS Entity. The restriction would also apply to revenues received, directly or indirectly, from associated persons of the SBS Entity. In order for an SBS Entity to reasonably believe that the independent representative received less than ten percent of its gross revenue over the past year from the SBS Entity, the Commission noted that the SBS Entity would likely need to obtain information regarding the independent representative’s gross revenues from either the special entity or independent representative.
ii. Comments on the Proposed Rule
Independence From the Special Entity The Commission requested comment on whether an independent representative must be independent of the special entity entering into the security-based swap, or whether the representative need only be independent of the SBS Entity. All five commenters agreed that the independent representative need only be independent from the SBS Entity, and emphasized that the intent of the proposed rule was to ensure a special entity received advice from someone in no way affiliated with an SBS Entity.901 One commenter, representing two trade associations for municipal power producers, argued that the intended benefit of the proposed independent representative requirement was to ensure that a special entity receives security-based swap advice from a person other than the SBS Entity—not to force special entities to hire third￾parties as independent representatives.902 The commenter noted that although many municipal power producers rely on third-party advisors when entering interest-rate swaps, they have internal experts to advise them on energy contracts. Another commenter asserted that the legislative history for Dodd-Frank indicated that a representative’s ‘‘independence’’ referred to its independence from the dealer or broker—not its independence from the special entity.903 The commenter pointed out that Congress specifically recognized the possibility that special entities would use an in-house risk specialist, and that the proposed rules

904 Id.
905See ABC, supra note 5; NABL, supra note 5; NAIPFA, supra note 5; AFSCME, supra note 5; Better Markets (August 2011), supra note 5; CFA, supra note 5; FIA/ISDA/SIFMA, supra note 5; APPA, supra note 5; BlackRock, supra note 5; SIFMA (August 2011), supra note 5; SIFMA (August 2015), supra note 5. 906See AFSCME, supra note 5; Better Markets (August 2011), supra note 5; CFA, supra note 5; NAIPFA, supra note 5. 907See Better Markets (August 2011), supra note 5. 908 Id. 909 Id. 910See CFA, supra note 5. 911See Business Conduct Standards for Swap Dealers and Major Swap Participants With Counterparties, 75 FR 80638, 80660 (Dec. 22, 2010) (‘‘CFTC Proposing Release’’). 912See SIFMA (August 2015), supra note 5. 913 Id. 914See NAIPFA, supra note 5. 915 Id. 916 Id. Nor did the commenter believe that an SBS Entity should be required to have a reasonable basis to believe that the representative would make the appropriate and timely disclosures of any potential conflicts of interest. 917See NABL, supra note 5. 918See ABC, supra note 5. seemed to incorporate this assumption.904 Standards for ‘‘Independence’’ The Commission solicited comment regarding whether to adopt a different test for a representative’s independence, or whether the definition of ‘‘independent representative’’ should exclude certain categories of associated persons. Eleven comment letters addressed the independence test in proposed Rule 15Fh–2(c)(2)–(3).905 Four commenters argued that the proposed rule would not sufficiently ensure a representative’s independence.906 For instance, one commenter suggested that the one-year prohibition on a representative being an associated person of the SBS Entity be extended to two years.907 This commenter also recommended that representatives who receive any compensation of any kind, directly or indirectly, from an SBS Entity during the prior year be disqualified.908 According to this commenter, representatives and associated persons should be barred from, directly or indirectly, working for or receiving compensation from any SBS Entities for one year to act as an independent representative for any special entity.909 Another commenter argued that under the proposed rule, a representative might be deemed to be independent even if he or she ‘‘worked with the SBS Entity as recently as a year ago, was recommended by the SBS Entity, has a direct business relationship with the SBS Entity that makes the representative highly financially dependent on that entity, and earns more of its revenues from the SBS Entity than from the Special Entity he or she purports to represent.’’ 910 This commenter also noted that, under the proposed rule, a representative could earn virtually all of its gross revenues from various SBS Entities, so long as no more than ten percent originated from the entity on the other side of the transaction. For these reasons, the commenter urged the Commission to adopt instead the version of the independence standard proposed by the CFTC, under
which a representative would be deemed to be independent if: ‘‘(1) the representative is not and, within one year, was not an associated person of the swap dealer or major swap participant, within the meaning of Section 1a(4) of the Act; (2) there is no principal relationship between the representative of the Special Entity and the swap dealer or major swap participant; and (3) the representative does not have a material business relationship with the swap dealer or major swap participant, provided however, that if the representative received any compensation from the swap dealer or major swap participant, the swap dealer or major swap participant must ensure that the Special Entity is informed of the compensation and the Special Entity agrees in writing, in consultation with the representative, that the compensation does not constitute a material business relationship.’’ 911 Similarly, since the adoption of the CFTC’s final business conduct rules, one commenter has argued that the Commission should harmonize its standards of independence with those of the CFTC, replacing the SEC’s restriction on revenues received by the independent representative from the SBS Entity with the following qualifications: (1) The representative is not, and within one year of representing the special entity in connection with the security-based swap, was not an associated person of the SBS Entity; (2) there is no principal relationship between the special entity’s representative and the SBS Entity; (3) the representative provides timely and effective disclosures to the special entity of all material conflicts of interest, complies with policies and procedures designed to mitigate conflicts of interest, is not directly or indirectly controlled by the SBS Entity, and does not receive referrals, recommendations, or introductions from the SBS Entity within one year of representing the special entity in connection with the security-based swap.912 As the commenter asserted, ‘‘the CFTC’s standard has, in our members’ experiences, proved sufficient to ensure the independence of special entity representatives and mitigate possible conflicts of interest, while also establishing an objective standard that special entities can apply in practice. As a result, we believe harmonization would achieve the proposed rules’ intended objective while also minimizing the extent to which SBS Entities and special entities need to incur significant additional costs.’’ 913 A third commenter suggested that the Commission revise the independence test for special entity representatives by:
(1) Using ERISA standards in assessing the independence of a representative (but rejecting the DOL’s fiduciary standard, under which a fiduciary may not derive more than 1% of its annual income from a party in interest and its affiliates); (2) considering a representative’s relationships with an SBS Entity on behalf of multiple special entities, including the representative’s relationships with an SBS Entity outside of the security-based swap transaction at issue; (3) including the revenues of an independent representative’s affiliates in applying the gross revenues test; (4) decreasing the ten-percent gross revenue threshold; and (5) adopting a two-year timeframe (rather than one year) to determine whether a representative is independent of the SBS Entity.914 The commenter argued that an independent representative should be permitted to receive compensation from the proceeds of a security-based swap, so long as the compensation was authorized by, and paid at the written direction of, the special entity.915 However, the commenter did not believe that a special entity should be allowed to consent to an independent representative’s conflicts of interest, even if fully disclosed, as such conflicts might still affect the independence of the representative.916 The sole commenter that supported the independence test as proposed did so on the grounds that market participants would benefit from the certainty of its safe harbor.917 Another commenter argued that the proposed rules’ definition of ‘‘independent representative’’ should not apply to ERISA plans, as ERISA already defines the criteria for ‘‘independence’’ of a representative.918 According to this commenter, if a plan’s representative is not independent of the plan’s counterparty, the transaction violates the prohibited transaction rules under ERISA section 406(b). Rather than

919 Id.
920See FIA/ISDA/SIFMA, supra note 5. 921See APPA, supra note 5. 922 Id. 923See BlackRock, supra note 5. 924 Id. 925 Id. 926 Id. 927See SIFMA (August 2011), supra note 5. 928 Id. 929 Id. 930See ABA Committees, supra note 5. 931 Id. 932 Id. 933See Proposing Release, 76 FR at 42426, supra note 3. See also APPA; Ropes & Gray, supra note 5; and BlackRock, supra note 5. adopt such overlapping regulations, the commenter suggested cross-referencing the independence requirements under ERISA. Otherwise, the prohibition on investment managers who receive revenues from SBS Dealers from serving as independent representatives could cause plans to lose their best investment managers and counterparties. Moreover, the commenter argued that ‘‘the administrative burden of applying the gross revenue test could in many cases be enormous at best and simply unworkable at worst.’’ 919 However, the majority of commenters urged the Commission to modify the proposed independence standards. For instance, while one commenter supported the Commission’s one-year prohibition on associated persons of SBS Entities serving as special entity representatives, the commenter suggested four changes to the gross revenues component of the proposed rule: (1) Only payments by or on behalf of the SBS Entity (not by or on behalf of any affiliates or other associated persons) should be taken into account; (2) the revenue computations should be based on the representative’s prior fiscal year rather than a rolling twelve-month look-back to simplify the calculations and reduce compliance costs; (3) payments to any affiliate (other than a wholly-owned subsidiary) of the representative should not be taken into account for purposes of this test; and (4) an SBS Entity should be able to rely on representations from the representative as to its gross revenues and whether payments that have been made to the representative equal or exceed the ten percent threshold.920 Another commenter proposed reducing the one year disqualification period for association with the SBS Entity to six months.921 This commenter also suggested excluding from the gross revenue test: (1) Income from referrals from the gross revenue test, because referrals ‘‘can be difficult to track;’’ and (2) income paid by an SBS Entity on behalf of the special entity.922 A third commenter generally opposed the proposed rule on the basis that it was unclear, would require costly enhancements to compliance systems, and ‘‘would be particularly problematic in instances where a corporate transaction changes the identity of associated persons during the look-back year.’’ 923 With respect to the first prong of the proposed rule, this commenter supported eliminating the one-year look back period, as it believed the costs of compliance with that provision would outweigh any benefits. Instead, the commenter argued that ‘‘independence’’ should be established if the representative is not an associated person of an SBS Entity at the time of the
transaction.924 With respect to the gross revenue test, the commenter argued that the term ‘‘indirect compensation’’ was vague, and that ‘‘determining what would comprise indirect compensation and establishing a compliance system to track that indirect compensation represents a significant and time consuming burden,’’ the expense of which would likely be passed on to special entities.925 The commenter therefore suggested limiting the gross revenue test to direct revenue received by the representative from the SBS Dealer—and not its affiliates.926 A fourth commenter objected to the compliance burdens raised by the proposed rule, as well as various implementation concerns on the grounds that both prongs of the test were ‘‘moving targets’’ that would substantially complicate compliance and impose additional burdens and costs on advisors and special entities.927 The commenter recommended that the Commission eliminate the twelve￾month ‘‘look-back’’ provision altogether, but argued that if the Commission retained this provision, it should apply only where a continuing agreement exists between the representative and the SBS Entity (such as an ongoing corporate services agreement), that the one-year period be defined as a calendar year rather than a rolling twelve-month period, and that it should only be triggered by the SBS Entity and the representative—not by any associated persons of the SBS Entity or the representative.928 This commenter additionally urged the Commission to eliminate the gross revenue test on the grounds that it was unduly restrictive and difficult to apply. However, if the Commission retained the gross revenue test, the commenter requested that the final rule clarify how gross revenues are to be calculated.929 Another commenter argued that the final version of proposed Rule 15Fh– 2(c) clarify that the ten percent gross revenue test would not apply to any independent representative employed by the special entity, as such a prohibition would be inappropriate.930 The commenter also suggested that the prohibition on independent representatives who have worked for an SBS Entity within the past year should not apply if the independent representative is an employee of the special entity, who owes the special entity a fiduciary duty.931 The commenter asserted that if an independent representative is an employee of and owes a fiduciary duty to an institutional investor organization, an SBS Entity should have no authority to assess the representative’s qualifications. The commenter pointed out that, as a fiduciary, the employee’s prior employment by an SBS Entity would be irrelevant—since any actual breach of fiduciary duty would be governed by the special entity’s charter, state law or other applicable legal requirements, rather than the Dodd￾Frank Act.932
iii. Response to Comments and Final
Rule
After consideration of the comments, the Commission is adopting Rule 15Fh– 2(c), with certain modifications. First, we moved the rule defining the ‘‘independence’’ of a special entity’s representative from Rule 15Fh–2 to Rule 15Fh–5 in an effort to minimize confusion, and to consolidate the requirements of the qualified independent representative into Rule 15Fh–5. Specifically, the Commission is renumbering proposed Rule 15Fh–2(c) as Rule 15Fh–5(a)(1)(vii). In doing so, we have subsumed the requirement that a representative be independent of the SBS Entity under the criteria for a special entity’s qualified independent representative. Consistent with our proposal and with comments received, we continue to believe that a qualified independent representative should be independent of the SBS Entity, but need not be independent of the special entity itself.933 We do not believe that special entities would receive any greater protection by being required to incur the cost of retaining a representative that was independent of the special entity; in fact, the special entity may be better served by someone who has an ongoing relationship with it and is more familiar with the uses of the proceeds of the swap and other needs of the special entity. Although the Dodd-Frank Act is

934Specifically, Rule 15Fh–2(a)(2) requires, among other things, a written representation by the special entity that it ‘‘will rely on advice from a qualified independent representative as defined in [Rule] 15Fh–5(a)’’ (emphasis added). 935See FIA/ISDA/SIFMA, supra note 5. 936See CFA, supra note 5. 937See APPA, supra note 5. 938See CFTC Adopting Release, 77 FR at 9795, supra note 21. silent concerning the question of independence from the special entity, nothing in the Dodd-Frank Act precludes the use of a qualified independent representative that is affiliated with the special entity. Accordingly, Rule 15Fh–5(a)(1) only requires that the independent representative be independent of the SBS Entity to be a qualified independent representative. We are adopting Rule 15Fh– 5(a)(1)(vii) (formerly proposed Rules 15Fh–2(c)(1) and (2)) with one modification. Proposed Rule 15Fh– 2(c)(1) defined an independent representative of a special entity, in
part, as ‘‘independent of the security￾based swap dealer or major security￾based swap participant that is the
counterparty to a proposed security￾based swap.’’ Rule 15Fh–5(a)(1)(vii) as adopted eliminates the phrase ‘‘that is the counterparty to a proposed security￾based swap’’ from the definition. As described immediately below, this change is intended to reconcile the use of the term ‘‘qualified independent representative’’ in Rules 15Fh–5(a)(1) and 15Fh–2(a)(2) as adopted. Specifically, Rule 15Fh–2(a)(2) as proposed and as adopted, under which an SBS Dealer may seek to establish that it is not acting as an advisor to a special entity, refers to the definition of ‘‘qualified independent representative’’ as defined in Rule 15Fh–5(a).934 However, although the relevant part of the definition of the term ‘‘independent representative of a special entity’’ in proposed Rule 15Fh–2(c)(1) included the phrase ‘‘that is a counterparty to a proposed security-based swap,’’ the requirements in Rule 15Fh–2(a)(2) (as proposed and as adopted) are not limited to transactions in which the SBS Dealer is a counterparty to the special entity with respect to the security-based swap. Thus, as noted, we are eliminating the phrase ‘‘that is the counterparty to a proposed security￾based swap’’ in Rule 15Fh–5(a)(1)(vii) as adopted to reconcile the cross reference to the term ‘‘qualified independent representative’’ in Rule 15Fh–2(a)(2). This change will not alter the scope of Rule 15Fh–5(a) as adopted, because that rule is only applicable to an SBS Entity acting as counterparty to a special entity. It will, however, align the definition of qualified independent representative with the scope of Rule 15Fh–2(a), which applies to recommended transactions whether or not the SBS Dealer is a counterparty to the recommended security-based swap. As a result, there must always be someone independent of the SBS Dealer reviewing any recommended security￾based swap transaction on behalf of the special entity, whether or not the SBS Dealer making the recommendation is the counterparty to the transaction. Furthermore, the elimination of the phrase ‘‘that is the counterparty to a proposed security-based swap’’ in the rule as adopted will harmonize the rule more closely with the parallel CFTC requirement. Under Rule 15Fh–5(a)(1)(vii)(A) as adopted, a representative of a special entity is independent of an SBS Entity if the representative does not have a relationship with the SBS Entity, ‘‘whether compensatory or otherwise, that reasonably could affect the independent judgment or decision￾making of the representative.’’ Rule 15Fh–5(a)(1)(vii)(B) (as adopted) modifies the criteria for determining the independence of the representative that was proposed in proposed Rule 15Fh– 2(c)(3) by replacing the ten percent gross revenues test with requirements for timely disclosures of all material conflicts of interest and a prohibition against referrals, recommendations or introductions by the SBS Entity within one year of the representative’s representation of the special entity. Under Rule
15Fh–5(a)(1)(vii)(B) as adopted, a representative of a special entity will be deemed to be independent of an SBS Entity if three conditions are met: (1) The representative is not and, within one year of representing the special entity in connection with the security-based swap, was not an associated person of the SBS Entity; (2) the representative provides timely disclosures to the special entity of all material conflicts of interest that could reasonably affect the judgment or decision making of the representative with respect to its obligations to the special entity and complies with policies and procedures reasonably designed to manage and mitigate such material conflicts of interest; and (3) the SBS Entity did not refer, recommend, or introduce the representative to the special entity within one year of the representative’s representation of the special entity in connection with the security-based swap. Rule 15Fh–5(a)(1)(vii)(B)(1) (formerly proposed Rule 15Fh–2(c)(2)) requires that the independent representative is not and was not an associated person of the SBS Entity ‘‘within one year of representing the special entity in connection with the security-based swap.’’ One commenter agreed with the one-year time frame in this provision.935 One commenter suggested that one year was not long enough and suggested a two-year look back 936 and another commenter suggested that one year was too long and suggested a six-month look back.937 After consideration of the comments, the Commission continues to believe that an appropriate amount of time is necessary to ‘‘cool off’’ any association with an SBS Entity before being considered independent of the SBS Entity, and believes that a one-year period between being an associated person of an SBS Entity and functioning as an independent representative is an appropriate amount of time. We disagree with the commenter that a shorter six-month look back would be appropriate, as we believe that a one￾year cooling off period provides greater assurances of independence. At the same time, we do not want to unnecessarily place lengthy restrictions on a representative’s ability to work as an independent representative or unnecessarily restrict a special entity’s access to qualified independent representatives. For this reason, we believe that a one year restriction strikes an appropriate balance. In addition to the comments received, we note that many market participants have established compliance policies and procedures to address a one-year look￾back to comply with the CFTC rule that requires that the independent representative was not an associated person of the Swap Entity within the preceding twelve months or the independent representative complied with policies and procedures reasonably designed to manage and mitigate the conflict of being an associated person within the last twelve months.938 Rule 15Fh–5(a)(1)(vii)(B)(2) adds the new requirement that a representative must provide timely disclosures to the
special entity of all material conflicts of interest that could reasonably affect the judgment or decision making of the representative regarding its obligations to the special entity, and the representative must comply with policies and procedures reasonably designed to manage and mitigate such material conflicts of interest. This requirement establishes a standard that is designed to support the development of an SBS Entity’s reasonable belief regarding the independence of the representative advising a special entity. One commenter recommended adopting

939See SIFMA (August 2015), supra note 5. 940See SIFMA (August 2011), supra note 5; FIA/ ISDA/SIFMA, supra note 5; APPA, supra note 5; BlackRock, supra note 5; and SIFMA (August 2015), supra note 5. 941See SIFMA (August 2011), supra note 5 (expressing concerns about calculating a rolling twelve months of revenues and arguing that the ten percent threshold would create a revenue ceiling that is unduly restrictive and difficult to apply (e.g., a representative to multiple collective investment vehicles would be required to consider each of its multiple distributors for each collective investment vehicle as a source of indirect revenue)); FIA/ISDA/ SIFMA, supra note 5 (arguing for clarification that (1) payments to or from affiliates of the SBS Entity or representative would not be taken into account; (2) revenue computations should be determined as of the end of the prior fiscal year; and (3) the SBS Entity may rely on representations from the representative as to its gross revenues and whether payments equal or exceed the ten percent threshold); APPA, supra note 5 (suggesting (1) elimination of income from referrals from the gross revenue test because referrals are difficult to track; and (2) gross revenues test should not take into account income paid by an SBS Entity on behalf of the special entity); BlackRock, supra note 5 (expressing concerns regarding what would comprise ‘‘indirect compensation’’ and the compliance systems to track it and arguing that revenue received from affiliates of the SBS Dealer should not be considered); and SIFMA (August 2015), supra note 5 (arguing for the replacement of the gross revenues test with the CFTC standard). 942See SIFMA (August 2011), supra note 5; and SIFMA (August 2015), supra note 5. 943Although the independence safe harbor under Rule 15Fh–5(a)(vii)(B) does not include a gross revenues test, SBS Entities should consider whether the sources of revenues of a representative create a conflict of interest that must be disclosed pursuant to Rule 15Fh–5(a)(vii)(B)(2) or 15Fh–5(b) or otherwise impede the independence of the representative. Depending on the facts and circumstances, failure to disclose material conflicts of interest when there is a recommendation by a broker-dealer can be a violation of the antifraud rules. See, e.g., Chasins, 438 F.2d at 1172. 944See NAIPFA, supra note 5; GFOA, supra note 5; APPA, supra note 5. 945See GFOA, supra note 5. such a requirement, asserting that the CFTC standard, including the requirement for timely disclosures has, in their ‘‘members’ experiences proved sufficient to ensure the independence of special entity representatives and mitigate possible conflicts of interest, while also establishing an objective standard that special entities can apply in practice.’’ 939 In addition, harmonization with the parallel CFTC rule will result in efficiencies for SBS Entities that have already established infrastructure to comply with the CFTC rule. In the Commission’s view, to be
‘‘timely,’’ a representative’s disclosures must allow the special entity sufficient opportunity to assess the likelihood or magnitude of a conflict of interest prior to entering into the security-based swap. To determine which conflicts of interest disclosures are required, an SBS Entity generally would need a reasonable basis to believe that the representative reviewed its relationships with the SBS Entity and its affiliates, including lines of business in which the representative solicits business. Additionally, where applicable, the SBS Entity generally would also need a reasonable basis to believe the representative reviewed the relationships of its principals and employees, who could affect the judgment or decision making of the representative on behalf of the special entity. Lastly, Rule 15Fh–5(a)(1)(vii)(B)(3) replaces the proposed ‘‘gross revenues’’ test with a standard under which a representative will not be deemed independent if the SBS Entity refers, recommends, or introduces the representative to the special entity within one year of the representative’s representation of the special entity in connection with the security-based swap. The change is intended to provide a simpler standard for achieving the policy goal that a special entity’s choice of representative and the advice the representative provides should be made without any influence or input from the SBS Entity. In making this modification to the rule as adopted, the Commission seeks to address commenters’ concerns about cost, clarity, and practicality.940 Commenters had expressed concerns regarding the gross revenues test and an SBS Entity’s ability to accurately track the revenues.941 One commenter suggested eliminating the gross revenues standard altogether.942 After consideration of the comments, the Commission believes that the disclosures provided and the prohibition against referrals, recommendations or introductions adequately addresses concerns regarding independence more simply and directly than the proposed ‘‘gross revenues’’ test.943 Furthermore, this prohibition harmonizes the Commission’s standards for the independence of the representative with those of the CFTC.
6. Qualifications of the Independent
Representative
Proposed Rules 15Fh–5(a)(1)(i)–(vii) would list the required qualifications of a special entity’s independent representative. The qualifications would be that the independent representative:
(1) Has sufficient knowledge to evaluate a security-based swap and its risks; (2) is not subject to statutory disqualification; (3) will undertake a duty to act in the best interests of the special entity; (4) makes appropriate and timely disclosures to the special entity of material information concerning the security-based swap; (5) will provide written representations to the special entity regarding fair pricing and the appropriateness of the security￾based swap; (6) (in the case of employee benefit plans subject to ERISA) is a fiduciary as defined in ERISA; and (7) is subject to the pay to play prohibitions of the Commission, the CFTC, or an SRO that is subject to the jurisdiction of the Commission or the CFTC. Each of these proposed qualifications is discussed in turn below. As discussed above in Section II.H.5.a.iii.B and more fully below, the rules as adopted will distinguish between transactions with special entities subject to ERISA, and transactions with special entities other than those subject to ERISA. Specifically, Rule 15Fh–5(a)(1) as adopted addresses the qualifications for the independent representatives of special entities other than those subject to regulation under ERISA, and Rule 15Fh–5(a)(2) as adopted addresses the qualifications for independent representatives of special entities subject to regulation under ERISA. a. Written or Other Representations Regarding Qualifications
i. Proposal
In the Proposing Release, the Commission also requested comment regarding whether independent representatives must furnish written representations about their qualifications, or whether the rules should permit other means of establishing that a special entity’s independent representative possessed the requisite qualifications.
ii. Comments on the Proposal
The Commission received three comment letters on this point, all in favor of a written representation requirement.944 Although one such commenter agreed that written representations should be sufficient to ensure that a qualified independent swap advisor had been hired, the commenter proposed that the written representations include a verification that the external swap advisor had registered with and met professional standards set by the appropriate regulatory body overseeing swap advisors.945 According to the commenter, this would provide for independent verification that was not associated with the SBS Dealer or the

946 Id. 947See APPA, supra note 5. 948 Id. See also SIFMA (August 2015), supra note 5 (asserting that an SBS Entity should be deemed to have formed a reasonable basis to believe that a special entity has a qualified independent representative by relying on written representations that the representative is either an ERISA fiduciary, or that the representative satisfies the criteria for a qualified independent representative). 949See discussion in Section II.D, supra. 950See ABC, supra note 5; SIFMA (August 2011), supra note 5. 951See SIFMA (August 2011), supra note 5. 952See ABA Committees, supra note 5; NAIPFA, supra note 5; CalPERS, supra note 5; Ropes & Gray, supra note 5; APPA, supra note 5; GFOA, supra note 5. 953See APPA, supra note 5. 954See NAIPFA, supra note 5. NAIPFA did not support a presumption of qualification for ‘‘a sophisticated, professional adviser such as a bank, Commission-registered investment adviser, insurance company or other qualifying QPAM or INHAM for Special Entities subject to ERISA, a registered municipal advisor, or a similar qualified professional.’’ 955See GFOA, supra note 5. 956See Proposing Release, 76 FR at 42429, supra note 3. Such registration would subject independent representatives to rules such as MSRB rules (for example, Notice 2011–04 Pay to Play Rules for Municipal Advisors) or other regulation (for example, 17 CFR 275.206(4)–5). See also Proposing Release, 76 FR at 42431 n.245–247, supra note 3. 957See NAIPFA, supra note 5; GFOA, supra note 5; FIA/ISDA/SIFMA, supra note 5. 958See APPA, supra note 5. 959See GFOA, supra note 5. special entity, thereby minimizing any potential conflict of interests.946 Another commenter suggested that, in the case of an internal representative, written representations should be obtained either from the representative or from the special entity, or a combination of the two, depending on the circumstances.947 In the case of third-party representatives, the commenter suggested that the third￾party representative provide the statement either directly to the SBS Entity or to the special entity acknowledging that the statement would be relied on by SBS Entities for purposes of the business conduct rules.948
iii. Response to Comments and Final
Rule
After considering the comments, the Commission has determined not to mandate a manner of compliance with the requirements of Rule 15Fh–5(a). As discussed above, the obligation is on the SBS Entity to have a reasonable basis for believing that an independent representative has the necessary qualifications. An SBS Entity may use various means, such as reliance on representations from the special entity or its representative or due diligence, to form its reasonable basis to believe the special entity’s independent representative meets the qualifications outlined in Rule 15Fh–5(a). When an SBS Entity is relying on representations from a special entity or its representative to satisfy the requirements of the rule, the requirements of Rule 15Fh–1(b) will apply.949 Consistent with our approach to representations used to make institutional suitability determinations, we believe that parties should be able to make representations regarding the knowledge and qualifications of the independent representative on a transaction-by-transaction basis, on an asset-class-by-asset-class basis, or broadly in terms of all potential transactions between the parties. However, where there is an indication that the independent representative is not capable of independently evaluating investment risks, or does not intend to exercise independent judgment regarding all of an SBS Entity’s recommendations, the SBS Entity necessarily will have to be more specific in its approach. For instance, in some cases, an SBS Entity may be unable to determine that an independent representative is capable of independently evaluating investment risks with respect to any security-based swap. In other cases, the SBS Entity may determine that the independent representative is generally capable of evaluating investment risks with respect to some categories or types of security￾based swaps, but that the independent representative may not be able to understand a particular type of security￾based swap or its risk. b. Sufficient Knowledge To Evaluate Transaction and Risks
i. Proposed Rule
Proposed Rule 15Fh–5(a)(1) would require an SBS Entity to have a reasonable basis to believe that the independent representative has sufficient knowledge to evaluate the security-based transaction and related risks.
ii. Comments on the Proposed Rule
The Proposing Release solicited comment regarding what circumstances, if any, would give rise to a presumption of qualification for certain independent representatives other than ERISA fiduciaries. Presumptive Qualification Two commenters supported a finding of presumptive qualification for sophisticated, professional advisers, such as banks, Commission-registered investment advisers, registered municipal advisors, or other similarly qualified professionals.950 The commenter stated its view that applicable federal and/or state regulations governing these entities already impose requirements that ensure a minimum qualification level, and any additional evaluation of such representatives’ qualifications would add little or no value to a special entity’s representative selection process.951 Other commenters supported the presumption of qualification for in￾house representatives of a special entity, since those representatives should presumably act in the best interests of the special entity by virtue of their employment with the special entity.952 More specifically, one commenter supported this presumption on the grounds that the representative had been hired by the special entity to perform a hedging and risk control function, that he or she would be subject to direct control by his or her employer, and that he or she would be subject to regular review.953 Another commenter supported this presumption so long as the in-house representative met established requirements for qualification, testing and continuing education.954 Similarly, one commenter supported the presumption of qualification for independent representatives where a governmental entity had verified the qualifications of its independent representative employee through the hiring process.955 Registration of Representative as Municipal Advisor or Investment Adviser In the Proposing Release, the Commission asked whether to require that an independent representative be registered as a municipal advisor or an investment adviser or otherwise subject to regulation, such as banking regulation.956 Three commenters expressed some support for the proposed registration requirement for independent representatives,957 while one commenter opposed it.958 The first commenter supporting the registration requirement suggested that the written representations regarding a representative’s qualifications include a verification that the external swap advisor had registered with and met professional standards set by the appropriate regulatory body overseeing swap advisors.959 Another commenter supported the requirement that independent representatives be registered with the Commission as municipal advisors or

960See NAIPFA, supra note 5.
961See FIA/ISDA/SIFMA, supra note 5. 962See APPA, supra note 5. 963See CFA, supra note 5; CalPERS (August 2011), supra note 5; GFOA, supra note 5; NAIPFA, supra note 5. 964See APPA, supra note 5. 965See NAIPFA, supra note 5. 966See CalPERS (August 2011), supra note 5. 967 Id. 968See APPA, supra note 5. 969 Id. 970See NAIPFA, supra note 5; APPA, supra note 5; Ropes & Gray, supra note 5. 971See NAIPFA, supra note 5. 972See APPA, supra note 5. 973 Id. 974See Ropes & Gray, supra note 5. 975 Id. 976See CFA, supra note 5; CalPERS (August 2011), supra note 5; GFOA, supra note 5; NAIPFA, supra note 5. 977However, as noted above in Section II.H.5., supra, to the extent a proficiency examination or certification process develops in the future, such examination or certification may inform an SBS Entity’s reasonable basis to believe the qualifications of the independent representative. 978See 29 U.S.C. 1104 and 1106. investment advisers, or that they otherwise be subject to regulation, such as banking regulations, under which the independent representative would be bound by a fiduciary duty of loyalty and care at all times.960 The third commenter requested that the Commission establish a safe harbor permitting an SBS Entity to conclude that the special entity’s representative was ‘‘qualified’’ (but not necessarily ‘‘independent’’) if the representative was a registered municipal advisor or an SEC-registered investment adviser that provides investment advice with respect to security-based swaps (or a foreign entity having an equivalent status abroad).961 As noted above, one commenter opposed requiring employees of a special entity to register in any capacity, and suggested that any requirement to register third-party representatives should first be issued in the form of a notice of proposed rulemaking.962 Proficiency Examination In the Proposing Release, the Commission requested comment regarding whether a proficiency examination should be developed to assess the qualifications of independent representatives. Four commenters supported the development and usage of a proficiency examination,963 while one commenter opposed any proficiency examination for in-house representatives.964 One commenter, advocating for a proficiency examination, argued that such testing should be mandatory for both in-house and third-party representatives.965 Another commenter suggested that the proficiency examination could be developed by the Commission, an SRO (e.g., FINRA), or another recognized testing organization.966 Furthermore, after passing the examination, this commenter suggested that an independent representative be required to complete periodic continuing education.967 On the other hand, one commenter opposed any proficiency examination for in-house representatives, and argued that a proficiency exam for third-party representatives might provide a false sense of expertise.968 This commenter also expressed concern that an examination requirement might, directly or
indirectly, impose additional costs or burdens on special entities or SBS Entities.969 Periodic Re-Evaluation of Qualifications In the Proposing Release, the Commission asked whether an SBS Entity should be required to reevaluate (or, as applicable, require a new written representation regarding) the qualifications of the independent representative on a periodic basis. The Commission received three comment letters in response to the request for comment.970 The first commenter viewed the reevaluation of a representative’s qualifications as unnecessary if independent representatives were subject to continuing education and periodic testing requirements.971 Another commenter suggested that the Commission permit the representations regarding a representative’s qualifications to be set forth in a letter that could be relied on for the duration of a swap master agreement.972 However, this commenter acknowledged a value in requiring periodic re-certification for third-party representatives, and recommended that such re-certification occur every two years.973 The third commenter was concerned that trade-by-trade documentation of the independent representative criteria could reduce the speed of trade execution for special entities and add compliance burdens to each transaction.974 This commenter requested that the Commission clarify that an SBS Dealer may meet its burden of confirming the qualifications of an independent representative through appropriate representations provided by the special entity no more frequently than annually.975
iii. Response to Comments and Final
Rule
Upon consideration of the comments, the Commission is adopting Rule 15Fh– 5(a)(1)(i) (formerly proposed Rule 15Fh– 5(a)(1)), as proposed. Rule 15Fh–5(a)(1)(i) as adopted requires that SBS Entities have a reasonable basis to believe that the independent representative has sufficient knowledge to evaluate the transaction and risks. The independent representative may be required to register by the statutes and rules of another regulatory regime, such as municipal advisor or investment adviser, and nothing in the business conduct standards modifies or otherwise alters those registration requirements. Whether or not an independent representative is otherwise registered under a different regulatory regime may inform the SBS Entity’s view of the independent representative’s knowledge and qualifications, but would not automatically satisfy the qualification requirements of the independent representative. For example, an independent representative registered as an investment adviser may be very knowledgeable with respect to a variety of asset classes that do not include security-based swaps. While some commenters supported the development of a proficiency examination, we are neither developing nor requiring that a proficiency examination be developed to assess the qualifications of independent representatives.976 As noted above, an SBS Entity may reasonably rely on written representations about the qualifications of the independent representative to satisfy this obligation. In this regard, the Commission believes that the framework of Rule 15Fh–5(a)(1) provides an appropriate criteria for assessing the qualifications of special entity representatives.977 As discussed below, we are separately providing in new Rule 15Fh–5(a)(2) that the qualified independent representative requirement will be satisfied if a special entity that is subject to regulation under ERISA has a representative that is a fiduciary as defined in Section 3 of ERISA. We recognize that Congress has established a comprehensive federal regulatory framework that applies to plans subject to regulation under ERISA.978 Such recognition of the federal regulatory framework for ERISA plans maintains statutory protections for ERISA plans, while addressing the potential conflict, recognized by commenters, between the