Notice2021-17424
Notice of Substituted Compliance Application Submitted by UBS AG and Credit Suisse AG in Connection With Certain Requirements Applicable to Non-U.S. Security-Based Swap Dealers Subject to Regulation in the Swiss Confederation; Proposed Order
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 16, 2021
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission ("Commission") is soliciting public comment on an application by UBS AG and Credit Suisse AG (the "Swiss Firms") requesting that, pursuant to rule 3a71-6 under the Securities Exchange Act of 1934 ("Exchange Act"), the Commission determine that registered security-based swap dealers ("SBSDs") that are not U.S. persons and that are subject to certain regulation in the Swiss Confederation ("Switzerland") may comply with certain requirements under the Exchange Act via compliance with corresponding requirements of Switzerland. The Commission also is soliciting comment on a proposed Order providing for conditional substituted compliance in connection with the application.
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<title>Federal Register, Volume 86 Issue 155 (Monday, August 16, 2021)</title>
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[Federal Register Volume 86, Number 155 (Monday, August 16, 2021)]
[Notices]
[Pages 45770-45792]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-17424]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92632; File No. S7-07-21]
Notice of Substituted Compliance Application Submitted by UBS AG
and Credit Suisse AG in Connection With Certain Requirements Applicable
to Non-U.S. Security-Based Swap Dealers Subject to Regulation in the
Swiss Confederation; Proposed Order
August 10, 2021.
AGENCY: Securities and Exchange Commission.
ACTION: Notice of application for substituted compliance determination;
proposed order.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
soliciting public comment on an application by UBS AG and Credit Suisse
AG (the ``Swiss Firms'') requesting that, pursuant to rule 3a71-6 under
the Securities Exchange Act of 1934 (``Exchange Act''), the Commission
determine that registered security-based swap dealers (``SBSDs'') that
are not U.S. persons and that are subject to certain regulation in the
Swiss Confederation (``Switzerland'') may comply with certain
requirements under the Exchange Act via compliance with corresponding
requirements of Switzerland. The Commission also is soliciting comment
on a proposed Order providing for conditional substituted compliance in
connection with the application.
DATES: Submit comments on or before September 10, 2021.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/submitcomments.htm">https://www.sec.gov/rules/submitcomments.htm</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#f785829b92da94989a9a92998384b7849294d9909881"><span class="__cf_email__" data-cfemail="7b090e171e56181416161e150f083b081e18551c140d">[email protected]</span></a>. Please include
File Number S7-07-21 on the subject line.
Paper Comments
<bullet> Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number S7-07-21. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's internet website (http://www.sec.gov/
[[Page 45771]]
rules/proposed.shtml). Typically, comments are also available for
viewing and printing in the Commission's Public Reference Room, 100 F
Street NE, Washington, DC 20549, on official business days between the
hours of 10 a.m. and 3 p.m. Due to pandemic conditions, however, access
to the Commission's Public Reference Room is not permitted at this
time. All comments received will be posted without change. Persons
submitting comments are cautioned that the Commission does not redact
or edit personal identifying information from comment submissions. You
should submit only information that you wish to make publicly
available.
FOR FURTHER INFORMATION CONTACT: Carol M. McGee, Assistant Director or
James R. Curley, Special Counsel, at 202-551-5870, Office of
Derivatives Policy, Division of Trading and Markets, Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549-7010.
SUPPLEMENTARY INFORMATION: The Commission is soliciting public comment
on an application by the Swiss Firms requesting that the Commission
determine that SBSDs that are not U.S. persons and that are subject to
certain regulation in Switzerland may satisfy certain requirements
under the Exchange Act by complying with comparable requirements in
Switzerland. The Commission also is soliciting comment on a proposed
Order, set forth in Attachment A, providing for conditional substituted
compliance in connection with the application.
I. Background
On August 6, 2021, market participants will begin to count
security-based swap transactions toward the thresholds for registration
with the Commission as SBSDs.\1\ Exchange Act rule 3a71-6 \2\
conditionally provides that non-U.S. SBSDs and major security-based
swap participants (``SBS Entities'') may satisfy certain requirements
under Exchange Act section 15F \3\ by complying with comparable
regulatory requirements of a foreign jurisdiction.\4\ Substituted
compliance potentially is available in connection with requirements
regarding business conduct and supervision, chief compliance officers,
trade acknowledgment and verification, non-prudentially regulated
capital and margin, recordkeeping and reporting, portfolio
reconciliation and dispute reporting, portfolio compression and trading
relationship documentation.\5\
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\1\ See Exchange Act Release No. 86175 (June 21, 2019), 84 FR
43872, 43954 (Aug. 22, 2019) (``Capital and Margin Adopting
Release''); see also Exchange Act Release No. 87780 (Dec. 18, 2019),
85 FR 6270, 6345-49 (Feb. 4, 2020).
\2\ 17 CFR 240.3a71-6.
\3\ 15 U.S.C. 78o-10.
\4\ The Commission also has discussed the parameters of
substituted compliance in connection with substituted compliance
requests regarding the Federal Republic of Germany (``Germany''),
the French Republic (``France''), and the United Kingdom (``UK'').
See Exchange Act Release No. 90378 (Nov. 9, 2020), 85 FR 72726 (Nov.
13, 2020) (``German Notice and Proposed Order''); Exchange Act
Release No. 90765 (Dec. 22, 2020), 85 FR 85686 (Dec. 29, 2020)
(``German Substituted Compliance Order''); Exchange Act Release No.
90766 (Dec. 22, 2020), 85 FR 85720 (Dec. 29, 2020) (``French Notice
and Proposed Order''); Exchange Act Release No. 91477 (Apr. 5,
2021), 86 FR 18341 (Apr. 8, 2021) (``French Reopening Release'');
Exchange Act Release No. 92484 (July 23, 2021), 86 FR 41612 (Aug. 2,
2021) (``French Substituted Compliance Order''); Exchange Act
Release No. 91476 (Apr. 5, 2021), 65 FR 18378 (Apr. 8, 2021) (``UK
Notice and Proposed Order''); Exchange Act Release No. 92529 (July
30, 2021), 86 FR 43318 (Aug. 6, 2021) (``UK Substituted Compliance
Order'').
\5\ See Exchange Act rule 3a71-6(d). Substituted compliance is
not available for antifraud prohibitions and information-related
requirements under section 15F. See Exchange Act rule 3a71-6(d)(1)
(specifying that substituted compliance is not available in
connection with the antifraud provisions of Exchange Act section
15F(h)(4)(A) and Exchange Act rule 15Fh-4(a), 17 CFR 240.15Fh-4(a),
and the information-related provisions of Exchange Act sections
15F(j)(3) and 15F(j)(4)(B)). Substituted compliance under rule 3a71-
6 also does not extend to certain other provisions of the federal
securities laws that apply to security-based swaps, such as: (1)
Additional antifraud prohibitions (see Exchange Act section 10(b),
15 U.S.C. 78j(b), Exchange Act rule 10b-5, 17 CFR 240.10b-5, and
Securities Act of 1933 section 17(a), 15 U.S.C. 77q(a)); (2)
requirements related to transactions with counterparties that are
not eligible contract participants (``ECPs'') (see Exchange Act
section 6(l), 15 U.S.C. 78f(l); Securities Act of 1933 section 5(e),
15 U.S.C. 77e(e)); (3) segregation of customer assets (see Exchange
Act section 3E, 15 U.S.C. 78c-5; Exchange Act rule 18a-4, 17 CFR
240.18a-4); (4) required clearing upon counterparty election (see
Exchange Act section 3C(g)(5), 15 U.S.C. 78c-3(g)(5)); (5)
regulatory reporting and public dissemination (see generally
Regulation SBSR, 17 CFR 242.900 et seq.); (6) SBS Entity
registration (see Exchange Act section 15F(a) and (b)); and (7)
registration of offerings (see Securities Act of 1933 section 5, 15
U.S.C. 77e).
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Substituted compliance in part is predicated on the Commission
determining the analogous foreign requirements are ``comparable'' to
the applicable requirements under the Exchange Act, after accounting
for factors such as the ``scope and objectives'' of the relevant
foreign regulatory requirements and the effectiveness of the relevant
foreign authority's or authorities' supervisory and enforcement
frameworks.\6\ Substituted compliance further requires that the
Commission and the relevant foreign financial regulatory authorities
have entered into an effective supervisory and enforcement memorandum
of understanding and/or other arrangement addressing cooperation and
other matters related to substituted compliance.\7\
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\6\ See Exchange Act rule 3a71-6(a)(2)(i).
\7\ See Exchange Act rule 3a71-6(a)(2)(ii). The Commission and
FINMA are in the process of negotiating a memorandum of
understanding to address cooperation matters related to substituted
compliance. The memorandum of understanding or other arrangement
will need to be in place before the Commission may make a final
determination allowing Covered Entities (as defined herein) to use
substituted compliance to satisfy obligations under the Exchange
Act. The Commission expects to publish any such memorandum of
understanding or arrangement on its website at <a href="http://www.sec.gov">www.sec.gov</a> under the
``Substituted Compliance'' tab, which is located on the ``Security-
Based Swap Markets'' page in the Division of Trading and Markets
section of the site.
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A party or group of parties that may potentially rely on a
substituted compliance order may submit a substituted compliance
application only if each such party provides a certification and
opinion of counsel that the entity can, ``as a matter of law, provide
the Commission with prompt access to its books and records, and can, as
a matter of law, submit to onsite inspection and examination by the
Commission.'' \8\ Commission rule 0-13 \9\ addresses procedures for
filing substituted compliance applications. The rule provides that the
Commission will publish a notice when a completed application has been
submitted and that any person may submit to the Commission ``any
information that relates to the Commission action requested in the
application.'' \10\
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\8\ See 17 CFR 240.15Fb2-4(c)(1); Exchange Act rule 3a71-
6(c)(1)(ii). In the Commission;s view the Swiss Firms have satisfied
this prerequisite. See Letter from Colin Lloyd of Cleary Gottlieb
Steen & Hamilton LLP on behalf of UBS AG and Credit Suisse AG to
Vanessa Countryman, Secretary, Commission, dated August 10, 2021
(``Swiss Application''). The Swiss Firms' Application is available
on the Commission's website at: <a href="https://www.sec.gov/page/exchange-act-substituted-compliance-and-listed-jurisdiction-applications-security-based-swap">https://www.sec.gov/page/exchange-act-substituted-compliance-and-listed-jurisdiction-applications-security-based-swap</a>.
\9\ 17 CFR 240.0-13.
\10\ See Commission rule 0-13(h). The Commission may take final
action on a substituted compliance application no earlier than 25
days following publication of the notice in the Federal Register.
See id.
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II. The Swiss Firms' Substituted Compliance Request
The Swiss Firms have submitted a complete substituted compliance
application to the Commission (``Swiss Application'').\11\ Pursuant to
rule 0-13, the Commission is publishing notice of the Swiss Application
together with a proposed Order to conditionally grant substituted
compliance to an entity that (1) is a security-based swap dealer
registered with the Commission; (2) is not a ``U.S. person,'' as that
term is defined in rule 3a71-3(a)(4) under the
[[Page 45772]]
Exchange Act; \12\ (3) is a systemically important bank authorized by
the Swiss Financial Market Supervisory Authority (``FINMA'') to conduct
banking activities in Switzerland; and (4) is supervised by FINMA under
the intensive and continual supervision model as a Category 1 firm as
that term is defined in BO Annex 3. In making its substituted
compliance determination, the Commission will consider public comments
on the Swiss Application and the proposed Order.
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\11\ See Swiss Application sections I-IV.
\12\ 17 CFR 240.3a71-3(a)(4).
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The Swiss Firms seek substituted compliance for Swiss market
participants in connection with a number of requirements under Exchange
Act section 15F, including:
A. Relevant Market Participants
The Commission will consider whether to allow substituted
compliance to be used by any Covered Entity.\13\
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\13\ See para. (d)(1) of the proposed Order.
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B. Relevant Section 15F Requirements
The Swiss Firms request that the Commission issue an order
determining that--for substituted compliance purposes--applicable
requirements in Switzerland are comparable with the following
requirements under Exchange Act section 15F:
<bullet> Risk control requirements--Requirements related to
internal risk management, trade acknowledgment and verification,
portfolio reconciliation and dispute reporting, portfolio compression
and trading relationship documentation.\14\
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\14\ See part V, infra.
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<bullet> Internal supervision, chief compliance officer and
additional Exchange Act section 15F(j) requirements--Requirements
related to diligent supervision, conflicts of interest, information
gathering under Exchange Act section 15F(j) and chief compliance
officers.\15\
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\15\ See part VI, infra.
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<bullet> Recordkeeping, reporting, and notification requirements--
Requirements related to making and keeping current certain prescribed
records, the preservation of records, reporting, and notification.\16\
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\16\See part VII, infra.
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C. Comparability Considerations and Proposed Order
In the view of the Swiss Firms, Swiss requirements taken as a whole
produce regulatory outcomes that are comparable to those of the
relevant requirements under the Exchange Act.\17\ In the Commission's
preliminary view, requirements under the Exchange Act and Swiss
requirements maintain similar approaches with respect to achieving
regulatory goals in several respects, but follow differing approaches
or incorporate disparate elements in certain other respects. The
Commission has considered those similarities and differences when
analyzing comparability and developing preliminary views, while
recognizing that differences in approach do not necessarily preclude
substituted compliance in light of the Commission's holistic, outcomes-
oriented framework for assessing comparability.\18\
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\17\ See Swiss Application section II at 3.
\18\ In this context, the Commission recognizes that other
regulatory regimes will have exclusions, exceptions and exemptions
that may not align perfectly with the corresponding requirements
under the Exchange Act. Where the Commission preliminarily has found
that the Swiss regime produces comparable outcomes notwithstanding
those particular differences, the Commission proposes to make a
positive determination on substituted compliance. Where the
Commission preliminarily has found that those exclusions, exemptions
and exceptions lead to outcomes that are not comparable, however,
the proposed Order would not provide for substituted compliance.
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Based on the Commission's analysis of the Swiss Application and
review of relevant Swiss requirements, the Commission is proposing an
Order, located at Attachment A, granting substituted compliance subject
to specific conditions and limitations. When Covered Entities seek to
rely on substituted compliance to satisfy particular requirements under
the Exchange Act, non-compliance with the applicable Swiss requirements
would lead to a violation of those requirements under the Exchange Act
and potential enforcement action by the Commission (as opposed to
automatic revocation of the substituted compliance order).
III. Scope of Substituted Compliance
The Swiss Application relates solely to entity-level requirements
and for entity-level Exchange Act requirements a Covered Entity must
choose either to apply substituted compliance pursuant to the Order
with respect to all security-based swap business subject to the
relevant Swiss requirements or to comply directly with the Exchange Act
with respect to all such business; a Covered Entity may not choose to
apply substituted compliance for some of the business subject to the
relevant Swiss requirements and comply directly with the Exchange Act
for another part of the business that is subject to the relevant Swiss
requirements. Additionally, for entity-level Exchange Act requirements,
if the Covered Entity also has security-based swap business that is not
subject to the relevant Swiss requirements, the Covered Entity must
either comply directly with the Exchange Act for that business or
comply with the terms of another applicable substituted compliance
order.
IV. Applicable Entities and General Conditions
A. Covered Entities for Which the Commission is Proposing a Positive
Conditional Substituted Compliance Determination
Under the proposed Order, substituted compliance would be available
to ``Covered Entities''--a term that would limit the scope of the
substituted compliance determination to SBSDs that are subject to
applicable Swiss requirements and oversight. Consistent with the
parameters of substituted compliance under Exchange Act rule 3a71-6,
the proposed ``Covered Entity'' definition provides that the relevant
entity must be a security-based swap dealer registered with the
Commission, and that the entity cannot be a U.S. person.\19\ The
proposed ``Covered Entity'' definition further would provide that the
entity must be a systemically important bank authorized by FINMA to
conduct banking activities in Switzerland.\20\ Each entity also must be
supervised by FINMA under the intensive and continual supervision model
as a Category 1 firm as that term is defined in BO Annex 3.\21\ These
prongs of the definition are intended to help ensure that Covered
Entities are subject to relevant Swiss requirements and oversight.
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\19\ See para. (e)(1)(i) and (ii) of the proposed Order.
\20\ See para. (e)(1)(iii) of the proposed Order.
\21\ See para. (e)(1)(iv) of the proposed Order.
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B. General Conditions and Prerequisites
Substituted compliance under the proposed Order would be subject to
a number of conditions and other prerequisites, to help ensure that the
relevant Swiss requirements that form the basis for substituted
compliance in practice will apply to the SBSD's security-based swap
business and activities, and to promote the Commission's oversight over
entities that avail themselves of substituted compliance.
1. ``Subject to and complies with'' Applicable Provisions
Each relevant section of the proposed Order would be subject to the
condition that the Covered Entity ``is subject to and complies with''
the applicable Swiss requirements that are needed to establish
comparability. Accordingly,
[[Page 45773]]
the proposed Order would not provide substituted compliance when a
Covered Entity is excused from compliance with relevant foreign
provisions, such as, for example, if relevant Swiss requirements do not
apply to the security-based swap activities of a branch of a Swiss SBSD
located outside of Switzerland. In that event, the Covered Entity would
not be ``subject to'' those requirements, and the Covered Entity could
not rely on substituted compliance in connection with those
activities.\22\
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\22\ An SBSD's ``voluntary'' compliance with the relevant Swiss
requirements would not suffice for these purposes. Substituted
compliance reflects an alternative means by which an SBSD may comply
with applicable requirements under the Exchange Act, and thus
mandates that the SBSD be subject to the requirements needed to
establish comparability and face consequences arising from any
failure to comply with those requirements. Moreover, the
comparability assessment takes into account the effectiveness of the
supervisory compliance program administered and the enforcement
authority exercised by FINMA, which would not be expected to promote
comparable outcomes when compliance merely is ``voluntary.''
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2. Additional General Conditions
Substituted compliance under the proposed Order would be subject to
the following general conditions intended to help ensure the
applicability of relevant Swiss requirements. In particular:
<bullet> Security-based swaps and transactions as ``derivatives''
or ``derivative transactions''--For each condition in paragraphs (b)
through (d) of this Order that requires the application of, and the
Covered Entity's compliance with, provisions of FinMIA and FMIO, the
relevant security-based swaps and security-based swap transactions are
``derivatives'' and/or ``derivative transactions'' for purposes of
FinMIA article 2(c), or otherwise are described by the relevant
language of that provision.\23\
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\23\ See para. (a)(1) of the proposed Order.
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<bullet> ``Counterparty'' status--For each condition in paragraph
(b) through (d) of this Order that requires the application of, and the
Covered Entity's compliance with, the provisions of FinMIA and FMIO,
the Covered Entity complies with the applicable conditions of the Order
regardless of whether the Covered Entity's counterparty is a
``counterparty'' for purposes of FinMIA article 93, or otherwise is
described by the relevant language of that provision.\24\
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\24\ See para. (a)(2) of the proposed Order.
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<bullet> Counterparty status as ``company''--For each condition in
paragraph (b) through (d) of this Order that requires the application
of, and the Covered Entity's compliance with, the provisions of FMIO,
the Covered Entity complies with the applicable conditions of the Order
regardless of whether a Covered Entity's counterparty is a ``company''
for purposes of FMIO article 77, or otherwise is described by the
relevant language of that provision.\25\
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\25\ See para. (a)(3) of the proposed Order.
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<bullet> Covered Entity as ``bank''--For each condition in
paragraph (b) through (d) of this Order that requires the application
of, and the Covered Entity's compliance with, the provisions of the BA
and BO and/or other Swiss requirements adopted pursuant to those
provisions, the Covered Entity is a ``bank'' for purposes of BA article
1a, or otherwise is described by the relevant language of that
provision.\26\
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\26\ See para. (a)(4) of the proposed Order.
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<bullet> Covered Entity as ``systemically important''--For each
condition in paragraph (b) through (d) of this Order that requires the
application of, and the Covered Entity's compliance with, the
provisions of the FINMA Circular 2017/1, the Covered Entity is
``systemically important'' for purposes of BA article 8(3), or
otherwise is described by the relevant language of that provision.\27\
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\27\ See para. (a)(5) of the proposed Order.
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<bullet> Covered Entity as ``category 1''--For each condition in
paragraph (b) through (d) of this Order that requires the application
of, and the Covered Entity's compliance with, the provisions of FINMA
Circular 2017/1, the Covered Entity is supervised as ``category 1,'' as
defined in BO articles 2(2) and 2(3) and BO Annex 3, or otherwise is
described by the relevant language of those provisions.\28\
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\28\ See para. (a)(6) of the proposed Order.
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<bullet> ``Institution-specific approach'' to operational risk
quantification--For each condition in paragraphs (b) through (d) of
this Order that requires the application of, and the Covered Entity's
compliance with, the provisions of FINMA Circular 2008/21 margins 45-
107, the Covered Entity applies the ``institution-specific approach''
to quantifying capital requirements for operational risk, as defined in
CAO article 94, or otherwise is described by the relevant language of
those provisions, and as approved by FINMA.\29\
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\29\ See para. (a)(7) of the proposed Order.
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<bullet> Memorandum of understanding--The Commission has an
applicable memorandum of understanding or other arrangement with FINMA
addressing cooperation with respect of the proposed Order at the time
the Covered Entity makes use of substituted compliance.\30\
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\30\ See para. (a)(8) of the proposed Order.
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<bullet> Notice of reliance on substituted compliance--A Covered
Entity must provide notice of its intent to rely on the proposed Order
by notifying the Commission in the manner specified on the Commission's
website.\31\ In the notice, the Covered Entity would need to identify
each specific substituted compliance determination in the proposed
Order for which the Covered Entity intends to apply substituted
compliance.\32\ If a Covered Entity elects not to apply substituted
compliance with respect to a specific substituted compliance
determination in the proposed Order, it must comply with the Exchange
Act requirements subject to that determination. Finally, a Covered
Entity must promptly update its notice to the Commission if it intends
to modify its reliance on the positive substituted compliance
determinations in the proposed Order.\33\
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\31\ See para. (a)(9) of the proposed Order.
\32\ If the Covered Entity intends to rely on all the
substituted compliance determinations in a given paragraph of the
proposed Order, it can cite that paragraph in the notice. For
example, if the Covered Entity intends to rely on the risk control
determinations in paragraph (b) of the proposed Order, it would
indicate in the notice that it is relying on the determinations in
paragraph (b). However, if the Covered Entity intends to rely on the
internal risk management, trade acknowledgement and verification,
and portfolio reconciliation determinations but not the portfolio
compression determination, it would need to indicate in the notice
that it is relying on paragraphs (b)(1)-(3) of the proposed Order.
In this case, paragraph (b)(4) of the proposed Order (the portfolio
compression determination) would be excluded from the notice and the
Covered Entity would need to comply with the Exchange Act portfolio
compression requirements. Further, as discussed below in section
VII.B of this notice, the recordkeeping and reporting determinations
in the proposed Order have been structured to provide Covered
Entities with a high level of flexibility in selecting specific
requirements within those rules for which they want to rely on
substituted compliance. For example, paragraph (d)(1)(i) of the
proposed Order sets forth the Commission's preliminary substituted
compliance determinations with respect to the requirements of
Exchange Act rule 18a-5, 17 CFR 240.18a-5. These proposed
determinations are set forth in paragraphs (d)(1)(i)(A) through (O).
If a Covered Entity intends to rely on some but not all of the
determinations, it would need to identify in the notice the specific
determinations in this paragraph it intends to rely on (e.g.,
paragraphs (d)(1)(i)(A), (B), (C), (D), (G), (H), (I), and (O)). For
any determinations excluded from the notice, the Covered Entity
would need to comply with the Exchange Act rule 18a-5 requirement.
\33\ A Covered Entity would modify its reliance on the positive
substituted compliance determinations in the proposed Order, and
thereby trigger the requirement to update its notice, if it adds or
subtracts determinations for which it is applying substituted
compliance or completely discontinues its reliance on the proposed
Order.
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<bullet> Notification related to changes in capital category--
Covered Entities with a prudential regulator would need to apply
substituted compliance with respect to the requirements of Exchange
[[Page 45774]]
Act rule 18a-8(c) and the requirements of Exchange Act rule 18a-8(h) as
applied to Exchange Act rule (c).\34\ Exchange Act rule 18a-8(c)
generally requires every security-based swap dealer with a prudential
regulator that files a notice of adjustment of its reported capital
category with the Federal Reserve Board, the Office of the Comptroller
of the Currency, or the Federal Deposit Insurance Corporation to give
notice of this fact to the that same day by transmitting a copy to the
Commission of the notice of adjustment of reported capital category in
accordance with Exchange Act rule 18a-8(h).\35\ Exchange Act rule 18a-
8(h) sets forth the manner in which every notice or report required to
be given or transmitted pursuant to Exchange Act rule 18a-8 must be
made. While Exchange Act rule 18a-8(c) is not linked to an Exchange Act
capital requirement, it is linked to capital requirements in the U.S.
promulgated by the prudential regulators. In its application, the Swiss
Firms cited various Swiss provisions as providing similar outcomes to
the notifications requirements of Exchange Act Rule 18a-8.\36\ This
general condition would be designed to clarify that a prudentially
regulated Covered Entity must provide the Commission with copies of any
notifications regarding changes in the Covered Entity's capital
situation required by Swiss law. The intent is to align the
notification requirement with the Swiss capital requirements applicable
to the Covered Entity.
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\34\ See para. (a)(10) of the proposed Order.
\35\ 17 CFR 240.18a-8(c).
\36\ See FINMASA article 29(2); CAO articles 14, 42(3), 101, and
130(4); and Liquidity Ordinance articles 17b, and 26(2).
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V. Substituted Compliance for Risk Control Requirements
A. Swiss Firms' Request and Associated Analytic Considerations
The Swiss Application in part requests substituted compliance in
connection with risk control requirements under the Exchange Act
relating to:
<bullet> Internal risk management--Internal risk management system
requirements pursuant to Exchange Act section 15F(j)(2) and relevant
aspects of Exchange Act rule 15Fh-3(h)(2)(iii)(I).\37\ Those provisions
address the obligation of SBSDs to follow policies and procedures
reasonably designed to help manage the risks associated with their
business activities.\38\
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\37\ 17 CFR 240.15Fh-3(h)(2)(iii)(I).
\38\ See Exchange Act Release No. 68071 (Oct. 18, 2012), 77 FR
70214, 70250 (Nov. 23, 2012). The Swiss Application discusses Swiss
requirements that address Covered Entities' obligations related to
internal risk management. See Swiss Application section II.1.a at 5-
8.
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<bullet> Trade acknowledgment and verification--Trade
acknowledgment and verification requirements pursuant to Exchange Act
section 15F(i) and Exchange Act rule 15Fi-2.\39\ Those provisions help
avoid legal and operational risks by requiring definitive written
records of transactions and for procedures to avoid disagreements
regarding the meaning of transaction terms.\40\
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\39\ 17 CFR 240.15Fi-2.
\40\ See Exchange Act Release No. 78011 (June 8, 2016), 81 FR
39808, 39809 & 39820 (June 17, 2016) (``Trade Acknowledgment and
Verification Adopting Release''). The Swiss Application discusses
Swiss requirements that address Covered Entities' obligations
related to confirmations. See Swiss Application section II.1.b at 9-
16.
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<bullet> Portfolio reconciliation and dispute reporting--Portfolio
reconciliation requirements pursuant to Exchange Act section 15F(i) and
Exchange Act rule 15Fi-3.\41\ Those provisions require that
counterparties engage in portfolio reconciliation and resolve
discrepancies in connection with uncleared security-based swaps and
promptly notify the Commission and applicable prudential regulators
regarding certain valuation disputes.\42\
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\41\ 17 CFR 240.15Fi-3.
\42\ See Exchange Act Release No. 87782 (Dec. 18, 2019), 85 FR
6359, 6360-61 (Feb. 4, 2020) (``Risk Mitigation Adopting Release'').
The Swiss Application discusses Swiss requirements that address
portfolio reconciliation and dispute resolution and reporting. See
Swiss Application section II.1.c at 17-23.
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<bullet> Portfolio compression--Portfolio compression requirements
pursuant to Exchange Act section 15F(i) and Exchange Act rule 15Fi-
4.\43\ Those provisions require that SBSDs have procedures addressing
bilateral offset, bilateral compression and multilateral compression in
connection with uncleared security-based swaps.\44\
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\43\ 17 CFR 240.15Fi-4.
\44\ See Risk Mitigation Adopting Release, 85 FR at 6361. The
Swiss Application discusses Swiss portfolio compression
requirements. See Swiss Application section II.1.c at 17-19, 23-24.
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<bullet> Trading relationship documentation--Trading relationship
documentation requirements pursuant to Exchange Act section 15F(i) and
Exchange Act rule 15Fi-5.\45\ Those provisions require that SBSDs have
procedures to execute written security-based swap trading relationship
documentation with their counterparties prior to, or contemporaneously
with, executing certain security-based swaps.\46\
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\45\ 17 CFR 240.15Fi-5.
\46\ See Risk Mitigation Adopting Release, 85 FR at 6361. The
Swiss Application discusses Swiss requirements regarding records of
agreements with counterparties. See Swiss Application section II.1.c
at 17-19, 24-31.
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Taken as a whole, these risk control requirements help to promote
market stability by mandating that SBSDs follow practices that are
appropriate to manage the market, credit, counterparty, operational and
legal risks associated with their security-based swap businesses. The
Commission's comparability assessment accordingly focuses on whether
the analogous foreign requirements--taken as a whole--produce
comparable outcomes with regard to providing that Covered Entities
follow risk mitigation and documentation practices that are appropriate
to the risks associated with their security-based swap businesses.
B. Preliminary Views and Proposed Order
1. General considerations
In the Commission's preliminary view based on the Swiss Application
and the Commission's review of applicable provisions, relevant Swiss
requirements would produce regulatory outcomes that are comparable to
those associated with the internal risk management, trade
acknowledgement and verification, portfolio reconciliation, and
portfolio compression risk control requirements, by subjecting Covered
Entities to risk mitigation and documentation practices that are
appropriate to the risks associated with those elements of their
security-based swap businesses. Substituted compliance for those risk
control requirements accordingly would be conditioned on Covered
Entities being subject to and complying with the Swiss provisions that
in the aggregate establish a framework that produces outcomes
comparable to those associated with the analogous risk control
requirements under the Exchange Act.\47\
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\47\ See para. (b)(1) of the proposed Order (listing the
requirements a Covered Entity must be subject to and comply with in
connection with internal risk management); para. (b)(2) (listing the
requirements a Covered Entity must be subject to and comply with in
connection with trade acknowledgement and verification); para.
(b)(3) (listing the requirements a Covered Entity must be subject to
and comply with in connection with portfolio reconciliation); and
para. (b)(4) (listing the requirements a Covered Entity must be
subject to and comply with in connection with portfolio
compression).
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In connection with dispute reporting, the Commission preliminarily
believes that Swiss requirements are not comparable to Exchange Act
requirements.\48\ Paragraph (c) of
[[Page 45775]]
Exchange Act rule 15Fi-3 requires SBSDs to promptly report to the
Commission valuation disputes in excess of $20 million that have been
outstanding for three or five business days (depending on counterparty
types).\49\ However, Swiss law lacks a specific requirement for
reporting security-based swap valuation disputes in excess of $20
million.\50\ Therefore, substituted compliance in connection with
dispute reporting requirements is preliminarily determined to not be
available. To fulfill the requirements of Exchange Act section 15F(i)
and Exchange rule 15Fi-3, a Swiss Covered Entity would be required to
comply with the dispute reporting requirements of Exchange Act rule
15Fi-3(c) directly.
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\48\ See para. (b)(3) of the proposed Order (excluding Exchange
Act rule 15Fi-3(c) covering reporting of security-based swap
valuation disputes from the risk control provisions covered by the
proposed Order).
\49\ See 17 CFR 240.15Fi-3(c).
\50\ See Swiss Application section II.1.c at 17, 22-23 (noting
that [t]he key difference between [Swiss and US portfolio
reconciliation] requirements is the reporting of valuation disputes,
which Swiss law does not require to be reported to the Commission .
. . the Commission may consider granting the requested substituted
compliance determination on the condition that a Swiss bank would
comply with the Commission's reporting requirement for disputes with
respect to more than USD $20 million pursuant to Exchange Act rule
15Fi-3(c) with respect to U.S. person counterparties'').
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In connection with portfolio reconciliation requirements, the
Commission preliminarily believes that Swiss requirements are
comparable to Exchange Act requirements when part of one of the
applicable Swiss requirements is not applied. The proposed Order
includes the requirement that a Covered Entity be subject to and comply
with FinMIA 108(b). However, the proposed Order also requires that
Covered Entities not apply FinMIA article 108(b)'s exception for
``small non-financial counterparties'' as defined in FinMIA article 98.
Requiring that Covered Entities not apply this exception helps ensures
that the Swiss requirements for portfolio reconciliation are applied to
Covered Entities in a manner comparable to the applicable Exchange Act
requirements.
In connection with portfolio compression requirements, the
Commission preliminarily believes that Swiss requirements are
comparable to Exchange Act requirements but only when one of the
applicable Swiss exclusions is not applied. The proposed Order includes
the requirement that a Covered Entity be subject to and comply with
FinMIA article 108(d).\51\ However, the proposed Order also requires
that Covered Entities not apply the portion of FinMIA article 108(d)
that excludes application of its requirements when there are fewer than
500 non-centrally cleared OTC derivatives transactions outstanding.\52\
Requiring that Covered Entities not apply this exclusion helps ensure
that the Swiss requirements for portfolio compression are applied to
Covered Entities in a manner comparable to the applicable Exchange Act
requirements.
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\51\ See para. (b)(4)(i) of the proposed Order.
\52\ See para. (b)(4)(ii) of the proposed Order.
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In connection with trading relationship documentation requirements,
the Commission preliminarily believes that Swiss requirements are not
comparable to Exchange Act requirements. Under Swiss law, there is no
explicit requirement to agree in writing to all terms governing the
trading relationship.\53\ By comparison, Exchange Act rule 15Fi-5
requires that ``[t]he security-based swap trading relationship
documentation shall be in writing and shall include all terms governing
the trading relationship between the security-based swap dealer . . .
and its counterparty.'' \54\ The Swiss Application's statement that
``[e]ven if OTC derivative transactions were to be initially traded on
the basis of a purely verbal agreement, they would still be subject to
the statutory requirements to have the key contractual terms confirmed
and reconciled'' \55\ is insufficient to produce a comparable
regulatory outcome to Exchange Act rule 15Fi-5, which specifically
requires that ``the security-based swap trading relationship
documentation shall be executed prior to, or contemporaneously with,
executing a security-based swap with any counterparty.'' \56\ Swiss law
also does not require particularized disclosures regarding the status
of a Swiss bank or its counterparty as an insured financial institution
or financial company,\57\ as required by Exchange Act rule 15Fi-
5(b)(5). Additionally, Swiss law does not require SBSDs to provide
information regarding security-based swaps that have been accepted for
clearing,\58\ as required by Exchange Act rule 15Fi-5(b)(6). Given
these discrepancies between the Swiss and U.S. trading relationship
documentation requirements, the Commission preliminarily believes that
the analogous Swiss requirements--taken as a whole--cannot be
determined to produce comparable outcomes. Therefore the Commission is
not proposing to make a positive substituted compliance determination
for trading relationship documentation requirements. To fulfill the
requirements of Exchange Act section 15F(i) and Exchange rule 15Fi-5, a
Swiss Covered Entity would be required to comply with the trading
relationship documentation requirements of Exchange Act rule 15Fi-5
directly.
---------------------------------------------------------------------------
\53\ The voluntary ``standard Swiss market practice to document
OTC derivatives transactions through written agreements'' described
in the Swiss Application does not establish the requisite
supervisory framework or enforcement authority to establish
comparability with the specific regulatory requirements of Exchange
Act section 15Fi-5. See Swiss Application section II.1.c at 24.
\54\ 17 CFR 240.15Fi-5(b)(1).
\55\ See Swiss Application section II.1.c at 24.
\56\ 17 CFR 240.15Fi-5(a)(2).
\57\ See Swiss Application section II.1.c at 18, 28-29.
\58\ See id. at 30.
---------------------------------------------------------------------------
While the Commission recognizes these and certain other differences
between Swiss requirements and the applicable risk control requirements
under the Exchange Act, in the Commission's preliminary view those
differences on balance would not preclude substituted compliance for
internal risk management, trade acknowledgement and verification,
portfolio reconciliation, and portfolio compression, particularly as
requirement-by-requirement similarity is not needed for substituted
compliance.
VI. Substituted Compliance for Internal Supervision, Chief Compliance
Officer and Additional Exchange Act Section 15F(j) Requirements
A. The Swiss Firms' Request and Associated Analytic Considerations
The Swiss Firms also request substituted compliance in connection
with requirements under the Exchange Act relating to:
<bullet> Internal supervision--Diligent supervision is required
pursuant to Exchange Act rule 15Fh-3(h),\59\ and Exchange Act section
15F(j)(5) requires conflict of interest systems and procedures. These
provisions generally require that SBSDs establish, maintain and enforce
supervisory policies and procedures that reasonably are designed to
prevent violations of applicable law, and implement certain systems and
procedures related to conflicts of interest.\60\
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\59\ 17 CFR 240.15Fh-3(h).
\60 \ The Swiss Application addresses Swiss provisions that
address firms' supervisory systems, responsible individuals and
qualification requirements for supervisors, supervisory system
policies and procedures; the chief compliance officer and the chief
compliance officer's reporting authority and job security, chief
compliance officer policies and procedures, and chief compliance
officer reports. See Swiss Application section II.3 at 67-109.
---------------------------------------------------------------------------
<bullet> Chief compliance officers--Chief compliance officer
requirements are set out in Exchange Act section 15F(k) and
[[Page 45776]]
Exchange Act rule 15Fk-1.\61\ These provisions in general require that
SBSDs designate individuals with the responsibility and authority to
establish, administer and review compliance policies and procedures, to
resolve conflicts of interest, and to prepare and certify an annual
compliance report to the Commission.\62\
---------------------------------------------------------------------------
\61\ 17 CFR 240.15Fk-1.
\62\ The Swiss Application discusses Swiss requirements that
address compliance officers and their responsibilities, compliance
officer appointment, removal and compensation, related conflict of
interest provisions and compliance-related reports. See Swiss
Application section II.3.c at 90-109.
---------------------------------------------------------------------------
<bullet> Additional Exchange Act section 15F(j) requirements--
Additional requirements related to information-gathering pursuant to
Exchange Act section 15F(j)(4)(A), and certain antitrust prohibitions
specified by Exchange Act section 15F(j)(6).\63\
---------------------------------------------------------------------------
\63\ Section 15F(j)(4)(A) particularly requires firms to have
systems and procedures to obtain necessary information to perform
functions required under section 15F. The Swiss Application in turn
discusses Swiss provisions generally addressing information
gathering and disclosure. See Swiss Application Section II.2 at 33.
Section 15F(j)(6) prohibits firms from adopting any process or
taking any action that results in any unreasonable restraint of
trade, or to impose any material anticompetitive burden on trading
or clearing. The Swiss Application addresses Swiss antitrust
requirements. See Swiss Application section II.3.b at 78.
---------------------------------------------------------------------------
Taken as a whole, these internal supervision, chief compliance
officer and additional Exchange Act section 15F(j) requirements help to
promote SBSDs' use of structures, processes and responsible personnel
reasonably designed to promote compliance with applicable law, to
identify and cure instances of non-compliance and to manage conflicts
of interest. The comparability assessment accordingly may focus on
whether the analogous foreign requirements--taken as a whole--produce
comparable outcomes with regard to providing that Covered Entities have
structures and processes reasonably designed to promote compliance with
applicable law, identify and cure instances of non-compliance and to
manage conflicts of interest, in part through the designation of an
individual with responsibility and authority over compliance matters.
B. Preliminary Views and Proposed Order
1. General considerations
Based on the Swiss Application and the Commission's review of
applicable provisions, in the Commission's preliminary view the
relevant Swiss requirements would produce regulatory outcomes that are
comparable to those associated with the above-described internal
supervision, chief compliance officer, conflict of interest and
information-related requirements by providing that Covered Entities
have structures and processes that reasonably are designed to promote
compliance with applicable law and to identify and cure instances of
non-compliance and manage conflicts of interest.\64\ As elsewhere, this
part of the proposed Order conditions substituted compliance on Covered
Entities being subject to and complying with specified Swiss
requirements that are necessary to establish comparability.\65\
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\64\ This portion of the proposed Order accordingly would extend
generally to the internal supervision provisions of Exchange Act
rule 15Fh-3(h), the requirement in Exchange Act section 15F(j)(4)(A)
to have systems and procedures to obtain necessary information to
perform functions required under Exchange Act section 15F and the
conflict of interest provisions of Exchange Act section 15F(j)(5).
See para. (c)(1) of the proposed Order. This portion of the proposed
Order does not extend to the portions of rule 15Fh-3(h) that mandate
supervisory policies and procedures in connection with: The risk
management system provisions of Exchange Act section 15F(j)(2)
(which are addressed by paragraph (b)(1) of the proposed Order in
connection with internal risk management); the information-related
provisions of Exchange Act sections 15F(j)(3) and (j)(4)(B) (for
which substituted compliance is not available); or the antitrust
provisions of Exchange Act section 15F(j)(6) (for which the
Commission is not proposing to provide substituted compliance). See
para. (c)(1)(ii) of the proposed Order.
\65\ See para. (c)(3) of the proposed Order.
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The Commission recognizes that certain differences are present
between those Swiss requirements and the applicable requirements under
the Exchange Act. In the Commission's preliminary view, on balance,
however, those differences would not preclude substituted compliance
within the relevant outcomes-oriented context.
2. Additional Conditions
Substituted compliance in connection with these requirements would
be subject to certain additional conditions to help ensure the
comparability of outcomes:
a. Application of Swiss Supervisory and Compliance Requirements to
Residual U.S. Requirements and Order Conditions
Under the proposed Order, substituted compliance for the relevant
internal supervision requirements would be conditioned on Covered
Entities complying with applicable Swiss supervisory and compliance
provisions as if those provisions also require the Covered Entity to
comply with applicable requirements under the Exchange Act and the
other applicable conditions to the Order.\66\
---------------------------------------------------------------------------
\66\ See para. (c)(4) of the proposed Order.
---------------------------------------------------------------------------
Even with substituted compliance, Covered Entities still would be
subject directly to a number of requirements under the Exchange Act and
to the conditions to the Order. In some cases, particular requirements
under the Exchange Act are outside the ambit of substituted
compliance.\67\ In other cases, certain requirements under the Exchange
Act may not have comparable Swiss requirements or may be outside the
scope of the Swiss Application,\68\ or the Covered Entity may decide
not to use substituted compliance for certain requirements under the
Exchange Act.\69\ While the Swiss regulatory framework in general
reasonably appears to promote Covered Entities' compliance with
applicable Swiss laws, those requirements do not appear to promote
Covered Entities' compliance with requirements under the Exchange Act
that are not subject to substituted compliance,\70\ or promote Covered
Entities' compliance with the applicable conditions to substituted
compliance. This condition would address this issue, while still
allowing Covered Entities to use their existing internal supervision
and compliance frameworks to comply with the relevant Exchange Act
requirements and Order conditions, rather than having to establish
separate special-purpose supervision and compliance frameworks.
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\67\ As noted, substituted compliance does not extend to
antifraud prohibitions or to certain other requirements under the
Exchange Act ( e.g., segregation requirements and requirements
related to transactions with counterparties that are not ECPs). See
note 5, supra.
\68\ The Swiss Firms are not requesting substituted compliance
in connection with: (1) Capital requirements: Exchange Act Rules
18a-1; (2) margin requirements: Exchange Act Rule 18a-3; (3)
recordkeeping requirements not applicable to non-bank SBSEs in
Exchange Act Rules 18a-5 and 18a-6; (4) reporting requirements
applicable to non-bank SBSEs in Exchange Act Rule 18a-7; (5)
notification requirements applicable to non-bank SBSEs in Exchange
Act rule 18a-8; and (6) securities count requirements in Exchange
Act rule 18a-9.
\69\ See part III, supra.
\70\ See note 5, supra.
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b. Compliance Reports
Under the proposed Order, substituted compliance in connection with
the compliance report requirements under Exchange Act section 15F(k)(3)
and Exchange Act rule 15Fk-1(c) also would be subject to the condition
that the compliance reports required pursuant to FINMA Circular 2017/1
margins 78-81 must: (1) Be provided to the Commission at least annually
and in the English language; (2) include a certification signed by the
chief compliance officer or senior
[[Page 45777]]
officer \71\ of the Covered Entity that, to the best of the certifier's
knowledge and reasonable belief and under penalty of law, the report is
accurate and complete in all material respects; (3) address the Covered
Entity's compliance with applicable requirements under the Exchange Act
and other applicable conditions of the proposed Order in connection
with requirements for which the Covered Entity is relying on the
proposed Order; (4) be provided to the Commission no later than 15 days
following the earlier of the submission of the report to the Covered
Entity's management body or the time the report is required to be
submitted to the management body; and (5) together cover the entire
period that the Covered Entity's annual compliance report referenced in
Exchange Act section 15F(k)(3) and Exchange Act rule 15Fk-1(c) would be
required to cover.\72\
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\71\ See Exchange Act rule 15Fk-1(e)(2) (defining ``senior
officer'' as ``the chief executive officer or other equivalent
officer'').
\72\ See para. (c)(2) of the proposed Order. FINMA Circular
2017/1 margins 78-81 require that a Covered Entity's compliance
function ``annually report to the executive board its assessment of
compliance risks and report on the activities of the compliance
function. A copy of these reports shall be provided to Internal
Audit as well as the audit firm.'' Under the proposed condition,
those reports, as submitted to the Commission and the Covered
Entity's management body, also would address the Covered Entity's
compliance with the other conditions of the proposed Order (in
addition to addressing the Covered Entity's compliance with
applicable Swiss provisions).
---------------------------------------------------------------------------
Although certain Swiss requirements address a Covered Entity's use
of internal compliance reports, those provisions do not require it to
submit compliance reports to the Commission. Under this condition, a
Covered Entity could leverage the compliance reports that it otherwise
must produce, by extending those reports to address compliance with the
conditions of the proposed Order.\73\
---------------------------------------------------------------------------
\73\ In practice, a Covered Entity may satisfy this condition by
identifying relevant Order conditions and reporting on the
implementation and effectiveness of its controls with regard to
compliance with those Order conditions.
---------------------------------------------------------------------------
c. Antitrust Considerations
Under the proposed Order, substituted compliance would not extend
to Exchange Act section 15F(j)(6) (and related internal supervision
requirements of Exchange Act rule 15Fh-3(h)(2)(iii)(I)). Allowing an
alternative means of compliance would not lead to outcomes comparable
to that statutory prohibition.\74\
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\74\ See also German Substituted Compliance Order, 85 FR at
85691-92; French Substituted Compliance Order, 86 FR at 41643; UK
Substituted Compliance Order, 86 FR at 43353. The Commission is not
taking any position regarding the applicability of the section
15F(j)(6) antitrust prohibitions in the cross-border context. Non-
U.S. SBSDs should assess the applicability of those prohibitions to
their security-based swap businesses.
---------------------------------------------------------------------------
VII. Substituted Compliance for Recordkeeping, Reporting and
Notification Requirements
A. Swiss Firms' Request and Associated Analytic Considerations
The Swiss Application in part requests substituted compliance for
requirements applicable to SBS Entities with a prudential regulator
under the Exchange Act relating to:
<bullet> Record Making--Exchange Act rule 18a-5 requires prescribed
records to be made and kept current.\75\
---------------------------------------------------------------------------
\75\ 17 CFR 240.18a-5. The Swiss Application discusses Swiss
record making requirements. See Swiss Application section II.2.a. at
33-47.
---------------------------------------------------------------------------
<bullet> Record Preservation--Exchange Act rule 18a-6 requires
preservation of records.\76\
---------------------------------------------------------------------------
\76\ 17 CFR 240.18a-6. The Swiss Application discusses Swiss
record preservation requirements. See Swiss Application section
II.2.b. at 48-61.
---------------------------------------------------------------------------
<bullet> Reporting--Exchange Act rule 18a-7 requires certain
reports.\77\
---------------------------------------------------------------------------
\77\ 17 CFR 240.18a-7. The Swiss Application discusses Swiss
requirements that address firms' obligations to make certain
reports. See Swiss Application section II.2.c. at 62-64.
---------------------------------------------------------------------------
<bullet> Notification--Exchange Act rule 18a-8 requires
notification to the Commission when certain financial or operational
problems occur.\78\
---------------------------------------------------------------------------
\78 \ 17 CFR 240.18a-8. The Swiss Application discusses Swiss
requirements that address firms' obligations to make certain
notifications. See Swiss Application section II.2.c. at 64-66.
---------------------------------------------------------------------------
<bullet> Daily Trading Records--Exchange Act section 15F(g)
requires SBS Entities to maintain daily trading records.\79\
---------------------------------------------------------------------------
\79\ The Swiss Application discusses Swiss requirements that
address firms' record preservation obligations related to records
that firms are required to create, as well as additional records
such as records of communications. See Swiss Application section
II.2.b. at 50-52.
---------------------------------------------------------------------------
Taken as a whole, the recordkeeping, reporting, and notification
requirements that apply to SBS Entities with a prudential regulator are
designed to promote the prudent operation of the firm's security-based
swap activities, assist the Commission in conducting compliance
examinations of those activities, and alert the Commission to potential
financial or operational problems that could impact the firm and its
customers. The comparability assessment accordingly may focus on
whether the analogous foreign requirements--taken as a whole--produce
comparable outcomes with regard to recordkeeping, reporting,
notification, and related practices that support the Commission's
oversight of these registrants. A foreign jurisdiction need not have
analogues to every requirement under Commission rules to receive a
positive substituted compliance determination.
B. Preliminary Views and Proposed Order
1. General Considerations
Based on the Swiss Application and the Commission's review of
applicable provisions, in the Commission's preliminary view, the
relevant Swiss requirements, subject to the conditions and limitations
of the proposed Order, would produce regulatory outcomes that are
comparable to the outcomes associated with the vast majority of the
recordkeeping, reporting, and notification requirements under the
Exchange Act applicable to SBS Entities with a prudential regulator
pursuant to Exchange Act section 15F(g) and Exchange Act rules 18a-5,
18a-6, 18a-7, and 18a-8.
In reaching this preliminary conclusion, the Commission recognizes
that there are certain differences between Swiss requirements and the
Exchange Act requirements. In the Commission's preliminary view, on
balance, those differences generally would not be inconsistent with
substituted compliance for these requirements. Requirement-by-
requirement similarity is not needed for substituted compliance.
However, the Commission is structuring its preliminary substituted
compliance determinations in the proposed Order to provide Covered
Entities with greater flexibility to select which distinct requirements
within the broader rule for which they would apply substituted
compliance. This would not preclude a Covered Entity from applying
substituted compliance for the entire rule (subject to conditions and
limitations). However, it would permit the Covered Entity to apply
substituted compliance with respect to certain requirements of a given
rule and to comply directly with the remaining requirements. This
granular approach to making substituted compliance determinations with
respect to discrete requirements within Exchange Act rules 18a-5, 18a-
6, 18a-7, and 18a-8 (collectively, the ``recordkeeping, reporting, and
notification rules'') is intended to permit Covered Entities to
leverage existing recordkeeping and reporting systems that are designed
to comply with the broker-dealer recordkeeping and reporting
requirements on which the recordkeeping and reporting requirements
applicable to SBS Entities are based. For example, it may be more
efficient for a Covered Entity to comply with certain Exchange Act
requirements
[[Page 45778]]
within a given recordkeeping, reporting, or notification rule (rather
than apply substituted compliance) because it can utilize systems that
its affiliated broker-dealer has implemented to comply with them. This
proposed approach is consistent with the approach taken by the
Commission in the French and UK Substituted Compliance Orders.\80\
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\80\ See French Substituted Compliance Order, 86 FR at 41649; UK
Substituted Compliance Order, 86 FR at 43360.
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As applied to Exchange Act rules 18a-5 and 18a-6, this approach of
providing greater flexibility results in preliminary substituted
compliance determinations with respect to the different categories of
records these rules require SBS Entities with a prudential regulator to
make, keep current, and/or preserve. The objective of these rules--
taken as a whole--is to assist the Commission in monitoring and
examining for compliance with substantive Exchange Act requirements
applicable to SBS Entities with a prudential regulator (e.g., business
conduct requirements) as well as to promote the prudent operation of
these firms.\81\ The Commission preliminarily believes the comparable
Swiss recordkeeping rules achieve these outcomes with respect to
compliance with substantive Swiss requirements for which preliminary
positive substituted compliance determinations are being made in this
proposed Order (e.g., the preliminary positive substituted compliance
determinations with respect to the majority of the Exchange Act
business conduct requirements). At the same time, the recordkeeping
rules address different categories of records through distinct
requirements within the rules. Each requirement with respect to a
specific category of records (e.g., paragraph (b)(1) of Exchange Act
rule 18a-5 addressing trade blotters) can be viewed in isolation as a
distinct recordkeeping rule. Therefore, it may be appropriate to make
substituted compliance determinations at this level of Exchange Act
rules 18a-5 and 18a-6.
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\81\ See, e.g., Exchange Act Release No. 71958 (Apr. 17, 2014),
79 FR 25194, 25199-200 (May 2, 2014).
---------------------------------------------------------------------------
As discussed in more detail below, the Commission's preliminary
view is that substituted compliance is appropriate for most of the
requirements applicable to SBS Entities with a prudential regulator
within the recordkeeping, reporting, and notification rules. However,
certain of the discrete requirements in these rules are fully or
partially linked to substantive Exchange Act requirements for which
substituted compliance is not available or for which a positive
substituted compliance determination would not be made under the
proposed Order. In these cases, a preliminary positive substituted
compliance determination is not be made for the requirement that is
fully linked to the substantive requirement or to the part of the
requirement that is linked to the substantive requirement. In
particular, a preliminary positive substituted compliance determination
is not being made, in full or in part, for recordkeeping, reporting, or
notification requirements linked to the following Exchange Act rules
for which substituted compliance is not available or a preliminary
positive substituted compliance determination is not being made: (1)
Exchange Act rule 15Fh-4 (``Rule 15Fh-4 Exclusion''); (2) Exchange Act
rule 15Fh-5 (``Rule 15Fh-5 Exclusion''); (3) Exchange Act rule 15Fh-6
(``Rule 15Fh-6 Exclusion''); (4) Exchange Act rule 18a-4 (``Rule 18a-4
Exclusion''); (5) Regulation SBSR (``Regulation SBSR Exclusion''); (6)
Form SBSE and its variations (``Form SBSE Exclusion''); (7) Exchange
Act rule 15Fh-1 Exclusion (``Rule 15Fh-1 Exclusion''), (8) Exchange Act
rule 15Fh-2 (``Rule 15Fh-2 Exclusion''); and (9) Exchange Act rule
15Fi-5 (``Rule 15Fi-5 Exclusion''). This proposed approach is
consistent with the approach taken by the Commission in the French and
UK Substituted Compliance Orders.\82\
---------------------------------------------------------------------------
\82\ See French Substituted Compliance Order, 86 FR at 41650; UK
Substituted Compliance Order, 86 FR at 43361.
---------------------------------------------------------------------------
In addition, certain of the requirements in the recordkeeping,
reporting, and notification rules are expressly linked to substantive
Exchange Act requirements where a preliminary positive substituted
compliance determination is being made under the proposed Order. In
these cases, substituted compliance with the linked requirement in the
recordkeeping, reporting, or notification rule is conditioned on the
Covered Entity applying substituted compliance to the linked
substantive Exchange Act requirement. This is the case regardless of
whether the requirement is fully or partially linked to the substantive
Exchange Act requirement. The recordkeeping, reporting, and
notification requirements that are linked to a substantive Exchange Act
requirement are designed and tailored to assist the Commission in
monitoring and examining an SBS Entity's compliance with the
substantive Exchange Act requirement. Swiss recordkeeping, reporting,
and notification requirements are designed to perform a similar role
with respect to the substantive Swiss requirements to which they are
linked. Consequently, this condition is designed to ensure that the
records, reports, and notifications of a Covered Entity align with the
substantive Exchange Act or Swiss requirement to which they are linked.
For these reasons, under the proposed Order, substituted compliance for
recordkeeping, reporting, and notification requirements linked to the
following Exchange Act rules would be conditioned on the Covered Entity
applying substituted compliance to the linked substantive Exchange Act
rule: (1) Exchange Act rule 15Fh-3(h) (``Rule 15Fh-3 Condition''); (2)
Exchange Act rule 15Fi-2 (``Rule 15Fi-2 Condition''); (3) Exchange Act
rule 15Fi-3 (``Rule 15Fi-3 Condition''); (4) Exchange Act rule 15Fi-4
(``Rule 15Fi-4 Condition''); and (5) Exchange Act rule 15Fk-1 (``Rule
15Fk-1 Condition''). This proposed approach is consistent with the
approach taken by the Commission in the French and UK Substituted
Compliance Orders.\83\
---------------------------------------------------------------------------
\83\ See French Substituted Compliance Order, 86 FR at 41650; UK
Substituted Compliance Order, 86 FR at 43361.
---------------------------------------------------------------------------
2. Exchange Act Rule 18a-5
Exchange Act rule 18a-5 requires SBS Entities to make and keep
current various types of records. The requirements for SBS Entities
without a prudential regulator are set forth in paragraph (a) of the
rule.\84\ The requirements for SBS Entities with a prudential regulator
are set forth in paragraph (b) of the rule.\85\ The Commission is
making a preliminary positive substituted compliance determination for
many of the requirements of paragraph (b) of Exchange Act rule 18a-5 in
the granular manner discussed above.\86\
---------------------------------------------------------------------------
\84\ See paras. (a)(1) through (18) of Exchange Act rule 18a-5.
\85\ See paras. (b)(1) through (14) of Exchange Act rule 18a-6.
\86\ See para. (d)(1) of the proposed Order.
---------------------------------------------------------------------------
However, certain of the requirements in these paragraphs are linked
to substantive Exchange Act requirements for which substituted
compliance is not available or a preliminary positive substituted
compliance determination would not be made under the proposed Order. In
these cases, a positive substituted compliance determination would not
be made for the linked requirement in Exchange Act rule 18a-5 or the
portion of the requirement in Exchange Act rule 18a-5 that is linked
[[Page 45779]]
to the substantive Exchange Act requirement.\87\
---------------------------------------------------------------------------
\87\ A positive preliminary substituted compliance determination
would not be made for the following requirements of Exchange Act
rule 18a-5 because they are linked to a substantive Exchange Act
requirement for which the proposed Order would not provide
substituted compliance: (1) Exchange Act rules 18a-5(b)(9) and (10)
are fully linked to Exchange Act rule 18a-4 and, therefore, would be
subject to the Rule 18a-4 Exclusion; (2) Exchange Act rule 18a-
5(b)(12) is fully linked to Exchange Act rule 15Fh-6 and, therefore,
would be subject to the Rule 15Fh-6 Exclusion; (3) the portions of
Exchange Act rule 18a-5(b)(13) that relates to Exchange Act rule
15Fh-4 would be subject to the Rule 15Fh-4 Exclusion; (4) the
portion of Exchange Act rule 18a-5(b)(13) that relates to Exchange
Act rule 15Fh-5 would be subject to the 15Fh-5 Exclusion; (5) the
portion of Exchange Act rule 18a-5(b)(13) that relates to Exchange
Act rule 15Fh-1 would be subject to the 15Fh-1 Exclusion; and (6)
the portion of Exchange Act rule 18a--5(b)(13) that relates to
Exchange Act rule 15Fh-2 would be subject to the 15Fh-2 Exclusion.
---------------------------------------------------------------------------
In addition, certain of the requirements in Exchange Act rule 18a-5
are fully or partially linked to substantive Exchange Act requirements
where a preliminary positive substituted compliance determination would
be made under the proposed Order. In these cases, substituted
compliance with the requirement in Exchange Act rule 18a-5 would be
conditioned on the Covered Entity applying substituted compliance to
the linked substantive Exchange Act requirement.\88\
---------------------------------------------------------------------------
\88\ Substituted compliance with the following requirements of
Exchange Act rule 18a-5 would be conditioned on the Covered Entity
applying substituted compliance to the linked substantive Exchange
Act requirement: (1) Exchange Act rules 18a-5(b)(6) and (b)(11) are
linked to Exchange Act rule 15Fi-2 and, therefore, would be subject
to the Rule 15Fi-2 Condition; (2) Exchange Act rule 18a-5(b)(13) is
linked to Exchange Act rule 15Fh-3 and, therefore, would be subject
to the Rule 15Fh-3(h) Condition; (3) Exchange Act rule 18a-5(b)(13)
is linked to Exchange Act rule 15Fk-1, and therefore, would be
subject to the Rule 15Fk-1 Condition; (4) Exchange Act rules 18a-
5(b)(14)(i) and (ii) are linked to Exchange Act rule 15Fi-3 and,
therefore, would be subject to the Rule 15Fi-3 Condition; and (5)
Exchange Act rule 18a-5(b)(14)(iii) is linked to Exchange Act rule
15Fi-4 and, therefore, would be subject to the Rule 15Fi-4
Condition.
---------------------------------------------------------------------------
In addition, the proposed Order would allow a Covered Entity to
apply substituted compliance on a transaction-by-transaction basis for
the Commission's recordkeeping requirements that are linked with the
counterparty protection requirements in Exchange Act rule 15Fh-
3(h).\89\ This approach is intended to be consistent with the
Commission preliminarily allowing Covered Entities to apply substituted
compliance on a transaction-by-transaction basis for the Commission's
counterparty protection requirements.
---------------------------------------------------------------------------
\89\ See para. (d)(1)(ii)(B) of the proposed Order.
---------------------------------------------------------------------------
Under the proposed Order, substituted compliance in connection with
the record making requirements of Exchange Act rule 18a-5 would be
subject to the condition that the Covered Entity: (1) Preserves all of
the data elements necessary to create the records required by Exchange
Act rules 18a-5(b)(1), (2), (3), and (7); and (2) upon request
furnishes promptly to representatives of the Commission the records
required by those rules (``SEC Format Condition'').\90\ This proposed
condition is modeled on the alternative compliance mechanism in
paragraph (c) of Exchange Act rule 18a-5. In effect, a Covered Entity
applying substituted compliance with respect to these requirements of
Exchange Act rule 18a-5 would need to comply with the comparable Swiss
requirements. However, under the SEC Format Condition, the Covered
Entity would need to produce a record that is formatted in accordance
with the requirements of Exchange Act rule 18a-5 at the request of
Commission staff. The objective is to require--on a very limited
basis--the production of a record that consolidates the information
required by Exchange Act rules 18a-5(b)(1), (2), (3), and (7) in a
single record and, as applicable, in a blotter or ledger format. This
will assist the Commission staff in reviewing the information on the
record.
---------------------------------------------------------------------------
\90\ See para. (d)(1)(ii)(A) of the proposed Order.
---------------------------------------------------------------------------
The following table summarizes the Commission's preliminary
positive substituted compliance determinations with respect to
requirements of Exchange Act rule 18a-5 by listing in each row: (1) The
paragraph of the proposed Order that sets forth the preliminary
determination; (2) the paragraph(s) of Exchange Act rule 18a-5 to which
the preliminary determination applies; (3) a brief description of the
records required by the paragraph(s); and (4) a brief description of
any additional conditions to applying substituted compliance to the
requirements, including any partial exclusions because portions of the
requirements are linked to substantive Exchange Act requirements for
which the proposed Order would not provide substituted compliance.\91\
---------------------------------------------------------------------------
\91\ The chart below does not include the proposed conditions
for applying substituted compliance to Exchange Act rule 18a-5;
namely that the Covered Entity: (1) Must be subject to and comply
with specified requirements of foreign law; and (2) as discussed
below, must promptly furnish to a representative of the Commission
upon request an English translation of a record. See para. (d)(7) of
the proposed Order (setting forth the English translation
requirement).
Exchange Act Rule 18a-5
[Record making]
----------------------------------------------------------------------------------------------------------------
Additional conditions and
Order paragraph Rule paragraph Rule description partial exclusions
----------------------------------------------------------------------------------------------------------------
(d)(1)(i)(A)...................... (b)(1)............... Trade blotters............ SEC Format Condition.
(d)(1)(i)(B)...................... (b)(2)............... Account ledgers........... SEC Format Condition.
(d)(1)(i)(C)...................... (b)(3)............... Stock record.............. SEC Format Condition.
(d)(1)(i)(D)...................... (b)(4)............... Memoranda of brokerage N/A.
orders.
(d)(1)(i)(E)...................... (b)(5)............... Memoranda of proprietary N/A.
orders.
(d)(1)(i)(F)...................... (b)(6)............... Confirmations, trade Rule 15Fi-2 Condition.
(b)(11).............. verification.
(d)(1)(i)(G)...................... (b)(7)............... Accountholder information. SEC Format Condition.
(d)(1)(i)(H)...................... (b)(8)............... Associated person's N/A.
employment application.
(d)(1)(i)(I)...................... (b)(13).............. Compliance with business (1) Rule 15Fh-3(h)
conduct requirements. Condition.
(2) Rule 15Fk-1
Condition.
(3) Rule 15Fh-1
Exclusion.
(4) Rule 15Fh-2
Exclusion.
(5) Rule 15Fh-4
Exclusion.
(6) Rule 15Fh-5
Exclusion.
(d)(1)(i)(J)...................... (b)(14)(i)........... Portfolio reconciliation.. Rule 15Fi-3 Condition.
(b)(14)(ii)..........
[[Page 45780]]
(d)(1)(i)(K)...................... (b)(14)(iii)......... Portfolio compression..... Rule 15Fi-4 Condition.
----------------------------------------------------------------------------------------------------------------
The following table summarizes the Commission's preliminary
determinations with respect to requirements of Exchange Act rule 18a-5
for which a positive substituted compliance determination would not be
made because they are fully linked to substantive Exchange Act
requirements for which the proposed Order would not provide substituted
compliance by listing in each row: (1) The paragraph of the proposed
Order that sets forth the determination; (2) the paragraph of Exchange
Act rule 18a-5 to which the determination applies; (3) a brief
description of the records required by the paragraph; and (4) a brief
description of why the requirement is excluded from substituted
compliance.
Exchange Act Rule 18a-5
[Record making]
----------------------------------------------------------------------------------------------------------------
Order paragraph Rule paragraph Rule description Exclusion
----------------------------------------------------------------------------------------------------------------
(d)(1)(ii)(C)..................... (b)(9)............... Possession or control Rule 18a-4 Exclusion.
records.
(d)(1)(ii)(C)..................... (b)(10).............. Reserve computations...... Rule 18a-4 Exclusion.
(d)(1)(ii)(C)..................... (b)(12).............. Political contribution Rule 15Fh-6 Exclusion.
records.
----------------------------------------------------------------------------------------------------------------
3. Exchange Act Rule 18a-6
Exchange Act rule 18a-6 requires an SBS Entity to preserve certain
types of records if it makes or receives them (in addition to the
records the SBS Entity is required to make and keep current pursuant to
Exchange Act rule 18a-5).\92\ Exchange Act rule 18a-6 also prescribes
the time period that these additional records and the records required
to be made and kept current pursuant to Exchange Act rule 18a-5 must be
preserved and the manner in which they must be preserved.
---------------------------------------------------------------------------
\92\ See 17 CFR 240.18a-6.
---------------------------------------------------------------------------
Paragraphs (a) through (d) of Exchange Act rule 18a-6 identify the
records that an SBS Entity must retain if it makes or receives them and
prescribes the retention periods for these records as well as for the
records that must be made and kept current pursuant to Exchange Act
rule 18a-5. Certain of these paragraphs prescribe requirements
separately for SBS Entities without a prudential regulator and SBS
Entities with a prudential regulator.\93\ The proposed Order would make
substituted compliance available for the requirements of these
paragraphs applicable to SBS Entities with a prudential regulator. As
discussed below, the Commission is making a preliminary positive
substituted compliance determination for many of the requirements of
these paragraphs applicable to SBS Entities with a prudential
regulator.
---------------------------------------------------------------------------
\93\ Paras. (a)(1), (b)(1), (d)(2)(i), and (d)(3)(i) of Exchange
Act rule 18a-6 apply to SBS Entities without a prudential regulator.
Paras. (a)(2), (b)(2), (d)(2)(ii), and (d)(3)(ii) of Exchange Act
rule 18a-6 apply to SBS Entities with a prudential regulator. Paras.
(c), (d)(1), (d)(4), and (d)(5) of Exchange Act rule 18a-6 apply to
SBS Entities irrespective of whether they have a prudential
regulator.
---------------------------------------------------------------------------
However, certain of these requirements are fully or partially
linked to substantive Exchange Act requirements for which a preliminary
positive substituted compliance determination would not be made under
the proposed Order. In these cases, a positive substituted compliance
determination would not be made for the linked requirement in Exchange
Act rule 18a-6.\94\
---------------------------------------------------------------------------
\94\ A positive substituted compliance determination would not
be made for the following requirements of Exchange Act rule 18a-6
because they are linked to a substantive Exchange Act requirement
for which the proposed Order would not provide substituted
compliance: (1) Exchange Act rule 18a-6(b)(2)(vi) is fully linked to
Regulation SBSR and, therefore, would be subject to the Regulation
SBSR Exclusion; (2) Exchange Act rule 18a-6(b)(2)(viii) is fully
linked to Exchange Act rule 15Fh-4 and, therefore, would be subject
to the Rule 15Fh-4 Exclusion; (3) Exchange Act rule 18a-
6(b)(2)(viii) is fully linked to Exchange Act rule 15Fh-5 and,
therefore, would be subject to the Rule 15Fh-5 Exclusion; (4)
Exchange Act rule 18a-6(b)(2)(v) is fully linked to Exchange Act
rule 18a-4 and, therefore, would be subject to the Rule 18a-4
Exclusion; (5) the portion of Exchange Act rule 18a-6(c) relating to
Form SBSE and its variations would be subject to the Form SBSE
Exclusion; (6) the portion of Exchange Act rule 18a-6(b)(2)(vii)
that relates to Exchange Act rule 15Fh-1 would be subject to the
15Fh-1 Exclusion; (7) the portion of Exchange Act rule 18a-
6(b)(2)(vii) that relates to Exchange Act rule 15Fh-2 would be
subject to the 15Fh-2 Exclusion; (8) the portion of Exchange Act
rule 18a-6(b)(2)(vii) that relates to Exchange Act rule 15Fh-4 would
be subject to the 15Fh-4 Exclusion; (9) the portion of Exchange Act
rule 18a-6(b)(2)(vii) that relates to Exchange Act rule 15Fh-5 would
be subject to the 15Fh-5 Exclusion; (10) the portion of Exchange Act
rule 18a-6(b)(2)(vii) that relates to Exchange Act rule 15Fh-6 would
be subject to the 15Fh-6 Exclusion; and (11) the portion of Exchange
Act rules 18a-6(d)(4) and (d)(5) that relates to Exchange Act rule
15Fi-5 would be subject to the Rule 15Fi-5 Exclusion.
---------------------------------------------------------------------------
In addition, certain of the requirements in Exchange Act rule 18a-6
are fully or partially linked to substantive Exchange Act requirements
where a positive substituted compliance determination would be made
under the proposed Order. In these cases, substituted compliance with
the requirement in Exchange Act rule 18a-6 would be conditioned on the
Covered Entity applying substituted compliance to the linked
substantive Exchange Act requirement.\95\
---------------------------------------------------------------------------
\95\ Substituted compliance with the following requirements of
Exchange Act rule 18a-6 would be conditioned on the Covered Entity
applying substituted compliance to the linked substantive Exchange
Act requirement: (1) Exchange Act rule 18a-6(b)(2)(vii) is linked to
Exchange Act rule 15Fh-3 and, therefore, would be subject to the
Rule 15Fh-3(h) Condition; (2) Exchange Act rule 18a-6(b)(2)(vii) is
linked to Exchange Act rule 15Fk-1 and, therefore, would be subject
to the Rule 15Fk-1 Condition; (3) Exchange Act rules 18a-6(d)(4) and
(d)(5) are linked to Exchange Act rule 15Fi-3 and, therefore, would
be subject to the Rule 15Fi-3 Condition; and (4) Exchange Act rules
18a-6(d)(4) and (d)(5) are linked to Exchange Act rule 15Fi-4 and,
therefore, would be subject to the Rule 15Fi-4 Condition.
---------------------------------------------------------------------------
Paragraph (e) of Exchange Act rule 18a-6 sets forth the
requirements for preserving records electronically. Paragraph (f) sets
forth requirements for when records are prepared or maintained by a
third party. The Order would make substituted compliance available for
the requirements of paragraphs (e) and (f) of Exchange Act
[[Page 45781]]
rule 18a-6 with respect to Covered Entities with a prudential
regulator.\96\
---------------------------------------------------------------------------
\96\ See paras. (d)(2)(i)(L) and (M) of the proposed Order.
---------------------------------------------------------------------------
Paragraph (g) of Exchange Act rule 18a-6 requires an SBS Entity to
furnish promptly to a representative of the Commission legible, true,
complete, and current copies of those records of the SBS Entity that
are required to be preserved under Exchange Act rule 18a-6, or any
other records of the SBS Entity that are subject to examination or
required to be made or maintained pursuant to section 15F of the
Exchange Act that are requested by a representative of the Commission.
The proposed Order would not make substituted compliance available for
the requirements of paragraph (g) of Exchange Act rule 18a-6 because
there is no comparable requirement in Switzerland to produce these
records to a representative of the Commission.
The following table summarizes the Commission's preliminary
positive substituted compliance determinations with respect to
requirements of Exchange Act rule 18a-6 by listing in each row: (1) The
paragraph of the proposed Order that sets forth the determination; (2)
the paragraph(s) of Exchange Act rule 18a-6 to which the determination
applies; (3) a brief description of the records required by the
paragraph(s); and (4) a brief description of any additional conditions
to applying substituted compliance to the requirements, including any
partial exclusions because portions of the requirements are linked to
substantive Exchange Act requirements for which the proposed Order
would not provide substituted compliance.\97\
---------------------------------------------------------------------------
\97\ The chart below does not include the proposed conditions
for applying substituted compliance to Exchange Act rule 18a-6;
namely that the Covered Entity: (1) must be subject to and complies
with the requirements of foreign law; and (2) must promptly furnish
to a representative of the Commission upon request an English
translation of a record. See para. (d)(7) of the proposed Order
(setting forth the English translation requirement).
Exchange Act Rule 18a-6
[Record preservation]
----------------------------------------------------------------------------------------------------------------
Conditions and partial
Order paragraph Rule paragraph Rule description exclusions
----------------------------------------------------------------------------------------------------------------
(d)(2)(i)(A)...................... (a)(2)............... 6 year record preservation N/A.
(d)(2)(i)(B)...................... (b)(2)(i)............ 3 year record preservation N/A.
(d)(2)(i)(C)...................... (b)(2)(ii)........... Communications............ N/A.
(d)(2)(i)(D)...................... (b)(2)(iii).......... Account documents......... N/A.
(d)(2)(i)(E)...................... (b)(2)(iv)........... Written agreements........ N/A.
(d)(2)(i)(F)...................... (b)(2)(vii).......... Business conduct standard (1) Rule 15Fh-3(h)
records. Condition.
(2) Rule 15Fk-1
Condition.
(3) Rule 15Fh-1
Exclusion.
(4) Rule 15Fh-2
Exclusion.
(5) Rule 15Fh-4
Exclusion.
(6) Rule 15Fh-5
Exclusion.
(7) Rule 15Fh-6
Exclusion.
(d)(2)(i)(G)...................... (c).................. Corporate documents....... Form SBSE Exclusion.
(d)(2)(i)(H)...................... (d)(1)............... Associated person's N/A.
employment application.
(d)(2)(i)(I)...................... (d)(2)(ii)........... Regulatory authority N/A.
reports.
(d)(2)(i)(J)...................... (d)(3)(ii)........... Compliance, supervisory, N/A.
and procedures manuals.
(d)(2)(i)(K)...................... (d)(4)............... Portfolio reconciliation.. (1) Rule 15Fi-3
(d)(5)............... Condition.
(2) Rule 15Fi-4
Condition.
(3) Rule 15Fi-5
Exclusion.
(d)(2)(i)(L)...................... (e).................. Electronic storage system. N/A.
(d)(2)(i)(M)...................... (f).................. Third-party recordkeeper.. N/A.
----------------------------------------------------------------------------------------------------------------
The following table summarizes the Commission's preliminary
determinations with respect to requirements of Exchange Act rule 18a-6
for which a positive substituted compliance determination would not be
made because they are fully linked to substantive Exchange Act
requirements for which the proposed Order would not provide substituted
compliance by listing in each row: (1) The paragraph of the proposed
Order that sets forth the determination; (2) the paragraph of Exchange
Act rule 18a-6 to which the determination applies; (3) a brief
description of the records required by those paragraph; and (4) a brief
description of why the requirement is excluded from substituted
compliance.
Exchange Act Rule 18a-6
[Preservation]
----------------------------------------------------------------------------------------------------------------
Order paragraph Rule paragraph Rule description Exclusion
----------------------------------------------------------------------------------------------------------------
(d)(2)(ii)........................ (b)(2)(v)............ Information supporting Rule 18a-4 Exclusion.
financial reports.
(d)(2)(ii)........................ (b)(2)(vi)........... Regulation SBSR Regulation SBSR
information. Exclusion.
(d)(2)(ii)........................ (b)(2)(viii)......... Special entity documents.. (1) Rule 15Fh-4
Exclusion.
(2) Rule 15Fh-5
Exclusion.
----------------------------------------------------------------------------------------------------------------
4. Exchange Act Rule 18a-7
Exchange Act rule 18a-7 requires SBS Entities, on a monthly basis
(if not prudentially regulated) or on a quarterly basis (if
prudentially regulated), to file an unaudited financial and operational
report on the FOCUS Report Part II (if not prudentially regulated) or
Part IIC (if prudentially regulated). The
[[Page 45782]]
Commission will use the FOCUS Reports filed by the SBS Entities to both
monitor the financial and operational condition of individual SBS
Entities and to perform comparisons across SBS Entities. The FOCUS
Report Part IIC elicits less information than the FOCUS Report Part II
because the Commission does not have responsibility for overseeing the
capital and margin requirements applicable to these entities.
The FOCUS Report Parts II and IIC are standardized forms that
elicit specific information through numbered line items. This
facilitates cross-firm analysis and comprehensive monitoring of all SBS
Entities registered with the Commission. Further, the Commission has
designated the Financial Industry Regulatory Authority, Inc.
(``FINRA'') to receive the FOCUS Reports from SBS Entities.\98\ Broker-
dealers registered with the Commission currently file their FOCUS
Reports with FINRA through the eFOCUS system it administers. Using
FINRA's eFOCUS system will enable broker-dealers, security-based swap
dealers, and major security-based swap participants to file FOCUS
Reports on the same platform using the same preexisting templates,
software, and procedures.
---------------------------------------------------------------------------
\98\ See Order Designating Financial Industry Regulatory
Authority, Inc., to Receive Form X-17A-5 (FOCUS Report) from Certain
Security-Based Swap Dealers and Major Security-Based Swap
Participants, Exchange Release No. 88866 (May 14, 2020).
---------------------------------------------------------------------------
Paragraph (a)(2) of Exchange Act rule 18a-7 requires SBS Entities
with a prudential regulator to file the FOCUS Report Part IIC on a
quarterly basis. The proposed Order would provide substituted
compliance for this requirement subject to the condition that the
Covered Entity file with the Commission periodic unaudited financial
and operational information in the manner and format specified by the
Commission by order or rule (``Manner and Format Condition'') and
present the financial information in accordance with generally accepted
accounting principles (``GAAP'') that the firms use to prepare general
purpose publicly available or available to be issued financial
statements in Switzerland (``Swiss GAAP Condition'').\99\ The
Commission believes that it would be appropriate to condition
substituted compliance with respect to Exchange Act rule 18a-7 on the
Covered Entity filing unaudited financial and operational information
in a manner and format that facilitates cross-firm analysis and
comprehensive monitoring of all SBS Entities registered with the
Commission.\100\ For example, the Commission could by order or rule
require Covered Entities with a prudential regulator to file the
financial and operational information with FINRA using the FOCUS Report
Part IIC but permit the information input into the form to be the same
information the SBS Entity reports to FINMA.
---------------------------------------------------------------------------
\99\ Under the proposed Order, Covered Entities with a
prudential regulator would need to present the information reported
in the FOCUS Report in accordance with GAAP that the firm uses to
prepare publicly available or available to be issued general purpose
financial statements in its home jurisdiction instead of U.S. GAAP
if other GAAP, such as International Financial Reporting Standards
(IFRS) as issued by the International Accounting Standards Board
(IASB), is used by the Covered Entity in preparing publicly
available or available to be issued general purpose financial
statements in Switzerland.
\100\ The Manner and Format condition is included in the French
and UK Substituted Compliance Orders. See French Substituted
Compliance Order, 86 FR at 41651; UK Substituted Compliance Order,
86 FR at 43361-62.
---------------------------------------------------------------------------
The following table summarizes the Commission's proposed
preliminary positive substituted compliance determinations with respect
to requirements of Exchange Act rule 18a-7 by listing in each row: (1)
The paragraph of the proposed Order that sets forth the determination;
(2) the paragraph of Exchange Act rule 18a-7 to which the determination
applies; (3) a brief description of the report required by the
paragraph; and (4) a brief description of any additional conditions to
applying substituted compliance to the requirements.\101\
---------------------------------------------------------------------------
\101\ The chart below does not include the proposed conditions
for applying substituted compliance to Exchange Act rule 18a-7;
namely that the Covered Entity: (1) Must be subject to and comply
with specified requirements of foreign law; and (2) must promptly
furnish to a representative of the Commission upon request an
English translation of a report. See para. (d)(7) of the proposed
Order (setting forth the English translation requirement).
Exchange Act Rule 18a-7
[Reporting]
----------------------------------------------------------------------------------------------------------------
Order paragraph Rule paragraph Rule description Conditions
----------------------------------------------------------------------------------------------------------------
(d)(3)(i)......................... (a)(2)............... File FOCUS Reports........ (1) Manner and Format
Condition.
(2) Swiss GAAP Condition.
----------------------------------------------------------------------------------------------------------------
5. Exchange Act Rule 18a-8
Exchange Act rule 18a-8 requires SBS Entities to send notifications
to the Commission if certain adverse events occur.\102\ The proposed
Order would provide substituted compliance for the requirements of
Exchange Act rule 18a-8 applicable to SBS Entities with a prudential
regulator (subject to conditions and limitations). In particular, the
requirements of: (1) Paragraph (c) of Exchange Act Rule 18a-8 that an
SBS Entity that is a security-based swap dealer and that files a notice
of adjustment to its reported capital category with a U.S. prudential
regulator must transmit a copy of the notice to the Commission; (2)
paragraph (d) of the rule that an SBS Entity provide notification to
the Commission if it fails to make and keep current books and records
under Exchange Act rule 18a-5 and to transmit a subsequent report on
steps being taken to correct the situation; and (3) paragraph (h) of
the rule setting forth how to make the notifications required by
Exchange Act 18a-8.
---------------------------------------------------------------------------
\102\ See 17 CFR 240.18a-8.
---------------------------------------------------------------------------
Under the proposed Order, substituted compliance in connection with
the notification requirements of Exchange Act rule 18a-8 would be
subject to the condition that the Covered Entity: (1) Simultaneously
sends a copy of any notice required to be sent by Swiss notification
laws to the Commission in the manner specified on the Commission's
website (i.e., the ``SEC Filing Condition''); and (2) includes with the
transmission the contact information of an individual who can provide
further information about the matter that is the subject of the notice
(i.e., the ``Contact Information Condition''). The purpose of this
condition is to alert the Commission to financial or operational
problems that could adversely affect the firm--the objective of
Exchange Act rule 18a-8.
In addition, the Order does not provide substituted compliance for
paragraph (g) of Exchange Act rule 18a-8 that an SBS Entity that is a
security-based swap dealer provide notification if it fails to make a
required deposit into its special reserve account for the
[[Page 45783]]
exclusive benefit of security-based swap customers under Exchange Act
rule 18a-4. Substituted compliance is not available for Exchange Act
rule 18a-4.
In addition, the proposed Order would not provide substituted
compliance for paragraph (g) of Exchange Act rule 18a-8 that an SBS
Entity that is a security-based swap dealer provide notification if it
fails to make a required deposit into its special reserve account for
the exclusive benefit of security-based swap customers under Exchange
Act rule 18a-4. Substituted compliance is not available for Exchange
Act rule 18a-4.
The following table summarizes the Commission's proposed
preliminary positive substituted compliance determinations with respect
to requirements of Exchange Act rule 18a-8 by listing in each row: (1)
The paragraph of the proposed Order that sets forth the determination;
(2) the paragraph of Exchange Act rule 18a-8 to which the determination
applies; (3) a brief description of the notification required by the
paragraph; and (4) a brief description of any additional conditions to
applying substituted compliance to the requirements.\103\
---------------------------------------------------------------------------
\103\ The chart below does not include the proposed conditions
for applying substituted compliance to Exchange Act rule 18a-8;
namely that the Covered Entity: (1) Must be subject to and comply
with specified requirements of foreign law; and (2) must promptly
furnish to a representative of the Commission upon request an
English translation of a notification. See para. (d)(7) of the
proposed Order (setting forth the English translation requirement).
Exchange Act Rule 18a-8
[Notification]
----------------------------------------------------------------------------------------------------------------
Order paragraph Rule paragraph Rule description Conditions
----------------------------------------------------------------------------------------------------------------
(d)(4)(i)(B)...................... (c).................. Prudential regulator (1) SEC Filing Condition.
capital category (2) Contact Information
adjustment notices. Condition.
(d)(4)(i)(C)...................... (d).................. Books and records notices. (1) SEC Filing Condition.
(2) Contact Information
Condition.
----------------------------------------------------------------------------------------------------------------
The following table summarizes the Commission's preliminary
determinations with respect to requirements of Exchange Act rule 18a-8
for which a positive substituted compliance determination would not be
made because they are fully linked to substantive Exchange Act
requirements for which the proposed Order would not provide substituted
compliance by listing in each row: (1) The paragraph of the proposed
Order that sets forth the determination; (2) the paragraph of Exchange
Act rule 18a-8 to which the determination applies; (3) a brief
description of the notification required by the paragraph; and (4) the
exclusion from substituted compliance.
Exchange Act rule 18a-8
[Notification]
----------------------------------------------------------------------------------------------------------------
Order paragraph Rule paragraph Rule description Exclusion
----------------------------------------------------------------------------------------------------------------
(d)(4)(ii)(C)..................... (g).................. Reserve account notices... Rule 18a-4 Exclusion.
----------------------------------------------------------------------------------------------------------------
6. Exchange Act Section 15F(g)
Exchange Act Section 15F(g) requires SBS Entities, including SBS
Entities with a prudential regulator, to maintain daily trading
records.\104\ The Commission preliminarily believes Swiss laws produce
a comparable result in terms of its daily trading recordkeeping
requirements.\105\ Accordingly, the Commission preliminarily is making
a positive substituted compliance determination for the self-executing
requirements in this paragraph.\106\
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\104\ See 15 U.S.C. 78o-10(g).
\105\ See CO article 958f; FMIO article 36; FMIO-FINMA article
1; FinMIA articles 38, 104, and 106; FINMA Circular 2013/8 marg. 60
and marg. 61.
\106\ See para. (d)(5) of the proposed Order.
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7. Examination and Production of Records
The proposed Order would not extend to, and Covered Entities would
remain subject to, the requirement of Exchange Act section 15F(f) to
keep books and records open to inspection by any representative of the
Commission and the requirement of Exchange Act rule 18a-6(g) to furnish
promptly to a representative of the Commission legible, true, complete,
and current copies of those records of the Covered Entity that are
required to be preserved under Exchange Act rule 18a-6, or any other
records of the Covered Entity that are subject to examination or
required to be made or maintained pursuant to Exchange Act section 15F
that are requested by a representative of the Commission.\107\
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\107\ See Exchange Act section 15F(f); Exchange Act rule 18a-
6(g). French and UK Substituted Compliance Orders do not extend
substituted compliance to these requirements. See French Substituted
Compliance Order, 86 FR at 41650; UK Substituted Compliance Order,
86 FR at 43361.
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Consequently, every Covered Entity registered with the Commission,
whether complying directly with Exchange Act requirements or relying on
substituted compliance as a means of complying with the Exchange Act,
would be required to satisfy the inspection and production requirements
imposed on such entities under the Exchange Act. Covered Entities would
be able to make, keep, and preserve records, subject to the proposed
conditions described above, in a manner prescribed by applicable Swiss
requirements. As an element of its substituted compliance application,
the Swiss Firms have provided the Commission with adequate assurances
that no law or policy would impede the ability of any entity that is
directly supervised by the authority and that may register with the
Commission to provide prompt access to the Commission to such entity's
books and records or to submit to onsite inspection or examination by
the Commission. Consistent with those assurances and the requirements
that apply to all Covered Entities under the Exchange Act, Covered
Entities operating under the proposed Order would need to keep books
and records open to inspection by any representative of the Commission
and to furnish promptly to a
[[Page 45784]]
representative of the Commission legible, true, complete, and current
copies of those records of the firm that these entities are required to
preserve under Exchange Act rule 18a-6 (which would include records for
which a positive substituted compliance determination is being made
with respect to Exchange Act rule 18a-6 under the Order), or any other
records of the firm that are subject to examination or required to be
made or maintained pursuant to Exchange Act section 15F that are
requested by a representative of the Commission.
8. English Translations
The proposed Order provides that to the extent documents are not
prepared in the English language, Covered Entities would need to
furnish to a representative of the Commission upon request an English
translation of any record, report, or notification of the Covered
Entity that is required to be made, preserved, filed, or subject to
examination pursuant to Exchange Act section 15F or the proposed
Order.\108\ This condition would be designed to addresses difficulties
that Commission examinations staff would have examining Covered
Entities that furnish documents in a foreign language. The English
translations would need to be provided promptly. This condition is
included in the French and UK Substituted Compliance Orders.\109\
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\108\ See para. (d)(7) of the proposed Order.
\109\ See French Substituted Compliance Order, 86 FR at 41651;
UK Substituted Compliance Order, 86 FR at 43361.
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VIII. Additional Considerations Regarding Supervisory and Enforcement
Effectiveness in Switzerland
A. General Considerations
As noted above, Exchange Act rule 3a71-6 provides that the
Commission's assessment of the comparability of the requirements of the
foreign financial regulatory system must account for ``the
effectiveness of the supervisory program administered, and the
enforcement authority exercised'' by the foreign financial regulatory
authority. This prerequisite accounts for the understanding that
substituted compliance determinations should reflect the reality of the
foreign regulatory framework, in that rules that appear high-quality on
paper nonetheless should not form the basis for substituted compliance
if--in practice--market participants are permitted to fall short of
their regulatory obligations. This prerequisite, however, also
recognizes that differences among the supervisory and enforcement
regimes should not be assumed to reflect flaws in one regime or
another.\110\
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\110\ See generally Business Conduct Adopting Release, 81 FR at
30079.
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In connection with these considerations, the Swiss Application
includes information regarding the Swiss supervisory and enforcement
framework applicable to derivatives markets and market participants.
This includes information regarding the supervisory and enforcement
authority afforded to FINMA to promote compliance with applicable
requirements, applicable supervisory and enforcement tools and
capabilities, consequences of non-compliance, and the application of
FINMA's supervisory and enforcement practices in the cross-border
context.\111\ After review of this information, the Commission
preliminarily believes that the framework is reasonably designed to
promote compliance with the laws where substituted compliance has been
requested.
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\111\ Staff also spoke with FINMA supervisors and reviewed
information on FINMA's website.
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In preliminarily concluding that the relevant supervisory and
enforcement considerations are consistent with substituted compliance,
the Commission particularly has considered the following factors:
B. Supervisory Framework in Switzerland
FINMA is the supervisor for the Swiss Firms, and all Covered
Entities that will register as security-based swap dealers in the
United States. FINMA has the ability to request records needed for
supervision from firms through the supervisory process. Every four
years, FINMA's Board of Directors publishes strategic goals that serve
as guidelines for FINMA's operational management. Each year, FINMA's
Board of Directors uses the strategic goals to define the annual
supervisory priorities, which are incorporated into the annual
objectives for individual organizational units and employees.
FINMA assigns prudentially supervised banks to five supervisory
categories. Category 1 firms receive the most supervisory attention and
the staff has been told that the Swiss Firms are Category 1 firms.
FINMA has multiple supervisors dedicated to each Category 1 firm who
are in constant dialogue with the firms, including weekly contact
(phone calls, emails) and quarterly meetings with senior management.
Supervisors review the various reports filed by the firms, including
monthly reports related to AML and risk as well as daily liquidity
reports. The supervisors also work with cross-divisional teams, who add
expertise to the supervision team covering specific aspects of the
Covered Entity such as risk management, AML, and compliance/conduct.
Audit firms play an important role in FINMA's supervisory
activities, primarily by conducting regulatory audits to assess firms'
compliance with supervisory requirements, and whether they can continue
to adhere to these requirements in the future. For Category 1 firms,
FINMA defines the audit strategy for each firm and audit firms are
engaged by the bank to conduct the regulatory audit annually in line
with FINMA's specifications. The audit reports are submitted directly
to FINMA, and include a risk analysis of each firm. FINMA can also
appoint mandataries (mandated auditors appointed to assist in ongoing
supervision by conducting audits at supervised institutions) to assist
it in performing its supervisory duties. Mandataries, which may be
deployed for urgent matters, focus on a specific situation or
circumstances at an individual firm.
On an annual basis, FINMA conducts a formal assessment of the Swiss
Firms (including assigning a risk rating) taking into account internal
audit reports, external audit reports, annual reports, and FINMA's view
of regulatory, economic, and business developments. FINMA sends the
firms an annual assessment letter detailing the risk rating, any
weaknesses that have been identified (with actions for the firms to
take), and the supervisory priorities for the year. Firms are typically
required to submit regular progress reports of corrective action for
any issues identified and provide evidence of closure.
FINMA conducts multiple onsite reviews of Category 1 firms each
year, some of which relate to the derivatives business. FINMA conducts
two types of reviews: (1) Supervisory reviews during which FINMA
obtains information on conceptual issues but also reviews and assesses
implementation; and (2) deep dives, which are narrower in scope. When
FINMA identifies findings during an onsite examination, FINMA provides
the firm a summary report or feedback letter that contains key
findings. FINMA may direct the firm to develop a mitigation plan,
reviews the plan for adequacy, and tracks the progress of the plan
until FINMA is satisfied with the corrective action taken. In general,
firms are given a certain period of time within which they have to
mitigate the
[[Page 45785]]
identified issues and restore compliance with the law. FINRA's review
and evaluation of corrective action undertaken by the firms is
performed on a case-by-case basis, depending on the severity of the
deficiency and the risks to be addressed. While minor issues may be
addressed through correspondence, material issues are reviewed and
evaluated through interviews or desk reviews of the appropriate
material. FINMA can also appoint an audit mandatary to confirm that
corrective action has been taken. For more significant issues, FINMA
supervisory staff can refer the matter to FINMA enforcement staff.
C. Enforcement Authority in Switzerland
As the financial market supervisory authority, FINMA is empowered
to enforce all financial law requirements relevant to the Swiss
Application. Informal investigations may be launched whenever FINMA
receives information about potential regulatory irregularities or
violations of law. Sources of information include, among others,
referrals from FINMA's supervisory staff, reports by other domestic or
foreign authorities, or complaints from investors and clients. Absent a
legal obligation to disclose, FINMA treats complaints confidentially.
However, there are no incentives provided for whistleblowers, and they
receive no specific statutory protection. At the conclusion of an
informal investigation, a determination is made whether the initial
indications of violations have been confirmed and are sufficiently
important, and if other relevant factors support opening a formal
investigation. If a formal investigation is launched, the
Administrative Procedure Act (``APA'') is implicated and provides for
certain rights and obligations of the involved parties.
FINMA has a broad range of investigative tools at its disposal, and
is empowered with unrestricted access to certain books, records and
recordings. In particular, Article 29 of FINMASA stipulates that
supervised persons and certain associates (including their auditors and
audit firms) must provide FINMA with all information and documents
FINMA requires to carry out its tasks. In addition, other provisions of
FINMASA and the APA empower FINMA to compel witnesses, subject to
certain statutory prerequisites, and hire experts to assist in
conducting investigations. FINMA is also permitted to inspect documents
and premises, and may investigate trading records from securities
dealers and trade reports from trade venues and repositories. In
general however, FINMA does not have jurisdiction over third parties
and cannot obtain electronic communications held by third parties
absent a contractual obligation to do so between the Covered Firm and
the third party provider. As needed to fulfill its supervisory duties,
FINMA may seek to obtain the information from public prosecutors who
are authorized to obtain electronic communications.
After evidence has been gathered, it is summarized in a statement
of facts regarding which the parties are permitted to comment.
Ultimately, the matter is concluded with an order by FINMA. The span of
time from the commencement of an informal investigation through the
issuance of an order varies. As an example, FINMA noted that the
average length for 2019 was 14.4 months. FINMASA provides a statute of
limitations of seven years for confiscation and the criminal
prosecution of minor offenses; there is no general statute of
limitations applicable to the rules related to the application for
substituted compliance.
FINMA may order a variety of sanctions to enforce the law. The
primary goal of Swiss financial market supervision relevant to the
application is to maintain and, if necessary, restore compliance with
the law by Covered Entities. In that regard, FINMA is not empowered to
issue penalties. FINMA does have authority to: Issue declaratory
rulings, order substitution of performance by FINMA, publish
supervisory rulings, impose cease-and-desist orders, require
disgorgement of illegal profits, issue activity bans against
individuals, impose industry bans, order liquidation or bankruptcy
procedures, or revoke the license of a Covered Firm, among other
sanctions. FINMA does not return confiscated ill-gotten gains to harmed
investors; however, it takes into account remedial payments to
investors made by the Covered Firm when establishing the amount to be
confiscated. Additionally, FINMA has the right and obligation to refer
conduct to prosecuting authorities if it suspects a criminal act by a
Covered Firm. For example, insider trading and price manipulation fall
within the remit of the public prosecutor. Swiss public prosecutors are
empowered to take coercive measures, such as an asset freeze, and seek
imposition of fines and other criminal law sanctions from competent
criminal courts. FINMA is not empowered to take coercive measures.
FINMA annually publishes its enforcement results in the aggregate.
As a general principle, it does not publish individual proceedings
unless necessary (i) for the protection of the market participants or
the supervised persons and entities, (ii) to correct false or
misleading information, or (iii) to safeguard the reputation of the
Swiss financial market. Article 34 of FINMASA permits FINMA to publish
the supervisory ruling in an individual matter in the case of a serious
violation of supervisory law. FINMA also maintains and publishes on its
website a warning list of companies and individuals who may be carrying
out unauthorized services and are not supervised by FINMA.
IX. Request for Comment
A. General Aspects of the Comparability Assessments and Proposed Order
The Commission requests comment regarding the preliminary views and
proposed Order in connection with each of the general ``regulatory
outcome'' categories addressed above. Commenters particularly are
invited to address, among other issues, whether the relevant Swiss
provisions generally are sufficient to produce regulatory outcomes that
are comparable to the outcomes associated with requirements under the
Exchange Act, and whether the conditions and limitations of the
proposed Order would adequately address potential gaps in the relevant
regulatory outcomes or would otherwise result in any implementation or
other practical issues. The Commission also requests comment upon
whether there are additional conditions that should be added to those
in the proposed Order to produce comparable regulatory outcomes.
Further, the Commission requests comment regarding whether the
proposed conditions and limitations guard against comparability gaps
arising from the cross-border application of Swiss requirements
(including when SBSDs conduct security-based swap business through
branches located in the United States or in third countries).
With respect to the proposed conditions and limitations, commenters
also are invited to address any differences between Swiss regulatory
requirements and frameworks and either the German, French or UK
requirements and frameworks that formed the basis for the Commission's
conditional and proposed conditional grants of substituted compliance
in those countries.\112\ Would the responses to
[[Page 45786]]
any of the questions that the Commission asked in connection with the
German Notice and Proposed Order,\113\ the French Notice and Proposed
Order,\114\ the French Reopening Order,\115\ or the UK Notice and
Proposed Order \116\ differ if those questions applied to Swiss
regulatory requirements and frameworks?
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\112\ See generally German Substituted Compliance Order, 85 FR
85686; French Substituted Compliance Order, 86 FR 41612; UK
Substituted Compliance Order, 86 FR 43318. See also German Notice
and Proposed Order, 85 FR 72726; French Notice and Proposed Order,
85 FR 85720; UK Notice and Proposed Order, 86 FR 18378.
\113\ German Notice and Proposed Order, 85 FR at 72740.
\114\ French Notice and Proposed Order, 85 FR 85720 at 85734.
\115\ French Reopening Release, 86 FR 18341.
\116\ UK Notice and Proposed Order, 86 FR at 18406.
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B. Risk Control Requirements
The Commission requests comment regarding the proposed grant of
substituted compliance in connection with requirements under the
Exchange Act related to internal risk management systems, trade
acknowledgement and verification, portfolio reconciliation, and
portfolio compression. Commenters particularly are invited to address
the basis for substituted compliance in connection with those risk
control requirements, and the proposed conditions and limitations
connected to substituted compliance for those requirements.
The Commission further requests comment regarding the initial
determination to not grant substituted compliance in connection with
dispute reporting and trading relationship documentation. Commenters
particularly are invited to address the basis for not providing a grant
of substituted compliance in connection with those risk control
requirements.
With respect to all risk control requirements, commenters also are
invited to address any differences between Swiss regulatory
requirements and frameworks and either the German or French
requirements and frameworks that formed the basis for the Commission's
conditional grants of substituted compliance for those countries, or
the UK requirements and frameworks that formed the basis for the
Commission's proposed conditional grant of substituted compliance for
the UK.\117\ Would the responses to any of the questions about risk
control requirements that the Commission asked in connection with the
German Notice and Proposed Order,\118\ the French Notice and Proposed
Order,\119\ the French Reopener,\120\ or the UK Notice and Proposed
Order \121\ differ if those questions applied to Swiss regulatory
requirements and frameworks?
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\117\ See German Substituted Compliance Order, 85 FR at 85689-
91; French Substituted Compliance Order, 86 FR at 41622-29; UK
Substituted Compliance Order, 86 FR at 43331-37. See also German
Notice and Proposed Order, 85 FR at 72730-32; French Notice and
Proposed Order, 85 FR at 85724-25; UK Notice and Proposed Order, 85
FR at 18383-85.
\118\ German Notice and Proposed Order, 85 FR at 72740.
\119\ French Notice and Proposed Order, 85 FR at 85734.
\120\ French Reopening Release, 86 FR 18341.
\121\ UK Notice and Proposed Order, 86 FR at 18406.
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C. Internal Supervision, Chief Compliance Officer and Additional
Exchange Act Section 15F(j) Requirements
The Commission requests comment regarding the proposed grant of
substituted compliance in connection with requirements under the
Exchange Act related to internal supervision and chief compliance
officers, as well as additional Exchange Act section 15F(j)
requirements. Commenters particularly are invited to address the basis
for substituted compliance in connection with those risk control
requirements, and the proposed conditions and limitations connected to
substituted compliance for those requirements.
With respect to internal supervision and chief compliance officer
requirements, as well as additional Exchange Act section 15F(j)
requirements, commenters also are invited to address any differences
between Swiss regulatory requirements and frameworks and either the
German or French requirements and frameworks that formed the basis for
the Commission's conditional grants of substituted compliance for those
countries, or the UK requirements and frameworks that formed the basis
for the Commission's proposed conditional grant of substituted
compliance for the UK.\122\ In addition, would the responses to any of
the questions about internal supervision or chief compliance officer
requirements, or the additional Exchange Act section 15F(j)
requirements, that the Commission asked in connection with the German
Notice and Proposed Order,\123\ the French Notice and Proposed
Order,\124\ the French Reopener,\125\ or the UK Notice and Proposed
Order \126\ differ if those questions applied to Swiss regulatory
requirements and frameworks?
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\122\ See German Substituted Compliance Order, 85 FR at 85691-
92; French Substituted Compliance Order, 86 FR at 41639-43; UK
Substituted Compliance Order, 86 FR at 43347-43353. See also German
Notice and Proposed Order, 85 FR at 72732-34; French Notice and
Proposed Order, 85 FR at 85726-28; UK Notice and Proposed Order, 85
FR at 18389-90.
\123\ German Notice and Proposed Order, 85 FR at 72740.
\124\ French Notice and Proposed Order, 85 FR at 85734.
\125\ French Reopening Release, 86 FR 18341.
\126\ UK Notice and Proposed Order, 86 FR at 18406.
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D. Recordkeeping, Reporting, and Notification
The Commission requests comment regarding the proposed grants of
substituted compliance in connection with requirements under the
Exchange Act related to recordkeeping, reporting, and notification, as
well as the requirement of Exchange Act section 15F(g). Commenters
particularly are invited to address the basis for substituted
compliance in connection with those requirements, and the proposed
conditions and limitations connected to substituted compliance for
those requirements. Does Swiss law taken as a whole produce regulatory
outcomes that are comparable to those of Exchange Act section 15F(g)
and Exchange Act rules 18a-5, 18a-6, 18a-7, and 18a-8? In this regard,
commenters are invited to address Swiss laws cited for each substituted
compliance determination with respect to the distinct requirements
within the recordkeeping, reporting, and notification rules (i.e., the
rules for which a more granular approach to substituted compliance is
being taken). With respect to each substituted compliance
determination, the Commission seeks comment on the following matters:
(1) Will the Swiss laws cited for the determination result in a
comparable regulatory outcome; (2) are there additional or alternative
Swiss laws that should be cited to achieve a comparable regulatory
outcome; and (3) are any of the Swiss laws cited for the determination
unnecessary to achieve a comparable regulatory outcome?
Commenters particularly are invited to address the proposed
condition with respect to Exchange Act rule 18a-5 that the Covered
Entity: (1) Preserve all of the data elements necessary to create the
records required by Exchange Act rules 18a-5(b)(1), (2), (3), and (7);
and (2) upon request furnish promptly to representatives of the
Commission the records required by those rules. Do the relevant Swiss
laws require Covered Entities to retain the data elements necessary to
create the records required by these rules? If not, please identify
which data elements are not preserved pursuant to the relevant Swiss
laws. Further, how burdensome would it be for a Covered Entity to
format the data
[[Page 45787]]
elements into the records required by these rules (e.g., a blotter,
ledger, or securities record, as applicable) if the firm was requested
to do so? In what formats do Covered Entities in Switzerland produce
this information to FINMA or other Swiss authorities? How do those
formats differ from the formats required by Exchange Act rules 18a-
5(b)(1), (2), (3), and (7)?
Is it appropriate to structure the Commission's substituted
compliance determinations in the proposed Order to provide Covered
Entities with greater flexibility to select which distinct requirements
within the broader recordkeeping, reporting, and notification rules for
which they want to apply substituted compliance? Explain why or why
not. For example, would it be more efficient for a Covered Entity to
comply with certain Exchange Act requirements within a given rule
(rather than apply substituted compliance) because it can utilize
systems that its affiliated broker-dealer has implemented to comply
with them? If so, explain why. If not, explain why not. Is it
appropriate to permit Covered Entities to take a more granular approach
to the requirements within the recordkeeping rules? For example, would
this approach make it more difficult for the Commission to get a
comprehensive understanding of the Covered Entity's security-based swap
activities and financial condition? Explain why or why not. Would it be
overly complex for the Covered Entity to administer a firm-wide
recordkeeping system under this approach? Explain why or why not.
Certain of the Commission's recordkeeping and notification
requirements are fully or partially linked to substantive Exchange Act
requirements for which a positive substituted compliance determination
preliminarily would not be made under the proposed Order. In these
cases, should the Commission not make a positive substituted compliance
determination for the fully linked requirement in the recordkeeping or
notification rules or to the portion of the requirement that is linked
to a substantive Exchange Act requirement? In particular, should the
Commission not make a positive substituted compliance determination for
recordkeeping or notification requirements linked to the following
Exchange Act rules for which a positive substituted compliance
determination is preliminarily not being made: (1) Exchange Act rule
15Fh-4; (2) Exchange Act rule 15Fh-5; (3) Exchange Act rule 15Fh-6; (4)
Exchange Act rule 18a-4; (5) Regulation SBSR; (6) Form SBSE and its
variations; (7) Exchange Act rule 15Fh-1; (8) Exchange Act rule 15Fh-2;
and (9) Exchange Act rule 15Fi-5? If not, explain why.
Certain of the requirements in the Commission's recordkeeping rules
are linked to substantive Exchange Act requirements where a positive
substituted compliance determination is being made under the proposed
Order. In these cases, should a positive substituted compliance
determination for the linked requirement in the recordkeeping rule be
conditioned on the Covered Entity applying substituted compliance to
the linked substantive Exchange Act requirement? If not, explain why.
Should this be the case regardless of whether the requirement is fully
or partially linked to the substantive Exchange Act requirement? If
not, explain why. In particular, should substituted compliance for
recordkeeping, reporting, and notification requirements linked to the
following Exchange Act rules be conditioned on the Covered Entity
applying substituted compliance to the linked substantive Exchange Act
rule: (1) Exchange Act rule 15Fh-3(h); (2) Exchange Act rule 15Fi-2;
(3) Exchange Act rule 15Fi-3; (4) Exchange Act rule 15Fi-4; and (5)
Exchange Act rule 15Fk-1? If not, explain why.
Commenters also are invited to address the preliminary positive
substituted compliance determination with respect to Exchange Act rule
18a-7, which would be conditioned on the Covered Entity filing
financial and operational information with the Commission in the manner
and format specified by the Commission by order or rule. Should the
Commission require Covered Entities with a prudential regulator to file
the financial and operational information using the FOCUS Report Part
IIC? Are there line items on the FOCUS Report Part IIC that elicit
information that is not included in the reports Covered Entities with a
prudential regulator file with FINMA or other Swiss authorities? If so,
do Covered Entities with a prudential regulator record that information
in their required books and records? Please identify any information
that is elicited in the FOCUS Report Part IIC that is not: (1) Included
in the financial reports filed by Covered Entities with a prudential
regulator with FINMA or other Swiss authorities; or (2) recorded in the
books and records required of Covered Entities with a prudential
regulator. Would the answer to these questions change if references to
FFIEC Form 031 were not included in the FOCUS Report Part IIC? If so,
how? As a preliminary matter, as a condition of substituted compliance
should Covered Entities with a prudential regulator file a limited
amount of financial and operational information on the FOCUS Report
Part IIC for a period of two years to further evaluate the burden of
requiring all applicable line items to be filled out? If so, which line
items should be required? To the extent that Covered Entities with a
prudential regulator otherwise report or record information that is
responsive to the FOCUS Report Part IIC, how could the information on
this report be integrated into a database of filings the Commission or
its designee will maintain for filers of the FOCUS Report Parts IIC
(e.g., the eFOCUS system) to achieve the objective of being able to
perform cross-form analysis of information entered into the uniquely
numbered line items on the forms?
Commenters further are invited to address any differences between
Swiss regulatory requirements and frameworks and the German, French,
and/or UK requirements and frameworks that formed the basis for the
Commission's conditional grants of substituted compliance for
recordkeeping, reporting, and notification requirements in those
countries.\127\ Would the responses to any of the questions about those
requirements that the Commission asked in connection with the German,
French, and/or UK notices and proposed orders differ if those questions
applied to Swiss regulatory requirements and frameworks?
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127\\ See German Substituted Compliance Order, 85 FR at 85695-
97; French Substituted Compliance Order, 86 FR at 41648-57; UK
Substituted Compliance Order, 86 FR at 43359-69.
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E. Supervisory and Enforcement Issues
The Commission further requests comment regarding how to weigh
considerations regarding supervisory and enforcement effectiveness in
Switzerland as part of the comparability assessments. Commenters
particularly are invited to address relevant issues regarding the
effectiveness of Swiss supervision and enforcement over firms that may
register with the Commission as SBSDs, including but not limited to
issues regarding:
<bullet> Swiss supervisory and enforcement authority, supervisory
inspection practices and the use of alternative supervisory tools, and
enforcement tools and practices;
<bullet> Swiss supervisory and enforcement effectiveness with
respect to derivatives such as security-based swaps; and
<bullet> Swiss supervision and enforcement in the cross-border
context (e.g., any differences between the oversight of firms'
businesses within Switzerland
[[Page 45788]]
and the oversight of activities and branches outside of Switzerland,
including within the United States).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\128\
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\128\ 17 CFR 200.30-3(a)(89).
J. Matthew DeLesDernier,
Assistant Secretary.
Attachment A
It is hereby determined and ordered, pursuant to rule 3a71-6 under
the Exchange Act, that a Covered Entity (as defined in paragraph (e)(1)
of this Order) may satisfy the requirements under the Exchange Act that
are addressed in paragraphs (b) through (d) of this Order so long as
the Covered Entity is subject to and complies with relevant
requirements of the Swiss Confederation and with the conditions to this
Order, as amended or superseded from time to time.
(a) General conditions.
This Order is subject to the following general conditions, in
addition to the conditions specified in paragraphs (b) through (d):
(1) Security-based swaps and transactions as ``derivatives'' or
``derivative transactions.'' For each condition in paragraphs (b)
through (d) of this Order that requires the application of, and the
Covered Entity's compliance with, provisions of FinMIA and FMIO, the
relevant security-based swaps and security-based swap transactions are
``derivatives'' and/or ``derivative transactions'' for purposes of
FinMIA article 2(c), or otherwise are described by the relevant
language of that provision.
(2) ``Counterparty'' status. For each condition in paragraph (b)
through (d) of this Order that requires the application of, and the
Covered Entity's compliance with, the provisions of FinMIA and FMIO,
the Covered Entity complies with the applicable conditions of the Order
regardless of the Covered Entity's counterparty is a ``counterparty''
for purposes of FinMIA article 93, or otherwise is described by the
relevant language of that provision.
(3) Counterparty's status as ``company.'' For each condition in
paragraph (b) through (d) of this Order that requires the application
of, and the Covered Entity's compliance with, the provisions of FMIO,
the Covered Entity complies with the applicable conditions of the Order
regardless of whether a Covered Entity's counterparty is a ``company''
for purposes of FMIO article 77, or otherwise is described by the
relevant language of that provision.
(4) Covered Entity as ``bank.'' For each condition in paragraph (b)
through (d) of this Order that requires the application of, and the
Covered Entity's compliance with, the provisions of the BA and BO and/
or other Swiss requirements adopted pursuant to those provisions, the
Covered Entity is a ``bank'' for purposes of BA article 1a, or
otherwise is described by the relevant language of that provision.
(5) Covered Entity as ``systemically important.'' For each
condition in paragraph (b) through (d) of this Order that requires the
application of, and the Covered Entity's compliance with, the
provisions of the FINMA Circular 2017/1, the Covered Entity is
``systemically important'' for purposes of BA article 8(3) and article
9, or otherwise are described by the relevant language of that
provision.
(6) Covered Entity as ``category 1.'' For each condition in
paragraph (b) through (d) of this Order that requires the application
of, and the Covered Entity's compliance with, the provisions of FINMA
Circular 2017/1, the Covered Entity is supervised as ``category 1,'' as
defined in BO articles 2(2) and 2(3) and BO Annex 3, or otherwise are
described by the relevant language of those provisions.
(7) ``Institution-specific approach'' to operational risk
quantification. For each condition in paragraphs (b) through (d) of
this Order that requires the application of, and the Covered Entity's
compliance with, the provisions of FINMA Circular 2008/21 margins 45-
107, the Covered Entity applies the institution-specific approach, as
defined in CAO article 94, to quantifying capital requirements for
operational risk, as approved by FINMA.
(8) Memorandum of Understanding with FINMA. The Commission and
FINMA have a supervisory and enforcement memorandum of understanding
and/or other arrangement addressing cooperation with respect to this
Order at the time the Covered Entity complies with the relevant
requirements under the Exchange Act via compliance with one or more
provisions of this Order.
(9) Notice to Commission. A Covered Entity relying on this Order
must provide notice of its intent to rely on this Order by notifying
the Commission in writing. Such notice must be sent to an email address
provided on the Commission's website. The notice must include the
contact information of an individual who can provide further
information about the matter that is the subject of the notice. The
notice must identify each specific substituted compliance determination
within paragraphs (b) through (d) of the Order for which the Covered
Entity intends to apply substituted compliance. A Covered Entity must
promptly provide an amended notice if it modifies its reliance on the
substituted compliance determinations in this Order.
(10) Notification Requirements Related to Changes in Capital. A
Covered Entity that is prudentially regulated relying on this Order
must apply substituted compliance with respect to the requirements of
Exchange Act rule 18a-8(c) and the requirements of Exchange Act rule
18a-8(h) as applied to Exchange Act rule 18a-8(c).
(b) Substituted compliance in connection with risk control
requirements.
This Order extends to the following provisions related to risk
control:
(1) Internal risk management. The requirements of Exchange Act
section 15F(j)(2) and relevant aspects of Exchange Act rule 15Fh-
3(h)(2)(iii)(I), provided that the Covered Entity is subject to and
complies with the requirements of: BO article 12; FINMA Circular 2017/1
margins 9-14, 31-49, 52-76, 82-97; and FINMA Circular 2008/21 margins
45, 54-63, 65-68, 117-138.
(2) Trade acknowledgement and verification. The requirements of
Exchange Act rule 15Fi-2, provided that the Covered Entity is subject
to and complies with the requirements of FinMIA articles 108(a) and
(c); and FMIO articles 95, 97, and 113(1).
(3) Portfolio reconciliation. The requirements of Exchange Act rule
15Fi-3, other than paragraph (c) to that rule, provided that:
(i) The Covered Entity is subject to and complies with the
requirements of FINMASA article 29; FinMIA article 108(b) and (c); and
FMIO articles 96, 97 and 113(1)(d);
(ii) The Covered Entity does not apply FinMIA article 108(b)'s
exception for ``small non-financial counterparties'' as defined in
FinMIA article 98.
(4) Portfolio compression. The requirements of Exchange Act rule
15Fi-4, provided that:
(i) The Covered Entity is subject to and complies with the
requirements of FinMIA article 108(d); and FMIO articles 98 and
113(1)(d); and
(ii) The Covered Entity does not apply the portion of FinMIA
article 108(d) that excludes application of the requirement when there
are fewer than 500 non-centrally cleared OTC derivatives transactions
outstanding.
(c) Substituted compliance in connection with internal supervision and
compliance requirements and
[[Page 45789]]
certain Exchange Act section 15F(j) requirements.
This Order extends to the following provisions related to internal
supervision and compliance and Exchange Act section 15F(j)
requirements:
(1) Internal supervision. The requirements of Exchange Act rule
15Fh-3(h) and Exchange Act sections 15F(j)(4)(A) and (j)(5), provided
that:
(i) The Covered Entity is subject to and complies with the
requirements identified in paragraph (c)(3) of this Order; and
(ii) This paragraph (c) does not extend to the requirements of
paragraph (h)(2)(iii)(I) to rule 15Fh-3 to the extent those
requirements pertain to compliance with Exchange Act sections
15F(j)(2), (j)(3), (j)(4)(B) and (j)(6), or to the general and
supporting provisions of paragraph (h) to rule 15Fh-3 in connection
with those Exchange Act sections.
(2) Chief compliance officers. The requirements of Exchange Act
section 15F(k) and Exchange Act rule 15Fk-1, provided that:
(i) The Covered Entity complies with the requirements identified in
paragraph (c)(3) of this Order;
(ii) All reports required pursuant to FINMA Circular 2017/1 margins
78-81 must also:
(A) Be provided to the Commission at least annually, and in the
English language;
(B) Include a certification signed by the chief compliance officer
or senior officer (as defined in Exchange Act rule 15Fk-1(e)(2)) of the
Covered Entity that, to the best of the certifier's knowledge and
reasonable belief and under penalty of law, the report is accurate and
complete in all material respects;
(C) Address the firm's compliance with:
(i) Applicable requirements under the Exchange Act; and
(ii) The other applicable conditions to this Order in connection
with requirements for which the Covered Entity is relying on this
Order;
(D) Be provided to the Commission no later than 15 days following
the earlier of:
(i) The submission of the report to the Covered Entity's management
body; or
(ii) The time the report is required to be submitted to the
management body; and
(E) Together cover the entire period that the Covered Entity's
annual compliance report referenced in Exchange Act section 15F(k)(3)
and Exchange Act rule 15Fk-1(c) would be required to cover.
(3) Applicable supervisory and compliance requirements. Paragraphs
(c)(1) and (c)(2) are conditioned on the Covered Entity being subject
to and complying with the following requirements: BA articles 3(2)(c),
and 3f; BO articles 12, 14e, and 14g; FINMA Circular 2017/1 articles 9-
97; FINMA Circular 2008/21 margins 54-62, 65-68, 121-122, and 128-
136.5; FINMA Circular 2013/8 margins 45-61, 64; FINMA Circular 2010/1
margins 16-74; and FINMA Circular 2018/3 margins 14-35.
(4) Additional condition to paragraph (c)(1). Paragraph (c)(1)
further is conditioned on the requirement that the Covered Entity
complies with the provisions specified in paragraph (c)(3) as if those
provisions also require compliance with:
(i) Applicable requirements under the Exchange Act; and
(ii) The other applicable conditions to this Order in connection
with requirements for which the Covered Entity is relying on this
Order.
(d) Substituted compliance in connection with recordkeeping, reporting,
and notification requirements.
This Order extends to the following provisions that apply to a
Covered Entity related to recordkeeping, reporting, and notification:
(1)(i) Make and keep current certain records. The requirements of
the following provisions of Exchange Act rule 18a-5, provided that the
Covered Entity complies with the relevant conditions in this paragraph
(d)(1)(i) and with the applicable conditions in paragraph (d)(1)(ii):
(A) The requirements of Exchange Act rule 18a-5(b)(1), provided
that the Covered Entity is subject to and complies with the
requirements of FMIO-FINMA article 1; FinMIA articles 104 and 106; FMIO
annex 2; CO article 958f;
(B) The requirements of Exchange Act rule 18a-5(b)(2), provided
that the Covered Entity is subject to and complies with the
requirements of CO article 958f; AccO article 1; FinMIA article 106;
(C) The requirements of Exchange Act rule 18a-5(b)(3), provided
that the Covered Entity is subject to and complies with the
requirements of CO article 958f; FinMIA articles 104 and 106; FMIO
annex 2;
(D) The requirements of Exchange Act rule 18a-5(b)(4), provided
that the Covered Entity is subject to and complies with the
requirements of FinMIA article 38; FMIO article 36; FinIA article 50;
FMIO-FINMA article 1; CO article 958f;
(E) The requirements of Exchange Act rule 18a-5(b)(5), provided
that the Covered Entity is subject to and complies with the
requirements of FMIO article 38; FinIA article 50; FMIO-FINMA article
1; CO article 958f;
(F) The requirements of Exchange Act rules 18a-5(b)(6) and (b)(11),
provided that:
(1) The Covered Entity is subject to and complies with the
requirements of FinMIA articles 106 and 108(a); FMIO article 95; CO
article 958f; and
(2) The Covered Entity applies substituted compliance for the
requirements of Exchange Act rule 15Fi-2 pursuant to this Order;
(G) The requirements of Exchange Act rule 18a-5(b)(7), provided
that the Covered Entity is subject to and complies with the
requirements of FMIO article 38; FinIA article 50; FMIO-FINMA article
1; FMIO annex 2; FinMIA articles 104 and 106; AMLA article 3; CO
article 958f;
(H) The requirements of Exchange Act rule 18a-5(b)(8), provided
that the Covered Entity is subject to and complies with the
requirements of CO article 958f; BA article 3; BO article 12; CO
article 330a; FINMA Circular 2008/21, Annex 3, margins 30-33;
(I) The requirements of Exchange Act rule 18a-5(b)(13), regarding
one or more provisions of Exchange Act rules 15Fh-3 or 15Fk-1 for which
substituted compliance is available under this Order, provided that:
(1) The Covered Entity is subject to and complies with the
requirements of FINMA Circular 2017/1; BA article 3; CO article 958f,
in each case with respect to the relevant security-based swap or
activity;
(2) With respect to the portion of Exchange Act rule 18a-5(b)(13)
that relates to one or more provisions of Exchange Act rule 15Fh-3 for
which substituted compliance is available under this Order, the Covered
Entity applies substituted compliance for such business conduct
standard(s) of Exchange Act rule 15Fh-3 pursuant to this Order, as
applicable, with respect to the relevant security-based swap or
activity; and
(3) With respect to the portion of Exchange Act rule 18a-5(b)(13)
that relates to Exchange Act rule 15Fk-1, the Covered Entity applies
substituted compliance for Exchange Act section 15F(k) and Exchange Act
rule 15Fk-1 pursuant to this Order;
(J) The requirements of Exchange Act rule 18a-5(b)(14)(i) and (ii),
provided that:
[[Page 45790]]
(1) The Covered Entity is subject to and complies with the
requirements of FinMIA articles 104 and 106; CO article 958f; and
(2) The Covered Entity applies substituted compliance for Exchange
Act rule 15Fi-3 pursuant to this Order; and
(K) The requirements of Exchange Act rule 18a-5(b)(14)(iii),
provided that:
(1) The Covered Entity is subject to and complies with the
requirements of FinMIA articles 104 and 106; CO article 958f; and
(2) The Covered Entity applies substituted compliance for Exchange
Act rule 15Fi-4 pursuant to this Order.
(ii) Paragraph (d)(1)(i) is subject to the following further
conditions:
(A) Paragraphs (d)(1)(i)(A) through (C) and (G) are subject to the
condition that the Covered Entity preserves all of the data elements
necessary to create the records required by the applicable Exchange Act
rules cited in such paragraphs and upon request furnishes promptly to
representatives of the Commission the records required by those rules;
(B) A Covered Entity may apply the substituted compliance
determination in paragraph (d)(1)(i)(I) to records of compliance with
Exchange Act rule 15Fh-3(h) in respect of one or more security-based
swaps or activities related to security-based swaps; and
(C) This Order does not extend to the requirements of Exchange Act
rule 18a-5(b)(9), (b)(10), or (b)(12).
(2)(i) Preserve certain records. The requirements of the following
provisions of Exchange Act rule 18a-6, provided that the Covered Entity
complies with the relevant conditions in this paragraph (d)(2)(i) and
with the applicable conditions in paragraph (d)(2)(ii):
(A) The requirements of Exchange Act rule 18a-6(a)(2), provided
that the Covered Entity is subject to and complies with the
requirements of FinMIA article 106; CO article 958f; FMIO-FINMA article
1(4); AccO article 3; FINMA Circular 2008/4 Marg. 16;
(B) The requirements of Exchange Act rule 18a-6(b)(2)(i), provided
that the Covered Entity is subject to and complies with the
requirements of FinMIA article 106; CO article 958f; FMIO-FINMA article
1(4); AccO article 3; FINMA Circular 2008/4 Marg. 16;
(C) The requirements of Exchange Act rule 18a-6(b)(2)(ii), provided
that the Covered Entity is subject to and complies with the
requirements of CO article 958f; FINMA Circular 2013/8 Marg. 60 and
Marg. 61;
(D) The requirements of Exchange Act rule 18a-6(b)(2)(iii),
provided that the Covered Entity is subject to and complies with the
requirements of CO article 958f; AMLA article 7(3); AMLO-FINMA article
5(1);
(E) The requirements of Exchange Act rule 18a-6(b)(2)(iv), provided
that the Covered Entity is subject to and complies with the
requirements of CO article 958f; FINMA Circular 2013/8 Marg. 60 and
Marg. 61;
(F) The requirements of Exchange Act rule 18a-6(b)(2)(vii),
regarding one or more provisions of Exchange Act rules 15Fh-3 or 15Fk-1
for which substituted compliance is available under this Order,
provided that:
(1) The Covered Entity is subject to and complies with the
requirements of FINMA Circular 2017/1; BA article 3; CO article 958f,
in each case with respect to the relevant security-based swap or
activity;
(2) With respect to the portion of Exchange Act rule 18a-
6(b)(2)(vii) that relates to one or more provisions of Exchange Act
rule 15Fh-3 for which substituted compliance is available under this
Order, the Covered Entity applies substituted compliance for such
business conduct standard(s) of Exchange Act rule 15Fh-3 pursuant to
this Order, as applicable, with respect to the relevant security-based
swap or activity; and
(3) With respect to the portion of Exchange Act rule 18a-
6(b)(2)(vii) that relates to Exchange Act rule 15Fk-1, the Covered
Entity applies substituted compliance for Exchange Act section 15F(k)
and Exchange Act rule 15Fk-1 pursuant to this Order;
(G) The requirements of Exchange Act rule 18a-6(c), provided that:
(1) The Covered Entity is subject to and complies with the
requirements of BA article 3; BO article 12; CO articles 686 and 958f;
and
(2) This Order does not extend to the requirements of Exchange act
rule 18a-6(c) relating to Forms SBSE, SBSE-A, SBSE-C, SBSE-W, all
amendments to these forms, and all other licenses or other
documentation showing the registration of the Covered Entity with any
securities regulatory authority or the U.S. Commodity Futures Trading
Commission;
(H) The requirements of Exchange Act rule 18a-6(d)(1), provided
that the Covered Entity is subject to and complies with the
requirements of CO article 958f; BA article 3; BO article 12; CO
article 330a; FINMA Circular 2008/21, Annex 3, margins 30-33;
(I) The requirements of Exchange Act rule 18a-6(d)(2)(ii), provided
that the Covered Entity is subject to and complies with the
requirements of BA article 3; BO article 12; CO article 958f; FINMA
Circular 2008/21 margins 122, 128, 131, and Appendix 2;
(J) The requirements of Exchange Act rule 18a-6(d)(3)(ii), provided
that the Covered Entity is subject to and complies with the
requirements of CO article 958f; BA article 3; BO article 12;
(K) The requirements of Exchange Act rule 18a-6(d)(4) and (d)(5),
regarding one or more provisions of Exchange Act rules 15Fi-3 or 15Fi-4
for which substituted compliance is available under this Order,
provided that:
(1) The Covered Entity is subject to and complies with the
requirements of CO article 958f; FinMIA article 106;
(2) With respect to the portion of Exchange Act rule 18a-6(d)(4)
and (d)(5) that relates to Exchange Act rules 15Fi-3 or 15Fi-4, the
Covered Entity applies substituted compliance for Exchange Act rules
15Fi-3 and 15Fi-4 pursuant to this Order; and
(3) This Order does not extend to the requirements of Exchange Act
rule 18a-6(d)(4) and (d)(5) relating to Exchange Act rule 15Fi-5;
(L) The requirements of Exchange Act rule 18a-6(e), provided that
the Covered Entity is subject to and complies with the requirements of
AccO; and
(M) The requirements of Exchange Act rule 18a-6(f), provided that
the Covered Entity is subject to and complies with the requirements of
FINMA Circular 2018/3.
(ii) Paragraph (d)(2)(i) is subject to the following further
conditions:
(A) A Covered Entity may apply the substituted compliance
determination in paragraph (d)(2)(i)(F) to records related to Exchange
Act rule 15Fh-3(h) in respect of one or more security-based swaps or
activities related to security-based swaps; and
(B) This Order does not extend to the requirements of Exchange Act
rule 18a-6(b)(2)(v), (b)(2)(vi), or (b)(2)(viii).
(3) File Reports. The requirements of the following provisions of
Exchange Act rule 18a-7, provided that the Covered Entity complies with
the relevant conditions in this paragraph (d)(3):
(i) The requirements of Exchange Act rule 18a-7(a)(2) and the
requirements of Exchange Act rule 18a-7(j) as applied to the
requirements of Exchange Act rule 18a-7(a)(2), provided that:
(A) The Covered Entity is subject to and complies with the
requirements of BA article 6a; BO article 32; CAO article 16; FINMA
Circular 2020/1; and FINMA Circular 2016/1; and
(B) The Covered Entity files periodic unaudited financial and
operational information with the Commission or its designee in the
manner and format required by Commission rule or order
[[Page 45791]]
and presents the financial information in the filing in accordance with
generally accepted accounting principles that the Covered Entity uses
to prepare general purpose publicly available or available to be issued
financial statements in Switzerland.
(4)(i) Provide Notification. The requirements of the following
provisions of Exchange Act rule 18a-8, provided that the Covered Entity
complies with the relevant conditions in this paragraph (d)(4)(i) and
with the applicable conditions in paragraph (d)(4)(ii):
(A) The requirements of Exchange Act rule 18a-8(c) and the
requirements of Exchange Act rule 18a-8(h) as applied to the
requirements of Exchange Act rule 18a-8(c), provided that the Covered
Entity is subject to and complies with the requirements of FINMASA
article 29(2); CAO articles 14, 42(3), 101, and 130(4); and Liquidity
Ordinance articles 17b, and 26(2).
(B) The requirements of Exchange Act rule 18a-8(d) and the
requirements of Exchange Act rule 18a-8(h) as applied to the
requirements of Exchange Act rule 18a-8(d), provided that:
(1) The Covered Entity is subject to and complies with the
requirements of FINMASA article 29(2); CAO articles 14, 42(3), 101, and
130(4); and Liquidity Ordinance articles 17b, and 26(2); and
(2) This Order does not extend to the requirements of Exchange Act
rule 18a-8(d) to give notice with respect to books and records required
by Exchange Act rule 18a-5 for which the Covered Entity does not apply
substituted compliance pursuant to this Order;
(ii) Paragraph (d)(4)(i) is subject to the following further
conditions:
(A) The Covered Entity:
(1) Simultaneously sends a copy of any notice required to be sent
by Swiss law cited in this paragraph of the Order to the Commission in
the manner specified on the Commission's website; and
(2) Includes with the transmission the contact information of an
individual who can provide further information about the matter that is
the subject of the notice; and
(B) This Order does not extend to the requirements of paragraph (g)
of rule 18a-8 or to the requirements of Exchange Act rule 18a-8(h) as
applied to such requirements.
(5) Daily Trading Records. The requirements of Exchange Act section
15F(g), provided that the Covered Entity is subject to and complies
with the requirements of CO article 958f; FMIO article 36; FMIO-FINMA
article 1; FinMIA articles 38, 104, and 106; FINMA Circular 2013/8
marg. 60 and marg. 61.
(6) Examination and Production of Records. Notwithstanding the
forgoing provisions of paragraph (d) of this Order, this Order does not
extend to, and Covered Entities remain subject to, the requirement of
Exchange Act section 15F(f) to keep books and records open to
inspection by any representative of the Commission and the requirement
of Exchange Act rule 18a-6(g) to furnish promptly to a representative
of the Commission legible, true, complete, and current copies of those
records of the Covered Entity that are required to be preserved under
Exchange Act rule 18a-6, or any other records of the Covered Entity
that are subject to examination or required to be made or maintained
pursuant to Exchange Act section 15F that are requested by a
representative of the Commission.
(7) English Translations. Notwithstanding the forgoing provisions
of paragraph (d) of this Order, to the extent documents are not
prepared in the English language, Covered Entities must promptly
furnish to a representative of the Commission upon request an English
translation of any record, report, or notification of the Covered
Entity that is required to be made, preserved, filed, or subject to
examination pursuant to Exchange Act section 15F of this Order.
(e) Definitions.
(1) ``Covered Entity'' means an entity that:
(i) Is a security-based swap dealer registered with the Commission;
(ii) Is not a ``U.S. person,'' as that term is defined in rule
3a71-3(a)(4) under the Exchange Act;
(iii) Is a systemically important bank authorized by FINMA to
conduct banking activities in the Swiss Confederation; and
(iv) Is supervised by FINMA under the intensive and continual
supervision model as a Category 1 firm as that term is defined in BO
Annex 3.
(2) ``AccO'' means the Ordinance on the Maintenance and Retention
of Accounts (Accounts Ordinance), CC 221.431, as amended from time to
time.
(3) ``AMLA'' means the Federal Act on Combating Money Laundering
and Terrorist Financing (Anti-Money Laundering Act), CC 955, as amended
from time to time.
(4) ``AMLO-FINMA'' means the Ordinance of the Swiss Financial
Market Supervisory Authority on the Prevention of Money Laundering and
the Financing of Terrorist Activities (FINMA Anti-Money Laundering
Ordinance), CC 955.033.0, as amended from time to time.
(5) ``BA'' means the Federal Act on Banks and Savings Banks
(Banking Act), CC 952, as amended from time to time.
(6) ``BO'' means the Ordinance on Banks and Savings Banks (Banking
Ordinance), CC 952.02, as amended from time to time.
(7) ``CAO'' means the Ordinance concerning Capital Adequacy and
Risk Diversification for Banks and Securities Dealers (Capital Adequacy
Ordinance), CC 952.03, as amended from time to time.
(8) ``CO'' means the Federal Act on the Amendment of the Swiss
Civil Code (Part Five: The Code of Obligations, CC 220, as amended from
time to time.
(9) ``FinIA'' means Federal Act on Financial Institutions
(Financial Institutions Act), CC 954.1, as amended from time to time.
(10) ``FINMA'' means the Swiss Financial Market Supervisory
Authority.
(11) ``FINMA Circular 2008/4'' means the FINMA Circular 2008/4,
Securities Journals.
(12) ``FINMA Circular 2008/21'' means the FINMA Circular 2008/21,
Operational Risk--Banks.
(13) ``FINMA Circular 2010/1'' means the FINMA Circular 2010/1,
Remuneration schemes.
(14) ``FINMA Circular 2013/8'' means the FINMA Circular 2013/8,
Market conduct rules, Supervisory rules on market conduct in securities
trading.
(15) ``FINMA Circular 2016/1'' means the FINMA Circular 2016/1,
Disclosure--Banks.
(16) ``FINMA Circular 2017/1'' means the FINMA Circular 2017/1,
Corporate Governance--Banks.
(17) ``FINMA Circular 2017/7'' means the FINMA Circular 2017/7,
Credit Risk--Banks.
(18) ``FINMA Circular 2018/3'' means the FINMA Circular 2018/3,
Outsourcing--Banks and Insurers.
(19) ``FINMA Circular 2020/1'' means the FINMA Circular 2020/1,
Accounting--Banks.
(20) ``FINMASA'' means the Federal Act on the Swiss Financial
Market Supervisory Authority (Financial Market Supervision Act), CC
956.1, as amended from time to time.
(21) ``FinMIA'' means the Federal Act on Financial Market
Infrastructures and Market Conduct in Securities and Derivatives
Trading (Financial Market Infrastructure Act), CC 958.1, as amended
from time to time.
(22) ``FMIO'' means the Ordinance on Financial Market
Infrastructures and Market Conduct in Securities and Derivatives
Trading (Financial Market Infrastructure Ordinance), CC 958.11, as
amended from time to time.
[[Page 45792]]
(23) ``FMIO-FINMA'' means the Ordinance of the Swiss Financial
Market Supervisory Authority on Financial Market Infrastructures and
Market Conduct in Securities and Derivatives Trading (FINMA Financial
Market Infrastructure Ordinance), CC 958.111, as amended from time to
time.
(24) ``Liquidity Ordinance'' means the Ordinance on the Liquidity
of Banks.
[FR Doc. 2021-17424 Filed 8-13-21; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on August 16, 2021.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.