SEC Trading and Markets FAQ: Security-Based Swap Entities

May 23, 2024

The staff of the Division of Trading and Markets of the Securities and Exchange Commission (“Commission”) have prepared the following responses to questions regarding substituted compliance for Chief Compliance Officer requirements[1]and opinions and certifications[2] that certain security-based swap dealers and major security-based swap participants (“firms”) must file with the Commission. These responses represent the views of the staff of the Division of Trading and Markets. They are not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved their content. These responses, like all staff statements, have no legal force or effect: they do not alter or amend applicable law, and they create no new or additional obligations for any person.

Substituted Compliance for Chief Compliance Officer Requirements under Exchange Act section 15F(k)[3] and Rule 15Fk-1[4]

The Commission’s substituted compliance orders condition substituted compliance for Exchange Act section 15F(k) and Rule 15Fk-1 in part on providing the Commission reports required pursuant to foreign laws:[5]

Q1: To satisfy foreign legal requirements, may a firm provide an altered version of the report(s) required pursuant to the relevant foreign law and still use substituted compliance for Exchange Act section 15F(k) and Rule 15Fk-1?

A1: No. Each of the Commission’s substituted compliance orders includes a condition requiring “all reports required pursuant to [the foreign law cited in the order]” to be provided to the Commission (as translated into English if necessary).[6] A version of the report that does not contain all the portions required pursuant to the relevant foreign law would not satisfy that condition.[7] Rule 3a71-6(b)(2) permits a firm to use substituted compliance only if it satisfies the conditions set forth in the Commission’s relevant substituted compliance order. A firm therefore may use substituted compliance for the Exchange Act section 15F(k) and Rule 15Fk-1 requirements only if the reports required pursuant to the foreign law cited in the relevant substituted compliance order are timely provided[8] to the Commission. [May 23, 2024]

Q2: May a firm create and provide the Commission a single annual report in lieu of providing the Commission with all the reports the firm creates under the foreign requirements specified in the relevant substituted compliance order and still use substituted compliance for Exchange Act section 15F(k) and Rule 15Fk-1?

A2: No. A firm may use substituted compliance for the Exchange Act section 15F(k) and Rule 15Fk-1 requirements only if every report required pursuant to the foreign laws specified in the order’s conditions to substituted compliance for Exchange Act section 15F(k) and Rule 15Fk-1 is timely provided to the Commission.[9] The Commission has stated that allowing a firm to create a single annual report regarding its security-based swap business amounts to allowing the firm to prepare a bespoke report outside of the requirements of both the Exchange Act and a foreign framework, and this bespoke report would be inconsistent with the Commission’s mandate to make a positive substituted compliance determination only when the firm complies with comparable foreign requirements.[10] [May 23, 2024]

Q3: May a firm provide the Commission the report under Rule 15Fk-1(c) in lieu of the reports required by the relevant substituted compliance order and still use substituted compliance for Exchange Act section 15F(k) and Rule 15Fk-1?

A3: No. Providing the reports required by the Commission’s order is a condition to substituted compliance for all of Exchange Act section 15F(k) and Rule 15Fk-1.[11] [May 23, 2024]

Opinions and Certifications Pursuant to Rules 15Fb2-4(c) and 3a71-6(c)(2)(ii)

Q1: May the opinion or certification be subject to assumptions, qualifications, reservations, or conditions to satisfy foreign legal requirements?

A1: No, except as specifically addressed in theCommission’s 2019 release. Rule 15Fb2-4(c) requires opinions and certifications to state that the firm can as a matter of law (and, in the case of certifications, also that the firm will) provide the Commission with prompt access to the firm’s books and records and submit to onsite inspection and examination by the Commission. The Commission’s 2019 release addressed questions about this requirement related to issues raised by foreign legal requirements[12] and in response stated only that opinions and certifications may: (1) be “predicated upon” the receipt of certain consents as described in that release;[13] (2) exclude records relating to security-based swap transactions entered into prior to the date on which the firm submits an application for registration pursuant to Exchange Act section 15F(b) and the rules thereunder which the firm continues to hold on its books and records and under which it may have continuing obligations;[14] (3) “take into account” whether certain regulatory arrangements have been entered into and/or a Commission determination granting substituted compliance in accordance with Rule 3a71-6(c)(3);[15] (4) consistent with conditional registration per Rule 15Fb2-1(d)(2), be conditioned upon the occurrence of a future action that would provide the Commission with adequate assurances of prompt access to the firm’s books and records and the ability of the firm to submit to onsite inspection and examination by the Commission;[16] and (5) address only covered books and records as described in that release and the jurisdiction(s) where the firm maintains its covered books and records.[17] [May 23, 2024]

Q2: TheCommission’s 2019 release provides the opinion and certification need only address the following records: (1) books and records that relate to the “U.S. business” of the firm (as defined in 17 CFR 240.3a71-3(a)(8));and (2) financial records necessary for the Commission to assess the compliance of the firm with applicable capital and margin requirements under the Exchange Act and rules promulgated by the Commission thereunder.[18] If the books and records from a non-security-based-swap business line and/or a foreign business line relate to the firm’s “U.S. business,” may the opinion and certification exclude such non-security-based-swap business line and/or foreign business line books and records?

A2: No. Books and records that “relate to” a firm’s U.S. business include those that the Commission needs to review, inspect or examine to determine compliance with applicable substantive requirements.[19] For example, documentation of the presence or absence of risk arising from the firm’s non-security-based-swap business lines and/or from the firm’s foreign business lines could relate to a firm’s compliance with its U.S. business risk management obligations under Exchange Act section 15F(j)(2) and the Commission’s rules thereunder. [May 23, 2024]

Q3: The Commission’s 2019 release provides that the opinion or certification may state that it “takes into account” whether certain regulatory arrangements have been entered into and a Commission determination granting substituted compliance in accordance with Rule 3a71-6(c)(3).[20] May an opinion or certification instead state that it is given in reliance on the regulatory arrangements or Commission determination?

A3: No. Although the opinion or certification may take into account whether the regulatory arrangements have been entered into and a determination granting substituted compliance in accordance with Rule 3a71-6(c)(3), the opinion or certification cannot replace its conclusions with the conclusions in such arrangements or determinations. For example, the opinion cannot state that it is relying on the legal analysis outlined in an arrangement and must reach its own legal conclusion. [May 23, 2024]

Q4: May an opinion or certification address solely a branch or subsidiary of the firm?

A4: No. Rule 15Fb2-4(c) states that the opinion and certification must address “the nonresident security-based swap dealer and nonresident major security-based swap participant” applying for registration pursuant to 15 U.S.C. 78o-10(b). [May 23, 2024]

Q5: May an opinion state that the Commission is not permitted to rely on the opinion’s conclusions or disclaim the opinion giver’s responsibility or liability?

A5: No. The Commission requires the opinion so that it has assurances in connection with an application for registration or substituted compliance determination.[21] [May 23, 2024]

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[1] For additional information, see the “Substituted Compliance” section of the Commission’s webpage regarding “Security-Based Swap Markets,” available at https://www.sec.gov/tm/security-based-swap-markets.

[2] See 17 CFR 240.15Fb2-4(c) (“Rule 15Fb2-4(c)”) and 17 CFR 240.3a71-6(c)(2)(ii) (“Rule 3a71-6(c)(2)(ii)”).

[3] 15 U.S.C. 78o-10(k).

[4] 17 CFR 240.15Fk-1.

[5] See, e.g.,Order Granting Conditional Substituted Compliance in Connection With Certain Requirements Applicable to Non-U.S. Security-Based Swap Dealers and Major Security-Based Swap Participants Subject to Regulation in the United Kingdom, para. X.(d)(2)(ii), Exchange Act Release No. 92529 (July 30, 2021), 86 FR 43318, 43372 (Aug. 6, 2021) (“UK Substituted Compliance Order”) (stating that all reports required by article 22(2)(c) of the United Kingdom version of Commission Delegated Regulation (EU) 2017/565 must be provided to the Commission). The Commission’s jurisdiction-specific orders granting substituted compliance are available at https://www.sec.gov/tm/Jurisdiction-Specific-Apps-Orders-and-MOU.

[6] See, e.g., UK Substituted Compliance Order para. X.(d)(2)(ii)(A).

[7] The Commission rejected a commenter’s request to narrow the scope of compliance reports provided to the Commission such that the Commission would receive foreign compliance reports only to the extent that the reports are related to the firm’s business as a security-based swap entity. The Commission explained that the Commission should be fully informed, consistent with the scope of the comparable foreign compliance reporting requirement, as to the implementation and effectiveness of the firm’s overall control environment for investment services and activities, as well as associated risks, complaints handling and remedies. As the Commission stated, the alternative approach of apportioning compliance reports into two buckets, and providing the Commission reports in only one of the buckets, does not match the analytic approach of considering the Exchange Act and foreign frameworks as a whole. See, e.g., id. at 43353.

[8] The reports must be provided as specified in the relevant Commission substituted compliance order. See, e.g., UK Substituted Compliance Order, para. X.(d)(2)(ii)(A).

[9] See supra note 6.

[10] See UK Substituted Compliance Order, 86 FR at 43352-53.

[11] See supra note 6.

[12] See Exchange Act Release No. 87780 (Dec. 18, 2019), 85 FR 6270, 6292 (Feb. 4, 2020) (“Cross-Border Adopting Release”).

[13] See id. at 6296-97.

[14] See id. at 6297.

[15] See id. at 6297-98.

[16] See id. at 6294-95.

[17] See id. at 6295-96.

[18] See id. at 6296. Note, however, that Exchange Act section 15F(f)(1)(C), 15 U.S.C. 78o-10(f)(1)(C), requires that a firm “shall keep books and records. . . . open to inspection and examination by any representative of the Commission” and that Rule 18a-6(g), 17 CFR 240.18a-6(g), provides that a firm “must furnish promptly to a representative of the Commission legible, true, complete, and current copies” of its books and records. The Commission stated that these obligations “are independent of, and in addition to, the certification and opinion of counsel requirement.” See id. at 6295.

[19] See Cross-Border Adopting Release, 85 FR at 6296.

[20] See id. at 6298.

[21] See, e.g.,Exchange Act Release No. 75611 (Aug. 5, 2015), 80 FR 48964, 48981 (Aug. 14, 2015).

Last Reviewed or Updated: May 23, 2024