[Federal Register Volume 83, Number 215 (Tuesday, November 6, 2018)]
[Rules and Regulations]
[Pages 55486-55488]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-24213]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-84511; File No. S7-24-18]
RIN 3235-AL10
Commission Statement on Certain Provisions of Business Conduct
Standards for Security-Based Swap Dealers and Major Security-Based Swap
Participants
AGENCY: Securities and Exchange Commission.
ACTION: Commission statement.
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SUMMARY: The Commission is issuing a statement regarding certain
provisions of its Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants. The statement sets
forth the Commission's position, for five years after the compliance
date for the security-based swap dealer and major security-based swap
participant registration rules, that certain actions with respect to
provisions of the Commission's business conduct standards will not
provide a basis for a Commission enforcement action.
DATES: The Commission's statement is effective November 6, 2018.
FOR FURTHER INFORMATION CONTACT: Lourdes Gonzalez, Assistant Chief
Counsel; Joanne Rutkowski, Assistant Chief Counsel; Devin Ryan, Senior
Special Counsel; Kelly Shoop, Special Counsel; or Neel Maitra, Special
Counsel, at 202-551-5550, in the Division of Trading and Markets,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549.
SUPPLEMENTARY INFORMATION:
I. Introduction
In 2012 the U.S. Commodity Futures Trading Commission (``CFTC'')
adopted business conduct rules for swap dealers and major swap
participants (``CFTC's Business Conduct Rules'').\1\ To assist the
swaps industry in implementing and complying with the CFTC's Business
Conduct Rules, industry participants developed standardized
counterparty
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relationship documentation that has been in force since 2012, and is
currently used by over 22,000 counterparties.\2\
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\1\ Business Conduct Standards for Swap Dealers and Major Swap
Participants with Counterparties, 77 FR 9734 (Feb. 17, 2012).
\2\ See International Swaps and Derivatives Association, Inc.
(``ISDA'') DF Protocol, List of Adhering Parties, available at
https://www.isda.org/protocol/isda-august-2012-df-protocol/adhering-parties.
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In 2016, pursuant to Section 15F of the Securities Exchange Act of
1934 (``Exchange Act''),\3\ the Commission adopted final rules imposing
business conduct standards (the ``SEC's Business Conduct Rules'') for
security-based swap dealers (``SBS Dealers'') and major security-based
swap participants (``Major SBS Participants'' and, together with SBS
Dealers, ``SBS Entities'').\4\ As noted in the Commission's Adopting
Release, the Commission endeavored to harmonize its rules with
analogous CFTC requirements where possible to create efficiencies for
entities that have already established infrastructure for compliance
with analogous CFTC requirements.\5\ In certain instances, however, the
Commission's requirements, and the associated representations that
would be required under standardized counterparty relationship
documentation, diverge from those of the analogous CFTC requirements,
which are reflected in existing standardized counterparty relationship
documentation. Market participants have expressed concerns about
practical compliance difficulties presented by certain of these
differences.\6\
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\3\ In this document, all references to ``Rules'' shall mean
those under the Exchange Act.
\4\ Business Conduct Standards for Security-Based Swap Dealers
and Major Security-Based Swap Participants, 81 FR 29960 (May 13,
2016) (``Adopting Release''). Although the rules are now effective,
the Commission determined not to require compliance with them until
entities are required to register as SBS Dealers or Major SBS
Participants. See id. at 30081.
\5\ Id. at 29964.
\6\ See, e.g., Letter from Securities Industry and Financial
Markets Association (``SIFMA'') and Institute of International
Bankers, June 21, 2018 (``SIFMA June 2018 Letter''); Letter from
Church Alliance to Brett Redfearn, June 26, 2018 (``Church Alliance
June 2018 Letter'').
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The Commission is mindful of the time and costs that may be
associated with a documentation initiative that would be undertaken
solely to address the SEC's Business Conduct Rules. Therefore, to
minimize potential market disruptions to existing counterparty
relationships resulting solely from documentation implementation issues
(upon their compliance date when compliance will first be required),
for a limited time period, the Commission takes the position that
certain actions with respect to provisions of the SEC's Business
Conduct Rules will not provide a basis for a Commission enforcement
action, as set forth below.\7\
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\7\ To the extent there are additional differences between the
CFTC's Business Conduct Rules and the SEC's Business Conduct Rules
that otherwise present documentation implementation difficulties
that could result in potential for market disruption, the Commission
encourages market participants to provide that information to the
Commission.
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II. Commission Position
The Commission's position \8\ is expressly limited to the SEC's
Business Conduct Rules, 17 CFR 240.15Fh-1 (Rule 15Fh-1) through
240.15Fh-6 (Rule 15Fh-6), set forth below. The Commission emphasizes
that its position is limited to the Commission's enforcement discretion
with respect to Rules 15Fh-1 through 15Fh-6, and does not modify or
change any contractual rights between counterparties to security-based
swaps. Further, nothing in the Commission's position excuses compliance
with Rule 15Fh-1(b), under which an SBS Entity cannot rely on a
representation if it has information that would cause a reasonable
person to question the accuracy of the representation.\9\ Unless
specified below, all terms shall have the definitions set forth in
Exchange Act Section 15F(h) and Rules 15Fh-1 through 15Fh-6. Finally,
the Commission's position applies only to the exercise of its
enforcement discretion as set forth in subsections A. through D. below,
and only until five years after the compliance date for the SBS Entity
registration rules.
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\8\ The Commission's position is an agency statement of general
applicability with future effect designed to implement, interpret,
or prescribe law or policy.
\9\ See Section II.D., infra, for the Commission's position on
written representations that were previously obtained in connection
with swaps.
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A. Non-ERISA Employee Benefit Plans
For purposes of the provisions relating to special entities under
Rules 15Fh-1 through 15Fh-6, it would not provide a basis for an
enforcement action if an SBS Entity considers an employee benefit plan
as defined in Rule 15Fh-2(d)(4) \10\ not to be a special entity where:
(i) The plan has previously represented in writing to the SBS Entity
that it is not a special entity for swap purposes under the CFTC's
Business Conduct Rules; (ii) at a reasonably sufficient time \11\ prior
to entering into a security-based swap with the plan, the SBS Entity
notifies the plan in writing that it may opt into special entity status
under Rule 15Fh-2(d)(4); \12\ and (iii) the plan does not opt into
special entity status.
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\10\ Rule 15Fh-2(d)(4) defines ``special entity'' to include:
``An employee benefit plan as defined in section 3 of the Employee
Retirement Income Security Act of 1974 (29 U.S.C. 1002) 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.''
\11\ See, e.g., Adopting Release, 81 FR at 29982 (``[I]t 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.'').
\12\ This notification requirement mirrors the approach set
forth in CFTC Regulation at 17 CFR 23.401(c)(6).
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B. Written Representations: SBS Dealers Not Acting as Advisors
Reliance on the representations described below during the five
years in which this Commission position is in effect would not provide
a basis for an enforcement action:
An SBS Dealer seeking to establish that it is not acting
as an advisor to a special entity within the meaning of Rule 15Fh-2(a)
relies on a written representation that a special entity will not rely
on recommendations provided by the SBS Dealer \13\ instead of having
the special entity represent in writing that it acknowledges that the
SBS Dealer is not acting as an advisor when the SBS Dealer recommends a
security-based swap or a trading strategy that involves the use of a
security-based swap to the special entity.\14\
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\13\ This written representation mirrors the requirement set
forth in CFTC Regulation at 17 CFR 23.440(b)(2)(ii), the analogous
provision to Rule 15Fh-2(a)(2)(i)(A).
\14\ See Rule 15Fh-2(a)(2)(i)(A).
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With respect to a special entity as defined in Rule 15Fh-
2(d)(3) (e.g., an employment plan subject to Title I of the Employee
Retirement Income Security Act of 1974 (29 U.S.C. 1002) (``ERISA
Special Entity'')), an SBS Dealer relies on a representation from the
ERISA Special Entity's fiduciary that such fiduciary is not relying on
recommendations provided by the SBS Dealer \15\ instead of having the
fiduciary represent in writing that it acknowledges that the SBS Dealer
is not acting as an advisor when it recommends a security-based swap or
a trading strategy that involves the use of a security-based swap to
the ERISA Special Entity.\16\
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\15\ This written representation mirrors the requirement set
forth in CFTC Regulation 23.440(b)(1)(ii), the analogous provision
to Rule 15Fh-2(a)(1)(ii).
\16\ See Rule 15Fh-2(a)(1)(ii).
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An SBS Dealer relies on a written representation from the
ERISA Special Entity that any recommendation it receives from the SBS
Dealer materially affecting a security-based swap transaction will be
evaluated by a
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fiduciary before the transaction occurs, instead of having an ERISA
Special Entity represent in writing that any recommendation it receives
from the SBS Dealer involving a security-based swap transaction will be
evaluated by a fiduciary before the transaction is entered into.\17\
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\17\ See Rule 15Fh-2(a)(1)(iii)(B). This written representation
mirrors the requirement set forth in CFTC Regulation 23.440(b), the
analogous provision to Rule 15Fh-2(a)(1)(iii)(B).
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C. Safe Harbor for SBS Dealers and Major SBS Participants Acting as
Counterparties to Special Entities
Rule 15Fh-5(b) provides a safe harbor for SBS Entities acting as
counterparties to a special entity other than an ERISA Special Entity.
As set forth in Rule 15Fh-5(b)(1)(ii)(B), to avail itself of the safe
harbor the SBS Entity must among other things, obtain written
representations from the representative of the special entity (the
``qualified independent representative'') that such representative: (1)
Meets the independence test as required by Rule 15Fh-5(a)(1)(vii); (2)
has the knowledge required under Rule 15Fh-5(a)(1)(i); (3) is not
subject to a statutory disqualification under Rule 15Fh-5(a)(1)(ii);
(4) undertakes a duty to act in the best interests of the special
entity as required by Rule 15Fh-5(a)(1)(iii); and (5) is subject to the
requirements regarding political contributions, as applicable, under
Rule 15Fh-5(a)(1)(vi).
It would not provide a basis for an enforcement action with respect
to relying on the safe harbor in Rule 15Fh-5(b)(1)(ii)(B) if, during
the five years in which this Commission position is in effect, instead
of obtaining these written representations, an SBS Entity relies on a
written representation from the qualified independent representative
that the representative has written policies and procedures reasonably
designed to ensure that the representative satisfies the requirements
for acting as a qualified independent representative.\18\ This position
is applicable only to the written representations set forth in Rule
15Fh-5(b)(1)(ii)(B) and is only applicable where the SBS Entity meets
all other Commission requirements as set forth in Rule 15Fh-5(b).
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\18\ The Commission notes that this written representation is
already required by Rule 15Fh-5(b)(1)(ii)(A), and mirrors the
analogous requirement set forth in CFTC Regulation at 17 CFR
23.450(d)(1)(ii)(A).
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D. Reliance on Previously-Obtained Written Representations
Finally, Rule 15Fh-1(b), as noted above, permits an SBS Entity to
rely on written representations from the counterparty or its
representative to satisfy its due diligence requirements under Rules
15Fh-1 through 15Fh-6, unless the SBS Entity has information that would
cause a reasonable person to question the accuracy of the
representation. As the Commission stated when adopting the rule, the
question of whether reliance on representations that had been obtained
with respect to the CFTC's Business Conduct Rules would satisfy an SBS
Entity's obligations under the SEC's Business Conduct Rules will depend
on the facts and circumstances of the particular matter.\19\ The
Commission's position is that, for purposes of Rule 15Fh-1(b), it would
not provide a basis for an enforcement action if, during the five years
in which this Commission position is in effect, an SBS Dealer relies on
representations from a counterparty or representative that were
previously provided in relation to swaps if the SBS Dealer is not aware
of information that would cause a reasonable person to question the
accuracy of the representation if the representation were given in
relation to security-based swaps.\20\
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\19\ See Adopting Release, 81 FR at 29976.
\20\ This position applies equally to the written
representations addressed in Sections II.B. and C., supra.
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By the Commission.
Dated: October 31, 2018.
Brent J. Fields,
Secretary.
[FR Doc. 2018-24213 Filed 11-5-18; 8:45 am]
BILLING CODE 8011-01-P