Conformed to Federal Register version

SECURITIES AND EXCHANGE COMMISSION 

17 CFR Parts 201 and 240

[Release No. 34-84858; File No. S7-14-15] 

RIN 3235-AL76

Applications by Security-Based Swap Dealers or Major Security-Based Swap Participants 

for Statutorily Disqualified Associated Persons to Effect or be Involved in Effecting 

Security-Based Swaps

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

SUMMARY: Pursuant to Section 15F(b)(6) of the Securities Exchange Act of 1934 

(“Exchange Act”), as added by Section 764(a) of Title VII of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act (“Dodd-Frank Act”), the Securities and Exchange 

Commission (“Commission”) is adopting Rule of Practice 194. Rule of Practice 194 provides a 

process for a registered security-based swap dealer or major security-based swap participant 

(collectively, “SBS Entity”) to make an application to the Commission for an order permitting an 

associated person that is a natural person who is subject to a statutory disqualification to effect or 

be involved in effecting security-based swaps on behalf of the SBS Entity. Rule of Practice 194 

also provides an exclusion for an SBS Entity from the prohibition in Exchange Act Section 

15F(b)(6) with respect to associated persons that are not natural persons. Finally, Rule of 

Practice 194 provides that, subject to certain conditions, an SBS Entity may permit an associated 

person that is a natural person who is subject to a statutory disqualification to effect or be 

involved in effecting security-based swaps on its behalf, without making an application pursuant 

to the rule, where the Commission, the Commodity Futures Trading Commission (“CFTC”), a
- 2 -

self-regulatory organization (“SRO”), or a registered futures association has granted a prior 

application or otherwise granted relief from the statutory disqualification with respect to that 

associated person.

DATES: Effective April 22, 2019.

FOR FURTHER INFORMATION CONTACT: Natasha Vij Greiner, Assistant Chief 

Counsel, Devin Ryan, Senior Special Counsel, and Edward Schellhorn, Special Counsel at 202-

551-5550, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street,

NE, Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

TABLE OF CONTENTS

I. BACKGROUND

II. SUMMARY OF FINAL RULE OF PRACTICE 194

III. DISCUSSION

A. Rule of Practice 194(a) – Scope of the Rule

B. Rule of Practice 194(b) – Required Showing

C. Rule of Practice 194(c) – Exclusion for Other Persons

D. Rule of Practice 194(d) – Form of Application

E. Rule of Practice 194(e) – Written Statement

F. Rule of Practice 194(f) – Prior Applications or Processes

G. Rule of Practice 194(g) – Notification to Applicant and Written Statement

H. Rule of Practice 194(h) – Notice in Lieu of an Application

I. Note to Rule of Practice 194

J. Confidentiality of Materials

K. Deleting Rule 15Fb6-1 and Schedule C to Forms SBSE, SBSE-A and SBSE-BD
- 3 -

L. Compliance Date

IV. PAPERWORK REDUCTION ACT

A. Summary of Collection of Information

B. Proposed Use of Information

C. Respondents

D. Total Burden Estimates Relating to Rule of Practice 194

E. Confidentiality

V. ECONOMIC ANALYSIS

A. Broad Economic Considerations

B. Economic Baseline

1. Security-Based Swap Market Activity and Participants

2. Natural Persons and Entity Persons Associated with SBS Entities

3. Other Markets and Existing Regulatory Frameworks

4. Data on Parallel Review Processes and Statutory Disqualification

5. Requests for Relief from Statutory Disqualification under Rule of Practice 194

C. Benefits, Costs, and Effects on Efficiency, Competition, and Capital Formation

1. Costs and Benefits of Rule of Practice 194

2. Effects on Efficiency, Competition, and Capital Formation

D. Rule Alternatives

1. Temporary Exclusions

2. Relief for Non-Investment-Related Offenses

3. No Relief for CFTC, SRO, or Registered Futures Association Review

4. No Relief for Associated Person Entities from Exchange Act Section 15F(b)(6)

5. Form of Applications to be Submitted: Time Period

6. Public Availability of Applications and Supporting Materials
- 4 -

VI. REGULATORY FLEXIBILITY ACT CERTIFICATION

A. Regulatory Framework

B. Assessment of Impact

C. Certification

VII. STATUTORY AUTHORITY 

TEXT OF THE RULE

I. BACKGROUND

Exchange Act Section 15F(b)(6), as added by Section 764(a) of the Dodd-Frank Act, 

makes it unlawful for an SBS Entity to permit an associated person1 who is subject to a statutory 

disqualification2 to effect or be involved in effecting security-based swaps on behalf of the SBS 

Entity if the SBS Entity knew, or in the exercise of reasonable care should have known, of the 

statutory disqualification, “[e]xcept to the extent otherwise specifically provided by rule,

1 Exchange Act Section 3(a)(70) generally defines the term “person associated with” an 

SBS Entity to include (i) any partner, officer, director, or branch manager of an SBS 

Entity (or any person occupying a similar status or performing similar functions); (ii) any 

person directly or indirectly controlling, controlled by, or under common control with an 

SBS Entity; or (iii) any employee of an SBS Entity. See 15 U.S.C. 78c(a)(70). The 

definition generally excludes persons whose functions are solely clerical or ministerial. 

Id. The definition of “person” under Exchange Act Section 3(a)(9) is not limited to 

natural persons, but extends to both entities and natural persons. See 15 U.S.C. 78c(a)(9) 

(“The term ‘person’ means a natural person, company, government, or political 

subdivision, agent, or instrumentality of a government.”).

2 The term statutory disqualification as used in Exchange Act Section 15F(b)(6) parallels 

the definition of statutory disqualification in Exchange Act Section 3(a)(39)(A) through 

(F), 15 U.S.C. 78c(a)(39)(A) through (F). See Applications by Security-Based Swap 

Dealers or Major Security-Based Swap Participants for Statutorily Disqualified 

Associated Persons To Effect or Be Involved in Effecting Security-Based Swaps, 

Exchange Act Release No. 75612 (Aug. 5, 2015), 80 FR 51684, 51686, n.16 (Aug. 25, 

2015) (“Proposing Release” or “proposal”).
- 5 -

regulation, or order of the Commission.”3 In this regard, Exchange Act Section 15F(b)(6) gives 

the Commission the discretion to determine, by order, that a statutorily disqualified associated 

person may effect or be involved in effecting security-based swaps on behalf of an SBS Entity, 

and/or to establish rules concerning the statutory prohibition in Exchange Act Section 

15F(b)(6).4

On August 5, 2015,5 the Commission proposed Rule of Practice 194 to establish a

3 Exchange Act Section 15F(b)(6) provides: “Except to the extent otherwise specifically 

provided by rule, regulation, or order of the Commission, it shall be unlawful for a 

security-based swap dealer or a major security-based swap participant to permit any 

person associated with a security-based swap dealer or a major security-based swap 

participant who is subject to a statutory disqualification to effect or be involved in 

effecting security-based swaps on behalf of the security-based swap dealer or major 

security-based swap participant, if the security-based swap dealer or major security-based 

swap participant knew, or in the exercise of reasonable care should have known, of the 

statutory disqualification.” 15 U.S.C. 78o-10(b)(6). The statutory prohibition in 

Exchange Act Section 15F(b)(6), 15 U.S.C. 78o-10(b)(6), is parallel to a statutory 

provision for a swap dealer or major swap participant (collectively “Swap Entities”) set 

forth in Section 4s(b)(6) of the Commodity Exchange Act (“CEA”), 7 U.S.C. 6s(b)(6).

4 On June 15, 2011, the Commission issued an order that, among other things, granted 

temporary relief from compliance with Exchange Act Section 15F(b)(6) for persons 

subject to a statutory disqualification who were, as of July 16, 2011, associated with an 

SBS Entity and who effected or were involved in effecting security-based swaps on 

behalf of such SBS Entity and allowed such persons to continue to be associated with an 

SBS Entity until the date upon which rules adopted by the Commission to register SBS 

Entities became effective. See Temporary Exemptions and Other Temporary Relief, 

Together With Information on Compliance Dates for New Provisions of the Securities 

Exchange Act of 1934 Applicable to Security-Based Swaps, Exchange Act Release No. 

64678 (June 15, 2011), 76 FR 36287, 36301, 36305-07 (June 22, 2011) (“June 2011 

Temporary Exemptions Order”). See also Order Extending Certain Temporary 

Exemptions and a Temporary and Limited Exception Related to Security-Based Swaps, 

Exchange Act Release No. 75919 (Sept. 15, 2015), 80 FR 56519 (Sept. 18, 2015) 

(extending the June 2011 Temporary Exemptions Order).

5 Concurrent with the issuance of the Rule of Practice 194 proposal, the Commission 

adopted registration requirements for SBS Entities, including certain rules relating to the 

statutory prohibition in Exchange Act Section 15F(b)(6). See Registration Process for 

Security-Based Swap Dealers and Major Security-Based Swap Participants, Exchange 

Act Release No. 75611 (Aug. 5, 2015), 80 FR 48964 (Aug. 14, 2015) (“Registration
- 6 -

process by which an SBS Entity could apply to the Commission to permit an associated person 

who is subject to a statutory disqualification to effect or be involved in effecting security-based 

swaps on behalf of the SBS Entity.6 As discussed in the Commission’s proposal,7 the federal 

securities laws provide various procedural avenues that allow certain registered entities to 

associate, where warranted, with persons subject to a statutory disqualification or other bar, 

including the Commission’s Rule of Practice 1938 and the Financial Industry Regulatory

Adopting Release”). See also 17 CFR 240.15Fb6-1 (providing that an SBS Entity, when 

it files an application to register with the Commission, may permit an associated person 

that is not a natural person who is subject to a statutory disqualification to effect or be 

involved in effecting security-based swaps on the SBS Entity’s behalf, provided that the 

statutory disqualification(s) occurred prior to the compliance date set forth in the 

Registration Adopting Release and that the SBS Entity identifies each such associated 

person on its registration form); 17 CFR 240.15Fb6-2 (requiring a Chief Compliance 

Officer of an SBS Entity to certify that it has performed background checks on all of its 

associated persons that are natural persons who effect or are involved in effecting 

security-based swaps on its behalf, and neither knows, nor in the exercise of reasonable 

care should have known, that any of its associated persons that effect or are involved in 

effecting security-based swaps on its behalf are subject to a statutory disqualification, 

unless otherwise specifically provided by rule, regulation, or order of the Commission). 

As discussed in Section III.K below, the Commission is making a technical amendment 

that deletes Rule 15Fb6-1 as well as Schedule C to Forms SBSE, SBSE-A and SBSEBD and also conforms the instructions in those forms to take into account the associated 

person entity exclusion that the Commission is adopting in final Rule of Practice 194(c).

6 See Proposing Release, 80 FR 51684-722.

7 See id. at 51687-89.

8 17 CFR 201.193. Rule of Practice 193 provides a process by which individuals that are 

associated with entities that are not regulated by an SRO (e.g., employees of an 

investment adviser, an investment company, or a transfer agent) can seek to reenter the 

securities industry despite previously being barred by the Commission. See Registration

of Security-Based Swap Dealers and Major Security-Based Swap Participants, Exchange 

Act Release No. 65543 (Oct. 12, 2011), 76 FR 65784, 65797 (Oct. 24, 2011) 

(“Registration Proposing Release”). See also Applications by Barred Individuals for 

Consent to Associate With a Registered Broker, Dealer, Municipal Securities Dealer, 

Investment Adviser or Investment Company, Exchange Act Release No. 20783, 

Investment Company Act Release No. 13839, Investment Advisers Act Release No. 903, 

49 FR 12204 (Mar. 29, 1984).
- 7 -

Authority’s (“FINRA”) eligibility proceedings (under the process set forth in Exchange Act Rule 

19h-1).9 The Commission modeled proposed Rule of Practice 194 on these existing processes 

where persons can make an application to reenter the industry despite previously being barred by 

the Commission or subject to a statutory disqualification with respect to membership or 

participation in, or association with a member of, an SRO.10 Accordingly, the Commission 

proposed to establish a procedural framework that is similar to processes that are familiar to 

market participants.11

9 17 CFR 240.19h-1. The FINRA Rule 9520 Series sets forth procedures for a person to 

become or remain associated with a member, notwithstanding the existence of a statutory

disqualification, and for a current member or person associated with a member to obtain 

relief from the eligibility or qualification requirements of the FINRA By-Laws and rules. 

A member (or new member applicant) seeking to associate with a natural person subject 

to a statutory disqualification must seek approval from FINRA by filing a Form MC-400 

application. See FINRA Form MC-400, Membership Continuance Application, 

http://www.finra.org/web/groups/industry/@ip/@enf/@adj/documents/industry/p011542.

pdf. Members (and new member applicants) that are themselves subject to a 

disqualification that wish to obtain relief from the eligibility requirements are required to 

submit a Form MC-400A application. See FINRA Form MC-400A, Membership 

Continuance Application: Member Firm Disqualification Application, 

http://www.finra.org/web/groups/industry/@ip/@enf/@adj/documents/industry/p013339.

pdf. Where required, FINRA sends a notice or notification to the Commission of its 

proposal to admit or continue the membership of a person or association with a member 

notwithstanding statutory disqualification in accordance with Exchange Act Rule 19h-1.

10 “Self-regulatory organization” is defined in Section 3(a)(26) of the Exchange Act, 15

U.S.C. 78c(a)(26), as “any national securities exchange, registered securities association, 

or registered clearing agency, or (solely for the purposes of sections 19(b), 19(c) and 

23(b) of [the Exchange Act]) the Municipal Securities Rulemaking Board established by 

section 15B of this title.”

11 In the proposal, the Commission also discussed, for example, the CFTC’s approach with 

respect to the statutory prohibition for swap dealers or major swap participants 

(collectively “Swap Entity”) as set forth in CEA Section 4s(b)(6), 7 U.S.C. 6s(b)(6). See

Proposing Release, 80 FR at 51688-89. The CFTC, with respect to statutorily 

disqualified associated persons of Swap Entities, limits the definition of associated 

persons of Swap Entities to natural persons. See 17 CFR 1.3(aa). As a result, the 

prohibition in CEA Section 4s(b)(6), 7 U.S.C. 6s(b)(6), applies to natural persons (not 

entities) associated with a Swap Entity. For further discussion on the CFTC’s approach
- 8 -

The Commission requested comment on all aspects of the proposal as well as two 

alternative approaches,12 and received comments in response.13

II. SUMMARY OF FINAL RULE OF PRACTICE 194

The Commission is adopting Rule of Practice 194 largely as proposed, with certain 

modifications.14 As adopted, Rule of Practice 194 provides a process by which an SBS Entity 

may apply to the Commission for an order permitting an associated person to effect or be 

involved in effecting security-based swaps on behalf of the SBS Entity where the associated 

person that is a natural person who is subject to a statutory disqualification and is thereby 

otherwise prohibited from effecting or being involved in effecting security-based swaps on 

behalf of an SBS Entity under Exchange Act Section 15F(b)(6). Rule of Practice 194 also 

provides an exclusion for an SBS Entity from the prohibition in Exchange Act Section 15F(b)(6) 

with respect to associated persons that are not natural persons (defined herein as “associated 

person entities”).

In particular, as explained more fully in Section III below, the Commission is adopting 

the following provisions in Rule of Practice 194:

• Paragraph (a) of Rule of Practice 194, which defines the scope of the rule and provides a 

process for submitting applications by an SBS Entity seeking an order of the Commission

to Swap Entities, see Section II.B.3 of the Proposing Release, 80 FR at 51688-89.

12 See Proposing Release, 80 FR at 51701-05.

13 These comment letters are available at: https://www.sec.gov/comments/s7-14-

15/s71415.shtml.

14 If any of the provisions of these amendments, or the application thereof to any person or 

circumstance, is held to be invalid, such invalidity shall not affect other provisions or 

application of such provisions to other persons or circumstances that can be given effect 

without the invalid provision or application.
- 9 -

to permit an associated person who is subject to a statutory disqualification to effect or be 

involved in effecting security-based swaps on behalf of the SBS Entity.

• Paragraph (b) of Rule of Practice 194, which specifies the required showing for an 

application. For the Commission to issue an order granting relief under Rule of Practice 

194, an SBS Entity is required to make a showing that it would be consistent with the 

public interest to permit the associated person to effect or be involved in effecting 

security-based swaps on behalf of the SBS Entity, notwithstanding the statutory 

disqualification.

• Paragraph (c) of Rule of Practice 194, which establishes an exclusion from the general 

prohibition in Exchange Act Section 15F(b)(6) with respect to all associated person 

entities.15

• Paragraphs (d) and (e) of Rule of Practice 194, which specify the form of the application 

with respect to an associated person that is a natural person and the items to be addressed 

in the written statement within the application.

• Paragraph (f) of Rule of Practice 194, which requires an applicant to provide as part of 

any application any order, notice or other applicable document reflecting the grant, denial 

or other disposition (including any dispositions on appeal) of any prior application 

concerning the associated person under Rule of Practice 194 and other similar processes.

• Paragraph (g) of Rule of Practice 194, which provides for notice to the applicant in cases

15 In conjunction with adopting in Rule of Practice 194(c), the Commission is also making 

technical amendments to: (1) delete Exchange Act Rule 15Fb6-1; (2) remove Schedule C 

to Forms SBSE, SBSE-A and SBSE-BD; and (3) remove all references to Schedule C in 

the instructions in the above-mentioned forms. See Section III.K, infra, for a further 

discussion of the technical amendments.
- 10 -

where the Commission staff anticipates making an adverse recommendation to the 

Commission with respect to an application made pursuant to this rule. In such cases, the 

applicant will be provided with a written statement of the reasons for the Commission 

staff’s preliminary recommendation, and the applicant will have 30 days to submit a 

written statement in response.

• Paragraph (h) to Rule of Practice 194, which provides that, where certain conditions are 

met, an SBS Entity does not need to file an application under Rule of Practice 194 to 

permit a statutorily disqualified associated person to effect or be involved in effecting 

security-based swaps on behalf of the SBS Entity. Specifically, paragraph (h) of Rule of 

Practice 194 allows an SBS Entity, subject to certain conditions, to permit a statutorily 

disqualified associated person to effect or be involved in effecting security-based swaps 

on behalf of the SBS Entity without making an application to the Commission, where the 

Commission, CFTC, an SRO (e.g., FINRA) or a national securities exchange), or a 

registered futures association (e.g., the National Futures Association (“NFA”)) has 

granted a prior application or otherwise granted relief from a statutory disqualification 

with respect to that associated person. In such cases where an SBS Entity meets the 

requirements of paragraph (h), the SBS Entity will be permitted to file a notice with the 

Commission (in lieu of an application).

III. DISCUSSION

A. Rule of Practice 194(a) – Scope of the Rule

Proposed Rule of Practice 194 would have defined the scope of the rule, namely 

providing a process for an SBS Entity to seek relief from the Commission to permit an associated 

person who is subject to a statutory disqualification to effect or be involved in effecting security-
- 11 -

based swaps on behalf of the SBS Entity or to seek relief to change the terms and conditions of a 

previously issued Commission order pursuant to Rule of Practice 194.16 The Commission 

proposed to allow an SBS Entity to voluntarily submit an application to the Commission to 

request an order where an associated person of an SBS Entity is subject to a statutory 

disqualification and consequently prohibited from effecting or being involved in effecting 

security-based swaps on behalf of the SBS Entity under Exchange Act Section 15F(b)(6).17

Although no commenters specifically commented on this provision of proposed Rule of 

Practice 194, the Commission received general comments regarding the scope of the rule as 

proposed.18

A commenter suggested that rather than permit SBS Entities to voluntarily submit an 

application to the Commission to request an order providing relief from Exchange Act Section 

15F(b)(6), the Commission should instead reaffirm what the commenter viewed as the 

Congressional mandate by issuing a rule that prohibits, on a blanket basis, associated persons 

that are subject to a statutory disqualification from effecting or being involved in effecting 

security-based swaps on behalf of SBS Entities.19

Section 15F(b)(6) of the Exchange Act provides that, except where otherwise specifically 

provided by rule, regulation, or order of the Commission, it shall be unlawful for an SBS Entity

16 See Proposing Release, 80 FR at 51689, 51719; proposed Rule of Practice 194(a).

17 15 U.S.C. 78o-10(b)(6); see proposed Rule of Practice 194(a).

18 See Letter from Americans for Financial Reform, dated October 26, 2015 (“Americans 

for Financial Reform Letter”), at 1. See also Letter from Robert E. Rutkowski, dated 

October 27, 2015 (“Rutkowski Letter”). The Rutkowski Letter requested only that the 

Commission seriously consider the recommendations set forth in the Americans for 

Financial Reform Letter.

19 Letter from Bartlett Naylor, Public Citizen, dated October 26, 2015 (“PublicCitizen 

Letter”), at 1-2.
- 12 -

to permit any person associated with the SBS Entity who is subject to a statutory disqualification 

to effect or be involved in effecting security-based swaps on behalf of the SBS Entity, if the SBS 

Entity knew, or in the exercise or reasonable care should have known, of the statutory 

disqualification.20 Thus, while Exchange Act Section 15F(b)(6) makes it unlawful for an SBS 

Entity to permit an associated person who is subject to a statutory disqualification to effect or be 

involved in effecting security-based swaps on behalf of the SBS Entity, it also gives the 

Commission the discretion to determine (by rule, regulation, or order) that a statutorily 

disqualified associated person may effect or be involved in effecting security-based swaps on 

behalf of an SBS Entity.21 The Commission has determined to exercise its statutory authority 

under Exchange Act Section 15F(b)(6) to assess on a case-by-case basis whether to grant relief 

from the statutory prohibition because there may be instances where it is consistent with the 

public interest to permit an associated person who is subject to a statutory disqualification to 

effect or be involved in effecting security-based swaps on behalf of the SBS Entity.

Additionally, the commenter’s approach22 would deviate from the Commission’s current practice 

in other contexts, which permits associated persons to apply to reenter the securities industry 

notwithstanding the existence of a statutory disqualification.23 In that respect, adopting the 

commenter’s approach could lead to the anomalous result where an applicant may be permitted 

to engage in securities transactions with members of the retail public—for example, as an 

associated person of a broker-dealer or investment adviser—but prohibited from effecting or

20 See Note 3, supra.

21 15 U.S.C. 78o-10(b)(6).

22 See Public Citizen Letter, at 1-2.

23 See, e.g., 17 CFR 240.19h-1; 17 CFR 201.193. See also Section I and Notes 8, 9, supra.
- 13 -

being involved in effecting security-based swap transactions with significantly more 

sophisticated institutional clients as an associated person of an SBS Entity.24 Although we 

acknowledge that security-based swaps may also be more complex and opaque than equities or 

bonds, thus increasing information asymmetries between SBS Entities and their clients, we 

believe that institutional clients may be more informed and may process disclosures more 

efficiently than retail investors in parallel settings.

The Commission also believes that a process for granting relief with respect to a statutory 

disqualification should be formalized, as suggested by one commenter.25 Exchange Act Section 

15F(b)(6) provides the Commission with discretion to determine whether a statutorily 

disqualified associated person may effect or be involved in effecting security-based swaps on 

behalf of an SBS Entity. However, it does not specify what information should be provided to 

the Commission when an SBS Entity seeks relief, nor does it set forth the standard under which 

the Commission would evaluate requests for relief. Rule of Practice 194 specifies the 

information and documents that SBS Entities should provide to the Commission, as well as the 

applicable procedures and standard of review, for seeking relief from the statutory prohibition in 

Exchange Act Section 15F(b)(6). By articulating the materials to be submitted, the items to be 

considered, and the standard of review, Rule of Practice 194 provides a clear process for SBS

24 See Proposing Release, 80 FR at 51698.

25 See Americans for Financial Reform Letter, at 1. The commenter noted that without 

proposed Rule of Practice 194, SBS Entities would still be able to apply to the 

Commission for relief from the prohibition in Exchange Act Section 15F(b)(6); however, 

the commenter supported the Commission’s efforts to formalize a process for seeking 

relief from the statutory prohibition of Exchange Act Section 15F(b)(6) to increase 

accountability and transparency into the application process.
- 14 -

Entities.26 Therefore, the Commission is adopting paragraph (a) of Rule of Practice 194, which 

defines the scope of the rule, as proposed.

B. Rule of Practice 194(b) – Required Showing

Proposed Rule of Practice 194 provided that the applicant would be required to show that 

it would be consistent with the public interest to permit the associated person of the SBS Entity 

who is subject to a statutory disqualification to effect or be involved in effecting security-based 

swaps on behalf of the SBS Entity.27

The Commission received one comment concerning the required showing set forth in the 

proposal. The commenter stated that, in assessing whether it is in the public interest to permit an 

associated person who is subject to a statutory disqualification to effect or be involved in 

effecting security-based swaps on behalf of an SBS Entity, the Commission should also consider 

whether the deterrent effect of disqualification would be diluted.28 Specifically, the commenter 

stated that, to be granted relief, the SBS Entity should be required to show that granting relief 

“would actually enhance the deterrent effect.”29

In assessing whether it is consistent with the public interest to permit an associated 

person that is a natural person who is subject to a statutory disqualification to effect or be 

involved in effecting security-based swaps on behalf of an SBS Entity, the Commission may

26 See Proposing Release, 80 FR at 51712.

27 See id. at 51689, 51719; proposed Rule of Practice 194(b). See Exchange Act Section 

3(a)(39)(A) through (F), 15 U.S.C. 78c(a)(39)(A) through (F), for a description of 

statutorily disqualifying events. See also Note 2, supra.

28 Public Citizen Letter, at 1, 4.

29 Id. at 4. The commenter additionally stated that the entity requesting the waiver should 

be required to prove that “the implicit deterrence impact of disqualification is not diluted” 

by receiving a waiver from penalties resulting from criminal misbehavior. Id. at 1.
- 15 -

consider deterrence, among other factors.30 However, the Commission does not agree with the 

commenter that the “applicant should be required to show that an exemption would actually 

enhance the deterrent effect”31 or that any petitioner for an exemption from disqualification 

should have to prove that the implicit deterrence impact of disqualification is not diluted by 

receiving a waiver from penalties from criminal misbehavior.32 Either standard could preclude 

the Commission from granting relief even where the public interest otherwise warrants doing 

so—i.e., raising deterrence above all other public interest considerations. Moreover, it is not 

clear that any applicant could meet either standard proposed by the commenter. The 

Commission does believe, however, consistent with the proposal,33 that the applicant should bear 

the burden of showing that permitting the associated person to effect or be involved in effecting 

security-based swaps on behalf of the SBS Entity is consistent with the public interest.

The Commission believes that the public interest standard is appropriate and consistent 

with Section 15F(b)(6) of the Exchange Act34 and is adopting the standard as proposed.

Exchange Act Section 15F(b)(6) is designed to limit the potential that associated persons who 

have engaged in certain types of “bad acts” will be able to negatively affect the security-based 

swap market and the participants in that market by prohibiting an SBS Entity from allowing a

30 In this regard, the Commission noted in the Proposing Release that statutory 

disqualification and an inability to continue associating with SBS Entities may create a 

disincentive against underlying misconduct for associated persons. See Proposing 

Release, 80 FR at 51689, 51716-17.

31 Public Citizen Letter, at 4.

32 See id. at 1. Non-criminal conduct also may result in a statutory disqualification. See 15

U.S.C. 78c(a)(39).

33 See Proposing Release, 80 FR at 51689.

34 A public interest standard also is consistent with the standard in Rule of Practice 193.

See 17 CFR 201.193(c).
- 16 -

statutorily disqualified associated person to effect or be involved in effecting security-based 

swap transactions, absent Commission relief. However, Section 15F(b)(6) also specifically 

provides that the Commission can allow SBS Entities to permit such statutorily disqualified 

associated persons to effect or be involved in effecting security-based swap transactions. The 

public interest standard is intended to capture those situations where the risk of the associated 

person engaging in security-based swap activity that may harm the market or the participants in 

the market is mitigated. Thus, as stated in the proposal, the Commission believes that it may 

grant relief in cases where the terms or conditions of association and the procedures proposed for 

supervision of the statutorily disqualified associated person are reasonably designed to mitigate 

the potential harm to the market or participants in the market.35

The Commission also notes that the items set forth in the proposal36 and adopted in final 

Rule of Practice 194(e), such as other misconduct in which the associated person may have 

engaged, the nature of the conduct that resulted in the statutory disqualification and disciplinary 

history of the associated person and SBS Entity requesting such relief, and the supervision to be 

accorded the associated person, would be relevant to the Commission’s consideration of whether 

the risks of permitting such associated persons that are natural persons to effect or be involved in 

effecting security-based swaps on behalf of the SBS Entity are sufficiently mitigated. Therefore, 

the Commission is adopting paragraph (b) of Rule of Practice 194 as proposed.37

35 See Proposing Release, 80 FR at 51689.

36 See id. at 51691-93, 51719-20; proposed Rule of Practice 194(d).

37 Where the Commission determines that it would be consistent with the public interest to 

permit the associated person that is a natural person of the SBS Entity to effect or be 

involved in effecting security-based swaps on behalf of the SBS Entity, the Commission 

will issue an order granting relief. Where the Commission does not or cannot make the 

determination that it is in the public interest to permit the associated person that is a
- 17 -

C. Rule of Practice 194(c) – Exclusion for Other Persons

The Commission is adopting Rule of Practice 194(c), which provides an exclusion for an 

SBS Entity from the prohibition in Exchange Act Section 15F(b)(6) with respect to associated 

person entities.

Proposed Rule of Practice 194(i) would have provided temporary relief, subject to certain 

conditions,38 from the statutory prohibition in Exchange Act Section 15F(b)(6) with respect to 

associated person entities that are subject to a statutory disqualification.39 The Commission 

proposed paragraph (i) of Rule of Practice 194 to address the situation where an operating SBS 

Entity becomes subject to the statutory prohibition in Exchange Act Section 15F(b)(6) with 

respect to an associated person that is not a natural person—either as a result of an associated 

person that effects or is involved in effecting security-based swaps on behalf of the SBS Entity 

becoming subject to a statutory disqualification, or as a result of a person who is subject to a

natural person of the SBS Entity to effect or be involved in effecting security-based 

swaps on behalf of the SBS Entity, the Commission will issue an order denying the 

application. See Proposing Release, 80 FR at 51694.

38 The Commission proposed two general limitations on the applicability of the temporary 

exclusion, namely that the temporary exclusion would not be available where: (1) the 

Commission has otherwise ordered—for example, where the Commission, by order, has 

censured, placed limitations on the activities or functions of the associated person, or 

suspended or barred such person from being associated with an SBS Entity; and (2) 

where the Commission, CFTC, an SRO or a registered futures association has previously 

denied membership, association, registration or listing as a principal with respect to the 

associated person that is the subject of the pending application. See id. at 51697. As 

discussed below, since the Commission is adopting the alternative that was set forth in 

the proposal, these limitations are no longer included in the rule. However, as discussed 

below, the Commission maintains its existing statutory authority to institute proceedings 

or bring an action against any associated person entities, and nothing in this provision 

affects the ability of the Commission, the CFTC, an SRO or the NFA to deny 

membership, association, registration or listing as a principal with respect to any 

associated person entity.

39 See Proposing Release, 80 FR at 51694-98, 51721; proposed Rule of Practice 194(i).
- 18 -

statutory disqualification becoming an associated person effecting or involved in effecting 

security-based swaps on behalf of the SBS Entity.40

The Commission also solicited comment on two alternative approaches with respect to 

the temporary exclusion, as proposed, including one alternative that would provide relief from 

the general prohibition in Exchange Act Section 15F(b)(6) with respect to all associated person 

entities.41 More specifically, the Commission requested comment on whether the Commission 

should instead provide an exclusion to permit an SBS Entity to allow associated person entities 

subject to a statutory disqualification to effect or be involved in effecting security-based swaps 

on behalf of SBS Entities.42 The Commission received two comments on this alternative, both of 

which stated that the Commission should not provide an exclusion to permit associated person 

entities that are subject to a statutory disqualification to effect or be involved in effecting

security-based swaps on behalf of SBS Entities. 43

One commenter stated that adopting a temporary exclusion, as proposed, would be 

inconsistent with the language and Congressional intent of Exchange Act Section 15F(b)(6).44

The commenter believes that the temporary exclusion provision addresses “industry-focused 

concerns” and would expose investors and markets to disruptive effects from unscrupulous

40 See, e.g., Proposing Release, 80 FR at 51694.

41 See id. at 51697–98. The other alternative proposed by the Commission related to the 

ultimate disposition of an application to the extent the Commission does not act within a 

specified time period. See id. at 51697.

42 See id. at 51697-98, 51716. In addition, the Commission also provided an economic 

analysis on this proposed alternative. See id. at 51716.

43 See Letter from Dennis M. Kelleher & Stephen W. Hall, Better Markets, Inc., dated 

October 26, 2015 (“Better Markets Letter”), at 5; Americans for Financial Reform Letter, 

at 3.

44 See Better Markets Letter, at 5.
- 19 -

conduct by associated person entities subject to a statutory disqualification.45 The commenter 

also believes that in the event that an associated person entity is prohibited from effecting or 

being involved in effecting security-based swaps on behalf of an SBS Entity, other market 

participants may fill the void with minimal disruption, or the SBS Entity may adopt measures to 

mitigate any negative impacts as a result of the statutory prohibition.46

A second commenter provided similar objections to the temporary exclusion.47 The 

commenter stated that disruption to an SBS Entity’s business is not a sufficient justification for 

providing a temporary exclusion with respect to an associated person entity who is subject to a 

statutory disqualification. The commenter further stated that any statutory disqualification that 

may require an SBS Entity to move services (such as advisory, booking, cash or collateral 

management services) to another entity is not a “market-moving event,” and would not justify 

the adoption of a temporary exclusion with respect to associated person entities. The 

commenter, however, acknowledged that there may be limited cases where an immediate change 

in a service provider would cause significant disruptions. But, rather than provide an automatic 

temporary exclusion, as proposed, the commenter suggested, as an alternative, that the 

Commission could in those limited cases grant a temporary exclusion of up to 30 days where 

doing so is appropriate and necessary.48

The Commission received a related comment in response to a request for comment in 

connection with the proposed requirements for an SBS Entity to register with the Commission,

45 Id.

46 See id.

47 See Americans for Financial Reform Letter, at 3.

48 See id.
- 20 -

which solicited comment on whether the Commission should consider excepting associated 

person entities from the statutory prohibition in Exchange Act Section 15F(b)(6).49 The 

commenter stated that, based on the Commission’s definition of the phrase “involved in 

effecting,” SBS Entities could have hundreds, if not thousands, of associated natural personswho 

will effect or will be involved in effecting security-based swaps.50 Moreover, the commenter 

stated that the definition of “associated person” could be read to extend not just to natural 

persons, but also to non-natural persons (e.g., entities) that are affiliates of SBS Entities.51 As a 

result, the commenter stated, prohibiting statutorily disqualified entities from effecting or being 

involved in effecting security-based swaps could result in “considerable” business disruptions 

and other ramifications.52 To address these concerns, the commenter stated that the Commission 

should narrow the scope of the associated persons considered to be effecting or involved in

49 In connection with proposing requirements for an SBS Entity to register with the 

Commission, the Commission solicited comment on potentially developing an alternative 

process, in accordance with Exchange Act Section 15F(b)(6), to establish exceptions to 

the statutory prohibition in Exchange Act Section 15F(b)(6). See Registration Proposing 

Release, 76 FR at 65797 (Question 90).

50 See Letter from Kenneth E. Bentsen, Jr., Securities Industry and Financial Markets 

Association, dated December 16, 2011 (“12/16/2011 SIFMA Letter”), at 8, available at 

https://www.sec.gov/comments/s7-40-11/s74011-4.pdf. The Commission has stated that 

the term “involved in effecting security-based swaps” generally means engaged in 

functions necessary to facilitate the SBS Entity’s security-based swap business, 

including, but not limited to the following activities: (1) drafting and negotiating master 

agreements and confirmations; (2) recommending security-based swap transactions to 

counterparties; (3) being involved in executing security-based swap transactions on a 

trading desk; (4) pricing security-based swap positions; (5) managing collateral for the 

SBS Entity; and (6) directly supervising persons engaged in the activities described in 

items (1) through (5) above. See Proposing Release, 80 FR at 51686, n.19 (citing the 

Registration Adopting Release, at Section II.B.1.ii.).

51 See 12/16/2011 SIFMA Letter.

52 See id. The commenter did not provide supporting data to quantify the number of 

associated persons or the magnitude of any potential business disruptions.
- 21 -

effecting security-based swaps, or, alternatively, exercise its statutory authority to grant 

exceptions to the general ban on an SBS Entity from associating with a person subject to a 

statutory disqualification.53

The Commission believes that adopting a rule providing for an exclusion for associated 

person entities is consistent with Exchange Act Section 15F(b)(6), which explicitly permits the 

Commission to establish exceptions to that statutory prohibition by “rule, regulation, or order.”54

In discussing the exclusion alternative, the Commission noted that it would take into 

consideration the extent to which this alternative approach would minimize potential disruptions 

to the business of SBS Entities that could lead to possible market disruption and how this 

approach would impact counterparty and investor protection.55 We discuss each of those 

considerations below.

The Commission believes that granting an automatic exclusion for associated person 

entities could reduce potential disruptions to the business of SBS Entities that could lead to 

market disruption. The scope of the prohibition in Section 15F(b)(6) of the Exchange Act covers 

a wide range of actions, given the definitions of statutory disqualification and associated person, 

and the meaning of “involved in effecting” a security-based swap transaction.56 Absent an 

exclusion, the statutory prohibition in Exchange Act Section 15F(b)(6) would apply immediately

53 See id.

54 15 U.S.C. 78o-10(b)(6). In addition, Exchange Act Section 15F(b)(4) provides the 

Commission with authority (other than certain inapplicable exceptions specified in 

Exchange Act Section 15F(b)(4)(d) and (e)) to “prescribe rules applicable to securitybased swap dealers and major security-based swap participants.” 15 U.S.C. 78o-10(b)(4).

55 See Proposing Release, 80 FR at 51698.

56 See Proposing Release, 80 FR at 51694. See also Registration Adopting Release, at 

Section III.B.1.i.
- 22 -

upon an associated person entity becoming subject to a statutory disqualification. Contrary to 

one commenter’s general view that moving services to another entity is not a “market-moving 

event,”57 the Commission continues to be concerned about the potential disruption to the 

security-based swap markets, including potential adverse effects to counterparties and other 

market participants, if SBS Entities engaged in the business must either cease operations, even 

temporarily, due to not being able to utilize the services of their associated person entities,58 or 

move services to another entity that may not be as well-equipped to handle them pending a 

determination by the Commission on their application for relief under the proposed temporary 

exclusion or pending a determination by another regulator for similar relief.59 For example, and 

as the Commission stated in the proposal, moving the cash and collateral management services 

from one entity to another would have a much more significant impact on the ability of the SBS 

Entity to operate—which, as noted above, could lead to possible market disruption—than 

assigning a different natural person to negotiate and execute security-based swap transactions.60

57 Americans for Financial Reform Letter, at 3. The commenter also acknowledged when 

discussing the proposed temporary exclusion for associated person entities that there may 

be some limited cases where an immediate change in a service provider would cause 

significant disruptions.

58 See Proposing Release, 80 FR at 51695-96.

59 Final Rule of Practice 194(h) provides that, subject to certain conditions, an SBS Entity 

may permit an associated person who is subject to a statutory disqualification to effect or 

be involved in effecting security-based swaps on its behalf, without making an 

application pursuant to the proposed rule, where the Commission, CFTC, an SRO or a 

registered futures association has granted a prior application or otherwise granted relief 

from a statutory disqualification with respect to that associated person. See Rule of 

Practice 194(h) and Section III.H, infra.

60 See Proposing Release, 80 FR at 51696, n.88 (citing the Registration Adopting Release, 

80 FR at 48975, where the Commission noted that it was particularly concerned that SBS 

Entities “may need to either cease operations, even temporarily, due to not being able to 

utilize these services of their associated person entities, or move these services to another
- 23 -

One commenter noted that other SBS Entities could potentially provide services to the 

market in the event that an associated person entity becomes subject to a statutory 

disqualification.61 However, irrespective of whether other SBS Entities may be able to provide 

such services over time (which may not necessarily occur), there is nonetheless a potential for 

short-term disruptions where an associated person entity becomes immediately barred as a result 

of being subject to a statutory disqualification. In particular, absent relief, an SBS Entity that is 

associated with a statutorily disqualified entity would be required either to restructure 

immediately or to cease dealing activity temporarily, which could result in various costs, such as 

costs associated with replacing the statutorily disqualified associated person entity or a legal 

reorganization.62 Such short-term disruptions could therefore adversely affect not just SBS 

Entities, but also counterparties or other market participants in the form of execution delays, 

potentially reduced liquidity or higher transaction costs.63 In that respect, the exclusion is not 

limited to addressing “industry-focused concerns” 64 or concerns about disruptions to the SBS 

Entity’s business alone.65

Although one commenter asserted that any short-term market disruptions could 

potentially be mitigated by the SBS Entity whose associated person entity becomes subject to a 

statutory disqualification, the commenter did not specify what measures could be taken by the

entity that may not be as well positioned to handle them, which could have an impact on 

the security-based swap market”).

61 See Better Markets Letter, at 5.

62 See also Section V.C.1.c, infra.

63 See id.

64 See Better Markets Letter, at 5.

65 See Americans for Financial Reform Letter, at 3.
- 24 -

SBS Entity to mitigate potential market dislocations.66 It is not clear that any measures that an 

SBS Entity could potentially take to mitigate potential market disruptions—e.g., the SBS Entity 

restructuring its business to use the services of another associated person entity that is not subject 

to a statutory disqualification—would in all instances be effective, feasible, or cost-effective.

For example, there may be instances where a change in a service provider could cause significant 

disruptions in the security-based swap market.67 These disruptions are augmented by the fact 

that, as discussed below, the Commission estimates that dealing activity in the security-based 

swap market is highly concentrated among a small number of dealers, with the top five dealer 

accounts intermediating approximately 55 percent of all SBS Entity transactions.68

In comparison to the proposed temporary exclusion approach, SBS Entities would be less 

constrained by the general statutory prohibition and would be able to associate with any and all 

statutorily disqualified associated person entities in any capacity without applying for relief 

under Exchange Act Section 15F(b)(6) or under Rule of Practice 194. This approach gives SBS 

Entities more certainty about their ability to permit statutorily disqualified associated person 

entities to effect or be involved in effecting security-based swaps, whereas the proposed 

temporary exclusion would have expired after 180 days, and SBS Entities would have 60 days to 

conform to the general statutory prohibition if the Commission, the CFTC, an SRO or a 

registered futures association does not render a decision on the application within that timeframe. 

Furthermore, SBS Entities associating with disqualified persons would not have to undergo

66 See Better Markets Letter, at 5.

67 See Americans for Financial Reform Letter, at 3 (acknowledging the potential for 

disruption in the event of an immediate change).

68 See Section V.A, infra, for further discussion.
- 25 -

business restructuring or apply for relief, thereby mitigating the risk of disruptions and avoiding 

the costs associated with such restructuring or application for relief, which may flow through to 

counterparties under the rule being adopted.

As the Commission noted in the proposal, the overall effects on security-based swap 

markets of adopting the alternative approach are unclear. The proposal, in connection with 

estimating anticipated costs, noted that the alternative approach, which we are now adopting, 

could hinder the Commission’s ability to make an individualized determination about whether 

permitting an associated person entity who is subject to a statutory disqualification to effect or be 

involved in effecting security-based swaps on behalf of an SBS Entity is consistent with the 

public interest, and that statutory disqualification and an inability to continue associating with 

SBS Entities creates disincentives against underlying misconduct for associated persons.69 The 

Commission has also considered the potential impact on investors and the security-based swap 

markets from permitting associated person entities subject to a statutory disqualification to effect 

or be involved in effecting security-based swaps on behalf of SBS Entities. The Commission 

acknowledges, as it did in the proposal, that the counterparty and compliance risks under the 

entity exclusion approach may be somewhat greater than those under the proposed approach.70

Nevertheless, the Commission recognizes, as it did in the proposal, that these risks and concerns 

are mitigated by the Commission’s ability, in the appropriate case, to institute proceedings under 

Exchange Act Section 15F(l)(3) to determine whether the Commission should censure, place 

limitations on the activities or functions of such person, or suspend for a period not exceeding 12

69 The Commission received comments supporting the potential deterrence effect of 

disqualification. See, e.g., Public Citizen Letter; Better Markets Letter.

70 See, e.g., Better Markets Letter.
- 26 -

months, or bar such person from being associated with an SBS Entity.71 Therefore, the exclusion 

in final Rule of Practice 194(c) will neither limit nor otherwise affect the Commission’s existing 

statutory authority to institute proceedings or bring an action against any associated person 

entities as outlined above.72 In addition, the exclusion in final Rule of Practice 194(c) will also 

neither limit nor otherwise affect the ability of the Commission, the CFTC, an SRO or the NFA 

to deny membership, association, registration or listing as a principal with respect to any 

associated person entity.73

As also noted in the proposal,74 this alternative approach would result in consistency with 

the CFTC’s approach with respect to the statutory prohibition for Swap Entities as set forth in 

CEA Section 4s(b)(6).75 The CFTC, with respect to statutorily disqualified associated persons of 

Swap Entities, limits the definition of associated persons of Swap Entities to natural persons. 76

71 See Proposing Release, 80 FR at 51698, n.98, 51716, n.194 (citing 15 U.S.C. 78o10(l)(3)).

72 See Proposing Release, 80 FR at 51698, n.98, 51716, n.194 (citing 15 U.S.C. 78o10(l)(3)). See, e.g., 15 U.S.C. 78u–3 (authorizing cease-and-desist proceedings).

73 For example, under Exchange Act Section 15A(g)(2), 15 U.S.C. 78o-3(g)(2), where it is 

necessary or appropriate in the public interest or for the protection of investors, the 

Commission may, by order, direct the SRO to deny membership to any registered broker 

or dealer, and bar from becoming associated with a member any person, who is subject to 

a statutory disqualification. Section 17(h) of the CEA provides for the CFTC to review 

certain NFA decisions, including the NFA’s disciplinary actions and member 

responsibility actions, as do the CFTC’s Part 171 Rules, 17 CFR §§ 171.1-171.50.

74 See Proposing Release, 80 FR at 51698.

75 7 U.S.C. 6s(b)(6).

76 See 17 CFR 1.3(aa). Specifically, the CFTC amended CEA Regulation 1.3(aa), 17 CFR 

1.3(aa), which generally defines the term “associated person” for purposes of entities 

registered with it, to cover Swap Entities. Consequently, with respect to Swap Entities, 

the definition reads, “(aa) Associated Person. This term means any natural person who is 

associated in any of the following capacities with: . . . (6) A swap dealer or major swap 

participant as a partner, officer, employee, agent (or any natural person occupying a 

similar status or performing similar functions), in any capacity that involves: (i) The
- 27 -

As a result, the prohibition in CEA Section 4s(b)(6) applies to natural persons (not entities) 

associated with a Swap Entity.77 Indeed, under the alternative approach, which we are now 

adopting, SBS Entities cross-registered as Swap Entities with the CFTC would experience 

potential economies of scope in associating with persons that are statutorily disqualified entities.

One commenter noted that the temporary exclusion provision may expose investors and 

markets to disruptive effects from unscrupulous conduct by associated person entities subject to 

a statutory disqualification.78 As noted in the Proposing Release, however, the Commission 

continues to believe that this approach appropriately considers the potentially competing 

objectives of minimizing the likelihood for market disruption while remaining consistent with 

the public interest and maintaining investor protections.79

Given the adoption of the exclusion alternative for Rule of Practice 194(c), the 

Commission is not adopting a commenter’s proposed alternative that the Commission could, on a 

case-by-case basis, provide a temporary exclusion of up to 30 days where doing so is necessary 

and appropriate. Under this alternative, pending approval by the Commission for such a 

temporary exclusion, an SBS Entity would be required to either (1) disassociate with the 

statutorily disqualified associated person entity immediately after the associated person entity

solicitation or acceptance of swaps (other than in a clerical or ministerial capacity); or (ii) 

The supervision of any person or persons so engaged.”).

77 See 7 U.S.C. 6s(b)(6), which states, “Except to the extent otherwise specifically provided 

by rule, regulation, or order, it shall be unlawful for a swap dealer or a major swap 

participant to permit any person associated with a swap dealer or a major swap 

participant who is subject to a statutory disqualification to effect or be involved in 

effecting swaps on behalf of the swap dealer or major swap participant, if the swap dealer 

or major swap participant knew, or in the exercise of reasonable care should have known, 

of the statutory disqualification.”

78 See Better Markets Letter, at 5.

79 See id.
- 28 -

became subject to a statutory disqualification, or (2) immediately have that associated person

cease effecting or being involved in effecting security-based swaps on behalf of the SBS Entity. 

This result would defeat the intent and purpose of the temporary exclusion and could result in a 

risk of market disruption immediately after the associated person entity becomes subject to a 

statutory disqualification, but prior to the entry of any order granting a temporary exclusion.

For the reasons discussed above, the Commission is adopting paragraph (c) of Rule of 

Practice 194, which provides an exclusion for an SBS Entity from the prohibition in Exchange 

Act Section 15F(b)(6) with respect to associated person entities.

D. Rule of Practice 194(d) – Form of Application

Proposed Rule of Practice 194 would have specified the form of the application to be 

submitted under the rule for natural persons.80 In particular, the Commission proposed that each 

application would be required to be supported by a written statement, signed by a knowledgeable 

person authorized by the SBS Entity, which addresses other items in proposed Rule of Practice

194.81 The proposal would have required an applicant to provide certain exhibits to the written

statement. For associated persons that are natural persons,82 the Commission proposed that an

80 See id. at 51689-91, 51719; proposed Rule of Practice 194(c). The proposal also 

specified the form of application to be submitted under the rule for associated person 

entities. See proposed Rule of Practice 194(e). Rule of Practice 194(c), as adopted, 

provides an exclusion for an SBS Entity from the prohibition in Exchange Act Section 

15F(b)(6) with respect to associated persons entities. Accordingly, the corresponding 

provision, proposed Rule of Practice 194(e), which would have specified the form of 

such applications for entities, is not needed and is not being adopted.

81 See Section III.E, infra, for a discussion of proposed Rule of Practice 194(d).

82 The Commission is making one technical change to the text of Rule of Practice 194(d) 

such that the phrase a “person that is subject to a statutory disqualification” (emphasis 

added) is being changed to read a “person who is subject to a statutory disqualification” 

(emphasis added). This technical change is intended to make the text of Rule of Practice 

194 more closely track the language used in Exchange Act Section 15F(b)(6), which
- 29 -

SBS Entity provide: (1) a copy of the order or other applicable document that resulted in the 

associated person being subject to a statutory disqualification;83 (2) an undertaking by the 

applicant to notify the Commission promptly in writing if any information submitted in support 

of the application becomes materially false or misleading while the application is pending;84 (3) a 

copy of the questionnaire or application for employment specified in Exchange Act Rule 15Fb6-

2(b);85and (4) a copy of any decision, order, or document issued with respect to any proceeding86

resulting in the imposition of disciplinary sanctions or pending proceeding against the associated 

person by the Commission, CFTC, any federal or state or law enforcement regulatory agency, 

registered futures association, foreign financial regulatory authority, registered national securities 

association, or any other SRO, or commodities exchange, or any court, that occurred during the 

five years preceding the filing of the application pursuant to Rule of Practice 194.87 The 

Commission also proposed that an application under Rule of Practice 194 would be filed

reads, in pertinent part, “who is subject to a statutory disqualification” (emphasis added). 

This technical change is also being made to Rule of Practice 194 (h)(1) and (h)(2).

83 See proposed Rule of Practice 194(c)(1).

84 See id. (c)(2).

85 17 CFR 240.15Fb6-2(b); see proposed Rule of Practice 194(c)(3).

86 In connection with final Rule of Practice 194, applicants should look to the definition of 

“proceeding” in Form SBSE, which states that a “proceeding” includes “a formal 

administrative or civil action initiated by a governmental agency, self-regulatory 

organization or a foreign financial regulatory authority; a felony criminal indictment or 

information (or equivalent formal charge); or a misdemeanor criminal information (or 

equivalent formal charge). Does not include other civil litigation, investigations, or 

arrests or similar charges effected in the absence of a formal criminal indictment or 

information (or equivalent formal charge).” See Registration Adopting Release, at 

Section III.G.1, and Form SBSE.

87 See proposed Rule of Practice 194(c)(4).
- 30 -

pursuant to Rules of Practice 151, 152 and 153.88

The Commission did not receive any specific comments on the form of application and 

written statement in proposed Rule of Practice 194. However, one commenter stated that the 

Commission should require applicants to address disciplinary events going back ten years, not 

five years.89 In support of a longer time period, the commenter stated that a ten-year time period 

would provide greater protections in accordance with the purpose of Exchange Act Section 

15F(b)(6), and would be more consistent with other provisions of the securities laws dealing with 

statutory disqualification.90

The Commission is adopting renamed paragraph (d) of Rule of Practice 194 as proposed, 

including the five-year time period in the proposal, for the reasons discussed in the Proposing 

Release.91 In determining to adopt the proposed five-year time period, the Commission carefully 

considered the burden that may be imposed by requiring SBS Entities to provide older materials 

and documents that may not be as readily available, as well as our need to evaluate the context

88 17 CFR 201.151, 201.152, 201.153. Rule of Practice 151, 17 CFR 201.151, concerns the 

procedure for filing of papers with the Commission; Rule of Practice 152, 17 CFR 

201.152, concerns the form of filing papers with the Commission; Rule of Practice 153, 

17 CFR 201.153, concerns the signature requirement and effect of filing papers.

89 See Better Markets Letter, at 6. Although the commenter did not specify a particular 

provision, the Commission did propose a five-year time period in proposed paragraph 

(c)(4). Proposed paragraph (c)(4) would require a copy of any decision, order, or 

document issued with respect to any proceedings resulting in the imposition of 

disciplinary sanctions or pending proceeding against the associated person by the 

Commission, CFTC, any federal or state or law enforcement regulatory agency, 

registered futures association, foreign financial regulatory authority, registered national 

securities association, or any other SRO, or commodities exchange, or any court, that 

occurred during the five years preceding the filing of the application pursuant to Rule of 

Practice 194. Proposed paragraphs (d)(6) and (d)(10) also contain similar requests for 

certain information for a five-year time period. See Section III.E, infra.

90 See Better Markets Letter, at 6.

91 Proposing Release, 80 FR at 51689-91, 51719; proposed Rule of Practice 194(c).
- 31 -

and circumstances underlying the application.92 Furthermore, we note that paragraph (d)(1) of 

the Rule as adopted requires that the application include a copy of the order or other applicable 

document that resulted in the associated person being subject to a statutory disqualification.

Therefore, the orders or other applicable documents provided with the application may go back 

longer than five years.93

In addition, the Commission does not agree with the commenter that a ten-year time 

period would be more consistent with the current practice in similar contexts. Paragraph (d)(4) 

of the final rule requires a copy of any decision, order, or document issued with respect to any 

proceeding resulting in the imposition of disciplinary sanctions or pending proceeding against 

the associated person by the Commission, CFTC, any federal or state or law enforcement 

regulatory agency, registered futures association, foreign financial regulatory authority, 

registered national securities association, or any other SRO, or commodities exchange, or any 

court, that occurred during the five years preceding the filing of the application pursuant to Rule 

of Practice 194. FINRA’s membership continuance applications require analogous disciplinary 

information for a five-year time period—not a ten-year time period.94 For example, like

92 We note that the Appendix paragraph (c) to Rule of Practice 194 states that, in addition to 

the information required by the rule, Commission staff may request supplementary 

information from the applicant to assist in the Commission’s review. See also Proposing 

Release, 80 FR at 51689, n.54, 51722 (proposing the same requirement).

93 For example, statutory disqualification may result where an associated person has 

committed “any other felony within ten years.” 15 U.S.C. 78c(a)(39)(F). See also, e.g., 

15 U.S.C. 80a-9(a) (ineligibility under Section 9(a) of the Investment Company Act of 

1940 (“Investment Company Act”) may result where a person (or an affiliated person) 

within ten years has been convicted of any felony or misdemeanor involving the purchase 

or sale of any security or arising out of such person’s conduct as an underwriter, broker, 

dealer, investment adviser, or in other specified categories).

94 See FINRA Form MC-400, Section 4, Items 9a, 11; FINRA Form MC-400A, Section 2, 

Items 4, 5.
- 32 -

paragraph (d)(4), FINRA Form MC-400, Section 4, Items 9 and FINRA Form MC-400A, 

Section 2, Item 4 request information within the past five years concerning “any proceeding 

which has resulted in the imposition of disciplinary sanctions by FINRA, the U.S. Securities and 

Exchange Commission, the Commodity Futures Trading Commission, any federal or regulatory 

agency, foreign financial regulatory authority, any self-regulatory organization or commodities 

exchange, or any court or state agency.”95 Additionally, the Commission’s Rule of Practice 193 

only requires compliance and disciplinary history during the two years preceding the filing of a 

Rule 193 application.96

As with the proposed rule, under the terms of the final rule, the SBS Entity (rather than 

the associated person) will be required to submit the application, including the signed written 

statement under paragraph (d). Further, as specified below, the Commission is requiring certain 

information (e.g., concerning the supervision by the SBS Entity over the associated person) to be 

submitted with the application that is within the possession of the SBS Entity itself. An 

application under Rule of Practice 194, as proposed and adopted, will be filed pursuant to Rules 

of Practice 151, 152 and 153.97 The Commission believes that filing pursuant to these rules will 

provide the Commission with the information that it needs to assess an application under Rule of 

Practice 194.

95 FINRA Form MC-400, Section 4, Item 9a; FINRA Form MC-400A, Section 2, Item 4.

96 See 17 CFR 201.193(b)(4)(iii). However, and as noted above, although paragraph (d)(4) 

(and other provisions relating to information that an applicant must provide regarding an 

individual’s disciplinary history) provide for a five-year time period, applicants will be 

required under paragraph (d)(1) of the final rule to provide the Commission with a copy 

of an order or other applicable document which subjects the individual to, a statutory 

disqualification irrespective of when the misconduct that gives rise to the statutory 

disqualification occurred (e.g., even if outside the five-year time period).

97 17 CFR 201.151, 201.152, 201.153. See also Note 88, supra.
- 33 -

E. Rule of Practice 194(e) – Written Statement

Proposed Rule of Practice 194 would have set forth the items to be addressed for 

applications for natural persons.98 In particular, the Commission proposed to require an 

applicant to address certain information in the written statement. For associated persons that are 

natural persons, an SBS Entity would be required to address: (i) the associated person’s 

compliance with any order resulting in the statutory disqualification;99 (ii) the associated 

person’s employment during the period subsequent to the event giving rise to the statutory 

disqualification;100 (iii) the capacity or position in which the associated person subject to a 

statutory disqualification proposes to be associated with the SBS Entity;101 (iv) the terms and 

conditions of employment and supervision to be exercised over the associated person and, where 

applicable, by such associated person;102 (v) the qualifications, experience, and disciplinary 

history103 of the proposed supervisor(s) of the associated person;104 (vi) the compliance and

98 See Proposing Release, 80 FR at 51691-93, 51719-20; proposed Rule of Practice 194(d). 

The proposal also set forth the items to be addressed for applications for associated 

person entities. See proposed Rule of Practice 194(f). Rule of Practice 194(c), as 

adopted, provides an exclusion for an SBS Entity from the prohibition in Exchange Act 

Section 15F(b)(6) with respect to associated persons entities; therefore, the corresponding 

provision with respect to associate person entities, proposed Rule of Practice 194(f), is 

not needed and is not being adopted.

99 See proposed Rule of Practice 194(d)(1).

100 See id. (d)(2).

101 See id. (d)(3).

102 See id. (d)(4).

103 Disciplinary history would include, for example, the items contained in Exchange Act 

Rule 17a-3(a)(12)(i)(D) through (G), 17 CFR 240.17a-3(a)(12)(i)(D) through (G), which 

items are required to be collected by broker-dealers with respect to their associated 

persons and are required to be provided on Form U-4. Such items include, among other 

things, a record of any disciplinary action taken, or sanction imposed, upon the associated 

person by any federal or state agency, or national securities exchange or national 

securities association, a record of any permanent or temporary injunction entered against
- 34 -

disciplinary history, during the five years preceding the filing of the application, of the SBS 

Entity;105 (vii) the names of any other statutorily disqualified associated persons at the SBS 

Entity, and whether they are to be supervised by the associated person;106 (viii) whether the 

associated person has taken any relevant courses, seminars, examinations or other actions 

subsequent to becoming subject to a statutory disqualification to prepare for his or her 

participation in the security-based swap business;107 (ix) why the associated person should be 

permitted to effect or be involved in effecting security-based swaps on behalf of the SBS 

Entity;108 (x) whether, during the five years preceding the filing of the application, the associated 

person has been involved in any litigation concerning investment or investment-related activities 

or whether there are there any unsatisfied judgments outstanding against the associated person 

concerning investment or investment-related activities;109 and (xi) any other information that the

the associated person, or a record of any arrest or indictment for any felony or certain 

specified types of misdemeanors. See also Recordkeeping and Reporting Requirements 

for Security-Based Swap Dealers, Major Security-Based Swap Participants, and BrokerDealers; Capital Rule for Certain Security-Based Swap Dealers, Exchange Act Release 

No. 71958 (Apr. 17, 2014), 79 FR 25194, 25205, 25308-09 (May 2, 2014).

104 See proposed Rule of Practice 194(d)(5).

105 See id. (d)(6).

106 See id. (d)(7).

107 See id. (d)(8).

108 See id. (d)(9).

109 See id. (d)(10). Applicants should look to the definition of “investment or investmentrelated” in Form SBSE, which states that “investment or investment-related” includes 

“pertaining to securities, commodities, banking, savings association activities, credit 

union activities, insurance, or real estate (including, but not limited to, acting as or being 

associated with a broker-dealer, municipal securities dealer, government securities broker 

or dealer, issuer, investment company, investment adviser, futures sponsor, bank, 

security-based swap dealer, major security-based swap participant, savings association, 

credit union, insurance company, or insurance agency).” See Registration Adopting 

Release, Form SBSE.
- 35 -

applicant believes to be material to the application.110

The Commission did not receive any specific comments on the items to be addressed set 

forth in the proposal. However, as discussed in Section III.D above, the Commission received 

one general comment stating that the Commission should require applicants to address 

disciplinary events going back ten years, not five years.111 For the same reasons set forth above 

in Section III.D, the Commission is adopting the five-year time period as proposed, and for the 

reasons discussed in the proposal,112 the Commission is adopting renamed paragraph (e) of Rule 

of Practice 194, as proposed, with four minor technical changes.113

F. Rule of Practice 194(f) – Prior Applications or Processes

Proposed Rule of Practice 194 would have required an applicant to provide as part of the 

application any order, notice or other applicable document reflecting the grant, denial or other 

disposition (including any dispositions on appeal) of any prior application concerning the 

associated person under Rule of Practice 194 and other similar processes.114 More specifically, 

the proposal would have required an applicant to provide any order, notice or other applicable

110 See proposed Rule of Practice 194(d)(11).

111 See Better Markets Letter, at 6. The commenter did not specify a particular provision of 

the proposal.

112 See Proposing Release, 80 FR at 51691-93, 51719-20; proposed Rule of Practice 194(d).

113 The technical changes are (1) updating an internal cross reference to subsection (c) in the 

proposal to reflect subsection (d) in final Rule of Practice 194; (2) moving the phrase 

“notwithstanding the event resulting in statutory disqualification” from an introductory 

phrase to later in the text of subparagraph (9) to clarify any possible ambiguity in 

subparagraph (9) without changing the scope of that provision; (3) updating the technical 

wording in subparagraph (e)(9) to more closely conform to the other provisions in 

subsection (e) by removing the phrase “the applicant should provide;” and (4) changing 

the term “impact upon” to “affect” to clarify any possible ambiguity in subparagraph (9) 

without changing the scope of the provision.

114 See Proposing Release, 80 FR at 51693-94, 51720-21; proposed Rule of Practice 194(g).
- 36 -

document where an application has previously been made for the associated person: (1) pursuant 

to Rule of Practice 194;115 (2) pursuant to Rule of Practice 193;116 (3) pursuant to Section 9(c) of 

the Investment Company Act;117 (4) pursuant to Exchange Act Section 19(d),118 Exchange Act 

Rule 19h-1119 or a proceeding by an SRO for a person to become or remain a member, or an 

associated person of a member, notwithstanding the existence of a statutory disqualification; and

(5) by the CFTC or a registered futures association for registration, including as a principal, 

notwithstanding the existence of a statutory disqualification.120 Proposed Rule of Practice 194 

also addressed: (i) the exception in CFTC Regulation 23.22(b)121 by requiring an SBS Entity to 

provide any order or other applicable document providing that the associated person may be 

listed as a principal, registered as an associated person of another CFTC registrant, or registered 

as a floor broker or floor trader, notwithstanding the statutory disqualification and (ii) the 

CFTC’s and NFA’s current process for granting relief from CEA Section 4s(b)(6),122 the

115 See proposed Rule of Practice 194(g)(1).

116 17 CFR 201.193; see proposed Rule of Practice 194(g)(2).

117 15 U.S.C. 80a-9(c); see proposed Rule of Practice 194(g)(3).

118 15 U.S.C. 78s(d); see proposed Rule of Practice 194(g)(4).

119 17 CFR 240.19h-1.

120 See proposed Rule of Practice 194(g)(5).

121 17 CFR 23.22(b); see proposed Rule of Practice 194(g)(5)(i). Under that provision, the 

CFTC allows association with a Swap Entity with respect to a person who is already 

listed as a principal, registered as an associated person of another CFTC registrant, or 

registered as a floor broker or floor trader, notwithstanding that the person is subject to a 

statutory disqualification under section 8a(2) or 8a(3) (7 U.S.C. 12a(2), (3)) of the CEA. 

See Note 11, supra.

122 7 U.S.C. 6s(b)(6); see proposed Rule of Practice 194(g)(5)(ii). This provision requires 

the SBS Entity to submit any determination by NFA (the sole registered futures 

association, see CFTC Registration Release, 77 FR at 2624) with respect to that grant of 

no-action relief. The Commission is adopting the language in paragraph (f)(5)(ii) largely 

as proposed but with a minor technical modification to more accurately reflect the
- 37 -

provision that is parallel to Exchange Act Section 15F(b)(6), with respect to persons that are not 

exempt from that provision pursuant to CFTC Regulation 23.22(b).123

Although the Commission did not receive any comments specifically addressing this 

provision of the proposal, one commenter stated that the Commission should take into account 

the views of other regulatory bodies that may have adjudicated similar issues with respect to the 

associated persons subject to a statutory disqualification.124 Renamed paragraph (f) of Rule of 

Practice 194, as adopted, will facilitate the Commission’s ability to take such views into account.

Paragraph (f) to Rule of Practice 194 is designed to inform the Commission when a 

similar application made with respect to the associated person has been granted or denied (or 

been subject to some other disposition).125 Information concerning the grant or denial (or other 

disposition) of a prior application or other request for relief, and the reasons for the grant or 

denial, may inform the Commission’s assessment as to whether it would be consistent with the 

public interest for the person to effect or be involved in effecting security-based swaps on behalf 

of an SBS Entity.

For example, in the event that a prior application has been granted, but the terms and 

conditions of the association with the other registrant are materially different than the proposed 

terms and conditions of the statutorily disqualified person’s association with the SBS Entity, the

CFTC’s and NFA’s approach to statutory disqualification.

123 17 CFR 23.22(b).

124 Letter from Elijah E. Cummings, Ranking Member, Committee on Oversight and 

Government Reform, U.S. House of Representatives, dated November 13, 2015 

(“Cummings Letter”), at 2.

125 As discussed in the Proposing Release, in cases where a statutorily disqualified person 

was formerly associated with another SBS Entity, an applicant should use reasonable 

efforts to obtain relevant documentation from the other SBS Entity.
- 38 -

Commission could consider whether the terms and conditions at the SBS Entity that are different 

may result in any greater risk of future misconduct.126

Accordingly, for reasons discussed in the proposal,127 the Commission is adopting 

renamed Rule of Practice 194(f), as proposed, with one minor technical change to more 

accurately reflect the CFTC’s and NFA’s approach to statutory disqualification.

The proposal would have required an applicant to provide any order, notice or other 

applicable document reflecting the grant, denial or other disposition (including any dispositions 

on appeal) of any prior application or process concerning the associated person by the CFTC and 

NFA through their process for granting relief from CEA Section 4s(b)(6)128 with respect to 

persons that are not exempt from that provision pursuant to CFTC Regulation 23.22(b).129 Under 

the CEA and CFTC regulations, the consequences of an individual’s statutory disqualification 

differ depending upon whether the individual is an associated person of a CFTC registrant or a

126 Notably, in circumstances where the prior application has been denied or where the terms 

and conditions of employment are not the same, an SBS Entity cannot avail itself of 

paragraph (h) of Rule of Practice 194, see Section III.H, infra, and therefore will be 

required to file an application under Rule of Practice 194 in order to permit an associated 

person subject to a statutory disqualification to be able to effect or be involved in 

effecting security-based swaps on behalf of an SBS Entity.

127 See Rule of Practice 194 Proposing Release, 80 FR at 51693-94, 51720-21.

128 7 U.S.C. 6s(b)(6).

129 17 CFR 23.22(b). See Proposing Release, 80 FR at 51693-51694, 51721; proposed Rule 

of Practice 194(g)(5(ii). Under the CFTC and NFA’s process, available through noaction relief granted by CFTC staff, a Swap Entity may make an application to NFA to 

permit an associated person of a Swap Entity subject to a statutory disqualification to 

effect or be involved in effecting swaps on behalf of the Swap Entity. NFA will provide 

notice to a Swap Entity whether or not NFA would have granted the person registration 

as an associated person. As noted in the Proposing Release, and as adopted here as well, 

the rule requires the SBS Entity to submit any determination by NFA (the sole registered 

futures association) with respect to that grant of no-action relief. See CFTC Letter No. 

12–15, at 5–8 (Oct. 11, 2012), available at 

http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-15.pdf.
- 39 -

principal of a CFTC registrant. An associated person of a CFTC registrant is required to register 

separately with the CFTC by filing his or her own application for registration. Therefore, if the

associated person of a CFTC registrant has a statutory disqualification, the application for 

registration will be denied unless the associated person goes through the process established by 

NFA to be registered notwithstanding the statutory disqualification. However, a principal of a 

CFTC registrant does not apply, either for registration or to be listed as a principal. Rather, the 

entity of which the person is a principal is required to list that principal on the entity’s 

application for registration with the CFTC. As a result, if the principal has a statutory 

disqualification, the entity’s application for registration with the CFTC will be denied unless the 

entity goes through the process with NFA to be registered, notwithstanding having to list a 

statutorily disqualified principal.130

G. Rule of Practice 194(g) – Notification to Applicant and Written Statement

Proposed Rule of Practice 194 would have set forth the procedure where there is an 

adverse recommendation proposed by the Commission staff with respect to an application under 

proposed Rule of Practice 194.131 Consistent with Rule of Practice 193(e),132 the Commission 

proposed that where there would be an adverse recommendation, the applicant would be so 

advised and provided with a written statement by the Commission staff of the reasons for such

130 Accordingly, the Commission has adopted the following language with the new language

underlined for subpart (ii): “Any determination by a registered futures association (as 

provided in 7 U.S.C. 21) that had the associated person applied for registration as an 

associated person of a swap dealer or a major swap participant, or had a swap dealer or

major swap participant listed the associated person as a principal in the swap dealer’s or

major swap participant’s application for registration, notwithstanding statutory 

disqualification, the application of the associated person or of the swap dealer or major

swap participant, as the case may be, would have been granted or denied.”

131 See Proposing Release, 80 FR at 51694, 51721; proposed Rule of Practice 194(h).

132 17 CFR 201.193(e).
- 40 -

recommendation, and the applicant would then have 30 days to submit to the Commission a 

written statement in response.133

The Commission did not receive comments concerning this provision of the proposal 

and, for the reasons discussed in the proposal, is adopting renamed paragraph (g) of Rule of 

Practice 194 as proposed.134

H. Rule of Practice 194(h) – Notice in Lieu of an Application

Proposed Rule of Practice 194 would have limited the applicability of the statutory 

prohibition in Exchange Act Section 15F(b)(6) by prescribing the conditions under which an 

SBS Entity could permit a person associated with it who is subject to a statutory disqualification 

to effect or be involved in effecting security-based swaps on its behalf without being required to 

file an application under Rule of Practice 194.135 The Commission proposed to permit, subject to 

all of the conditions specified in proposed paragraph (j)(2) being met,136 an associated person 

who is subject to a statutory disqualification to effect or be involved in effecting security-based 

swaps on behalf of SBS Entities where the Commission or other regulatory authority previously 

reviewed the matter and permitted the person subject to a statutory disqualification to be a 

member, associated with a member, registered or listed as a principal of a regulated entity 

notwithstanding the statutory disqualification.137 The Commission also proposed that where an

133 See Proposing Release, 80 FR at 51694, 51721; proposed Rule of Practice 194(h).

134 See id.

135 Proposing Release, 80 FR at 51698-700, 51721-22; proposed Rule of Practice 194(j).

136 As explained in the proposal, “[a]n SBS Entity seeking to rely on proposed Rule of 

Practice (j)(1) would have to meet all of the conditions specified in proposed paragraph 

(j)(2).” Id. at 51699. The same is true for adopted Rule of Practice 194(h).

137 See id. at 51698-99 (discussing proposed paragraph (j)(1)(i) through (iv)). These same 

provisions are being adopted in Rule of Practice 194(h)(1)(i) through (iv). We note that
- 41 -

SBS Entity meets certain requirements the SBS Entity would be permitted to file notice with the 

Commission (in lieu of an application).138

The Commission received comments objecting generally to the proposal.139 One 

commenter stated that the provision should not be adopted as proposed because FINRA’s 

statutory disqualification process is “typically designed for individuals” and Exchange Act 

Section 15F(b)(4) creates a “new statutory disqualification.” As outlined above, FINRA member 

firms that are themselves subject to a statutory disqualification and wish to obtain relief from the 

eligibility requirements are required to seek approval from FINRA.140 Furthermore, Exchange 

Act Section 15F(b)(4)141 does not reference “statutory disqualification” or otherwise establish a 

category of conduct that would disqualify an associated person from effecting or being involved 

in effecting security-based swaps.142

Rule of Practice 194(h) would not be applicable in instances where the Commission itself 

has made an affirmative determination to bar or suspend the associated person. See id. at 

51698 (explaining that, other than in cases where the person is subject to a Commission 

bar, the Commission did not believe it would be necessary to re-examine an event for 

which relief has already been granted by the CFTC, an SRO or a registered futures 

association).

138 See Proposing Release, 80 FR at 51699-700; proposed Rule of Practice 194(j)(2)(iii), 

(iv).

139 Americans for Financial Reform Letter, at 2; Better Markets Letter, at 3-4; Public Citizen 

Letter, at 4-5; Cummings Letter, at 2-3.

140 See Note 9, supra (discussing FINRA Form MC-400A, Membership Continuance 

Application: Member Firm Disqualification Application, 

http://www.finra.org/web/groups/industry/@ip/@enf/@adj/documents/industry/p013339.

pdf).

141 As noted above, see Note 54, supra, Exchange Act Section 15F(b)(4) provides the 

Commission with authority (other than certain inapplicable exceptions specified in 

Exchange Act Section 15F(b)(4)(d) and (e)) to “prescribe rules applicable to securitybased swap dealers and major security-based swap participants.” 15 U.S.C. 78o-10(b)(4).

142 Rather, Exchange Act Section 15F(b)(6) references “statutory disqualification,” and the 

Commission has previously stated that a “statutory disqualification” for purposes of
- 42 -

The Commission also received comments arguing that allowing deference to SROs is 

inconsistent with current practice.143 However, the Commission observes that Rule of Practice 

194(h) is generally consistent with the current practice with respect to SROs and their members. 

For example, the information provided by the notice under adopted paragraph (h)(2)(iii) is 

consistent with the information that is currently required for a notification under Exchange Act 

Rule 19h-1(a)(4).144 In the event that the views of the Commission were to diverge from the 

CFTC, an SRO or a registered futures association with respect to an associated person subject to 

a statutory disqualification under the statutory scheme of the Exchange Act, under Exchange Act 

Section 15F(l)(3), the Commission retains the authority to, by order, censure, place limitations 

on the activities or functions of the associated person, or suspend or bar such person from being 

associated with an SBS Entity.145 As a result, even in cases where the CFTC, an SRO or a 

registered futures association has previously granted relief and an SBS Entity files a notice in 

lieu of an application under Rule of Practice 194(h), the Commission may, in the appropriate 

case, institute proceedings under Exchange Act Section 15F(l)(3) to determine whether the 

Commission should censure, place limitations on the activities or functions of such person, or

Exchange Act Section 15F(b)(6) is not a new defined term (with additional categories), 

but rather is described (consistent with other contexts) in Exchange Act Sections 

3(a)(39)(A) through (F). 15 U.S.C. 78c(a)(39)(A) through (F); see also Registration 

Adopting Release, 80 FR at 48972; 17 CFR 240.15Fb2-1(e); 17 CFR 240.15Fb6-1; 17 

CFR 240.15Fb6-2.

143 See Americans for Financial Reform Letter, at 2. See also Cummings Letter, at 2-3 

(arguing that the Commission should not delegate its authority to interpret the Exchange 

Act to the CFTC, FINRA or a registered futures association, in part, because “[n]one of 

the entities to which the proposed rule would grant the authority to issue a waiver has 

been granted that responsibility by statute.”).

144 17 CFR 240.19h-1(a)(4); proposed Rule of Practice 194(j)(2)(iii), (iv).

145 15 U.S.C. 78o-10(l)(3). See also Proposing Release, 80 FR at 51698 n.98.
- 43 -

suspend for a period not exceeding 12 months, or bar such person from being associated with an 

SBS Entity.146 The Commission also believes that where the conditions set forth in paragraph (h) 

are met, it would not be necessary for the Commission (other than in cases where the person is 

subject to a Commission bar) to re-examine by means of a full application under Rule of Practice 

194 an event for which relief has already been granted. Rather, the Commission believes that the 

better approach is to require an applicant to provide a notice under Rule of Practice 194(h) in lieu 

of a full application under Rule of Practice 194, which would alert the Commission to issues that 

could lead to the institution of proceedings pursuant to Exchange Act Section 15F(l)(3)147 where 

doing so is appropriate.

Another commenter argued that the Commission should not “delegate” its authority to 

determine whether an exclusion from Exchange Act Section 15F(b)(6) is appropriate because 

regulators administer different statutory schemes and have different priorities.148 This same 

commenter argued that this proposed subsection should not be adopted because, among other 

things, the Commission should exercise its own judgment in each case to ensure that the policies 

underlying the securities laws are fulfilled.149

The Commission acknowledges that other regulators administer different statutory

146 See 15 U.S.C. 78o-10(l)(3). See also, e.g., 15 U.S.C. 15(b)(6).

147 15 U.S.C. 78o-10(l)(3).

148 See Better Markets Letter, at 3-4.

149 See Better Markets Letter, at 3-4 (arguing that this proposed subsection should not be 

adopted because the Commission should exercise its judgment in each case to ensure that 

the policies underlying the securities laws are fulfilled and because the proposal would 

not ensure that applications for an exemption from disqualification will be subject to 

strong, consistent, and relevant considerations under the securities laws).
- 44 -

schemes,150 but it does not believe that the applicable standards that regulators identified in 

paragraph (h) use in their respective statutory disqualification processes are sufficiently different 

to warrant requiring SBS Entities to file a full application under Rule of Practice 194, as opposed 

to a notice in lieu of an application. In particular, the CFTC and NFA assess whether registration 

would not pose a substantial risk to the public despite the existence of the statutory 

disqualification.151 Likewise, and as noted above, consistent with Exchange Act Section 

15A(g)(2),152 under Article 3, Section 3(d) of the FINRA By-Laws,153 the FINRA Board may, in 

its discretion, approve the continuance in membership, and may also approve the association or 

continuance of association of any person, if the FINRA Board determines that such approval is 

consistent with the public interest and the protection of investors.154 Although the CFTC or a 

registered futures association may not review “considerations under the securities laws,”155 and 

may have “different statutory schemes and . . . different priorities,”156 those regulators, and 

SROs, will generally assess whether it is consistent with the public interest to permit a person 

who is subject to statutory disqualification to be associated with (or a principal of) a registered 

entity. As a result, a review by the regulators provided for in paragraph (h) would substantially 

overlap with any review that the Commission would undertake in assessing whether an applicant

150 See Better Markets Letter, at 3-4; Cummings Letter, at 2-3.

151 See CEA Regulation 3.60(e)(1), (2), 17 CFR 3.60(e)(1)(2), NFA Registration 507(a)(1), 

(2).

152 15 U.S.C. 78o-3(g)(2).

153 See FINRA By-Laws, Article III, Section 3(d), 

http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=4606.

See also Registration Proposing Release, 80 FR at 51687.

154 See also FINRA Rules 9522(e), 9524(b)(1).

155 See Better Markets Letter, at 3-4.

156 Id.
- 45 -

has made a showing under Rule of Practice 194(b) that it would be consistent with the public 

interest to grant relief with respect to a statutorily disqualified associated person. And, as stated, 

the Commission will retain authority under Exchange Act Section 15F(l)(3)157 to determine 

whether potential considerations under the securities law would warrant diverging from a 

decision of another regulator in a particular matter.

Similarly, the Commission received comments arguing that SROs are conflicted or do not 

otherwise have the impartiality necessary to make decisions regarding the best interests of the 

public.158 While the Commission has carefully considered the concerns raised by these 

commenters, the Commission believes that the statutory and regulatory framework under which 

SROs operate (including the Commission’s oversight function of SROs159 and the CFTC’s 

oversight of the NFA160), and the Commission’s independent authority to, where appropriate,

157 15 U.S.C. 78o-10(l)(3).

158 See Public Citizen Letter, at 4-5; Better Markets Letter, at 3-4; Cummings Letter, at 2; 

Americans for Financial Reform Letter, at 2.

159 As stated in Note 9, supra, an SRO may be required to send a notice or notification to the 

Commission of its proposal to admit or continue the membership of a person or 

association with a member notwithstanding statutory disqualification in accordance with 

Exchange Act Rule 19h-1. See 17 CFR 240.19h-1. Under Exchange Act Section 

15A(g)(2), 15 U.S.C. 78o-3(g)(2), where it is necessary or appropriate in the public 

interest or for the protection of investors, the Commission may, by order, direct the SRO 

to deny membership to any registered broker or dealer, and bar from becoming associated 

with a member any person, who is subject to a statutory disqualification. See also 15

U.S.C. 78f(c)(2) (national securities exchange); 15 U.S.C. 78q-1(b)(4)(A) (registered 

clearing agency).

160 The NFA is a registered futures association under section 17 of the CEA, 7 U.S.C. 21, 

and is the SRO for swap transactions. Section 17(h) of the CEA provides for CFTC 

review of certain NFA decisions, including the NFA’s disciplinary actions and member 

responsibility actions, as do the CFTC’s Part 171 Rules, 17 CFR §§ 171.1-171.50. In 

addition, the CFTC may institute review of disciplinary actions taken by the NFA on its 

own motion. See 17 U.S.C. 21(h)(3). See also CFTC, Division of Clearing and 

Intermediary Oversight, Review of the Disciplinary Program of National Futures
- 46 -

institute proceedings with respect to the statutorily disqualified associated person under 

Exchange Act Section 15F(l)(3), serves to mitigate commenters’ concerns.161 SROs are 

entrusted with quasi-governmental authority, and, subject to Commission oversight.162 SROs 

must also be organized and have the capacity to carry out the purposes of the Exchange Act and 

to comply and enforce compliance by its members and persons associated with its members with 

the Exchange Act, the rules and regulations thereunder and the rules of the SRO.163 The 

Exchange Act reflects a recognition of self-regulation as a fundamental component of the 

oversight and supervision of U.S. securities markets and their members.

The Commission likewise disagrees with a commenter’s view that “[n]one of the entities 

to which the proposed rule would grant the authority to issue a waiver has been granted that 

responsibility by statute.”164 To the extent that the commenter may be concerned that the 

Commission does not have the statutory authority to rely on prior determinations made by those 

regulators, as set forth in Rule of Practice 194(h), Exchange Act Section 15F(b)(6) expressly 

provides broadly and without limitation that the Commission can establish exceptions to that 

statutory prohibition by “rule, regulation, or order.”165 Granting relief from the statutory 

prohibition to SBS Entities where the conditions set forth in Rule of Practice 194(h) are met, 

including the filing of a notice in lieu of an application, is within the scope of the statutory

Association, July 2002, 

https://www.cftc.gov/sites/default/files/files/tm/tmnfarer071102.pdf.

161 See 15 U.S.C. 78o-10(l)(3); Proposing Release, 80 FR at 51698 n.98.

162 See, e.g., 15 U.S.C. 78o-3 (registered securities associations); 15 U.S.C. 78s(registration, 

responsibilities, and oversight of SROs).

163 See, e.g., 15 U.S.C. 78o-3(b)(2).

164 See Cummings Letter, at 2.

165 15 U.S.C. 78o-10(b)(6).
- 47 -

authority provided to the Commission under Exchange Act Section 15F(b)(6).166 Moreover, the 

regulators identified in paragraph (j) are currently granted the authority under their own statutory 

and regulatory frameworks to provide relief from a statutory disqualification.167 Paragraph (h) 

does not “delegate [the Commission’s] authority to interpret the Exchange Act”168 because such 

regulators only interpret their own statutory and regulatory frameworks with respect to persons 

subject to a statutory disqualification. The Commission believes that where the conditions set 

forth in paragraph (h) are met, it would not be necessary for the Commission (other than in cases 

where the person is subject to a Commission bar) to re-examine by means of a full application 

under Rule of Practice 194 an event for which relief has already been granted. Rather, the 

Commission believes that the better approach is to require an applicant to provide a notice under 

Rule of Practice 194(h) in lieu of a full application under Rule of Practice 194, which would alert 

the Commission to issues that could lead to the institution of proceedings pursuant to Exchange 

Act Section 15F(l)(3)169 where doing so is appropriate.

Another commenter objected to the proposal on the grounds that the Commission should 

itself make a determination, rather than the CFTC, an SRO or a registered futures association, in 

part, because the proposal would “render[] the [Commission] unaccountable to Congress.”170

The Commission also received a comment objecting to the proposal on the grounds that the 

Commission retains sole authority and responsibility to interpret and adjudicate the entire body 

of securities law in the public interest and any waiver decision should be reviewed by the

166 See 5 U.S.C. 78o-10(b)(4). See also Note 54, supra.

167 See Registration Adopting Release, 80 FR at 51687-89.

168 See Cummings Letter, at 2.

169 15 U.S.C. 78o-10(l)(3).

170 Public Citizen Letter, at 4-5.
- 48 -

Commission.171 In all cases where paragraph (h) applies, although the Commission would not 

receive an application under Rule of Practice 194, the Commission would be able to review the 

facts of cases.172 Nor is it the case that paragraph (h) of Rule of Practice 194 would “render[] the 

[Commission] unaccountable to Congress”173 or divest the Commission of its “sole authority and 

responsibility to interpret and adjudicate the entire body of securities law in the public 

interest,”174 because, as noted above, the Commission retains its statutory authority to bring an 

action under Exchange Act Section 15F(l)(3).

After careful consideration of the comments received, and for the reasons discussed in the 

proposal,175 the Commission is adopting renamed paragraph (h) to Rule of Practice 194 as 

proposed, with five technical modifications. First, because Rule of Practice 194, as adopted, 

provides an exclusion for an SBS Entity from the prohibition in Exchange Act Section 15F(b)(6) 

with respect to associated persons entities, references in the proposed rule text to “is a natural 

person”176 and one proposed subsection, which pertained to associated person entities only,177 are 

no longer needed, and are not being adopted. Second, certain internal cross references to other 

provisions within this subsection are being revised to reflect renamed Rule of Practice 194(h).178

Third, the phrase “or otherwise by the Commission” is being added to paragraph (h)(1)(ii) to

171 Cummings Letter, at 2-3.

172 Contra Americans for Financial Reform Letter, at 2.

173 Public Citizen Letter, at 5.

174 Cummings Letter, at 2.

175 See Proposing Release, 80 FR at 51698-700, 51721-22.

176 See proposed Rule of Practice 194(j)(1)(ii), (j)(2)(iii).

177 See id. (j)(2)(iv).

178 Internal cross references to subsection (j) in the proposal are being updated to reflect 

subsection (h) in final Rule of Practice 194. See id. (j)(1), (j)(2)(ii).
- 49 -

address situations where the Commission has granted a natural person consent to associate or 

change the terms and conditions of association with a regulated entity even if that consent was 

not granted pursuant to Rule of Practice 193.179 Fourth, the Commission is changing the phrase a 

“person that is subject to a statutory disqualification” (emphasis added) in paragraphs (h)(1) and 

(h)(2) to read a “person who is subject to a statutory disqualification” (emphasis added) to more 

closely track the language used in Exchange Act Section 15F(b)(6).180 Finally, a reference to the 

Commission’s Rules of Practice 151, 152 and 153 is being added to provide guidance on how the 

notice in Rule of Practice 194 (h)(2)(iii) should be filed with the Commission.181

I. Note to Rule of Practice 194

The Commission proposed adopting an accompanying Note to Rule of Practice 194, 

similar to the Preliminary Note to Rule of Practice 193.182 The Commission received no 

comments concerning the Note to proposed Rule of Practice 194 and is adopting, for the reasons 

discussed in the proposal, the Note substantially as proposed.183

As adopted, the Note to Rule of Practice 194 provides that:

• An application made pursuant to the rule must show that it would be consistent with the

179 This modification to paragraph (h)(1)(ii) is intended to address a regulatory gap with 

respect to Commission orders granting natural persons consent to associate with 

regulated entities that are not currently listed in Rule of Practice 193, such as, for 

example, natural persons associated with municipal advisors. Although Rule of Practice 

193 does not currently mention municipal advisors, Rule 15Bc4-1 states that the 

Commission may “consent” to a person being associated with a municipal advisor. As a 

result, this modification will include Commission orders granting such consent within the 

scope of Rule 194.

180 See Note 82, supra (discussing the same technical change to Rule of Practice 194(d)).

181 See Note 88, supra (discussing the Commission’s Rules of Practice 151, 152 and 153).

182 See Proposing Release, 80 FR at 51700-01; proposed Rule of Practice 194, Appendix.

See also 17 CFR 201.193, Preliminary Note.

183 See Proposing Release, 80 FR at 51700-01.
- 50 -

public interest to permit the associated person of the SBS Entity to effect or be involved 

in effecting security-based swaps on behalf of the SBS Entity.184

• The nature of the supervision that an associated person will receive or exercise as an 

associated person with a registered entity is an important matter bearing upon the public 

interest.

• In meeting the burden of showing that permitting the associated person to effect or be 

involved in effecting security-based swaps on behalf of the SBS Entity is consistent with 

the public interest, the application and supporting documentation must demonstrate that 

the terms or conditions of association, procedures, or proposed supervision (if the 

associated person is a natural person), are reasonably designed to ensure that the statutory 

disqualification does not negatively affect the ability of the associated person to effect or 

be involved in effecting security-based swaps on behalf of the SBS Entity in compliance 

with the applicable statutory and regulatory framework. The Commission made one 

technical amendment in the Note to Rule of Practice 194 to change the term “impact 

upon” to “affect” in order to clarify any possible ambiguity without changing the scope of 

the provision.

• Normally, the applicant’s burden of demonstrating that permitting the associated person 

to effect or be involved in effecting security-based swaps on behalf of the SBS Entity is 

consistent with the public interest will be difficult to meet where the associated person is 

to be supervised by, or is to supervise, another statutorily disqualified individual.

• The associated person may be limited to association in a specified capacity with a

184 See Section III.B, supra.
- 51 -

particular registered entity and may also be subject to specific terms and conditions.

Notably, the Commission proposed that where the associated person wishes to become 

the sole proprietor of a registered entity and thus is seeking that the Commission issue an order 

permitting the associated person who is subject to a statutory disqualification to effect or be 

involved in effecting security-based swaps on behalf of an SBS Entity notwithstanding an 

absence of supervision, the applicant’s burden will be difficult to meet.185 The Commission has 

modified this sentence because the Commission does not anticipate that a registered SBS Entity 

will be formed as a sole proprietorship in light of the de minimis exception to the definition of 

“security-based swap dealer”186 and the thresholds applicable to the definition of “major 

security-based swap participant.”187 As modified, paragraph (i)(5) to the Note to Rule of 

Practice 194 provides that where there is an absence of supervision over the associated person 

who is subject to a statutory disqualification, the applicant’s burden will be difficult to meet. 

The Commission is including this statement because, as stated, the Commission believes that 

there is a greater risk of harm where the associated person subject to a statutory disqualification 

is not subject to adequate supervision.

Finally, the Note discusses various procedural aspects of Rule of Practice 194, including 

the following:

• In addition to the information specifically required by the rule, applications with respect 

to natural persons should be supplemented, where appropriate, by written statements of

185 See, e.g., Final Rule of Practice 194(e)(3). See also Proposing Release, 80 FR at 51700, 

51722. Accord 17 CFR 201.193, Preliminary Note.

186 See 17 CFR 240.3a71-2.

187 See, e.g., 17 CFR 240.3a67-1(a)(2), 240.3a67-3, 240.3a67-5, 3a67-9.
- 52 -

individuals who are competent to attest to the associated person’s character, employment 

performance, and other relevant information.

• In addition to the information required by the rule, the Commission staff may request 

additional information to assist in the Commission’s review.

• Intentional misstatements or omissions of fact may constitute criminal violations of 18

U.S.C. 1001, et seq. and other provisions of law.

• The Commission will not consider any application that attempts to reargue or collaterally 

attack the findings that resulted in the statutory disqualification.

J. Confidentiality of Materials

In the proposal, the Commission stated that orders issued in accordance with Rule of 

Practice 194 would be made publicly available, but applications and supporting materials would 

be kept confidential subject to applicable law.188 The Commission received three comments 

stating that the Commission should require all applications and supporting materials to be made 

public.189 Specifically, one commenter stated that requiring all applications and supporting 

materials to be made public would: (i) promote transparency; (ii) ensure that the public 

understands that the Commission’s handling of such applications, thereby improving the public’s 

confidence in the Commission’s oversight of market participants more generally; and (iii) 

influence the application process under Rule of Practice 194 if it appears to be too lenient in 

favor of allowing disqualified persons to serve in the security-based swap markets.190 Another

188 See Proposing Release, 80 FR at 51694.

189 Better Markets Letter, at 6; American for Financial Reform, at 3-4; Cummings Letter, at 

3.

190 Better Markets Letter, at 6.
- 53 -

commenter stated that that: (1) applications and any supporting materials should be made public 

as soon as they are received to ensure public transparency in the application and accountability; 

and (2) should the Commission adopt the temporary exclusion in paragraph (i), the notice 

required to be sent to the Commission should be made public.191 Another commenter noted that, 

although the Commission should make applications under Rule of Practice 194 public, the 

Commission should be able to make a good cause determination that such applicants remain 

under seal.192

The Commission has carefully considered the comments and has determined not to 

automatically make applications and supporting materials under Rule of Practice 194 public 

(e.g., on the Commission’s website). For the reasons set forth below and consistent with the 

Commission’s current practice in other contexts (e.g., applications and supporting materials 

under Rule of Practice 193), the Commission believes that, as proposed, it is appropriate to keep 

applications and supporting materials confidential, subject to the existing statutory and 

regulatory framework with respect to the public availability of such materials, including the 

Freedom of Information Act (“FOIA”),193 the Exchange Act,194 and applicable Commission 

rules.195

First, applications and supporting materials may contain information that is proprietary or 

otherwise confidential and not generally subject to disclosure under applicable law.196 As one

191 Americans for Financial Reform Letter, at 3-4.

192 Cummings Letter, at 3.

193 5 U.S.C. 552, et seq.

194 See 15 U.S.C. 78x.

195 See, e.g., 17 CFR 200.80; 17 CFR 201.190; 17 CFR 240.24b-2.

196 See 5 U.S.C. 552; 17 CFR 200.80(b)
- 54 -

commenter acknowledged, good cause may exist not to disclose certain information contained in 

application materials.197 The existing statutory and regulatory framework sets forth a detailed 

process for the Commission to make available application materials198 to members of the public, 

upon request, but to keep certain information contained in those materials confidential, where 

appropriate.199 FOIA, for example, contains express categories of statutory exemptions where 

public disclosure is not required200—e.g., information that would invade an individual’s personal 

privacy, or trade secrets or commercial or financial information that is confidential or 

privileged.201 In addition to protecting the privacy interests of applicants and their associated 

persons, there is also a public interest in preserving the confidentiality of such materials to 

promote candor in applications so that the Commission may assess, based on all material facts, 

whether granting an application is consistent with the public interest.

The Commission believes that this existing statutory and regulatory framework, which 

provides for the public availability of certain materials, appropriately takes into consideration the 

applicants’ interests in confidentiality with the concerns identified by commenters concerning 

accountability, transparency, appropriateness of decision-making, and public confidence in the 

Rule of Practice 194 application process (and the Commission’s oversight of market participants 

more generally). Moreover, the Commission believes that relying on the existing statutory and 

regulatory framework with respect to application materials is preferable to a “good cause”

197 See Cummings Letter, at 3.

198 15 U.S.C. 78x(a) (for purposes of 5 U.S.C. 552, “the term ‘records’ includes all 

applications . . . notices, and other documents filed with or otherwise obtained by the 

Commission pursuant to the [Exchange Act] or otherwise”).

199 See, e.g., 17 CFR 200.80(a)(4), (b).

200 See 5 U.S.C. 552(b). See also 17 CFR 200.80(b).

201 See 5 U.S.C. 552(b)(4), (6). See also 17 CFR 200.80(b)(4), (b)(6).
- 55 -

standard of public disclosure, as suggested by one commenter,202 for the same reasons noted 

above, as well as because the current statutory and regulatory framework is generally wellestablished and is routinely administered by Commission staff.

Second, in light of the information that the Commission intends to make publicly 

available, the Commission believes that there is minimal additional benefit in requiring all 

applications and supporting materials automatically to be made public—particularly given that 

the existing statutory and regulatory framework provides a process for members of the public to 

request application materials to be made available, consistent with the protections of the existing 

framework. Further, statutorily disqualified associated persons that are natural persons will not 

be permitted to effect or be involved in effecting security-based swaps on behalf of SBS Entities 

until an order is issued granting relief under Rule of Practice 194. Such orders will be made 

publicly available on the Commission’s website, consistent with current practice,203 and will 

provide notice to the public and identify for the benefit of counterparties and other market 

participants instances where a statutorily disqualified associated person that is a natural person 

has been permitted to effect or be involved in effecting security-based swaps on behalf of an SBS 

Entity.

K. Deleting Rule 15Fb6-1 and Schedule C to Forms SBSE, SBSE-A and SBSEBD

Concurrent with the issuance of the Rule of Practice 194 proposal, the Commission 

adopted registration requirements for SBS Entities, including certain rules relating to the

202 Cummings Letter, at 3.

203 See 17 CFR 200.80(a)(2)(i), (3).
- 56 -

statutory prohibition in Exchange Act Section 15F(b)(6).204 The Registration Adopting Release 

provided, among other things, that an SBS Entity, when it files an application to register with the 

Commission, may permit an associated person that is not a natural person who is subject to a 

statutory disqualification to effect or be involved in effecting security-based swaps on the SBS 

Entity’s behalf, provided that the statutory disqualification(s) occurred prior to the compliance 

date set forth in the Registration Adopting Release and that the SBS Entity identifies each such 

associated person on its registration form, namely Schedule C to Forms SBSE, SBSE-A and 

SBSE-BD.

Because Rule of Practice 194, as adopted, provides an exclusion for an SBS Entity from 

the prohibition in Exchange Act Section 15F(b)(6) with respect to associated persons entities,

Rule 15Fb6-1 and its related Schedule C are no longer necessary. Accordingly, given the 

associated person entity exclusion that the Commission is adopting in final Rule of Practice 

194(c), the Commission is making technical amendments to: (1) delete Exchange Act Rule 

15Fb6-1; (2) remove Schedule C to Forms SBSE, SBSE-A and SBSE-BD; and (3) remove all 

references to Schedule C in the instructions in the above-mentioned forms.

L. Compliance Date

As noted above, the effective date of Rule of Practice 194, as adopted, is April 22, 2019. 

We note, however, that the compliance date for the SBS Entity registration rules set forth in the 

Registration Adopting Release is the later of: six months after the date of publication in the 

Federal Register of a final rule release adopting rules establishing capital, margin and 

segregation requirements for SBS Entities; the compliance date of final rules establishing

204 See Registration Adopting Release, 80 FR at 48964. See also, e.g., 17 CFR 240.15Fb6-1.
- 57 -

recordkeeping and reporting requirements for SBS Entities; the compliance date of final rules 

establishing business conduct requirements under Exchange Act Sections 15F(h) and 15F(k); 

or the compliance date for final rules establishing a process for a registered SBS Entity to 

make an application to the Commission to allow an associated person who is subject to a 

statutory disqualification to effect or be involved in effecting security-based swaps on the SBS 

Entity’s behalf.205

IV. PAPERWORK REDUCTION ACT

Rule of Practice 194 contains “collection of information requirements” within the 

meaning of the Paperwork Reduction Act of 1995 (“PRA”). An agency may not conduct or 

sponsor, and a person is not required to respond to, a collection of information unless it displays 

a currently valid control number. The Commission has submitted the information to the Office 

of Management and Budget (“OMB”) for review in accordance with 44 U.S.C. 3507 and 5 CFR 

1320.11. The title of this collection is “Rule of Practice 194.” The collection of information was 

assigned OMB Control No. 3235-0733. The responses to the collection of information are 

required to obtain a benefit.

In the proposal, the Commission solicited comment on the collection of information 

requirements associated with proposed Rule of Practice 194.206 In particular, pursuant to 44

U.S.C. 3505(c)(2)(B), the Commission asked commenters to evaluate whether the proposed

205 See Registration Adopting Release, at 1. The Commission recently requested comment 

on, among things, whether a longer compliance period, such as 18 months after the date 

of publication of the last of four releases noted above in the Federal Register, would be 

more appropriate. See Capital, Margin, and Segregation Requirements for SecurityBased Swap Dealers and Major Security-Based Swap Participants and Capital 

Requirements for Broker-Dealers, Exchange Act Release No. 34-84409 (Oct. 11, 2018), 

83 FR 53007, 53019 (Oct. 19, 2018).

206 See Proposing Release, 80 FR at 51708.
- 58 -

collection is necessary for the proper performance of our functions, including whether the 

information shall have practical utility; to evaluate the accuracy of our estimate of the burden of 

the proposed collection of information; to determine whether there are ways to enhance the 

quality, utility, and clarity of the information to be collected; and to evaluate whether there are 

ways to minimize the burden of collection of information on those who are to respond, including 

through the use of automated collection techniques or other forms of information technology.

The Commission did not receive any comments on the collection of information requirements.

A. Summary of Collection of Information

Rule of Practice 194 provides a process by which an SBS Entity may apply to the 

Commission for an order permitting an associated person to effect or be involved in effecting 

security-based swaps on behalf of the SBS Entity notwithstanding a statutory disqualification. 

To make an application under Rule of Practice 194, the SBS Entity filing an application with 

respect to an associated person that is a natural person would provide to the Commission:

• Exhibits required by paragraph (d) to Rule of Practice 194, including a copy of the order 

or other applicable document that resulted in the associated person being subject to a 

statutory disqualification; an undertaking by the applicant to notify promptly the 

Commission in writing if any information submitted in support of the application 

becomes materially false or misleading while the application is pending; a copy of the 

questionnaire or application for employment specified in Rule 15Fb6-2(b),207 with 

respect to the associated person; in cases where the associated person has been subject of 

any proceeding resulting in the imposition of disciplinary sanctions during the five years

207 17 CFR 240.15Fb6-2(b).
- 59 -

preceding the filing of the application or is the subject of a pending proceeding by the 

Commission, CFTC, any federal or state regulatory or law enforcement agency, 

registered futures association, foreign financial regulatory authority, registered national 

securities association, or any other SRO, or commodities exchange or any court, a copy 

of the related order, decision, or document issued by the court, agency or SRO.

• A written statement that includes the information specified in paragraphs (e) and (f) to 

Rule of Practice 194, including, but not limited to: the associated person’s compliance 

with any order resulting in statutory disqualification; the capacity or position in which the 

person subject to a statutory disqualification proposes to be associated with the SBS 

Entity; the terms and conditions of employment and supervision to be exercised over 

such associated person and, where applicable, by such associated person; the compliance 

and disciplinary history, during the five years preceding the filing of the application, of 

the SBS Entity; information concerning prior applications or processes.

Under paragraph (g) to Rule of Practice 194, an applicant could submit a written 

statement in response to any adverse recommendation proposed by Commission staff with 

respect to an application under Rule of Practice 194.

An SBS Entity would not be required to file an application under Rule of Practice 194 

with respect to certain associated persons that are subject to a statutory disqualification, as 

provided for in paragraph (h) of proposed Rule of Practice 194. To meet those requirements, 

however, the SBS Entity would be required to file a notice with the Commission. For associated 

persons that are natural persons, the notice in paragraph (h)(2)(iii) would set forth: (1) the name 

of the SBS Entity; (2) the name of the associated person subject to a statutory disqualification;

(3) the name of the associated person’s prospective supervisor(s) at the SBS Entity; (4) the place
- 60 -

of employment for the associated person subject to a statutory disqualification; and

(5) identification of any SRO or agency that has indicated its agreement with the terms and 

conditions of the proposed association, registration or listing as a principal.

The information sought in connection with Rule of Practice 194 would assist the 

Commission in determining whether allowing associated persons to effect or be involved in 

effecting security-based swaps on behalf of a SBS Entity, notwithstanding statutory 

disqualification, is consistent with the public interest.

The Commission has sought to minimize the burdens and costs associated with Rule of 

Practice 194. First, the Commission is not requiring an application under Rule of Practice 194 

with respect to certain associated persons subject to a statutory disqualification previously 

granted relief (i.e., by the Commission, the CFTC, an SRO, or a registered futures association). 

Rather, in such instances, SBS Entities would only be required to provide a notice to the 

Commission under Rule of Practice 194(h)(2)(iii). Second, Rule of Practice 194 generally 

requires information that is already required by Rule of Practice 193208 and FINRA Form 

MC400.209 Because the requirements in Rule of Practice 194 are generally similar to preexisting requirements in Rule of Practice 193 and FINRA Form MC-400 (and largely use the 

same terminology), Rule of Practice 194 should provide a familiar process for respondents.210

Third, where appropriate, the Commission has limited the scope of certain requirements, 

including by limiting the time period for requested information (for example, paragraphs (d)(4),

208 17 CFR 201.193; see Note 8, supra.

209 See FINRA Form MC-400; see Note 9, supra.

210 The Commission estimates that approximately 16 registered SBS Entities will be brokerdealers, and thus registered with FINRA. See Section V.B.
- 61 -

(e)(6), and (e)(10) to Rule of Practice 194) or the scope of information sought (for example, 

paragraph (e)(10) and to proposed Rule of Practice 194). Finally, the documents that are 

requested to be provided with the written statement in paragraph (d) of Rule of Practice 194 

(e.g., a copy of the order or other applicable document that resulted in statutory disqualification) 

should be readily available or accessible to the SBS Entity or to the associated person.

B. Proposed Use of Information

Information collected in connection with an application under Rule of Practice 194 will 

assist the Commission in determining whether an associated person of an SBS Entity should be 

permitted to effect or be involved in effecting security-based swaps on behalf of the SBS Entity, 

notwithstanding that the associated person is subject to a statutory disqualification. Although, 

absent the rule, an SBS Entity could nonetheless submit an application for an exemptive order 

directly under Exchange Act Section 15F(b)(6),211 Rule of Practice 194 specifies the information 

the Commission needs to evaluate such an application, and under what standard the Commission 

will consider whether to grant such relief.

Information collected in connection with the notice provided by Rule of Practice 

194(h)(2)(iii) will assist the Commission for examination purposes by identifying associated 

persons that are subject to a statutory disqualification (and other basic information).

C. Respondents

The Commission has previously stated that it believes that, based on data obtained from 

the Depository Trust & Clearing Corporation and conversations with market participants, 

approximately fifty entities may fit within the definition of security-based swap dealer and up to 

five entities may fit within the definition of major security-based swap participant—55 SBS

211 15 U.S.C. 78o-10(b)(6).
- 62 -

Entities in total.212

With respect to associated persons that are natural persons, as discussed in Section V.B.2 

below, the Commission has estimated that there will be 420 total associated persons that are 

natural persons at each SBS dealer and 62 total associated persons that are natural persons at 

each major participant, or 21,310 total associated persons that are natural persons. The 

Commission anticipates that, on an average annual basis, only a small fraction of the natural 

persons would be subject to a statutory disqualification. Between 2011 and June of 2018 FINRA 

received an average of 33 MC-400 applications with respect to individuals subject to a statutory 

disqualification seeking relief under the FINRA Rule 9520 Series.213 Given that the Commission 

estimates that there will be far fewer associated persons of SBS Entities that are natural persons 

(21,310 total associated persons that are natural persons) than the approximately 267,000 

registered representatives,214 the Commission anticipates that SBS Entities will file for relief 

under Rule of Practice 194 with respect to substantially fewer associated persons that are natural 

persons.

In addition, to estimate the number of such persons, the Commission staff has conferred 

with NFA to assess how many associated persons of the 102 provisionally registered Swap

212 See Business Conduct Standards for Security-Based Swap Dealers and Major SecurityBased Swap Participants, Exchange Act Release No. 77617, (April 14, 2016) 81 FR 

30089 (May 13, 2016) (“Business Conduct Adopting Release”).

213 See Section V.B, infra.

214 Based on an analysis of regulatory filings, as of December 31, 2017, there are 3,523 

broker-dealers that employed full-time registered representatives and were doing a public 

business; these broker-dealers each employed on average 75.8 registered representatives, 

or 267,043 in total. See Section V.B, infra.
- 63 -

Entities215 have applied for relief from CEA 4s(b)(6)216 (the analogous provision to Exchange 

Act Section 15F(b)(6)217 for SBS Entities) for determination by NFA that, had the associated 

person applied for registration as an associated person of a Swap Entity, notwithstanding 

statutory disqualification, the application would have been granted.218 NFA has informed 

Commission staff that, from October 11, 2012 to June 30, 2018, NFA determined that in 13 out 

of 15 requests NFA would have granted registration with respect to the associated person subject 

to a statutory disqualification.219

Accordingly, based on that available data, the Commission estimates that, on an average 

annual basis, SBS Entities will seek relief in accordance with Rule of Practice 194 for up to five 

natural persons subject to a statutory disqualification, and SBS Entities would provide notices 

pursuant to Rule of Practice 194(h)(2)(iii) for up to five natural persons.

Therefore, the Commission anticipates that, on an average annual basis, SBS Entities 

would file up to five applications under Rule of Practice 194 with respect to associated persons 

that are natural persons and five notices for natural persons under Rule of Practice 194(h)(2)(iii).

D. Total Burden Estimates Relating to Rule of Practice 194

It is likely that the time necessary to complete an application under Rule of Practice 194

215 See CFTC Provisionally Registered Swap Dealers as of October 11, 2018, 

https://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer.html, last 

accessed November 6, 2018.

216 7 U.S.C. 6s(b)(6).

217 15 U.S.C. 78o-10(b)(6); see Note 11, supra.

218 See EasyFile AP Statutory Disqualification Form Submission, NFA, 

https://www.nfa.futures.org/NFA-electronic-filings/easyFile-statutorydisqualification.HTML.

219 Of the 15 requests, for one, an application for registration was filed and subsequently 

withdrawn and for the other, the individual was no longer employed by the firm.
- 64 -

will vary depending on the number of exhibits required to be submitted in accordance with Rule 

of Practice 194(d), and the amount of information that would need to be discussed in the written 

statement, as specified in Rule of Practice 194(e).

Based on the Commission staff’s estimates and experience,220 the Commission estimates 

that for associated persons that are natural persons it would take SBS Entities approximately 30 

hours to research the questions, and complete and file an application under Rule of Practice 194. 

In addition, the Commission believes that the average time necessary for an SBS Entity to 

research the questions, complete and file a notice under Rule of Practice 194(h)(2)(iii) would be 

less than for a full application under Rule of Practice 194 and the Commission estimates that it 

would take approximately 6 hours.221

Given that the Commission estimates that, on an average annual basis, there will be up to 

five applications under Rule of Practice 194 with respect to associated persons that are natural 

persons, and up to five notices under Rule of Practice 194(h)(2)(iii), the Commission estimates

220 For example, based on the experience relative to Form BD, the Commission has 

estimated the average time necessary for an SBS Entity to research the questions and 

complete and file a Form SBSE for an entity, including the accompanying schedules and 

disclosure reporting pages—which solicit information regarding statutory 

disqualification—to be approximately one work week, or 40 hours. However, the 

Commission has estimated that it would take an SBS Entity three-quarters of the time to 

make a similar application on behalf of a natural person, or in this case, 30 hours per 

natural person. See Proposing Release, 80 FR at 51707. Additionally, as noted above, 

Rule of Practice 194, as adopted, makes Schedule C to Forms SBSE, SBSE-A, and 

SBSE-BD unnecessary. The elimination of Schedule C with respect to those Forms is 

expected to separately reduce the time burden on SBS Entities unrelated to the time 

burdens otherwise associated with Rule of Practice 194.

221 Although the Commission did not receive any comments on the time burden for 

completing a notice under Rule of Practice 194, we have decided to increase the estimate 

of 3 hours per notice to 6 hours per notice to reflect that it may take an SBS Entity, 

especially one doing this for the first time, longer to research the questions, complete and 

file a notice than the proposed 3 hours per notice.
- 65 -

the total burden associated with filing such applications and notices on average to be 180 hours 

on an annual basis.222

E. Confidentiality

As stated above, under both the proposed and adopted approach, orders and notices under 

Rule of Practice 194 will be made publicly available on the Commission’s website, whereas 

applications and supporting materials will be kept confidential, subject to the existing statutory 

and regulatory framework with respect to the public availability of such materials, including the 

FOIA,223 the Exchange Act,224 and applicable Commission rules.225

V. ECONOMIC ANALYSIS

A. Broad Economic Considerations

On August 5, 2015, the Commission adopted final rules and forms establishing the 

registration process for SBS Entities.226 Those rules reference the events in the existing 

definition of “statutory disqualification” in Exchange Act Section 3(a)(39)(A) through (F)227 and 

apply them to Exchange Act Section 15F(b)(6). This definition disqualifies associated persons 

from effecting or being involved in effecting security-based swaps for violations of the securities 

laws, but also for all felonies and certain misdemeanors, including felonies and misdemeanors

222 This estimate is based on the following: [((30 hours) x (up to 5 SBS Entities applying 

with respect to associated persons that are natural persons)) + (6 hours) x (up to 5 SBS 

Entities filing notices under Rule of Practice 194(h)(2)(iii))] = 180 hours total.

223 See 5 U.S.C. 552, et seq.

224 See 15 U.S.C. 78x.

225 See, e.g., 17 CFR 200.80; 17 CFR 201.190; 17 CFR 240.24b-2.

226 See Registration Adopting Release.

227 See 15 U.S.C. 78o-10(b)(6)(A) through (F).
- 66 -

not related to the securities laws and/or financial markets.228 Once compliance with the 

registration process is required, registered SBS Entities will be unable, absent Commission 

action, to utilize any associated person, including entities and natural persons with potentially 

valuable capabilities, skills or expertise, to effect or be involved in effecting security-based 

swaps if the person has been disqualified for any reason, including for non-investment-related 

conduct that may not pose a risk to security-based swap market participants.229

Exchange Act Section 15F(b)(6) gives the Commission flexibility to address situations 

involving statutorily disqualified associated persons. Specifically, under this section, the 

prohibition with respect to statutorily disqualified persons applies “[e]xcept to the extent 

otherwise specifically provided by rule, regulation, or order of the Commission.”230 This 

statutory provision gives the Commission discretion to determine that a statutorily disqualified 

person may effect or be involved in effecting security-based swaps on behalf of an SBS Entity. 

Exchange Act Section 15F(b)(6), however, does not specify what information must be provided 

to the Commission when an SBS Entity seeks relief, nor does it set forth the standard under 

which the Commission would evaluate requests for relief. Rule of Practice 194 is intended to 

establish a framework for SBS Entities seeking such relief from the statutory prohibition in 

Exchange Act Section 15F(b)(6).

We are mindful of the economic effects, including the costs and benefits, of our rule.

228 15 U.S.C. 78c(a)(39)(A) through (F).

229 The final SBS Entity registration rules also require the Chief Compliance Officer of an 

SBS Entity, or his or her designee, to certify on its registration form that none of its 

associated persons that effect or are involved in effecting security-based swaps on its 

behalf are subject to a statutory disqualification. See Registration Adopting Release, at 

Section II.B.3.

230 See 15 U.S.C. 78o-10(b)(6).
- 67 -

Section 3(f) of the Exchange Act provides that whenever the Commission is engaged in 

rulemaking pursuant to the Exchange Act and is required to consider or determine whether an 

action is necessary or appropriate in the public interest, the Commission shall also consider, in 

addition to the protection of investors, whether the action will promote efficiency, competition, 

and capital formation.231 In addition, Section 23(a)(2) of the Exchange Act requires the 

Commission, when making rules under the Exchange Act, to consider the impact such rules 

would have on competition.232 Exchange Act Section 23(a)(2) also provides that the 

Commission shall not adopt any rule which would impose a burden on competition that is not 

necessary or appropriate in furtherance of the purposes of the Exchange Act.

In the Proposing Release, the Commission solicited comment on all aspects of the costs 

and benefits associated with the rule, including any effect the rule may have on efficiency, 

competition, and capital formation. The Commission has considered these comments, as 

discussed in greater detail in the sections that follow. The analysis below addresses the likely 

economic effects of the final Rule of Practice 194, including the benefits and costs of the final 

rule, and their potential impact on efficiency, competition, and capital formation.

In the Proposing Release, the Commission noted that the inability of a statutorily 

disqualified associated person to effect or be involved in effecting security-based swaps on 

behalf of an SBS Entity creates a disincentive against underlying misconduct by an associated 

person.233 We continue to believe that limiting the involvement of statutorily disqualified 

associated persons in security-based swap markets on behalf of SBS Entities may lower

231 See 15 U.S.C. 78c(f).

232 See 15 U.S.C. 78w(a)(2).

233 See Proposing Release, 80 FR at 51716.
- 68 -

compliance and counterparty risks arising from disqualification, facilitate competition among 

higher quality SBS Entities, and enhance counterparty protections, supervision and integrity of 

security-based swap markets.234 However, we continue to recognize that limits on statutorily 

disqualified associated persons may require SBS Entities to undergo business restructuring in the 

event of disqualification or to apply with the Commission for relief, resulting in costs for SBS 

Entities, such as costs of searching for and initiating relationships with new associated persons or 

legal reorganization.

We also recognize that the above costs of SBS Entities may be passed on to 

counterparties in the form of higher transaction costs or reduced liquidity. Market participants 

may value bilateral relationships with SBS Entities and searching for and initiating bilateral 

relationships with new SBS Entities may involve additional direct costs for counterparties. For 

example, security-based swaps are long-term contracts that are often renegotiated and, in the 

absence of Rule of Practice 194, counterparties could price the potential future inability to 

modify a contract, widening spreads. The Commission continues to recognize that where SBS 

Entities must cease dealing activity with counterparties as a result of disqualification (pending 

reorganization or resolution of application under Rule of Practice 194), other SBS Entities may 

step in to intermediate transaction activity in security-based swap markets. The resulting effects 

on competition will depend on whether SBS Entities that capture the newly available market 

share are smaller participants, which could increase competition, or those that already enjoy a 

degree of market power and are able to consolidate their position while the disqualified SBS 

Entity is undergoing restructuring or awaiting a relief determination, which may decrease 

competition, at least temporarily.

234 See, e.g., Public Citizen Letter; Better Markets Letter.
- 69 -

Moreover, our economic analysis recognizes that information about the conduct that gave 

rise to statutory disqualification in the United States (e.g., by SEC orders, FINRA actions etc.) is 

generally public. In addition, under the final SBS Entity registration rules, SBS Entities are 

required to provide disciplinary history (criminal, regulatory action, civil judicial and financial 

disclosures) information for SBS Entity control affiliates.235

While there is a dearth of evidence on misconduct in swap and security-based swap 

markets, our economic analysis recognizes research that shows, in some settings:236 (i) past 

misconduct may predict future misconduct risk, and some public disclosures may be informative 

of future misconduct risk; (ii) capital markets may penalize some disclosed misconduct, and 

market participants engaging in misconduct generally suffer reputational costs; (iii) entities may 

disassociate from employees engaging in misconduct, but there may be a significant amount of 

heterogeneity in the incidence of misconduct by natural persons across employer firms, and the 

match between natural associated person and SBS Entities tends to be endogenous; and (iv) the 

reduction in misconduct in a particular market can reduce the number of service providers, but 

high prevalence of misconduct can reduce capital market participation.237

235 In conjunction with adopting Rule of Practice 194(c), the Commission is also removing 

Schedule C from Forms SBSE, SBSE-A and SBSE-BD. Importantly, this change does 

not eliminate questions 14A and 14B and corresponding disclosure reporting pages and 

related obligations, and such information will continue to be available to market 

participants. Under the final SBS Entity registration rules, SBS Entity applications on 

Forms SBSE, SBSE-A, and SBSE-BD (including the Schedules and disclosure reporting 

pages) filed with the Commission as required by Rule 15Fb2-1, will be made public. All 

amendments to SBS Entity applications, required by Rule 15Fb2-3, will be made public. 

SBS Entities’ Form SBSE-C certifications, required by Rules 15Fb2-1 and 15Fb6-2 and 

filed as part of their applications, will be made public. See 80 FR at 48995.

236 See Sections V.B and V.C.2, infra.

237 We also recognize that there is a body of behavioral finance research, commonly focused 

on retail investor behavior, and a law and economics literature on compensatory and
- 70 -

While we seek to identify the closest parallel regulatory and market settings, we are 

cautious in interpreting these results. We recognize that the unique characteristics of securitybased swap markets may reduce or strengthen these effects. For example, as shown in the 

economic baseline, security-based swap markets are dealer markets, with the overwhelming bulk 

of activity taking place among dealers and between dealers and non-dealer financial entities.

The Commission estimates that dealing activity in security-based swap markets is highly 

concentrated among a small number of dealers, with the top five dealer accounts intermediating 

approximately 55 percent of all SBS Entity transactions,238 and reaching hundreds and even 

thousands of counterparties. At the same time, a median non-dealer counterparty transacts in 

security-based swaps with two security-based swap dealers (“SBS Dealers”) in over-the-counter 

security-based swaps (and an average with three SBS Dealers), outside of registered exchanges 

or swap execution facilities. If several SBS Dealers with a large market share facing thousands 

of counterparties are disqualified at the same time and must immediately cease dealing activity, a

punitive damages, deterrence, moral heuristics, and related issues. For example, we have 

received comment citing Schkade et al. (1999), which presented evidence from two 

experiments designed to test whether individuals believe in optimal deterrence. They 

concluded that individuals may not spontaneously think in terms of optimal deterrence 

and their proposed punishments do not differ depending on the probability of deterrence. 

See Better Markets Letter at 2. See also David Schkade, Cass R. Sunstein, & Daniel 

Kahneman, Do People Want Optimal Deterrence? (John M. Olin Program in Law and 

Economics, Working Paper No. 77, 1999), available at 

http://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=1173&context=law_and

_economics, last accessed Sept. 28, 2018. We believe the applicability of this body of 

literature to statutory disqualification in security-based swap markets is likely limited due 

to the unique features of these markets (such as dealer concentration increasing the role 

of dealer reputation, public nature of most misconduct, and institutional nature of the 

investor clientele).

238 The Commission staff analysis of DTCC Derivatives Repository Limited Trade 

Information Warehouse transaction records indicates that approximately 99 percent of 

single-name CDS price-forming transactions in 2017 involved an ISDA-recognized 

dealer.
- 71 -

risk of market-wide disruption may exist. However, the concentrated nature of security-based 

swap dealing activity limits the ability of customers to choose SBS Entity counterparties that do 

not rely on disqualified persons and corresponding reputational incentives. Moreover, securitybased swaps may also be more complex and opaque than equity or bonds, increasing information 

asymmetries between SBS Entities and their clients. Nevertheless, institutional clients may be 

more informed and may process disclosures more efficiently than retail investors in parallel 

settings, reducing the impact of these asymmetries.

The Commission recognizes that the final rules may directly and indirectly impact SBS 

Entities, as well as counterparties of SBS Entities and other market participants. We have 

considered these economic effects as they pertain to individual provisions and rule alternatives. 

As we have noted above, Exchange Act Section 15F(b)(6) gives the Commission authority to 

provide relief from the statutory prohibition against associating with disqualified persons by 

rule, regulation, or order, and the Commission is not bound by any particular approach in 

exercising its discretion to provide relief. In particular, in the absence of a disqualification 

review process, SBS Entities would still be able to apply for relief from Exchange Act Section 

15F(b)(6), and the Commission would be able to issue an order either granting or denying relief.

The Commission continues to believe that when determining whether to make an 

application for relief, SBS Entities will weigh the scarcity and value of the particular skills of an 

associated person against any application and reputational costs from associating with 

disqualified persons and their beliefs as to the likelihood of an approval or denial decision by the 

Commission. To the extent that the final Rule of Practice 194 (compared with the availability of 

and process for obtaining relief without the Rule) alters an SBS Entity’s assessment of either 

application and reputational costs, its beliefs about likely outcomes, or its decision to apply with
- 72 -

the Commission, economic costs and benefits may accrue to SBS Entities, their associated 

persons, and counterparties to SBS Entities.

The Commission believes that the primary benefits of the final approach include:

(i) providing SBS Entities clarity regarding the items to be addressed, the information and 

supporting documentation to be submitted, and the standard of review (affecting application 

costs and beliefs about likely outcomes); (ii) ensuring that the Commission has sufficient 

information to make a meaningful determination that allowing an SBS Entity to permit 

statutorily disqualified associated persons to effect or be involved in effecting security-based 

swaps is consistent with the public interest; (iii) streamlining the treatment of statutorily 

disqualified associated person entities across integrated swap and security-based swap markets; 

and (iv) mitigating the risk of business disruptions to SBS Entities and their counterparties from 

disqualification of associated person entities. We note that, regardless of the regulatory approach 

chosen, SBS Entities may find it less costly to disassociate with, or reassign, disqualified persons 

than to apply for relief, as discussed in greater detail in the Economic Baseline.

B. Economic Baseline

To assess the economic impact of Rule of Practice 194, the Commission is using as a 

baseline the regulation of SBS Entities as it exists at the time of this release, including applicable 

rules we have adopted, but excluding rules we have proposed but not yet finalized. The analysis 

includes the statutory and regulatory provisions that currently govern the security-based swap 

market pursuant to the Dodd-Frank Act, rules adopted in the Intermediary Definitions Adopting 

Release, the Cross-Border Adopting Release, and the SDR Rules and Core Principles Adopting 

Release. Additionally, our baseline includes rules that have been adopted but for which
- 73 -

compliance is not yet required, including the Registration Adopting Release,239 and the Business 

Conduct Adopting Release,240 as these final rules—even if compliance is not yet required—are 

part of the existing regulatory landscape that market participants expect to govern their securitybased swap activity.

There are currently no registered entities that are required to comply with either the 

statutory disqualification certifications in the final SBS Entity registration rules or the statutory 

prohibition in Exchange Act Section 15F(b)(6). However, to perform a meaningful assessment 

of the final Rule of Practice 194, our economic baseline presumes that compliance with the final 

SBS Entity registration rules is required as set forth in Exchange Act Rules 15Fb1-1 through 

15Fb6-2,241 the general prohibition in Exchange Act Section 15F(b)(6)242 is in effect, and the 

Commission may use its authority under Exchange Act Section 15F(b)(6) to issue an order 

providing relief.

1. Security-Based Swap Market Activity and Participants

a. Available Data from the Security-Based Swap Market

The Commission’s understanding of the market is informed, in part, by available data on 

security-based swap transactions, though the Commission acknowledges that limitations in the 

data limit the extent to which it is possible to quantitatively characterize the market.243 Since 

these data do not cover the entire market, the Commission has analyzed market activity using a

239 See Registration Adopting Release, 80 FR at 48997-9003.

240 See Business Conduct Adopting Release, 81 FR at 29960.

241 Notably, the final SBS Entity registration rules included Exchange Act Rule 15Fb6-1, 17 

CFR 240.15Fb6-1. See Note 5, supra, for background on Exchange Act Rule 15Fb6-1.

242 See 15 U.S.C. 78o-10(b)(6).

243 The Commission also relies on qualitative information regarding market structure and 

evolving market practices provided by commenters and knowledge and expertise of 

Commission staff.
- 74 -

sample of transactions that includes only certain segments of the market. The Commission 

believes, however, that the data underlying this analysis provides reasonably comprehensive 

information regarding single-name credit default swap (“CDS”) transactions and the composition 

of the participants in the single-name CDS market.

Specifically, the analysis of the current state of the security-based swap market is based 

on data obtained from the DTCC Derivatives Repository Limited Trade Information Warehouse 

(“TIW”), especially data regarding the activity of market participants in the single-name CDS 

market during the period from 2006 to 2017.244 Although the definition of security-based swaps 

is not limited to single-name CDS,245 single-name CDS contracts make up a majority of securitybased swaps, and we believe that the single-name CDS data are sufficiently representative of the 

market to inform our analysis of the current security-based swap market. According to data 

published by the Bank for International Settlements (“BIS”), the global notional amount 

outstanding in single-name CDS was approximately $4.6 trillion,246 in multi-name index CDS 

was approximately $4.4 trillion, and in multi-name, non-index CDS was approximately $343

244 In prior releases, the Commission has examined data for other time periods. For 

example, in the Business Conduct Standards Adopting Release, the Commission 

presented an analysis of TIW data for November 2006 through December 2014. While 

the exact numbers of various groups of transacting agents and account holders in that 

analysis differ from the figures reported in this section (for a longer time period), we do 

not observe significant structural differences in market participation. Compare 81 FR at 

30102 (Tables 1 and 2) with Tables 1 and 2 below.

245 While other repositories may collect data on transactions in total return swaps on equity 

and debt, we do not currently have access to such data for these products (or other 

products that are security-based swaps). Additionally, the Commission explains below 

that data related to single-name CDS provides reasonably comprehensive information for 

the purpose of this analysis.

246 The global notional amount outstanding represents the total face amount used to calculate

payments under outstanding contracts. The gross market value is the cost of replacing all 

open contracts at current market prices.
- 75 -

billion.247 The total gross market value outstanding in single-name CDS was approximately

$130 billion, and in multi-name CDS instruments was approximately $174 billion.248 The global 

notional amount outstanding in equity forwards and swaps as of December 2017 was $3.21 

trillion, with total gross market value of $197 billion.249

The Commission further notes that the data available from TIW does not encompass 

those CDS transactions that both: (i) do not involve U.S. counterparties;250 and (ii) are based on

247 See BIS, Semi-annual OTC derivatives statistics at December 2017, Table 10.1, 

https://www.bis.org/statistics/d10_1.pdf, last accessed May 18, 2018.

248 See id.

249 These totals include swaps and security-based swaps, as well as products that are 

excluded from the definition of “swap,” such as certain equity forwards. See OTC, 

Equity-Linked Derivatives Statistics, Table D8, https://www.bis.org/statistics/d8.pdf, last 

accessed May 18, 2018. For the purposes of this analysis, the Commission assumes that 

multi-name index CDS are not narrow-based index CDS and therefore, do not fall within 

the security-based swap definition. See 15 U.S.C. 78c(a)(68)(A). See also Further 

Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; 

Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR 48208. The 

Commission also assumes that all instruments reported as equity forwards and swaps are 

security-based swaps, potentially resulting in underestimation of the proportion of the

security-based swap market represented by single-name CDS. Therefore, when measured 

on the basis of gross notional outstanding single-name CDS contracts appear to constitute 

roughly 59% of the security-based swap market. Although the BIS data reflects the 

global OTC derivatives market, and not just the U.S. market, the Commission has no 

reason to believe that these ratios differ significantly in the U.S. market.

250 Following publication of the Warehouse Trust Guidance on CDS data access, TIW 

surveyed market participants, asking for the physical address associated with each of 

their accounts (i.e., where the account is organized as a legal entity). This physical 

address is designated the registered office location by TIW. When an account 

reports a registered office location, we have assumed that the registered office 

location reflects the place of domicile for the fund or account. When an account 

does not report a registered office location, we have assumed that the settlement 

country reported by the investment adviser or parent entity to the fund or account is 

the place of domicile. Thus, for purposes of this analysis, the Commission has 

classified accounts as “U.S. counterparties” when they have reported a registered 

office location in the United States. The Commission notes, however, that this 

classification is not necessarily identical in all cases to the definition of U.S. person 

under Rule 3a71-3(a)(4).
- 76 -

non-U.S. reference entities. Notwithstanding this limitation, the TIW single-name CDS data 

should provide sufficient information to permit the Commission to identify the types of market 

participants active in the security-based swap market and the general pattern of dealing within 

that market.251

b. Affected SBS Entities

Final SBS Entity registration rules have been adopted, but compliance is not yet required.

Therefore, we do not have data on the actual number of SBS Entities that will register with the 

Commission, or the number of persons associated with registered SBS Entities. The 

Commission has elsewhere estimated that up to 50 entities may register with the Commission as 

security-based swap dealers, and up to five additional entities may register as major securitybased swap participants,252 and these estimates remain unchanged.

Firms that act as dealers play a central role in the security-based swap market. Based on 

an analysis of 2017 single-name CDS data in TIW, accounts of those firms that are likely to 

exceed the security-based swap dealer de minimis thresholds and trigger registration 

requirements intermediated transactions with a gross notional amount of approximately $2.9 

trillion, with approximately 55 percent of the gross notional intermediated by the top five dealer

251 The challenges the Commission faces in estimating measures of current market activity 

stem, in part, from the absence of comprehensive reporting requirements for securitybased swap market participants. The Commission has adopted rules regarding trade 

reporting, data elements, and public reporting for security-based swaps that are designed 

to, when fully implemented, provide the Commission with additional measures of market 

activity that will allow us to better understand and monitor activity in the security-based 

swap market. See Regulation SBSR – Reporting and Dissemination of Security-Based 

Swap Information; Final Rule Amendments, Exchange Act Release No. 78321 (July 14, 

2016), 81 FR 53545 (Aug. 12, 2016).

252 See, e.g., Registration Adopting Release, 80 FR at 49000.
- 77 -

accounts.253

These dealers transact with hundreds or thousands of counterparties. Approximately 21 

percent of accounts of firms expected to register as security-based dealers and observable in TIW 

have entered into security-based swaps with over 1,000 unique counterparty accounts as of yearend 2017.254 Another 25 percent of these accounts transacted with 500 to 1,000 unique 

counterparty accounts; 29 percent transacted with 100 to 500 unique accounts; and 25 percent of 

these accounts intermediated security-based swaps with fewer than 100 unique counterparties in 

2017. The median dealer account transacted with 495 unique accounts (with an average of 

approximately 570 unique accounts). Non-dealer counterparties transacted almost exclusively 

with these dealers. The median non-dealer counterparty transacted with two dealer accounts 

(with an average of approximately three dealer accounts) in 2017.

c. Other Market Participants

In addition to dealers, thousands of other participants appear as counterparties to securitybased swap contracts in our sample, and include, but are not limited to, investment companies, 

pension funds, private funds, sovereign entities, and industrial companies. We observe that most 

non-dealer users of security-based swaps do not engage directly in the trading of swaps, but trade 

through banks, investment advisers, or other types of firms acting as dealers or agents. Based on 

an analysis of the counterparties to trades reported to the TIW, there are 2,110 entities that

253 The Commission staff analysis of TIW transaction records indicates that approximately 

99% of single-name CDS price-forming transactions in 2017 involved an ISDArecognized dealer.

254 Many dealer entities and financial groups transact through numerous accounts. Given 

that individual accounts may transact with hundreds of counterparties, the Commission 

may infer that entities and financial groups may transact with at least as many 

counterparties as the largest of their accounts.
- 78 -

engaged directly in trading between November 2006 and December 2017.255

As shown in Table 1, below, close to three-quarters of these entities (DTCC-defined 

“firms” shown in TIW, which we refer to here as “transacting agents”) were identified as 

investment advisers, of which approximately 40 percent (about 30 percent of all transacting 

agents) were registered as investment advisers under the Advisers Act.256 Although investment 

advisers are the vast majority of transacting agents, the transactions they executed account for 

only 12.8 percent of all single-name CDS trading activity reported to the TIW, measured by 

number of transaction-sides (each transaction has two transaction sides, i.e., two transaction 

counterparties). The vast majority of transactions (83.3 percent) measured by number of 

transaction-sides were executed by ISDA-recognized dealers.

255 These 2,110 entities, which are presented in more detail in Table 1, below, include all 

DTCC-defined “firms” shown in TIW as transaction counterparties that report at least 

one transaction to TIW as of December 2017. The staff in the Division of Economic and 

Risk Analysis classified these firms, which are shown as transaction counterparties, by 

machine matching names to known third-party databases and by manual classification. 

See, e.g., Dealing Activity Adopting Release, 81 FR 8602, fn.43. Manual classification 

was based in part on searches of the EDGAR and Bloomberg databases, the SEC’s 

Investment Adviser Public Disclosure database, and a firm’s public website or the public 

website of the account represented by a firm. The staff also referred to ISDA protocol 

adherence letters available on the ISDA website.

256 See 15 U.S.C. 80b1–80b21. Transacting agents participate directly in the security-based 

swap market, without relying on an intermediary, on behalf of principals. For example, a 

university endowment may hold a position in a security-based swap that is established by 

an investment adviser that transacts on the endowment’s behalf. In this case, the 

university endowment is a principal that uses the investment adviser as its transacting 

agent.
- 79 -

Table 1. The number of transacting agents by counterparty type and the fraction of total 

trading activity, from November 2006 through December 2017, represented by each 

counterparty type.

Transacting Agents NumberPercent

Transaction

share

1 For the purpose of this analysis, the ISDA-recognized dealers are those identified by ISDA as 

belonging to the G14 or G16 dealer group during the period: JP Morgan Chase NA (and Bear 

Stearns), Morgan Stanley, Bank of America NA (and Merrill Lynch), Goldman Sachs, Deutsche 

Bank AG, Barclays Capital, Citigroup, UBS, Credit Suisse AG, RBS Group, BNP Paribas, 

HSBC Bank, Lehman Brothers, Société Générale, Credit Agricole, Wells Fargo and Nomura. 

See, e.g., https://www.isda.org/a/5eiDE/isda-operations-survey-2010.pdf.

Principal holders of CDS risk exposure are represented by “accounts” in the TIW.257 The 

staff’s analysis of these accounts in TIW shows that the 2,110 transacting agents classified in 

Table 1 represent 13,137 principal risk holders. Table 2, below, classifies these principal risk 

holders by their counterparty type and whether they are represented by a registered or 

unregistered investment adviser.258 For instance, banks in Table 1 allocated transactions across 

349 accounts, of which 20 were represented by investment advisers. In the remaining instances, 

banks traded for their own accounts. Meanwhile, ISDA-recognized dealers in Table 1 allocated

257 “Accounts” as defined in the TIW context are not equivalent to “accounts” in the 

definition of “U.S. person” provided by Exchange Act rule 3a71-3(a)(4)(i)(C). They also 

do not necessarily represent separate legal persons. One entity or legal person may have 

multiple accounts. For example, a bank may have one DTCC account for its U.S. 

headquarters and one DTCC account for one of its foreign branches.

258 Unregistered investment advisers include all investment advisers not registered under the 

Investment Advisers Act and may include investment advisers registered with a state or a 

foreign authority, as well as investment advisers that are exempt reporting advisers under 

section 203(l) or 203(m) of the Investment Advisers Act.

Investment Advisers 1635 77.5% 12.8%

- SEC registered 658 31.2% 8.6%

Banks 262 12.4% 3.4%

Pension Funds 29 1.4% 0.1%

Insurance Companies 42 2.0% 0.2%

ISDA-Recognized Dealers1 17 0.8% 83.3%

Other 125 5.9% 0.2%

Total 2,110 100.0% 100%
- 80 -

transactions across 91 accounts. Private funds are the largest type of account holders that we 

were able to classify, and although not verified through a recognized database, most of the funds 

we were not able to classify appear to be private funds.259

Table 2. The number and percentage of account holders—by type—who participate in the 

security-based swap market through a registered investment adviser, an unregistered 

investment adviser, or directly as a transacting agent, from November 2006 through 

December 2017.

Account Holders 

by Type

Number Represented by a

registered investment

adviser

Represented by an

unregistered 

investment adviser

Participant is

transacting

agent2

Private Funds 3,857 1,973 51% 1,859 48% 25 1%

DFA Special 1,319 1,262 96% 37 3% 20 2%

Entities

Registered 1,159 1,082 93% 73 6% 4 0%

Investment

Companies

Banks (non- 349 20 6% 8 2% 321 92%

ISDA-recognized

dealers)

Insurance 301 196 65% 34 11% 71 24%

Companies

ISDA-Recognized 91 0 0% 0 0% 91 100%

Dealers

Foreign 83 63 76% 3 4% 17 20%

Sovereigns

Non-Financial 75 52 69% 4 5% 19 25%

Corporations

Finance 20 11 55% 0 0% 9 45%

Companies

Other/Unclassified 5,883 3,745 64% 1,887 32% 251 4%

All 13,137 8,404 64% 3,905 30% 828 6%

2 This column reflects the number of participants who are also trading for their own accounts.

259 For the purposes of this discussion, “private fund” encompasses various unregistered 

pooled investment vehicles, including hedge funds, private equity funds, and venture 

capital funds. There remain over 5,800 DTCC accounts unclassified by type. Although 

unclassified, each account was manually reviewed to verify that it was not likely to be a 

special entity within the meaning of the Dodd-Frank Act and instead was likely to be an 

entity such as a corporation, an insurance company, or a bank.
- 81 -

2. Natural Persons and Entity Persons Associated with SBS Entities

We now estimate the number of natural persons associated with entities likely to register 

with the SEC as SBS Entities. Based on an analysis of broker-dealer FOCUS reports, as of 

December 31, 2017, there were 3,523 broker-dealers that employed full-time registered 

representatives and were doing a public business; these broker-dealers each employed on average

75.8 registered representatives, or approximately 267,043 in total. However, based on our 

review of the entities we believe may register as SBS Dealers and their activities, the 

Commission believes the subset of clearing broker-dealers provides a better estimate given their 

size, complexity of operations, and role in clearing and trade execution. As of December 31, 

2017, there were 438 clearing broker-dealers which had, on average, each employed 420 persons 

who were registered representatives; we use this average as the basis for our estimate of 21,000 

natural persons associated with dealers (420*50=21,000). Note, however, that SBS Entities will 

be limited to sales of security-based swaps, whereas broker-dealers are generally engaged in the 

sale of a broader range of financial instruments, as well as other business lines such as prime 

brokerage services. Thus, it is possible that fewer people would be needed to facilitate this 

business.

Since registration requirements for major security-based swap participants are triggered 

by position thresholds, as opposed to activity thresholds for dealer registration, we anticipate that 

entities seeking to register with the Commission as major security-based swap participants may 

more closely resemble hedge funds and investment advisers. Accordingly, to estimate the 

number of natural persons associated with major security-based swap participants, we use Form 

ADV filings by registered investment advisers. Based on this analysis, as of June 30, 2018 there 

were 13,010 registered investment advisers; these investment advisers had an average of 62
- 82 -

employees each. We use this average as the basis for our estimate of 310 natural persons 

associated with major security-based swap participants (62*5=310).

The estimated 21,000 natural persons associating with security-based swap dealers and 

estimated 310 natural persons associating with major security-based swap participants together 

provide our estimate of 21,310 natural persons associating with entities that are likely to register 

with the Commission as SBS Entities.

We now turn to the estimate of the number of entities associated with SBS Entities.

Based on an analysis of historical Form BD filings, broker-dealers with control affiliates had an 

average of 8 control affiliates that started to associate between 2000 and 2017, and have not 

ended the association by December 31, 2017. Similar to the approach in the Proposing Release, 

it may be appropriate to scale the figure by a factor of two to account for complexity in business 

structures and for the fact that security-based swap dealers are likely to resemble some of the 

larger broker dealers, which results in an estimate of up to 800 (8*50*2=800) entities associated 

with security-based swap dealers. We continue to recognize that some SBS Entities, especially 

those SBS Entities not cross-registered as broker-dealers, may be engaged in sales of a more 

limited range of financial instruments than broker-dealers.

Using information on entity control persons in Schedules A, B and D in historical Form 

ADV filings for investment advisers as of June 30, 2018, investment advisers with control 

persons had an average of approximately 38.4 control persons listed as firms or organizations 

that started to associate between 2000 and June 2018 and have not ended the association by June 

2018. We continue to believe that it may be appropriate to scale the figure by a factor of two to 

account for complexity in business structures and for the fact that major swap participants are 

likely to be similar to some of the larger investment advisers, which results in an estimate of up
- 83 -

to approximately 384 (38.4*5*2 = 384) entities associated with major security-based swap 

participants.

The estimated 800 entity persons associating with security-based swap dealers and 

estimated 384 entity persons associating with major security-based swap participants together 

provide our estimate of 1,184 entity persons associating with SBS entities that will register.

Overall, we estimate that as many as 420 natural persons may associate with each dealer 

and as many as 62 natural persons may associate with each major participant, amounting to as 

many as 21,310 associated natural persons in total. In addition, we estimate that 1,184 entity 

persons may be associating with all SBS Entities.

We note that SBS Entities currently intermediating security-based swaps are frequently 

part of complex organizational structures, which may include thousands of natural persons and 

hundreds of entities. Further, we believe that SBS Entities may adjust their organizational 

structures and activities in response to the associated person and other requirements of the final 

SBS Entity registration rules and the pending substantive Title VII rules. We anticipate that 

there may be a high degree of heterogeneity in business structures and organizational complexity 

among SBS Entities. Ultimately, the Commission lacks data on SBS Entity associations with 

disqualified persons effecting or involved in effecting security-based swaps on their behalf, and 

commenters have not provided information or data that would allow such quantification. It is, 

therefore, difficult to estimate with a high degree of certainty the number of associated persons 

currently intermediating security-based swaps on behalf of SBS Entities that may be affected by 

the final rules.

3. Other Markets and Existing Regulatory Frameworks

The numerous financial markets are integrated, often attracting the same market
- 84 -

participants that trade across corporate bond, swap, and security-based swap markets, among 

others.

260 For example, persons who will register as SBS Dealers and major security-based swap 

participants are likely also to be engaged in swap activity. In part, this overlap reflects the 

relationship between single-name CDS contracts, which are security-based swaps, and index

CDS contracts, which may be swaps or security-based swaps. A single-name CDS contract 

covers default events for a single reference entity or reference security. Index CDS contracts and 

related products make payouts that are contingent on the default of index components and allow 

participants in these instruments to gain exposure to the credit risk of the basket of reference 

entities that comprise the index, which is a function of the credit risk of the index components.

A default event for a reference entity that is an index component will result in payoffs on both 

single-name CDS written on the reference entity and index CDS written on indices that contain 

the reference entity. Because of this relationship between the payoffs of single-name CDS and 

index CDS products, prices of these products depend upon one another,261 creating hedging 

opportunities across these markets.

These hedging opportunities mean that participants that are active in one market are 

likely to be active in the other. Commission staff analysis of approximately 4,358 TIW accounts 

that participated in the market for single-name CDS in 2017 revealed that approximately 2,936 

of those accounts, or 67 percent, also participated in the market for index CDS. Of the accounts 

that participated in both markets, data regarding transactions in 2017 suggest that, conditional on

260 See Proposing Release, 80 FR at 51711.

261 “Correlation” typically refers to linear relationships between variables; “dependence” 

captures a broader set of relationships that may be more appropriate for certain swaps and 

security-based swaps. See, e.g., George Casella & Roger L. Berger, Statistical Inference 

171 (2nd ed. 2002).
- 85 -

an account transacting in notional volume of index CDS in the top third of accounts, the 

probability of the same account landing in the top third of accounts in terms of single-name CDS 

notional volume is approximately 38 percent; by contrast, the probability of the same account 

landing in the bottom third of accounts in terms of single-name CDS notional volume is only 5.4 

percent. As a result of cross-market participation, informational efficiency, pricing and liquidity 

may spill over across markets.262

Based on an analysis of 2017 TIW data, the Commission estimates that approximately 46 

of the 50 entities expected to register as security-based swap dealers will be dually registered 

with the CFTC and therefore be subject to CFTC requirements for swap dealers. Additionally, 

based on an analysis of TIW data and filings with the Commission, the Commission continues to 

estimate that 16 market participants that will register as SBS Dealers have already registered 

with the Commission as broker-dealers and are thus subject to Exchange Act and FINRA 

requirements applicable to such entities. Therefore, we expect SBS Entities to associate with 

persons effecting or involved in effecting transactions across the various markets overseen by the 

Commission, CFTC, FINRA, and NFA.

The Commission, CFTC, FINRA, and NFA have already established processes that 

enable various persons subject to a statutory disqualification or other bars to be permitted to 

associate with regulated entities transacting in equity, bond, commodity, swap, and other

markets. In light of these considerations, our analysis below considers the costs and benefits, as

262 See Business Conduct Adopting Release, 81 FR at 30108; Christopher Culp, Andria van 

der Merwe, & Bettina J. Starkle, Single-name Credit Default Swaps: A review of the 

Empirical Academic Literature 71-85 (International Swaps and Derivatives Association 

Study, 2016), available at https://www.isda.org/a/KSiDE/single-name-cds-literaturereview-culp-van-der-merwe-staerkle-isda.pdf; Patrick Augustin, Marti G. 

Subrahmanyam, Dragon Y. Tang, & Sarah Q. Wang, Credit Default Swaps: Past, 

Present, and Future, 8 Ann. Rev. Fin. Econ. 175 (2016).
- 86 -

well as the effects on efficiency, competition and capital formation of the disqualification review 

process under final Rule of Practice 194 in context of existing review processes established by 

the Commission, CFTC, FINRA, and NFA.

4. Data on Parallel Review Processes and Statutory Disqualification

While the Commission lacks data on the incidence of statutory disqualifications in the 

security-based swap market, and therefore the likely number of applications for relief, we look to 

the securities market and the experience of broker-dealers as a guide. In the Proposing Release, 

we presented data on closely parallel statutory disqualification review processes. In this section, 

we provide updated information and data on applications, dispositions, investor losses, and reoffenses from parallel review processes by FINRA, the CFTC, the Commission’s review under 

Rule of Practice 193, and recent research. From the outset, we recognize that one of the 

limitations of the data provided below is the time period for which the data are available (postcrisis period). We recognize that incidences of misconduct and fraud may be more prevalent and 

more difficult to detect in economic booms. As such, the figures below may underestimate the 

prevalence of certain types of misconduct in other markets.

a. FINRA’s Review Process

The Commission continues to believe that the incidence of statutory disqualification 

among broker-dealers serves as a reasonable basis to estimate the incidence of disqualification 

among SBS Entities, because both broker-dealers and SBS Entities are engaged in the business 

of intermediating trades in financial instruments.

Based on information provided by FINRA to the Commission, in 8.5 years between 2010 

and June 2018, FINRA has received 280 MC-400 applications (an average of approximately 33 

per year), and 176 MC-400A applications (an average of approximately 21 per year). The
- 87 -

number of applications by type on an annual basis is reported in Figure 1.

Figure 1. MC-400 and MC-400A applications received in 2010 - June 2018.263

70

60

50

40

30

20

10

0

2010 2011 2012 2013 2014 2015 2016 2017 Jan-Jun

2018

MC-400 (individuals) MC-400A (firms)

Of all MC-400 applications for individuals received during 2010 – June of 2018, 

approximately 26 percent of applications were related to statutory disqualification for solely noninvestment related conduct; the other 74 percent were for investment-related conduct. Of all

MC-400 applications received during 2010 – June 30, 2018, 24 percent of those applications 

were related to SEC orders, 20 percent of those applications were related to FINRA actions, 16 

percent of those applications were related to SOX violations, and 3 percent of those applications 

were related to injunctions. The remaining approximately 11 percent of those MC-400 

applications were due to other investment-related or multiple types of conduct (including 

investment related conduct). Of all MC-400A applications received during 2010 – June of 2018,

263 The overwhelming majority of MC-400A applications submitted in 2015 resulted from 

the Commission’s Municipalities Continuing Disclosure Cooperation (“MCDC”) 

initiative. The relatively high number of MC-400A Applications processed in 2015 is 

atypical of the amount of MC-400A applications that FINRA typically disposes of in a 

calendar year.
- 88 -

1 application was related to statutory disqualification for solely non-investment related conduct; 

the remaining 175 were for investment-related conduct. Figure 2 and Figure 3 present 

information about the nature of underlying conduct related to applications MC-400 and MC400A applications in the full sample.

With respect to application dispositions, between 2010 and June of 2018, FINRA made 

299 MC-400 dispositions for individuals subject to a statutory disqualification seeking relief 

under its FINRA Rule 9520 Series. Of these dispositions, 89 (or 30 percent) were approvals 

(including 23 approvals for non-investment-related disqualifications and 66 for investmentrelated disqualifications); 157 (or 53 percent) were denials; 29 were instances where the 

individuals were no longer required to file an application; and 24 were determined not to be 

statutorily disqualified. Figure 4 shows time trends in MC-400 dispositions.

Further, between 2010 and June of 2018, FINRA made dispositions pertaining to 173 

MC-400A applications for statutorily disqualified member firms under its Rule 9520 Series. Of 

the MC-400A dispositions, 102 (or 59 percent) were approvals; 1 was a denial; in 53 (or 31 

percent) applications the firm filed Form BDW, was canceled by FINRA or the application was 

no longer required; and in 17 applications (10 percent) the firm was determined not to be 

disqualified. Figure 5 shows time trends in MC-400A dispositions.
- 89 -

Figure 2. MC-400 Applications received in 2010 - June 2018, by nature of underlying 

conduct.

Non-investment 

related, 73

Other 

investmentrelated / 

Multiple, 31

SOX, 45

FINRAAction, 

56

Injunction, 8

SEC Order, 67

Figure 3. MC-400A Applications received in 2010 - June 2018, by nature of underlying 

conduct.

Other 

investmentrelated / 

Multiple, 29

Non-investment 

related, 1

SOX, 3 FINRA Action, 11

Injunction, 12

SEC Order, 120
- 90 -

Figure 4. Application dispositions by year of disposition (regardless of when the 

applications were received): MC-400 applications for natural persons.

50

45

40

35

30

25

20

15

10

5

0

2010 2011 2012 2013 2014 2015 2016 2017 Jan-Jun

2018

Not disqualified

No longer requried to file an 

application

Denials 

Approvals

Figure 5. Application dispositions by year of disposition (regardless of when the 

applications were received): MC-400A applications for entities.264

Regarding reoffenses,265 out of 89 MC-400 applications approved between 2010 and June

264 See Note 263.

265 For MC-400 Applications: Reoffender is defined as a disqualified individual who was

45

40

35

Not disqualified

30

25

20

15

BDW, canceled by FINRA, or no

longer required

Denials

10 Approvals

2010 2011 2012 2013 2014 2015 2016 2017 Jan-Jun
- 91 -

of 2018, there were 10 reoffenses. Of the 10 MC-400 reoffenses, 2 offenders were originally 

disqualified for non-investment related offenses, and the repeat offense for both offenders was 

also non-investment related; and 2 offenders were originally disqualified for non-investment 

related misconduct and the repeat offense was investment related.266 For entities, out of 102 

MC-400A application approvals between 2010 and June of 2018, there were 29 reoffenses (all 

were investment-related). A portion of these occurred in 2015, which saw an increase in MC400A applications as a result of the Commission’s MCDC Initiative.

b. CFTC/NFA Review Process

We have also requested and received data from NFA. According to NFA staff, between 

October 11, 2012, and June 30, 2018, 7 different Swap Dealers filed 15 applications to the NFA 

for NFA to provide notice to the Swap Dealer that, had the person applied for registration as an 

associated person, NFA would have granted such registration. As noted above, the Commission 

has estimated that up to 55 SBS Entities may seek registration, while the CFTC has provisionally 

registered 102 Swap Entities.267 Using the data from NFA concerning 15 applications over 

approximately 5.75 years, we estimate the filing of approximately 2 applications per year on

previously approved to associate pursuant to Rule 19h-1 and who then became subject to 

a subsequent final regulatory action or was convicted of a criminal offense within the 

relevant time period (January 1, 2010, through June 30, 2018), as reported on the 

individual’s Uniform Registration Forms.

For MC-400A Applications: Reoffender is defined as a broker-dealer who was previously 

approved pursuant to Rule 19h-1 and who then became subject to statutory 

disqualification again within the relevant time period (January 1, 2010, through June 30, 

2018), as reported on the broker-dealer’s Uniform Registration Forms.

266 A total of 3 individuals account for 4 reoffenses (i.e., one person reoffended twice).

267 See CFTC Provisionally Registered Swap Dealers, as of October 11, 2018, 

https://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer.html, last 

accessed November 6, 2018.
- 92 -

aggregate across all SBS Entities requesting that statutorily disqualified associates persons be 

permitted to effect or be involved in effecting security-based swaps on behalf of an SBS 

Entity.268

We note that the number of applications received by NFA may only present a partial 

picture of the potential impact of a disqualification because, inter alia, (1) the CFTC definition 

of “associated person” of a Swap Entity includes only natural persons, not entities (see 17 CFR 

1.3(aa)(6)); (2) in CFTC Regulation 23.22(b), 17 CFR 23.22(b), the CFTC provided an exception 

from the prohibition set forth in CEA Section 4s(b)(6), 7 U.S.C. 6s(b)(6), for any person subject 

to a statutory disqualification who is already listed as a principal, registered as an associated 

person of another CFTC registrant, or registered as a floor broker or floor trader.

Most applications were made with respect to individuals disqualified for non-investment 

related conduct: of the 15 applications, 9 applications were filed by Swap Dealers for associated 

persons whose disqualifying misconduct was not investment-related (misdemeanors and felonies 

for non-investment related conduct). With respect to application dispositions, the NFA made a

determination that it would have granted registration as an associated person of a Swap Dealer if 

that person had applied for registration as an associated person on 13 applications. In two other 

instances, an application for registration was filed and subsequently withdrawn (2012) and an 

individual was no longer employed by the firm (2013).

Regarding instances of repeated misconduct, since individuals who act as associated 

persons of Swap Dealers are not registered, NFA receives no information regarding re-offenses. 

However, to date, none of the swap dealers have filed additional statutory disqualification forms

268 This figure slightly overestimates the number of applications calculated as: (15 

applications x 55 SBSEs /102 Swap entities) / approximately 5.75 years ~=1.4.
- 93 -

to request NFA determination with respect to a new statutory disqualification for any of the 

individuals. Information that would provide any estimates of investor losses in various 

disqualification instances was not available.

c. Other Data about Misconduct

In the Proposing Release, the Commission described available data on disqualification 

and misconduct in the securities market. In this section, we supplement the discussion with 

recent research on that topic. In addition to data on parallel review processes, research has 

examined data on misconduct of brokers, registered investment advisers, and money 

managers.269 These results are generally obtained from registered brokers and investment 

advisers, in a more competitive industry with a clientele that includes retail customers. This 

differs from security-based swap markets, which have unique features. For example, securitybased swaps may be more opaque than equity or bonds, potentially increasing informational 

asymmetries among transacting counterparties.270 At the same time, security-based swap 

markets have a dealer-oriented market structure, where a relatively small group of dealers serves 

a predominantly institutional clientele.271 This can strengthen repeated game reputational 

incentives, and the institutional nature of the clientele may suggest a greater degree of investor 

sophistication than in the retail context.

269 A significant limitation of this literature is the fact that only a fraction of misconduct may

be detected. As a result, misconduct rates in the data reflect both the prevalence of the 

underlying misconduct and the probability of detection.

270 See Better Markets Letter, at 2 (stating that “derivatives are so complex and poorly 

understood by even sophisticated market participants.”).

271 As can be seen from Tables 1 and 2 above, the overwhelming bulk of activity is 

conducted by dealers and institutions. See also Inaki Aldasoro & Torsten Ehlers, The 

Credit Default Swap Market: What a Difference a Decade Makes, BIS Quarterly Review, 

June 2018, at 1, 4 (Graph 2), available at https://www.bis.org/publ/qtrpdf/r_qt1806b.pdf, 

last accessed July 30, 2018.
- 94 -

Nevertheless, these data imply that, at least in their specific settings: (i) past disciplinary 

events and other disclosed matters may predict higher probability of future misconduct; (ii) 

employee characteristics are strong predictors of future employee misconduct; (iii) the ability to 

predict future misconduct with past misconduct may weaken over time; and (iv) misconduct may 

be relatively rare, employees with misconduct histories may be attracted to employers with 

higher prevalence of misconduct, and the misconduct of employees may increase the likelihood 

of misconduct of their colleagues.

Egan, Matvos, and Seru (2017)272 examine BrokerCheck disclosures of the disciplinary 

history of FINRA registered representatives in 2005-2015. The paper defines misconduct 

broadly and includes in the definition customer disputes, disciplinary events, and financial 

matters reported by FINRA. On average, only 7 percent of employees in a given firm have 

misconduct records. However, rates of misconduct in several firms with the highest incidences 

of misconduct are as high as 15-20 percent. Hence, entities exhibit significant differences in 

misconduct risks in their labor force and, at least in some entities, the prevalence of misconduct 

by associated natural persons is significantly higher than industry average. In addition, firms 

tend to “match on misconduct,” with firms with higher rates of prior misconduct hiring 

employees with misconduct histories. Finally, prior misconduct strongly predicts repeated 

misconduct: approximately a third of employees with misconduct engage in repeated 

misconduct, and employees with prior misconduct are approximately five times as likely to

272 See Mark Egan, Gregor Matvos, & Amit Seru, The Market for Financial Adviser 

Misconduct, J. Pol. Econ. (forthcoming, 2017), available at 

https://ssrn.com/abstract=2739170. Their measures of misconduct reflect customer 

disputes, disciplinary events, and financial matters reported by FINRA from advisers' 

disclosure statements during that period.
- 95 -

engage in new misconduct compared to the sample average. Similarly, Assadi (2018)273 finds 

that misconduct predicts future misconduct, and this relationship is weakened by time elapsed 

since the previous incidence of misconduct.

Dimmock, Gerken, and Graham (2018)274 examine customer complaints against FINRAregistered representatives in 1999 through 2011, and argue that misconduct of individuals 

influences the misconduct of their coworkers. The paper uses mergers of firms as a quasiexogenous shock and examines changes in an adviser’s misconduct around changes to an 

employee’s coworkers due to a merger. The paper estimates that an employee is 37 percent 

more likely to commit misconduct if her new coworkers encountered in the merger have a 

history of misconduct. The paper contributes to broader evidence on peer effects, connectedness, 

and commonality of misconduct,275 and can help explain the distributional properties in the 

prevalence of misconduct across firms documented in Egan, Matvos, and Seru (2017).

Other papers have considered the role of disclosures for the predictability of misconduct 

and the distribution of investor losses related to misconduct. They seem to indicate that, in some 

contexts, existing disclosures accessible to the investing public allow investors to identify 

brokers, investment managers, and hedge funds that have significantly higher misconduct risk 

both in terms of probability of misconduct as well as dollar investor losses. While these results

273 See Pooria Assadi, Empirical Investigation of the Causes and Effects of Misconduct in the

U.S. Securities Industry (Working Paper, 2018), available at

http://summit.sfu.ca/system/files/iritems1/17890/etd10567_PAssadi.pdf.

274 See Stephen G. Dimmock, William C. Gerken, & Nathaniel Graham, Is Fraud 

Contagious? Coworker Influence on Misconduct by Financial Advisors, 73 J. Fin. 1417, 

(2018). 275 See, e.g., Christopher A. Parsons, Johan Sulaeman, & Sheridan Titman, The Geography 

of Financial Misconduct, 73 J. Fin. 2087 (2018), available at 

https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12704.
- 96 -

are limited to their specific settings, we note that the security-based swap market is an 

institutional market. As such, the investor clientele consuming public disclosures of registered 

SBS Entities may be more sophisticated than that of retail brokerages or investment managers in 

the settings discussed below. In the broker-dealer setting, which may be most analogous to the 

security-based swap setting, Qureshi and Sokobin (2015)276 use BrokerCheck data for 2000 

through 2013 to explore the distribution of events involving investor losses (measured as 

complaints that led to awards against brokers or voluntarily settled above a de minimis 

threshold). They also test whether public disciplinary records, financial and other disclosures, 

and employment history information can meaningfully predict future misconduct and investor 

losses. The paper’s three main results are as follows. First, investor loss events are rare and 

predominantly one-time offenses. Between 98.7 percent and 99 percent of brokers are not 

associated with any investor loss events. Of the brokers with investor loss events, the 

overwhelming majority (approximately 82 percent) have only 1 event, with only about 12 

percent having 2 events and about 6 percent of brokers having 3 events or more. Second, 

publicly observable data yield a high degree of predictability of future investor loss events. For 

example, 20 percent of brokers with the highest ex-ante predicted probability of investor losses 

(based on public disclosures) are associated with more than 55 percent of the investor loss events 

with approximately 56 percent of total dollar investor losses. In turn, 20 percent of brokers with 

the lowest ex-ante probability of investor loss events are associated with only 3.8 percent of 

investor loss events. The paper concludes that publicly available information allows investors to

276 See Hammad Qureshi & Jonathan S. Sokobin, Do Investors Have Valuable Information 

about Brokers? (FINRA Office of the Chief Economist Working Paper, August 2015), 

available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2652535, last accessed 

July 30, 2018.
- 97 -

discriminate between brokers with a high propensity for investor loss from other brokers. Third, 

losses associated with the broker’s coworkers meaningfully increase the overall power to predict 

investor loss events; however, undisclosed financial events, undisclosed disciplinary events, and 

exam performance do not.

5. Requests for Relief from Statutory Disqualification under Rule of Practice 

194

In the Proposing Release, the Commission relied on disqualification review application 

data for 2014, and estimated that there may be as many as five applications per year with respect 

to associated natural persons and as many as two applications per year with respect to associated 

person entities.277 As described above, we estimate that up to 55 entities may register with the 

Commission as SBS Entities, and we now estimate 21,310 associated natural persons. We have 

also received additional data regarding the total number of MC-400 and MC-400A applications 

received by FINRA from 2010 through June of 2018. Assuming the ratio of applications for 

association with statutorily disqualified persons at SBS Entities is the same as at broker-dealers, 

the data indicate there may be approximately three applications for natural persons per year.278

Recognizing potential annual fluctuations in the incidence of disqualification review 

applications, we now conservatively estimate that SBS Entities may file up to five applications 

per year with respect to their associated natural persons.279

277 See Proposing Release, 80 FR at 51707.

278 For natural persons: 21,310 * (33/267,043) = 2.6.

279 To the extent that SBS Entities are using the same personnel to transact in security-based 

swaps, swaps, and underlying securities, and if those personnel are the subject of a prior 

application or other form of relief from the Commission, CFTC, an SRO, or a registered 

futures association, the number of new applications the Commission receives may be 

lower than the calculated estimate.

We also note that registered SBS Entities retain the option of complying with statutory
- 98 -

C. Benefits, Costs, and Effects on Efficiency, Competition, and Capital 

Formation

Exchange Act Section 15F(b)(6) provides the Commission with the authority to provide 

relief from the prohibition against using associated natural persons subject to a statutory 

disqualification to effect or be involved in effecting security-based swaps.280 As discussed 

above, clarity provided by the final rule regarding the materials to be submitted, the items to be 

considered, and the standard of review, may alter an SBS Entity’s assessment of (1) any 

application costs and reputational costs that come with choosing to associate with disqualified 

persons, and (2) its beliefs as to the likelihood of an approval or denial decision by the 

Commission. To the extent that any such alteration leads to greater or fewer applications for 

relief under Rule of Practice 194 relative to the baseline with no process rule in place, economic 

costs and benefits may accrue to SBS Entities, associated persons, and counterparties to SBS 

Entities.

As discussed above, we estimate that the Commission will receive five or fewer 

applications per year under the final Rule of Practice 194. Given the number of natural persons 

expected to associate with SBS Entities, and our understanding of the labor market in securitybased swaps, reassigning or disassociating from a disqualified natural person for the purposes of 

effecting security-based swaps on behalf of SBS Entities may be relatively less costly than 

disassociating from disqualified person entities. We continue to believe that the overall

disqualification provisions by disassociating with or reassigning disqualified persons. As 

a result, many instances of disqualification may be resolved through disassociation or 

reassignment. Registered SBS Entities would likely take advantage of the provision only 

when the benefits of associating with a disqualified person outweigh the costs, including 

reputational costs, of making an application.

280 See 15 U.S.C. 78o-10(b)(6).
- 99 -

economic impact of the final rule will depend primarily on: (i) how many associated persons of 

SBS Entities become disqualified and their value to their associated SBS Entities, (ii) the relative 

market share of affected SBS Entities, (iii) the importance and structure of relationships between 

SBS Entities and their counterparties, and (iv) the response of unaffected SBS Entities and their 

counterparties. We are mindful of the economic tradeoffs inherent in our policy choices and 

their impact on the securities markets. We discuss these economic effects in more detail below.

The Commission lacks data on the complexity and variety of current SBS Entity business 

structures and activities, the degree of SBS Entity reliance on associated persons subject to 

statutory disqualification, the location and specificity of expertise of such persons, as well as any 

reputational costs of associating with disqualified persons in security-based swap markets.

Further, the economic effects of various provisions of the final Rule of Practice 194 hinge on a 

number of factors. Such factors include: (i) whether and how significantly SBS Entities may be 

affected by the statutory prohibition in Exchange Act Section 15F(b)(6); (ii) any reputational and 

direct costs and response of counterparties to SBS Entities seeking relief under Rule of Practice 

194 relative to the baseline exemptive relief process; (iii) differences in counterparty risks and 

related losses under final Rule of Practice 194 relative to the baseline exemptive relief process; 

and (iv) how other SBS Entities may react to the newly opened market share should some SBS 

Entities temporarily cease effecting security-based swaps or exit the market due to the statutory 

prohibition in Exchange Act Section 15F(b)(6). To the best of our knowledge, no such data are 

publicly available, and commenters have not provided data, estimates or other information to 

enable quantification. We, therefore, cannot quantify many of the effects of the final Rule of 

Practice 194, including the tradeoff behind an SBS Entity’s choice to pursue relief and face 

potential reputational losses versus disassociating with the statutorily disqualified associated
- 100 -

person. Where we cannot quantify, we discuss in qualitative terms the relevant economic 

effects, including the costs and benefits of the final rule and alternative approaches.

1. Costs and Benefits of Rule of Practice 194

a. Costs and Benefits of a Review Process

In evaluating the likely benefits to SBS Entities of the approach being adopted, we note 

that absent Rule of Practice 194, SBS Entities would still be able to apply to the Commission, 

and the Commission would still be able to exercise its authority to grant relief.281 The final Rule 

of Practice 194 does, however, establish a structured process that provides SBS Entities clarity 

and guidelines on the form of application, the items to be considered, and the standard of review 

that the Commission will apply. Furthermore, the final rule helps to ensure that the Commission 

will have sufficient information to make a meaningful determination that providing relief for an 

associated person is consistent with the public interest.

Specifically, absent Rule of Practice 194 and without a formal review process, SBS 

Entities seeking to apply for relief from Section 15F(b)(6) are likely to apply to the Commission 

directly, looking to either Rule of Practice 193282 or an analogous process as a guide. We believe 

that such applications would be more time-consuming and would be more prone to errors or 

more likely to be deemed to contain insufficient information to allow the Commission to make 

an informed determination.

Under the final Rule of Practice 194, SBS Entities will generally be aware of the 

information they are required to provide, as well as the standard of review. Clarity about the 

items that the Commission will consider in making a determination, will allow SBS Entities to

281 See 15 U.S.C. 78o-10(b)(6). See also Section V.B, supra. 282 See 17 CFR 201.193.
- 101 -

make more-informed assessments as to the likelihood that the Commission will either grant or 

deny relief, which may affect their decision whether to apply for relief. The final Rule of 

Practice 194 may thus conserve resources relative to a more time-consuming and error-prone 

application process absent the rule. Delays in the application process absent the rule may require 

SBS Entities to replace or reassign a statutorily disqualified associated person. To the extent that 

the application review process under Rule of Practice 194 is less error-prone and involves fewer 

delays, such costs may be reduced. In addition, the final Rule of Practice 194 may allow SBS 

Entities to make more-informed evaluations about the tradeoff between pursuing an application 

and either disassociating with or reassigning a person subject to a statutory disqualification.

To the extent that Rule of Practice 194 increases certainty and conserves resources for 

SBS Entities applying for relief from the statutory prohibition in Exchange Act Section 

15F(b)(6), some SBS Entities may choose to apply to the Commission under Rule of Practice 

194, where they would have otherwise disassociated from a disqualified person. This may 

benefit affected SBS Entities that would have incurred higher costs from disassociating 

compared with costs of applying for relief under Rule of Practice 194. As discussed in greater 

detail in Section V.C.2, under Rule of Practice 194, a greater number of SBS Entities may be 

able to effect security-based swaps without potentially costly business restructuring. As a result, 

the counterparties of SBS Entities may benefit from greater choice of SBS Entity counterparties 

and lower transaction costs. Finally, applications and supporting materials, including 

information concerning supervisory structure, terms of employment and other items, may inform 

Commission understanding of SBS Entity associations and ongoing oversight.

While Rule of Practice 194 is expected to result in benefits discussed above, it will also 

result in direct application costs for SBS Entities filing with the Commission under the final Rule
- 102 -

of Practice 194. In the Proposing Release, the Commission estimated that the average time 

necessary for an SBS Entity to research the questions, and complete and file an application under 

Rule of Practice 194 would be approximately 40 hours for applications regarding entities, and 30 

hours for applications regarding natural persons.283 The Commission received no comments and 

continues to believe the estimate for applications regarding natural persons is reasonable and 

appropriate; the exclusion for entities under the final rule, however, means that SBS Entities will 

not make any applications regarding entities and thus will spend no time on such applications.

Since the Commission now estimates that SBS Entities would make up to five applications on an 

average annual basis, the Commission estimates the economic costs to prepare, review, and 

submit applications under the final Rule of Practice 194 of up to $73,620 per year.284

Notably, an SBS Entity would only submit an application where the SBS Entity believed 

that the economic value of retaining a particular person to effect security-based swaps 

outweighed the application costs associated with the final Rule of Practice 194. In other words, 

any application costs would be incurred by SBS Entities on a voluntary basis. As such, it is not 

clear how many SBS Entities will choose to apply for relief rather than simply disassociate from 

a statutorily disqualified associated person. Furthermore, the decision to incur application costs 

would also reflect an SBS Entity’s assessment of the likelihood of the Commission granting 

relief under the public interest standard set forth in the final Rule of Practice 194. Lastly, under

283 See Proposing Release, 80 FR at 51713.

284 This estimate is based on the following. Total burden hours = [(30 hours) x (up to 5 SBS 

Entities applying with respect to associated persons that are natural persons) + (6 hours) x 

(up to 5 SBS Entities filing notices)] = 180. Attorney at $409 per hour x 180 burden 

hours = $73,620. The hourly cost figure is based upon data from SIFMA’s Management 

& Professional Earnings in the Securities Industry 2013 (modified by the Commission 

staff to adjust for inflation and to account for an 1,800-hour work-year and multiplied by

5.35 to account for bonuses, firm size, employee benefits, and overhead).
- 103 -

the baseline and absent Rule of Practice 194, SBS Entities can apply to the Commission for 

exemptive relief from the statutory prohibition, which would also involve costs. Since 

compliance with SBS Entity registration is not yet required and, thus, no exemptive relief 

applications by SBS Entities have been filed, we are unable to estimate those costs. The net 

costs of the application process under Rule of Practice 194 must be assessed relative to the 

baseline process of requesting exemptive relief, and the above estimate of $73,620 per year is 

likely to overestimate the additional costs of the application process.

Under the baseline, an SBS Entity would not be precluded under Exchange Act Section 

15F(b)(6) from seeking Commission relief.285 However, as already discussed, SBS Entities 

would lack clarity about the application process and, though they may look to Rule of Practice 

193 or similar processes as a guide, SBS Entities could potentially expend more resources than 

necessary due to process uncertainty. Thus, notwithstanding the cost estimates above, the final 

rule may mitigate application costs relative to the baseline due to the existence of a structured 

process. We expect that this cost mitigation would be most significant for SBS Entities that 

would be among the first to seek relief. SBS Entities seeking relief later would enjoy the 

benefits of learning by observing the process experienced by first-movers.

The Commission has received comment that the absence of penalties invites misconduct 

and that a ban on disqualified persons without exclusions would lead firms to understand that 

failure to oversee and disassociate from disqualified persons jeopardizes business.286 In 

evaluating this argument, the Commission has considered recent supplemental information 

relevant to this question. Specifically, in other contexts, some entities dismiss or disassociate

285 See Section supra. 286 See Public Citizen Letter, at 1-2.
- 104 -

from disqualified persons to limit reputational costs. For example, Egan, Matvos, and Seru

(2017) show that approximately half of employees with a misconduct history lose their jobs. 

However, other firms frequently rehire such employees, and the rehiring firms tend to have 

higher rates of prior misconduct. Employees with prior misconduct records are more likely to be 

hired by firms with higher rates of misconduct that pay lower compensation, have retail 

customers, and operate in counties with lower education, elderly populations, and higher 

incomes. The paper hypothesizes that such firms “specialize” in misconduct and cater to 

unsophisticated customers, but the paper does not evaluate fees or performance of investor 

portfolios. However, in the residential mortgage-backed securities (“RMBS”) market, Griffin, 

Kruger, and Maturana (2018)287 do not find that RMBS employees had lower levels of job 

retention, promotion, or outside moves than non-RMBS employees, even when RMBS 

employees signed high-loss deals or deals implicated in lawsuits. While these results in the 

RMBS market appear somewhat inconsistent with evidence in the broker-dealer setting (Egan et 

al. (2017)), Amiram et al. (2018) suggest that instances of RMBS-related fraud in the sample 

may not have imposed on banks reputational costs large enough to result in significant labor 

market discipline of RMBS employees. In addition, some RMBS employees that signed deals 

implicated in lawsuits may have remained in continued employment of issuing banks to support 

litigation.

We continue to acknowledge that the results of the cited studies are not specific to the 

swap or security-based swap contexts. However, the studies suggest that, in some settings, even

287 See John M. Griffin, Samuel Kruger, & Gonzalo Maturana, Do Labor Markets 

Discipline? Evidence from RMBS Bankers, J. Fin. Econ. (accepted, 2018), available at 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2977741, last accessed Aug. 19, 

2018.
- 105 -

without a ban on disqualified persons, some employers may already understand that failure to 

oversee and disassociate from some disqualified persons may jeopardize the firms’ business, and 

the labor market may provide some penalties against misconduct. To the degree that these 

findings may apply to institutional security-based swap markets, they indicate that market 

discipline may be a separate disincentive against misconduct and may partly mitigate the concern 

raised by the commenter288 that the absence of bans invites misconduct.

b. Costs and Benefits of the Commission, CFTC, SRO, Registered 

Futures Association Provision

Beyond establishing a process for submitting applications, Rule of Practice 194 allows an 

SBS Entity, subject to certain conditions, to permit an associated person who is subject to a 

statutory disqualification to effect or be involved in effecting security-based swaps on behalf of 

the SBS Entity without making an application to the Commission, if the associated person’s 

membership, association, registration, or listing as a principal has been granted or otherwise 

approved by the Commission, CFTC, an SRO, or a registered futures association. In such cases 

where an SBS Entity meets the requirements of the final rule, these SBS Entities would be able 

to provide notice to the Commission in lieu of having to compile the same information and 

documentation for a repeated review, thereby eliminating redundancy and decreasing SBS Entity 

costs.

This provision of final Rule of Practice 194 provides SBS Entities with flexibility in 

hiring and assigning employees and associating with entities depending on business needs and 

required capabilities. To the extent that SBS Entities, Swap Entities, and broker-dealers use the 

same personnel or entities to effect security-based swaps, swaps, and securities transactions, SBS

288 See Public Citizen Letter, at 1-2.
- 106 -

Entities will not have to undergo and bear costs of duplicate review when decisions about relief 

from statutory disqualifications have already been made by the Commission or another 

regulatory authority. This provision would, therefore, primarily benefit SBS Entities transacting 

across markets through statutorily disqualified associated persons previously granted relief by 

the Commission, the CFTC, FINRA or NFA by enabling those SBS Entities to avoid costs of a 

separate application process under Rule of Practice 194 or business restructuring. We also 

recognize that this provision reduces costs incurred by SBS Entities associating with disqualified 

persons previously granted relief by the Commission, the CFTC, FINRA or NFA so it may 

benefit these disqualified persons by potentially improving their employment options and 

business outcomes.

Notwithstanding these benefits, this provision of the final Rule of Practice 194 may give 

rise to risks related to permitting otherwise statutorily disqualified associated persons to effect or 

be involved in effecting security-based swaps on behalf of SBS Entities without an 

individualized determination by the Commission that doing so is consistent with the public 

interest. Exchange Act Rule 19h-1 provides for Commission review of notices filed by SROs 

proposing to admit any person to, or continue any person in, membership or association with a 

member, notwithstanding statutory disqualification.289 The Commission does not, however, 

review or approve statutory disqualification decisions of NFA or CFTC. As a result, in 

circumstances where the SBS Entity has obtained relief from the NFA or CFTC, the Commission 

will not have the opportunity through the Rule of Practice 194 process to make an individualized 

determination or impose terms of reassociation specific to risks and activities in security-based 

swap markets. However, this relief is only available where an application related to a specific

289 See 17 CFR 240.19h-1.
- 107 -

disqualifying event has been reviewed and approved by the CFTC, FINRA, or the NFA, and the 

terms and conditions of association with the SBS Entity are the same in all material respects as 

those approved by the CFTC, FINRA, or the NFA. Since this provision would result in a 

potentially greater number of statutorily disqualified associated persons being permitted to effect 

or be involved in effecting security-based swaps on behalf of SBS Entities, it may increase 

compliance and counterparty risks, as discussed in section IV.D. However, we note that the 

Commission continues to have authority to bring a separate action under Exchange Act Section 

15F(l)(3).290 As discussed above and in Section III, the Commission continues to believe that 

this provision may benefit SBS Entities relying on the same associated persons transacting across 

integrated markets, and, to the extent SBS Entity costs may be passed along to counterparties in 

the form of less attractive terms of available security-based swaps, it may also benefit 

counterparties.

c. Costs and Benefits of the Relief for Associated Entity Persons from 

Exchange Act Section 15F(b)(6)

As part of the final Rule of Practice 194, the Commission is adopting a blanket exclusion 

from the general prohibition in Exchange Act Section 15F(b)(6) with respect to all associated 

person entities. As a result of this provision, SBS Entities cross-registered as Swap Entities with 

the CFTC would experience economies of scope in associating with persons that are entities 

because the “associated person” definition of a Swap Entity is limited solely to natural persons 

and excludes person entities.291 SBS Entities will be able to rely on the same associated person 

entities in transactions with the same counterparties across integrated swap and security-based

290 See 15 U.S.C. 78o-10(l)(3).

291 See 17 CFR 1.3(aa)(6). See also CFTC Regulation 23.22(b), 17 CFR 23.22(b).
- 108 -

swap markets. As estimated in the economic baseline, approximately 46 out of 50 entities likely 

to register with the Commission as SBS Dealers are already registered with the CFTC as Swap 

Dealers and are currently able to associate with statutorily disqualified associated person entities 

in their swap activity.

In addition, as discussed above, approximately two thirds of accounts participating in the 

single-name CDS market also transact in index CDS subject to the CFTC’s disqualification 

regime. This suggests that a majority of security-based swap counterparties are already currently 

transacting with the same entities likely to register as SBS Entities and that those SBS Entities 

may be associating with disqualified entities. The entity exclusion would enable the same SBS 

Entity – counterparty relationships to continue across swap and security-based swap markets, 

eliminating the need for a counterparty to establish new dealer relationships solely for the 

purpose of security-based swap transactions.

Further, SBS Entities will avoid all costs of business restructuring related to associated 

person entities that become statutorily disqualified, or in the event of new associations with 

statutorily disqualified associated person entities effecting or involved in effecting security-based 

swaps on the SBS Entity’s behalf. This flexibility may benefit SBS Entities and enable them to 

provide counterparty services to security-based swap counterparties more effectively or 

efficiently. In addition, the exclusion eliminates the potential for disruption to security-based 

swap markets, including potential adverse effects to counterparties, that may occur if SBS 

Entities temporarily cease operations due to not being able to utilize the services of their 

associated person entities or if SBS Entities move services to associated person entities that may 

not be as well-equipped to handle them, pending a determination on their application for relief.

Relief for SBS Entities associating with statutorily disqualified person entities would
- 109 -

result in SBS Entities being less constrained by the general statutory prohibition. We continue to 

recognize that associating with statutory disqualified person entities effecting or involved in 

effecting security-based swaps on behalf of SBS Entities may give rise to counterparty and 

compliance risks and related losses.292 We also continue to recognize that statutory 

disqualification and an inability to continue associating with SBS Entities creates disincentives 

against underlying misconduct for associated persons.293 Further, we recognize that, under the 

provision being adopted, the Commission would be unable to make an individualized 

determination about whether permitting a given associated person entity subject to a statutory 

disqualification to effect or be involved in effecting security-based swaps on behalf of an SBS 

Entity is consistent with the public interest.294

Some counterparties may respond to the exclusion by increasing the amount of due 

diligence they perform on their SBS Entity counterparties (such as accessing public Form SBSE 

disclosures, SEC orders, FINRA actions, and other public records) relative to the current 

baseline. We are unable to quantitatively estimate the number of counterparties that may 

respond in this way and related costs, as the extent of additional information acquisition and 

related costs will depend on: each counterparty’s baseline due diligence and compliance 

practices; the size of the counterparty’s security-based swap transaction activity and relative 

importance of such activity in the counterparty’s business; the degree to which the counterparty

292 See, e.g., Better Markets Letter. See also Proposing Release, 80 FR at 51713. Accord 

Egan, Matvos, & Seru (2017) (showing in another context that there is considerable 

clustering of employees engaging in misconduct in a handful of firms).

293 See, e.g., Public Citizen Letter; Better Markets Letter. See also Proposing Release, 80 FR 

at 51716.

294 However, the Commission could, by order, censure, place limitations on the activities or 

functions of the associated person, or suspend or bar such person from being associated 

with an SBS Entity. See 15 U.S.C. 78o-10(l)(3).
- 110 -

values statutory disqualification of associated persons as a signal of SBS Entity quality; and each 

counterparty’s assessment of the tradeoff between potentially higher ongoing risks related to

disqualification of SBS Entities’ associated persons and the relative attractiveness of the price 

and non-price terms of security-based swaps that SBS Entities with disqualified associated 

persons may offer.

Several factors may limit the above economic effects of this final provision.

First, information about conduct giving rise to statutory disqualification (e.g., SEC 

orders, injunctions, FINRA actions) in the U.S. is generally public.295 In addition, the final SBS 

Entity registration rules that form a part of our economic baseline require all SBS Entities to 

submit to the Commission information about their disciplinary histories, including those of 

control affiliates. Under the final SBS Entity registration rules that form a part of the economic 

baseline, this information will subsequently be made public by the Commission.296 We 

recognize that control affiliates are a subset of all associated person entities of an SBS Entity.

However, to the extent that SBS market participants consider disciplinary history of control 

affiliates important in predicting future misconduct, assessing counterparty risks, or selecting 

security-based swap market counterparties, market participants will have access to such 

disclosures. Under the baseline, SBS market participants are, thus, able to choose whether and

295 As a general matter, Commission orders are publicly available, and FINRA disciplinary 

actions issued in 2005 or later are eligible for publication pursuant to Rule 8313 (Release 

of Disciplinary Complaints, Decisions and Other Information). Information about 

criminal convictions are generally publicly available in the United States (absent orders 

sealing those records), but are typically made available through federal, state, and local 

criminal dockets, which can be more costly to access. Statutorily disqualifying events in 

foreign jurisdictions may not be public depending on the rules and blocking/privacy 

statutes in various jurisdictions.

296 See Registration Adopting Release, 80 FR at 49004.
- 111 -

how to transact with SBS Entities that use control affiliates with a history of misconduct, 

enabling better informed counterparty selection and market discipline of misconduct.

Second, the security-based swap market is a dealer market, with the bulk of activity and 

exposure among dealers, or between dealers and non-dealer financial entities.297 To the degree 

that disciplinary history may predict future counterparty risks, and to the extent that institutional 

market participants are able to process the information in disclosures, disciplinary history 

disclosures regarding control affiliates are likely to reduce counterparty selection of SBS Entities 

that have been the subject of disciplinary actions, imposing market discipline.298 SBS Entities, 

knowing that disciplinary history of control affiliates must be disclosed, may have further 

incentives to avoid engaging in misconduct or may exit the market.

As discussed above, one commenter indicated that a ban on statutorily disqualified 

associated persons without any exclusions (including without an entity exclusion) would lead 

firms to understand that lax oversight and failure to disassociate from disqualified persons 

jeopardizes business.299 In addition, a commenter indicated that, absent an associated person 

entity prohibition, there would be no deterrent for entities or firms engaging in misconduct that 

gives rise to disqualification.300 In evaluating these arguments, the Commission has considered 

recent supplemental information. Specifically, existing evidence on reputational incentives 

surrounding misconduct is limited to other contexts (such as corporate restatements, SEC 

enforcement actions, securities class actions, mutual fund scandals, and broker disclosures, etc.).

297 See Tables 1 and 2 of the baseline. See also Aldasoro & Ehlers (2018) at 4 (Graph 2),

available at https://www.bis.org/publ/qtrpdf/r_qt1806b.pdf.

298 See Registration Adopting Release, 80 FR at 49004.

299 See Public Citizen Letter, at 1-2.

300 See Americans for Financial Reform Letter, at 3.
- 112 -

However, most existing evidence on broker-dealers and mutual funds seems to suggest that 

markets may often respond to disclosures of financial misconduct and investors may vote with 

their feet, such that companies and mutual funds engaging in misconduct suffer direct and 

reputational costs around the revelation of misconduct.301 We note that not all misconduct 

affects reputational capital, and some papers show that the market may be less likely to penalize 

non-financial, third-party, and some financial reporting misconduct.302 However, to the degree 

that disclosures of disciplinary history information are informative of the probability of different 

types of future misconduct, 303 customers may choose to closely monitor such disclosures and 

make informed counterparty selection decisions. Sophisticated institutional investors with large 

security-based swap exposures may have stronger incentives and better ability to monitor their 

SBS Entity counterparties, and their choice to shift business to another SBS Entity may result in

301 For example, in the mutual fund advisor context, Wu (2018) shows that advisors with 

ADV disciplinary history disclosures are more likely to be replaced in the year following 

misconduct, which dampens the effect of misconduct on fund flows. See Kai Wu, The 

Economic Consequences of Mutual Fund Advisory Misconduct (Asian Finance 

Association 2018 Conference, Working Paper, 2018) available at 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3061419, last accessed Sept. 8, 

2018. See also Dan Amiram, Serene Huang, & Shiva Rajgopal, Does Financial 

Reporting Misconduct Pay Off Even When Discovered? (Working Paper, October 1, 

2018), available at 

https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles/25784/Does%20miscon 

duct%20pay%20Oct%201%202018%20SR.pdf.

302 See, e.g., Jonathan M. Karpoff, D. Scott Lee, & Gerald S. Martin, Foreign Bribery: 

Incentives and Enforcement (Working Paper, April 7, 2017), available at 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1573222, last accessed Aug. 19, 

2018. See also Bruce Haslem, Irena Hutton, & Aimee Hoffman Smith, How Much Do 

Corporate Defendants Really Lose? A New Verdict on the Reputation Loss Induced by 

Corporate Litigation (Working Paper, November 21, 2016), available at 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2290821, last accessed

Aug. 19, 2018. See also Amiram, Huang, & Rajgopal (2018).

303 For example, in the parallel broker-dealer context, some existing research suggeststhat 

disclosures of past misconduct are strongly predictive of future misconduct risk. See, 

e.g., Qureshi & Sokobin (2015).
- 113 -

greater losses for their original SBS Entity counterparty. As a result, reputational incentive 

effects may be more important in markets with a concentrated institutional investor clientele. 

Thus, we recognize that reputational costs of misconduct may be another important disincentive 

against SBS Entity associations with disqualified persons, separate from a ban on statutorily 

disqualified associated persons, potentially mitigating the concern raised by commenters.304

At the same time, the concentrated nature of security-based swap dealing activity may 

reduce the ability of counterparties to choose to transact with SBS Entities that do not rely on 

disqualified associated persons. As estimated in the economic baseline, the top five dealer 

accounts engaged in over 55 percent of all SBS Entity transactions, and the median counterparty 

transacted with only 2 dealers in 2017. While reputational incentives may flow from a 

customer’s willingness to deal with an SBS Entity, the fact that the customer many not have 

many dealers to choose from weakens those incentives. Importantly, we recognize that these 

estimates of market concentration are themselves reflecting market participants’ current choice 

of counterparties. Institutional counterparties are likely to trade off the potentially higher 

counterparty risk of transacting with SBS Entities with disqualified person entities against the 

price and non-price terms of security-based swaps such SBS Entities may offer. If a number of 

active counterparties choose to move their business to SBS Entities without disqualified 

associated persons, even if they currently have low market share, activity may become further 

concentrated among SBS Entities without disqualified persons and / or market concentration 

itself may decrease.

304 See Public Citizen Letter, at 1-2; Americans for Financial Reform Letter, at 3.
- 114 -

Third, as discussed above,305 the exclusion in Rule of Practice 194(c) will neither limit 

nor otherwise affect the Commission’s statutory authority to institute proceedings or bring an 

action against any associated person entities, including, in the appropriate case, to institute 

proceedings under Exchange Act Section 15F(l)(3) to determine whether the Commission should 

censure, place limitations on the activities or functions of such person, or suspend for a period 

not exceeding 12 months, or bar such person from being associated with an SBS Entity. As 

noted above, this exclusion will also neither limit nor otherwise affect the ability of the 

Commission, the CFTC, an SRO or the NFA to deny membership, association, registration or 

listing as a principal with respect to any associated person entity.

The overall effects of this exclusion on security-based swap markets reflect these 

economic tradeoffs and will likely be similar to those observed in swap markets, which involve 

largely the same group of dealers (46 out of 50 SBS Dealers expected to be cross-registered in 

swap markets) and most of the same counterparties (approximately two thirds of accounts are 

active across single name and index CDS markets).

d. Costs and Benefits of Public Availability of Orders and Notices

The publication of orders and notices gives rise to both costs and benefits for affected 

SBS Entities, their counterparties, and other market participants.

First, publicly available and publicly disseminated information regarding applications 

under Rule of Practice 194 would provide market participants with information they may find 

useful in assessing their counterparties. In particular, market participants may use knowledge 

about whether an SBS Entity has applied for relief and/or whether an SBS Entity currently

305 See Section III.C, infra, for a discussion of proposed Rule of Practice 194(c).
- 115 -

employs or associates with disqualified persons to effect or be involved in effecting securitybased swaps when choosing counterparties. In general, such information may be valued by 

market participants when selecting counterparties, if they believe such knowledge is informative 

about the misconduct risk of a counterparty.

In addition, we note that this information may be useful to SBS Entities that have not 

applied for relief under the final Rule of Practice 194. In particular, publicly available 

information regarding the outcome of Rule of Practice 194 applications may inform other SBS 

Entities’ assessments of the likelihood that the Commission would grant relief in particular 

circumstances. For example, SBS Entities could look to outcomes in applications where 

disqualifications were for similar reasons. Such information may be useful in determining 

whether it is cost effective to seek relief.

We note that some SBS Entities may prefer that orders approving or denying an

application under the rule remain private if they believe that counterparties will use this 

information as a signal of low quality or high counterparty risks of transacting with SBS Entities. 

Therefore, potential reputational costs associated with going through the application process and 

potentially associating with statutorily disqualified associated persons may discourage some SBS 

Entities from applying for relief under the final rule. Such SBS Entities may instead choose to 

disassociate from disqualified persons or reassign them to responsibilities that do not involve 

effecting or being involved in effecting security-based swaps. In considering disassociation, an 

SBS Entity will weigh any reputational costs against any costs of disassociation. For 

disqualified natural persons, such costs include the cost to an SBS Entity of replacing an 

employee (or other associated person), and will depend on the scarcity and value of a particular 

person’s skills.
- 116 -

As stated above, under the approach being adopted, orders and notices under Rule of 

Practice 194 will be made publicly available on the Commission’s website, whereas applications 

and supporting materials will be kept confidential, subject to the existing statutory and regulatory 

framework with respect to the public availability of such materials, including the FOIA,306 the 

Exchange Act,307 and applicable Commission rules.308 To the extent that 1) the information 

provided by SBS Entities in applications and supporting materials may be informative about 

future compliance and counterparty risks, 2) this information will not be fully reported in orders 

and notices, and 3) market participants may face costs of obtaining this information under the 

FOIA and other applicable laws, the approach being adopted provides fewer benefits relative to 

the alternative of routine mandatory disclosure of applications and supporting materials by 

applicants or the Commission. These considerations are discussed in greater detail in Section 

IV.D.6.

2. Effects on Efficiency, Competition, and Capital Formation

The Commission has assessed the effects arising from the final Rule of Practice 194 on 

efficiency, competition, and capital formation. As noted above, limiting the ability of statutorily 

disqualified associated persons to effect or be involved in effecting security-based swaps on 

behalf of SBS Entities may mitigate compliance and counterparty risks and may facilitate 

competition among higher quality SBS Entities, thereby enhancing integrity of security-based 

swap markets. At the same time, limits on a statutorily disqualified associated person’s 

participation in the security-based swap markets may result in costs of business restructuring or

306 See 5 U.S.C. 552, et seq.

307 See 15 U.S.C. 78x.

308 See, e.g., 17 CFR 200.80; 17 CFR 201.190; 17 CFR 240.24b-2.
- 117 -

applying to the Commission for relief, which may disrupt existing counterparty relationships and 

increase transaction costs borne by counterparties. As with the other economic effects already 

discussed, the effects of final Rule of Practice 194 on efficiency, competition, and capital 

formation flow primarily from: (i) how the rule alters an SBS Entity’s evaluation of the tradeoff 

between the value of an associated person’s skill and expertise in effecting security-based swaps 

against the costs of applying for relief or restructuring, and its ultimate decision concerning 

whether to seek relief and (ii) the exclusion of statutorily disqualified associated person entities 

from the scope of the prohibition.

As noted above, by providing a structured process and clarity as to the standard of 

review, the final Rule of Practice 194 may conserve resources relative to the baseline for SBS 

Entities applying for relief under Section 15F(b)(6), and therefore create a more efficient process 

for SBS Entities that choose to apply. Clarity about the items that the Commission will consider 

in making determinations on applications for relief may allow SBS Entities to make more 

informed assessments about whether a particular application is likely to be approved or denied. 

Increased certainty about the process may, in turn, alter an SBS Entity’s evaluation of its own 

cost-benefit tradeoff in determining whether to file an application for relief, enabling the entity to 

more efficiently expend resources. To the extent that the savings resulting from the final rule 

encourage more SBS Entities to apply for relief, a greater number of SBS Entities may be able to 

effect security-based swaps without disruptions related to reassignments of statutorily 

disqualified staff. This may facilitate competition among SBS Entities or improve terms of 

available security-based swaps, if some SBS Entities pass along their costs to counterparties in 

the form of higher priced security-based swaps.

In addition, should more SBS Entities apply for relief or seek to avail themselves of the
- 118 -

associated person entity exclusion, a greater number of statutorily disqualified persons may seek 

employment and business opportunities in security-based swap markets. On the one hand, this 

could increase the “lemons” problem and related costs of adverse selection,309 since market 

participants may demand a discount from counterparties if they expect a greater chance that 

counterparties have employed statutorily disqualified associated persons that are involved in 

arranging transactions. On the other hand, the conduct that gives rise to disqualification is 

generally public information and orders regarding the outcome of review applications under Rule 

of Practice 194 as well as notices submitted by SBS Entities will be made public by the 

Commission, which may significantly attenuate this effect.

Persons eligible to rely on the exclusion related to applications already reviewed by the 

Commission, the CFTC, an SRO, or a registered futures association may enjoy a competitive 

advantage over persons not eligible for the same treatment. Because SBS Entities would not 

need to expend resources filing an application and would not face uncertainty concerning the 

likelihood of approval of such applications, they may prefer associating with persons who can 

rely on such an exclusion over other disqualified persons. If SBS Entities exhibit a preference 

for such persons, it could create competitive disparities among statutorily disqualified associated 

persons.

The associated person entity exclusion may prevent the fragmentation of transaction 

activity across related markets due to differential regulatory treatment of statutory

309 See, e.g., George A. Akerlof, The Market for “Lemons”: Quality Uncertainty and the 

Market Mechanism, 84 Q. J. Econ. 488 (1970). Informational asymmetry about quality 

can negatively affect market participation and decrease the amount of trading—a problem 

commonly known as adverse selection. When information about counterparty quality is 

scarce, market participants may be less willing to enter into transactions and the overall 

level of trading may fall.
- 119 -

disqualification. The Commission continues to recognize extensive spillovers between the 

informational efficiency, pricing, and liquidity of swap and security-based swap markets, and 

their connection to activity in reference security markets. Given the high degree of concentration 

of dealing activity in single-name and index CDS markets, even a temporary inability of one or 

several SBS Entities to transact due to a statutorily disqualifying event of an associated person 

entity may result in liquidity fragmentation and mispricing of claims with otherwise identical 

payoffs and risks. As a result, the associated person entity exclusion may limit fragmentation of 

integrated markets.

In addition, under the associated person entity exclusion, SBS Entities would be able to 

continue their security-based swap market participation without incurring the costs of 

reassigning or disassociating from disqualified entities. As a result, SBS Entities associating 

with entities that become subject to a statutory disqualification can continue dealing in securitybased swaps without incurring costs of business restructuring. SBS Entities that begin to 

associate with already statutorily disqualified entities would be eligible for the same relief. This 

may enhance competition among SBS Entities as both SBS Entities with and those without 

statutorily disqualified associated person entities will be able to compete for security-based swap 

business with counterparties. This competitive effect may be particularly important given the 

highly concentrated nature of the security-based swap dealer market.

The overall effects of the exclusion for associated person entities from the general 

statutory prohibition on efficiency, competition, and capital formation, depend on the balance of 

several competing effects. Broadly, the exclusion may lower costs to SBS Entities of beginning 

or continuing to associate with statutorily disqualified entities. It also may serve to mitigate 

potential disruptions—such as SBS Entities temporarily ceasing dealing activity pending
- 120 -

business restructuring—should associated person entities of a number of SBS Entities become 

disqualified. At the same time, the presence and magnitude of the potential market disruption is 

unclear, since other SBS Entities are likely to begin competing for the newly opened market 

share if, for example, the SBS Entity had to, at least temporarily, cease dealing activity. The 

overall effects of this provision on security-based swap market quality, competition, and capital 

formation depend primarily on: (i) whether and which SBS Entities would be able to win the 

newly opened market share in such cases; (ii) the degree to which statutory disqualification may 

indicate future misconduct risk by associated person entities; (iii) the reputation costs to SBS 

Entities from associating with statutorily disqualified associated person entities relative to costs 

of disassociating and establishing a relationship with a non-statutorily disqualified associated 

person entity, and (iv) the degree to which existing public information about conduct giving rise 

to statutory disqualification is informative of future misconduct risk and the extent to which 

counterparties pay attention to such public information.

The Commission has received comment in support of strong disqualification standards as 

a feature of the SBS Entity regulatory framework, the general need of the public to have 

confidence in regulatory oversight of market participants, and making applications and 

supporting materials public.310 We note that some recent research in other contexts shows that 

greater prevalence of disclosed misconduct can reduce investor participation in capital markets. 

Some research suggests that retail investor participation in the stock market may decrease around 

the revelation of fraud or misconduct, and there may be negative spillovers for firms that were 

not engaged in misconduct. For example, Gurun, Stoffman, and Yonker (2018) find that

310 See Americans for Financial Reform Letter, at 4; Better Markets Letter, at 2, 6; 

Cummings Letter, at 3.
- 121 -

residents of communities more exposed to fraud were more likely to shift from capital marketsto 

bank deposits. This result is consistent with the theoretical result in Gennaioli, Shleifer, and 

Vishny (2015) that portfolio managers provide “hand-holding” to build investor trust. Giannetti 

and Wang (2016) show that household participation in the stock market in a given state 

decreases after the revelation of corporate fraud in that state. They find that even households 

that do not hold stocks in scandal firms decrease holdings in both fraudulent and non-fraudulent 

firms. They also find that households with more lifetime exposure to corporate fraud allocate a 

lower share of capital into equity.311 Importantly, this research pertains to retail investor 

behavior in markets with relatively low informational asymmetries. We continue to recognize 

that these effects may be muted in institutional swap or security-based swap markets, or 

amplified due to the greater opacity of swaps or security-based swaps.

In addition, strong disqualification standards suggested by commenters may adversely 

affect competition and consumer surplus. For example, Berk and van Binsbergen (2017) model 

the costs and benefits of both disclosure and standards regulation of “charlatans” (professionals 

who sell a service they do not deliver) in high skill professions. Both standards and disclosure 

regulations drive charlatans out of the market, but the resulting reduction in competition amongst 

producers actually reduces aggregate consumer surplus, benefiting producers.312

311 See Umit G. Gurun, Noah Stoffman, & Scott E. Yonker, Trust Busting: The Effect of 

Fraud on Investor Behavior, 31 Rev. Fin. Stud. 1341 (2018); Nicola Gennaioli, Andrei 

Shleifer, & Robert Vishny, Money Doctors, 70 J. Fin. 91 (2015); Mariassunta Giannetti 

& Tracy Yue Wang, Corporate Scandals and Household Stock Market Participation, 71 

J. Fin. 2591 (2016).

312 The model assumes that, among others, the producers have no dominating outside options 

(skilled producers do not exit the market when the equilibrium wage in the profession 

declines). The paper models a labor market in which skill is in high demand, but very 

short supply. As a result, price increases due to standards regulation lead to the entry of
- 122 -

Further, information about underlying misconduct is public, and other research discussed 

above suggests that there may be significant capital market and labor market penalties for 

misconduct in some settings.313 This may suggest that SBS Entities may simply disassociate 

from or reassign a statutorily disqualified associated person where the reputational penalties are 

severe. In addition, instead of exiting the market, some counterparties of SBS Entities with 

statutorily disqualified associated persons may simply move transaction activity to SBS Entities 

without such statutorily disqualified associated persons. Thus, where counterparties may 

become less willing transact with SBS Entities relying on statutorily disqualified associated 

persons, other SBS Entities that do not rely on disqualified associate persons may win business. 

Finally, we continue to note that Exchange Act Section 15F(b)(6) does not preclude either SBS 

Entities from seeking relief or the Commission from granting relief in the absence of the final 

Rule of Practice 194 or another disqualification review process. This economic analysis assesses 

the impacts of Rule of Practice 194 relative to a statutory baseline under which SBS Entities can 

seek exemptive relief from the Commission.

charlatans, but, because supply of skill is constrained, that does not increase quality. By 

contrast, Leland (1979) and the literature that emerged from it does not model charlatans 

or focus on markets with a short supply of skill. In Leland (1979), the introduction of 

standards can benefit consumers since the resulting price increase leads to the entry of 

higher quality goods – something that cannot happen when the supply of high quality 

goods is constrained, as in Berk and van Binsbergen (2017). Moreover, in Leland (1979) 

the government is fully informed and the consumer has no information about the quality 

of the good, whereas Berk and van Binsbergen (2017) model a homogeneous good 

bought by heterogeneous consumers. See Jonathan Berk & Jules H. van Binsbergen, 

Regulation of Charlatans in High-Skill Professions (Stanford University Graduate School 

of Business, Research Paper No. 17-43, August 4, 2017), available at 

https://ssrn.com/abstract=2979134, last accessed Aug. 18, 2018. See also Hayne E. 

Leland, Quacks, Lemons, and Licensing: A Theory of Minimum Quality Standards, 87 J. 

Pol. Econ. 1328 (1979).

313 See Section V.C.1.a, supra. See also Note 301, supra.
- 123 -

D. Rule Alternatives

In addition to Rule of Practice 194, the Commission has considered several primary 

alternative approaches, which are discussed below.

1. Temporary Exclusions

The Commission proposed a temporary exclusion, under which SBS Entities would not 

have to comply with the statutory prohibition in Exchange Act Section 15F(b)(6) with respect to 

associated person entities for the first 180 days that an application before the Commission, the 

CFTC, an SRO, or a registered futures association is pending. However, after 180 days, the SBS 

Entity would have 60 days to disassociate from the disqualified person entity pending disposition 

of the review application. The Commission is not adopting such an approach, but is, instead, 

adopting a broader exclusion that provides relief to all associated person entities and is not time 

limited.

The alternative would provide more limited relief to SBS Entities associating with 

statutorily disqualified associated person entities relative to the approach being adopted. Similar 

to the final exclusion for associated person entities, the alternative would lower business 

restructuring costs for SBS Entities that are associated with disqualified entities. As a result, like 

the rule being adopted, the alternative would limit the risk that SBS Entities may become, at least 

temporarily, unable to intermediate transactions and bear additional costs, which may be passed 

along to counterparties in the form of execution delays, potentially reduced liquidity or higher 

transaction costs. Further, similar to the final rule, the alternative would recognize that nondealer counterparties may value bilateral relationships with SBS Entities, and searching for and 

initiating bilateral relationships with new SBS Entities may involve direct costs for 

counterparties. The alternative would also eliminate costs and delays related to SBS Entities
- 124 -

ceasing dealing activity, but only conditional on filing a review application and only for the first 

180 days.

Unlike the approach being adopted, the alternative would introduce significant 

uncertainty about the eventual ability of an SBS Entity to associate with a statutorily disqualified 

associated person entity, even when the affiliate has disassociated from any natural persons who 

may have engaged in the underlying misconduct. Such an alternative and resulting uncertainty 

may be particularly costly for those SBS Entities that are cross-registered with the CFTC as 

Swap Entities, as Swap Entities are able to freely associate with statutorily disqualified 

associated person entities and, in swap markets, the statutory prohibition is applied to natural 

persons only. In addition, under the alternative, SBS Entities would bear direct costs of time and 

resources necessary to complete applications and collect necessary documentation to file for 

relief under Rule of Practice 194 – costs that may be passed on to counterparties in the form of 

more expensive security-based swaps. In addition, similar to the approach being adopted, and as 

discussed in Section V.C.1., some counterparties may choose to engage in greater due diligence 

and bear related costs, to the degree that they have a significant security-based swap business, 

interpret statutory disqualification as a meaningful signal of SBS Entities’ quality, and do not 

already perform such due diligence.

The Commission continues to believe statutory disqualification may have incentive 

effects with respect to underlying misconduct. Relative to the approach being adopted, the 

temporary exclusion alternative could result in fewer statutorily disqualified associated person 

entities transacting in security-based swap markets on behalf of SBS Entities. While the 

alternative may involve lower compliance and counterparty risks relative to the approach being 

adopted, it would also impose new costs on SBS Entities and counterparties, and may involve
- 125 -

greater risks of disruptions to security-based markets. Moreover, as recognized in the Proposing 

Release, the temporary nature of the exclusion under the alternative would introduce uncertainty 

concerning the eventual need to restructure before the Commission, the CFTC, an SRO, or 

registered futures association has rendered a decision on the application.

The Commission could also have adopted a modified temporary exclusion, under which, 

the application would be considered granted if the Commission, the CFTC or an SRO does not 

render a decision within 180 days the application. This alternative would effectively default to 

relief from the statutory prohibition for applications under review. SBS Entities would be able to 

permit statutorily disqualified associated person entities to effect or be involved in effecting 

security-based swaps on their behalf, unless the Commission made an individualized 

determination that it is not consistent with the public interest to permit the participation of such 

statutorily disqualified associated person entities within 180 days of the application being filed. 

Relative to the approach being adopted, this would involve greater application costs and 

uncertainty about the eventual need to restructure the business and disassociate from the 

statutorily disqualified associated person entity. However, it would allow the Commission, the 

CFTC or SRO to perform an individualized assessment of the facts of each case within the first 

180 days of filing. This alternative may somewhat strengthen counterparty protections relative 

to the approach being adopted, but would increase uncertainty and costs of restructuring for 

affected SBS Entities and their counterparties.314

The overall effects of the temporary stay alternatives relative to the approach being 

adopted, thus, depend on: (i) the degree to which disqualifying conduct by an associated person

314 See, e.g., Americans for Financial Reform Letter; Better Markets Letter; Cummings 

Letter.
- 126 -

may predict future misconduct and related counterparty risks; (ii) the extent to which the largely 

institutional security-based swap market participants fail to observe and process public 

information regarding their counterparties’ disqualifying conduct; (iii) the reputational costs of 

SBS Entities in associating with statutorily disqualified associated person entities relative to the 

uniqueness of their resources and abilities; and (iv) the degree to which uncertainty related to the 

temporary exclusion alternative would lead to preemptive disassociations from valuable 

statutorily disqualified associated person entities.

2. Relief for Non-Investment-Related Offenses

The Commission could also adopt the approach of automatically excepting from the 

Section 15F(b)(6) prohibition all SBS Entities that associate with statutorily disqualified persons 

if the matters that triggered the statutory disqualification were non-investment-related.315 SBS 

Entities would still be required to apply for relief under Rule of Practice 194 for investmentrelated statutory disqualifications. Such an approach would eliminate restructuring or 

application costs for SBS Entities associating with statutorily disqualified persons when statutory 

disqualification arises out of non-investment related offenses. This may, in turn, attract new 

persons currently disqualified for non-investment-related offenses into the security-based swap 

market, and increase competition among SBS Entity associated persons. At the same time, other 

SBS Entities associating with persons statutorily disqualified for investment-related offenses 

would still have to bear costs of disassociating or applying for relief, and would have to compete 

with a greater number of SBS Entities that do not have to apply for relief.

As discussed above, statutory disqualification and the potential inability to deal in various

315 Section V.B.4 presents data from 2010 through June 2018 about the incidence of 

statutory disqualification and reoffenses by investment-related and non-investment 

related nature of conduct in a somewhat analogous scenario for broker-dealers.
- 127 -

markets may present an incentive against misconduct, including non-investment-related 

misconduct. Relative to the approach being adopted, this alternative may weaken incentives 

against non-investment-related misconduct. The alternative would also lower the information 

benefits of reviewing applications and supporting materials, including information concerning 

supervisory structure, terms of employment and other items, which will inform Commission 

understanding of SBS Entity associations and ongoing oversight. Finally, some statutory 

disqualification triggers that may not fall in the “investment related offense” category may point 

to a higher risk of future misconduct, including violations of securities laws, federal rules, and 

regulations thereunder.316 Uniformly excepting associated persons disqualified for noninvestment-related misconduct without an opportunity for the Commission to review the 

circumstances of each case and make a determination that allowing SBS Entities to permit those 

persons to effect or be involved in effecting security-based swaps is consistent with the public 

interest may pose risks to counterparties and security-based swap markets.

3. No Relief for CFTC, SRO, or Registered Futures Association Review

Rule of Practice 194 allows SBS Entities to permit statutorily disqualified persons to 

effect or be involved in effecting security-based swaps on their behalf without an application to 

the Commission, if the associated person’s membership, association, registration or listing as a 

principal has been granted or otherwise approved by the CFTC, an SRO, or a registered futures 

association. The Commission could adopt an alternative approach under which such SBS

316 See, e.g., Kelvin Law & Lillian F. Mills, Do Financial Gatekeepers Under-Protect 

Investors? Evidence from Criminal Background Checks (Working Paper, April 27, 2018), 

available at https://ssrn.com/abstract=3075305, last accessed Aug. 18, 2018; Robert 

Davidson, Aiyesha Dey, & Abbie Smith, Executives' “Off-the-job” Behavior, Corporate 

Culture, and Financial Reporting Risk, 117 J. Fin. Econ. 5 (2015).
- 128 -

Entities would not automatically be able to permit statutorily disqualified associated persons to 

effect or be involved in effecting security-based swaps on the SBS Entity’s behalf, either on a 

permanent or temporary basis, based on a determination by the CFTC, an SRO, or a registered 

futures association. Instead, such SBS Entities would have to apply for a substantive review by 

the Commission under Rule of Practice 194.317 However, the exclusion for all associated person 

entities would still apply, as in the approach being adopted.

This alternative approach would allow the Commission to review the facts and 

circumstances of each case and make an individualized public interest determination as to 

whether each statutorily disqualified associated person should be permitted to effect or be 

involved in effecting security-based swaps on behalf of SBS Entities, and under which 

conditions. If fewer SBS Entities choose to go through a separate review by the Commission, 

this alternative may result in a smaller number of statutorily disqualified associated persons 

effecting or involved in effecting security-based swaps than the adopted approach. To the extent 

that statutory disqualification, and terms and conditions of reassociation imposed as a result of 

individualized Commission review, reduce compliance and counterparty risks, this alternative 

may improve compliance and counterparty protections for security-based swap market 

participants.

However, this alternative may increase costs for SBS Entities. Specifically, this 

alternative would require SBS Entities to incur the application costs under Rule of Practice 194 

with respect to associated persons that have already been approved by the CFTC, an SRO, or a 

registered futures association, or to incur the costs of restructuring the business or disassociating

317 See Americans for Financial Reform Letter; Better Markets Letter; Public Citizen Letter; 

Cummings Letter.
- 129 -

from such persons. If the application is denied, SBS Entities would need to restructure the 

business or disassociate from the associated person. In addition, in light of the high degree of 

integration among swap and security-based swap markets and expected cross-registration, many 

SBS Entities are expected to transact across swap, security-based swap and reference security 

markets, and some SBS Entities may be relying on the same personnel and entities in effecting, 

for instance, single name and index CDS. This alternative approach would limit SBS Entity 

flexibility in hiring and retaining statutorily disqualified associated persons where the SBS Entity 

believes the person’s quality and expertise outweigh the potential reputational costs of 

associating with a disqualified person and where the CFTC, an SRO, or a registered futures 

association has made a favorable finding with respect to the associated person.

The effects of this alternative on security-based swap markets will depend on: (i) the 

extent to which SBS Entities rely on disqualified persons approved by the CFTC, an SRO, or a 

registered futures association; (ii) the magnitude of any business restructuring costs; (iii) the 

significance of bilateral counterparty relationships, and (iv) the severity of compliance and 

counterparty risks posed by statutorily disqualified associated persons. As discussed in earlier 

sections, we lack data or other information to quantify these effects with any degree of certainty.

4. No Relief for Associated Person Entities from Exchange Act Section 

15F(b)(6)

The Commission could establish a uniform prohibition on associated person entities 

subject to statutory disqualification effecting or being involved in effecting security-based swaps 

on behalf of SBS Entities, without the availability of any application review process, and 

regardless of the reason for the disqualification or whether the CFTC, an SRO, or a registered 

futures association has permitted such associated person entities to participate in the market.

Under this alternative approach, all statutorily disqualified associated person entities not covered
- 130 -

by the exemption in the final SBS Entity registration rules318 would be barred from 

intermediating security-based swaps on behalf of SBS Entities.319 To the extent that past 

disqualifications can point to higher compliance and counterparty risks, this alternative could 

potentially strengthen counterparty protections. Further, the inability to participate in various 

markets due to disqualification disincentivizes misconduct. Adopting this approach would 

strengthen these incentive effects, but only to the degree that reputational incentives and capital 

market discipline may currently not be sufficiently strong disincentives against misconduct for 

some entities. However, as discussed in detail in the economic baseline, evidence from other 

market suggests that market participants, even retail investors, pay close attention to disclosures 

of disciplinary history and vote with their feet, such that market participants suffer significant 

and sticky reputation costs around revelations of misconduct.

We recognize that this market discipline effect may be partly mitigated due to the 

concentrated nature of current security-based swap dealing activity discussed above. But we also 

note that market concentration is itself endogenous to market participants’ counterparty selection 

and customer demand. That is, counterparties trade off the potentially higher counterparty risk 

of transacting with SBS Entities that rely on disqualified associated persons against the 

attractiveness of security-based swaps (price and non-price terms) that they may offer. If a large 

number of counterparties choose to move their business to SBS Entities that do not rely on

318 As discussed in the economic baseline, under Exchange Act Rule 15Fb6-1, unless 

otherwise ordered by the Commission, an SBS Entity may permit statutorily disqualified 

associated person entities to effect or be involved in effecting security-based swaps on its 

behalf, provided that the statutory disqualification occurred prior to the compliance date 

set forth in the Registration Adopting Release, and provided that the SBS Entity identifies 

each such associated person on the applicable registration form.

319 See, e.g., Public Citizen Letter.
- 131 -

disqualified associated persons (including those SBS Entities that may currently have lower 

market share), market concentration itself can decrease.

Barring all statutorily disqualified associated person entities from effecting or being 

involved in effecting security-based swaps on behalf of SBS Entities would impose costs of 

business restructuring for a number of SBS Entities, which may in turn affect market quality. 

Specifically, in the event of a disqualification after the compliance date of the final SBS Entity 

registration rules, SBS Entities would be required to cease intermediating security-based swaps 

and restructure their business to disassociate from all disqualified entities, posing a risk of 

business disruptions during the restructuring. If a number of entities associated with different 

SBS Entities become disqualified at the same time, a number of SBS Entities may, in turn, 

become temporarily unable to effect security-based swaps due to disqualification. As discussed 

elsewhere, the subset of SBS Entities that are major security-based swap participants are 

expected to hold large security-based swap positions, and their activities in security-based swap 

markets may pose market and counterparty risks.320 As discussed in the economic baseline, the 

remaining SBS Entities that are SBS Dealers play a central role in security-based swap markets, 

intermediating trades with hundreds of counterparties and representing a significant portion of 

trading activity in security-based swaps.

If some SBS Entities are temporarily unable to effect security-based swaps, transaction 

costs may increase and other terms of security-based swaps available to counterparties may 

deteriorate. For example, security-based swaps are often renegotiated during the life of the 

contract and, in the event of a disruption to the bilateral relationship with the SBS Entity related

to an associated entity disqualification, counterparties may find themselves unable to modify

320 See Business Conduct Adopting Release, 81 FR at 30111.
- 132 -

contracts. Absent relief for associated person entities, counterparties may price such potential 

future constraints in larger spreads.

We note that other SBS Entities are likely to step in to pick up the market share, and, to 

the extent that statutory disqualification of associated person entities may indicate ongoing 

compliance and counterparty risks of SBS Entities, SBS Entities with potentially lower 

compliance and counterparty risks would be intermediating security-based swaps. However, as 

discussed above, SBS Entities that capture the newly available market share may be able to 

consolidate market power while the disqualified SBS Entity is undergoing restructuring or 

awaiting a relief determination. As a result, competition in security-based swap markets may, at 

least temporarily, decrease, and pricing power of remaining SBS Entities may increase. The 

overall economic effects of the alternative would depend on: (i) the costs and the required length 

of time for business restructuring; (ii) which SBS Entities would be able to pick up the newly 

available market share; and (iii) the relative importance of bilateral relationships between SBS 

Entities and counterparties.

In addition, SBS Entities cross-registered as Swap Entities with the CFTC would not 

experience economies of scope in associating with persons that are entities and would be unable 

to rely on the same associated person entities in transactions with the same counterparties across 

integrated swap and security-based swap markets. As discussed in the economic baseline, 

approximately 46 out of 50 entities likely to register with the Commission as SBS Dealers are 

already registered with the CFTC as Swap Dealers. In addition, as discussed above, two thirds 

of accounts transacting in single-name CDS also transact in index CDS. Under the alternative, 

counterparty relationships with dually registered Swap and SBS Entities could be disrupted, 

potentially requiring counterparties to establish new dealer relationships solely for the purpose of
- 133 -

security-based swap transactions. Lastly, this alternative may decrease the number of entities 

seeking to associate with SBS Entities since statutorily disqualified associated person entities 

will no longer be able to effect or be involved in effecting security-based swaps. Such 

disqualified entities may seek to associate with security-based swap market participants that are 

not required to register (entities falling within the de minimis exception set forth in Exchange Act 

Rule 3a71-2321). The alternative has the potential to significantly reduce competition among 

associated person entities engaging in security-based swap transactions on behalf of SBS 

Entities.322 Reduced competition may increase the pricing power of remaining market 

participants vis-à-vis their activities on behalf of SBS Entities in security-based swap markets, 

and such costs are likely to be passed on to counterparties.

5. Form of Applications to be Submitted: Time Period

The final Rule of Practice 194 requires applications to include certain types of 

information and supporting materials concerning disciplinary sanctions and other events over the 

preceding five years. In response to a comment received,323 we have considered an alternative 

approach, under which the Commission would require applicants to address disciplinary events 

with a longer time period (e.g., ten years) for certain items specified in Rule of Practice 194. In 

considering this alternative, we note that Rule of Practice 194, as adopted, does not specify a 

time period with respect to certain other items relating to disciplinary history, including, among 

other things, (i) a copy of the order or other applicable document that resulted in the associated 

person being subject to a statutory disqualification; and (ii) a copy of the questionnaire or

321 See 17 CFR 240.3a-71-2.

322 See, e.g., Berk & van Binsbergen (2017).

323 See Better Markets Letter, at 6.
- 134 -

application for employment required by Exchange Act Rule 15Fb6-2(b). In addition, under final 

Rule of Practice 194, the Commission has reserved the right to request from the applicant 

supplementary information to assist in its review, which could include information outside of the 

five-year time period, where appropriate.

Requiring applicants to provide information concerning a longer time period could 

potentially provide additional information regarding ongoing counterparty and compliance risks. 

Also, requiring filing of information concerning disciplinary sanctions, compliance and 

disciplinary history, litigation concerning investment or investment-related activities and 

unsatisfied judgments and supporting materials for a longer period of time as part of applications 

under Rule of Practice 194 may enhance the review process and its counterparty protections 

benefits. At the same time, requiring SBS Entities to provide older materials and documents 

may increase application burdens under the Rule of Practice 194. Importantly, older misconduct 

may be less important in predicting future misconduct than recent offenses. Additionally, as 

discussed above, the five-year time period is more consistent with the current practice in other 

contexts. The approach being adopted provides the Commission with the benefit of a longer 

look-back period, where necessary, without uniformly imposing that burden on all SBS Entities 

applying for relief.

6. Public Availability of Applications and Supporting Materials

Under Rule of Practice 194, as adopted, orders and notices will be made publicly 

available on the Commission’s website, whereas applications and supporting materials provided 

pursuant to Rule of Practice 194 will be kept confidential, subject to the existing statutory and 

regulatory framework with respect to the public availability of such materials, including the
- 135 -

FOIA,324 the Exchange Act,325 and applicable Commission rules.326 As an alternative approach, 

applications and supporting materials could be made publicly available. We have considered 

comments about how this alternative may affect applicants, other SBS Entities, and non-SBS 

Entity market participants.327

Making application and supporting materials publicly available on the Commission’s 

website may enable market participants to independently assess ongoing compliance and 

counterparty risks as they pertain to individual security-based swaps. To the extent that 

applications and supporting materials contain more information than orders and notices, and to 

the extent that this additional information enables market participants to better assess 

counterparty risks, this alternative could strengthen market discipline and the reputational 

disincentives against misconduct, increasing counterparty protections. However, it is not clear 

that applications and supporting materials would contain significant additional information 

relevant for counterparty selection, given the fact that the information about misconduct that 

gives rise to disqualification is public, and that notices prepared by SBS Entities and 

Commission orders will be made public.

We recognize that the public nature of such filings may affect SBS Entity reputation and 

bilateral relationships in security-based swap markets. Under this alternative, more SBS Entities 

are likely to disassociate from disqualified natural persons instead of filing with the Commission 

an application for relief under Rule of Practice 194. To the extent that associations with

324 See 5 U.S.C. 552, et seq.

325 See 15 U.S.C. 78x.

326 See, e.g., 17 CFR 200.80; 17 CFR 201.190; 17 CFR 240.24b-2.

327 See Better Markets Letter, at 6; Americans for Financial Reform Letter, at 3-4; 

Cummings Letter, at 3.
- 136 -

disqualified persons may pose ongoing compliance and counterparty risks, this could potentially 

benefit market participants and strength counterparty protections. However, confidentiality and 

reputational concerns may also deter an SBS Entity from filing an application even where it 

would be consistent with the public interest to permit the associated person subject to a statutory 

disqualification to effect or be involved in effecting security-based swaps on behalf of the SBS 

Entity, reducing the expected benefits of the review process. We continue to note that, as 

discussed throughout the release, the range of conduct that gives rise to statutory disqualification 

is broad and may not always be indicative of higher probability of counterparty risks and 

investor losses.

Further, as a result of reputational and confidentiality concerns, making applications and 

supporting materials publicly available on the Commission’s website may lead SBS Entities to 

make less informative disclosures, which may influence the effectiveness of the review process. 

In addition, we are sensitive to the concern that applications and supporting materials under Rule 

of Practice 194 may reveal commercial or financial information that is confidential or privileged, 

and information that would invade and individual’s personal privacy. We recognize that costs 

may be incurred by SBS Entities to redact confidential information from any application and 

supporting materials if they were to be made publicly available on the Commission’s website.

Accordingly, under the approach being adopted, where counterparties, which may be 

institutional market participants,328 or other interested persons believe that applications or

328 The Commission has classified market participants transacting in single name CDS 

reported to TIW to include private funds, registered investment companies, banks, 

insurance companies, ISDA recognized dealers, foreign sovereigns, non-financial 

corporations, finance companies, special entities and other account holders (such as 

hedge funds, private equity and venture capital funds). As can be seen from Table 2 in 

the economic baseline, approximately 94 percent of market participants transacted in
- 137 -

supporting materials contain information beyond any information that is publicly available, such 

persons would be able to submit a FOIA request to seek to obtain those materials—in accordance 

with the existing statutory and regulatory framework with respect to the public availability of 

such materials.329 As discussed in Sections I and II, the Commission continues to believe the 

existing statutory and regulatory framework sets forth a detailed and well-established process for 

the Commission to make available application materials330 to members of the public, upon 

request, but to keep certain information contained in those materials confidential, where 

appropriate.331

VI. REGULATORY FLEXIBILITY ACT CERTIFICATION

A. Regulatory Framework

The Regulatory Flexibility Act (“RFA”)332 requires federal agencies, in promulgating 

rules, to consider the impact of those rules on small entities. Section 603(a)333 of the 

Administrative Procedure Act,334 as amended by the RFA, generally requires the Commission to 

undertake a regulatory flexibility analysis of all proposed rules, or proposed rule amendments, to

single name CDS through investment advisers between 2006-2017. Over the same time 

period, investment advisers, banks, insurance companies, pension funds and ISDA 

recognized dealers represented approximately 94.1 percent of transacting agents and 99.8 

percent of total trading activity.

329 Alternatively, such counterparties could also request such information directly from SBS 

Entities.

330 See 15 U.S.C. 78x(a) (for purposes of 5 U.S.C. 552, “the term ‘records’ includes all 

applications, notices, and other documents filed with or otherwise obtained by the 

Commission pursuant to the [Exchange Act] or otherwise”).

331 See, e.g., 17 CFR 200.80(a)(4), (b).

332 5 U.S.C. 601 et seq.

333 5 U.S.C. 603(a).

334 5 U.S.C. 551 et seq.
- 138 -

determine the impact of such rulemaking on “small entities.”335 Section 605(b) of the RFA 

provides that this requirement shall not apply to any proposed rule or proposed rule amendment, 

which if adopted, would not have a significant economic impact on a substantial number of small 

entities.336

The Commission certified that the proposed Rule of Practice 194, if adopted, would not 

have a significant economic impact on a substantial number of small entities for purposes of the 

RFA.337 Although we encouraged written comments regarding this certification, no commenters 

responded to this request.

B. Assessment of Impact

Rule of Practice 194, as adopted, establishes rules concerning an application by SBS 

Entity to the Commission for an order permitting an associated person that is a natural person 

who is subject to a statutorily disqualification to effect or be involved in effecting security-based 

swaps on behalf of an SBS Entity. With respect to SBS Entities, based on feedback from market 

participants and our information about the security-based swap markets, the Commission 

continues to believe, as we stated in the proposal,338 that (1) the types of entities that would 

engage in more than a de minimis amount of dealing activity involving security-based swaps—

which generally would be large financial institutions—would not be “small entities” for purposes

335 Although Section 601(b) of the RFA defines the term “small entity,” the statute permits 

the Commission to formulate is own definition. The Commission has adopted definitions 

for the term small entity for the purposes of Commission rulemaking in accordance with 

the RFA. Those definitions, as relevant to this proposed rulemaking, are set forth in Rule 

0-10, 17 CFR 240.0-10. See Exchange Act Release No. 18451, 47 FR 5212 (Feb. 4, 

1982).

336 See 5 U.S.C. 605(b).

337 See Proposing Release, 80 FR at 51718.

338 See id.
- 139 -

of the RFA;339 and (2) the types of entities that may have security-based swap positions above 

the level required to be a “major security-based swap participant” would not be “small entities” 

for purposes of the RFA.340

C. Certification

For the foregoing reasons, the Commission certifies that Rule of Practice 194, as adopted, 

will not have a significant economic impact on a substantial number of small entities for 

purposes of the RFA.

VII. STATUTORY AUTHORITY

The Commission is adopting Rule of Practice 194 pursuant to Exchange Act Section 

15F(b)(4) and (6),341 as added by Section 764(a) of the Dodd-Frank Act, and Exchange Act 

Section 23(a).

342

List of Subjects in 17 CFR Parts 201 and 240

Administrative practice and procedure, Reporting and recordkeeping requirements, 

Securities.

TEXT OF THE RULE

In accordance with the foregoing, the Securities and Exchange Commission is amending 

title 17, chapter II of the Code of Federal Regulations as follows:

339 See, e.g., Cross-Border Adopting Release, 79 FR at 47368. See also Economic Analysis 

Section V.B.1.b., supra. For example, and as explained above, based on an analysis of 

2017 single-name CDS data in TIW, accounts of those firms that are likely to exceed the 

security-based swap dealer de minimis thresholds and trigger registration requirements 

intermediated transactions with a gross notional amount of approximately $2.9 trillion, 

approximately 55 percent of which was intermediated by the top five dealer accounts. 

See id.

340 See Cross-Border Adopting Release, 79 FR at 47368.

341 15 U.S.C. 78o-10(b)(4), (6).

342 15 U.S.C. 78w(a).
- 140 -

PART 201 – RULES OF PRACTICE

1. The general authority citation for Subpart D is revised to read as follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77h-1, 77j, 77s, 77u, 77sss, 77ttt, 78(c)(b), 78d-1,

78d-2, 78l, 78m, 78n, 78o(d), 78o-3, 78o-10(b)(6), 78s, 78u-2, 78u-3, 78v, 78w, 80a-8, 80a-9,

80a-37, 80a-38, 80a-39, 80a-40, 80a-41, 80a-44, 80b-3, 80b-9, 80b-11, 80b-12, 7202, 7215, and

7217.

* * * * *

2. Add § 201.194 to subpart D before the undesignated center heading “Initiation of 

Proceedings and Prehearing Rules” to read as follows:

§ 201.194 Applications by security-based swap dealers or major security-based swap 

participants for statutorily disqualified associated persons to effect or be 

involved in effecting security-based swaps.

A security-based swap dealer or major security-based swap participant making an 

application under this section should refer to paragraph (i) of this section.

(a) Scope of rule. Applications by a security-based swap dealer or major security-based 

swap participant for the Commission to permit an associated person (as provided in 15 U.S.C. 

78c(a)(70)) to effect or be involved in effecting security-based swaps on behalf of a registered 

security-based swap dealer or major security-based swap participant, or to change the terms and 

conditions thereof, may be made pursuant to this section where the associated person is subject 

to a statutory disqualification and thereby prohibited from effecting or being involved in 

effecting security-based swaps on behalf of a security-based swap dealer or major security-based 

swap participant under Exchange Act Section 15F(b)(6) (15 U.S.C. 78o-10(b)(6)).

(b) Required showing. The applicant shall make a showing that it would be consistent 

with the public interest to permit the person associated with the security-based swap dealer or
- 141 -

major security-based swap participant who is subject to a statutory disqualification to effect or be 

involved in effecting security-based swaps on behalf of the security-based swap dealer or major 

security-based swap participant.

(c) Exclusion for other persons. The security-based swap dealer or major security-based 

swap participant shall be excluded from the prohibition in Section 15F(b)(6) of the Securities 

Exchange Act of 1934 (15 U.S.C. 78o-10(b)(6)) with respect to an associated person that is not a 

natural person who is subject to a statutory disqualification.

(d) Form of application. Each application with respect to an associated person that is a 

natural person who is subject to a statutory disqualification shall be supported by a written 

statement, signed by a knowledgeable person authorized by the security-based swap dealer or 

major security-based swap participant, which addresses the items set forth in paragraph (e) of 

this section. The application shall be filed pursuant to Rules of Practice 151, 152, and 153 (17 

CFR 201.151, 201.152, and 201.153). Each application shall include as exhibits:

(1) A copy of the order or other applicable document that resulted in the associated 

person being subject to a statutory disqualification;

(2) An undertaking by the applicant to notify promptly the Commission in writing if any 

information submitted in support of the application becomes materially false or misleading while 

the application is pending;

(3) A copy of the questionnaire or application for employment specified in 17 CFR 

240.15Fb6-2(b), with respect to the associated person; and

(4) If the associated person has been the subject of any proceeding resulting in the 

imposition of disciplinary sanctions during the five years preceding the filing of the application 

or is the subject of a pending proceeding by the Commission, the Commodity Futures Trading
- 142 -

Commission, any federal or state regulatory or law enforcement agency, registered futures 

association (as provided in 7 U.S.C. 21), foreign financial regulatory authority, registered 

national securities association, or any other self-regulatory organization (as provided in 15

U.S.C. 78c(a)(26)), or commodities exchange, or any court, the applicant should include a copy 

of any order, decision, or document issued by the court, agency, self-regulatory organization (as 

provided in 15 U.S.C. 78c(a)(26)), or other relevant authority involved.

(e) Written statement. The written statement required by paragraph (d) of this section 

shall address each of the following, to the extent applicable:

(1) The associated person’s compliance with any order resulting in statutory 

disqualification, including whether the associated person has paid fines or penalties, disgorged 

monies, made restitution or paid any other monetary compensation required by any such order;

(2) The associated person’s employment during the period subsequent to becoming 

subject to a statutory disqualification;

(3) The capacity or position in which the person subject to a statutory disqualification 

proposes to be associated with the security-based swap dealer or major security-based swap 

participant;

(4) The terms and conditions of employment and supervision to be exercised over such 

associated person and, where applicable, by such associated person;

(5) The qualifications, experience, and disciplinary history of the proposed supervisor(s) 

of the associated person;

(6) The compliance and disciplinary history, during the five years preceding the filing of 

the application, of the applicant;

(7) The names of any other associated persons at the applicant who have previously been
- 143 -

subject to a statutory disqualification and whether they are to be supervised by the associated 

person;

(8) Any relevant courses, seminars, examinations or other actions completed by the 

associated person subsequent to becoming subject to a statutory disqualification to prepare for 

his or her participation in the security-based swap business;

(9) A detailed statement of why the associated person should be permitted to effect or be 

involved in effecting security-based swaps on behalf of the security-based swap dealer or major 

security-based swap participant, notwithstanding the event resulting in statutory disqualification, 

including what steps the associated person or applicant has taken, or will take, to ensure that the 

statutory disqualification does not negatively affect the ability of the associated person to effect 

or be involved in effecting security-based swaps on behalf of the security-based swap dealer or 

major security-based swap participant in compliance with the applicable statutory and regulatory 

framework;

(10) Whether the associated person has been involved in any litigation during the five 

years preceding the filing of the application concerning investment or investment-related 

activities or whether there are any unsatisfied judgments outstanding against the associated 

person concerning investment or investment-related activities, to the extent not otherwise 

covered by paragraph (e)(9) of this section. If so, the applicant should provide detailsregarding 

such litigation or unsatisfied judgments; and

(11) Any other information that the applicant believes to be material to the application.

(f) Prior applications or processes. In addition to the information specified above, any 

person making an application under this rule shall provide any order, notice or other applicable 

document reflecting the grant, denial or other disposition (including any dispositions on appeal)
- 144 -

of any prior application or process concerning the associated person:

(1) Pursuant to this section;

(2) Pursuant to Rule of Practice 193 (17 CFR 201.193);

(3) Pursuant to Investment Company Act Section 9(c) (15 U.S.C. 80a-9(c));

(4) Pursuant to Section 19(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78s(d)), 

Rule 19h-1 under the Securities Exchange Act of 1934 (17 CFR 240.19h-1), or a proceeding by a 

self-regulatory organization (as provided in 15 U.S.C. 78c(a)(26)) for a person to become or 

remain a member, or an associated person of a member, notwithstanding the existence of a 

statutory disqualification; or

(5) By the Commodity Futures Trading Commission or a registered futures association 

(as provided in 7 U.S.C. 21) for registration, including as an associated person, or listing as a 

principal, notwithstanding the existence of a statutory disqualification, including:

(i) Any order or other document providing that the associated person may be listed as a 

principal or registered as an associated person of a futures commission merchant, retail foreign 

exchange dealer, introducing broker, commodity pool operator, commodity trading advisor, or 

leverage transaction merchant, or any person registered as a floor broker or a floor trader, 

notwithstanding that the person is subject to a statutory disqualification from registration under

Section 8a(2) or 8a(3) of the Commodity Exchange Act (7 U.S.C. 12a(2), (3)); or

(ii) Any determination by a registered futures association (as provided in 7 U.S.C. 21) 

that had the associated person applied for registration as an associated person of a swap dealer or 

a major swap participant, or had a swap dealer or major swap participant listed the associated 

person as a principal in the swap dealer’s or major swap participant’s application for registration, 

notwithstanding statutory disqualification, the application of the associated person or of the swap
- 145 -

dealer or major swap participant, as the case may be, would have been granted or denied.

(g) Notification to applicant and written statement. In the event an adverse 

recommendation is proposed by Commission staff with respect to an application made pursuant 

to this section, the applicant shall be so advised and provided with a written statement of the 

reasons for such recommendation. The applicant shall then have 30 days thereafter to submit a 

written statement in response.

(h) Notice in lieu of an application. (1) A security-based swap dealer or major securitybased swap participant may permit a person associated with it who is subject to a statutory 

disqualification to effect or be involved in effecting security-based swaps on its behalf, without 

making an application pursuant to this section, where the conditions in paragraph (h)(2) of this 

section are met, and where:

(i) The person has been admitted to or continued in membership, or participation or 

association with a member, of a self-regulatory organization (as provided in 15 U.S.C. 

78c(a)(26)), notwithstanding that such person is subject to a statutory disqualification under 

Section 3(a)(39)(A) through (F) of the Securities Exchange Act of 1934 (15 U.S.C. 

78c(a)(39)(A) through (F));

(ii) The person has been granted consent to associate pursuant to the Rule of Practice 193 

(17 CFR 201.193) or otherwise by the Commission;

(iii) The person has been permitted to effect or be involved in effecting security-based

swaps on behalf of a security-based swap dealer or major security-based swap participant 

pursuant to this section; or

(iv) The person has been registered as, or listed as a principal of, a futures commission 

merchant, retail foreign exchange dealer, introducing broker, commodity pool operator,
- 146 -

commodity trading advisor, or leverage transaction merchant, registered as an associated person 

of any of the foregoing, registered as or listed as a principal of a swap dealer or major swap 

participant, or registered as a floor broker or floor trader, notwithstanding that the person is 

subject to a statutory disqualification under Sections 8a(2) or 8a(3) of the Commodity Exchange 

Act (7 U.S.C. 12a(2), (3)), and the person is not subject to a Commission bar or suspension 

pursuant to Sections 15(b), 15B, 15E, 15F, or 17A of the Securities Exchange Act of 1934 (15

U.S.C. 78o(b), 78o-4, 78o-7, 78o-10, 78q-1), Section 9(b) of the Investment Company Act of 

1940 (15 U.S.C. 80a-9(b)), or Section 203(f) of the Investment Advisers Act of 1940 (15 U.S.C. 

80b-3(f)).

(2) A security-based swap dealer or major security-based swap participant may permit a 

person associated with it who is subject to a statutory disqualification to effect or be involved in 

effecting security-based swaps on its behalf, without making an application pursuant to this 

section, as provided in paragraph (h)(1), subject to the following conditions:

(i) All matters giving rise to a statutory disqualification under Section 3(a)(39)(A) 

through (F) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(39)(A) through (F)) have 

been subject to a process where the membership, association, registration or listing as a principal 

has been granted or otherwise approved by the Commission, Commodity Futures Trading 

Commission, self-regulatory organization (as provided in 15 U.S.C. 78c(a)(26)), or a registered 

futures association (as provided in 7 U.S.C. 21);

(ii) The terms and conditions of the association with the security-based swap dealer or 

major security-based swap participant are the same in all material respects as those approved in 

connection with a previous order, notice or other applicable document granting the membership, 

association, registration or listing as a principal, as provided in paragraph (h)(1); and
- 147 -

(iii) The security-based swap dealer or major security-based swap participant has filed a 

notice with the Commission. The notice shall be filed pursuant to Rules of Practice 151, 152, 

and 153 (17 CFR 201.151, 201.152, and 201.153). The notice must set forth, as appropriate:

(A) The name of the security-based swap dealer or major security-based swap participant;

(B) The name of the associated person subject to a statutory disqualification;

(C) The name of the associated person’s prospective supervisor(s) at the security-based 

swap dealer or major security-based swap participant;

(D) The place of employment for the associated person subject to a statutory 

disqualification; and

(E) Identification of any agency, self-regulatory organization (as provided in 15 U.S.C.

78c(a)(26)) or a registered futures association (as provided in 7 U.S.C. 21) that has indicated its 

agreement with the terms and conditions of the proposed association, registration or listing as a 

principal.

(i) Note to § 201.194. (1) Under Section 15F(b)(6) of the Securities Exchange Act of 

1934 (15 U.S.C. 78o-10(b)(6)), except to the extent otherwise specifically provided by rule, 

regulation, or order of the Commission, it shall be unlawful for a security-based swap dealer or a 

major security-based swap participant to permit any person associated with a security-based 

swap dealer or a major security-based swap participant who is subject to a statutory 

disqualification to effect or be involved in effecting security-based swaps on behalf of the 

security-based swap dealer or major security-based swap participant, if the security-based swap 

dealer or major security-based swap participant knew, or in the exercise of reasonable care 

should have known, of the statutory disqualification.

(2) Subject to the exclusion provided in paragraph (c) of this section, in accordance with
- 148 -

the authority granted in Section 15F(b)(6) of the Securities Exchange Act of 1934 (15 U.S.C. 

78o-10(b)(6)), this section governs applications to the Commission by a security-based swap 

dealer or major security-based swap participant for the Commission to issue an order to permit a 

natural person who is an associated person of a security-based swap dealer or major securitybased swap participant who is subject to a statutory disqualification to effect or be involved in 

effecting security-based swaps on behalf of the security-based swap dealer or major securitybased swap participant.

(3) Applications made pursuant to this section must show that it would be consistent with 

the public interest to permit the associated person of the security-based swap dealer or major 

security-based swap participant to effect or be involved in effecting security-based swaps on 

behalf of the security-based swap dealer or major security-based swap participant. In addition to 

the information specifically required by the rule, applications should be supplemented, where 

appropriate, by written statements of individuals who are competent to attest to the associated 

person’s character, employment performance, and other relevant information. In addition to the 

information required by the rule, the Commission staff may request supplementary information 

to assist in the Commission’s review. Intentional misstatements or omissions of fact may 

constitute criminal violations of 18 U.S.C. 1001, et seq. and other provisions of law. The 

Commission will not consider any application that attempts to reargue or collaterally attack the 

findings that resulted in the statutory disqualification.

(4) The nature of the supervision that an associated person will receive or exercise as an 

associated person with a registered entity is an important matter bearing upon the public interest. 

In meeting the burden of showing that permitting the associated person to effect or be involved 

in effecting security-based swaps on behalf of the security-based swap dealer or major security-
- 149 -

based swap participant is consistent with the public interest, the application and supporting 

documentation must demonstrate that the terms or conditions of association, procedures or 

proposed supervision, are reasonably designed to ensure that the statutory disqualification does 

not negatively affect the ability of the associated person to effect or be involved in effecting 

security-based swaps on behalf of the security-based swap dealer or major security-based swap 

participant in compliance with the applicable statutory and regulatory framework.

(5) Normally, the applicant’s burden of demonstrating that permitting the associated 

person to effect or be involved in effecting security-based swaps on behalf of the security-based 

swap dealer or major security-based swap participant is consistent with the public interest will be 

difficult to meet where the associated person is to be supervised by, or is to supervise, another 

statutorily disqualified individual. In addition, where there is an absence of supervision over the 

associated person who is subject to a statutory disqualification, the applicant’s burden will be 

difficult to meet. The associated person may be limited to association in a specified capacity 

with a particular registered entity and may also be subject to specific terms and conditions.

PART 240 – GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT 

OF 1934

3. The general authority citation for part 240 continues to read as follows: 

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 

77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 

78n, 78n-1, 78o, 78o-4, 78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll,

78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq., and 8302; 7 

U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; and Pub. L. 111-203, 939A, 

124 Stat. 1887 (2010); and secs. 503 and 602, Pub. L. 112-106, 126 Stat. 326 (2012), 

unless otherwise noted.
- 150 -

* * * * *

§ 240.15Fb6-1 [Removed and reserved].

4. Remove and reserve § 240.15Fb6-1.

By the Commission. 

Dated: December 19, 2018.

Brent J. Fields, 

Secretary.