[Federal Register Volume 85, Number 249 (Tuesday, December 29, 2020)]
[Notices]
[Pages 85720-85743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28697]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90766; File No. S7-22-20]


Notice of Substituted Compliance Application Submitted by the 
French Autorit[eacute] des March[eacute]s Financiers and the 
Autorit[eacute] de Contr[ocirc]le Prudential et de R[eacute]solution in 
Connection With Certain Requirements Applicable to Non-U.S. Security-
Based Swap Dealers and Major Security-Based Swap Participants Subject 
to Regulation in the French Republic; Proposed Order

AGENCY: Securities and Exchange Commission.

ACTION: Notice of application for substituted compliance determination; 
proposed order.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or 
``SEC'') is soliciting public comment on an application by the French 
Autorit[eacute] des March[eacute]s Financiers (``AMF'') and the 
Autorit[eacute] de Contr[ocirc]le Prudential et de R[eacute]solution 
(``ACPR'') requesting that, pursuant to rule 3a71-6 under the 
Securities Exchange Act of 1934 (``Exchange Act''), the Commission 
determine that registered security-based swap dealers and registered 
major security-based swap participants (``SBS Entities'') that are not 
U.S. persons and that are subject to certain regulation in the French 
Republic (``France'') may comply with certain requirements under the 
Exchange Act via compliance with corresponding requirements of France 
and the European Union. The Commission also is soliciting comment on a 
proposed Order providing for conditional substituted compliance in 
connection with the application.

DATES: Submit comments on or before January 25, 2021.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

    <bullet> Use the Commission's internet comment form (http://www.sec.gov/rules/proposed.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#e496918881c9878b8989818a9097a4978187ca838b92"><span class="__cf_email__" data-cfemail="691b1c050c440a0604040c071d1a291a0c0a470e061f">[email protected]</span></a>. Please include 
File Number S7-22-20 on the subject line.

Paper Comments

    <bullet> Send paper comments to Vanessa A. Countryman, Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-1090.

All submissions should refer to File Number S7-22-20. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's internet website (http://www.sec.gov/rules/proposed.shtml). Comments are also available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. All comments received will be posted without 
change. Persons submitting comments are cautioned that the Commission 
does not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
publicly available.

FOR FURTHER INFORMATION CONTACT: Carol M. McGee, Assistant Director or 
Laura Compton, Senior Special Counsel at 202-551-5870, Office of 
Derivatives Policy, Division of Trading and Markets, Securities and 
Exchange Commission, 100 F Street NE, Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: 
    The Commission is soliciting public comment on an application by 
the AMF

[[Page 85721]]

and the ACPR (``French Authorities'') requesting that the Commission 
determine that SBS Entities that are not U.S. persons and that are 
subject to certain regulation in France may satisfy certain 
requirements under the Exchange Act by complying with comparable 
requirements in France including relevant European Union (``EU'') 
requirements. The Commission also is soliciting comment on a proposed 
Order, set forth in Attachment A, providing for conditional substituted 
compliance in connection with that application.

I. Background

    Exchange Act rule 3a71-6 conditionally provides that non-U.S. SBS 
Entities may satisfy certain requirements under Exchange Act section 
15F by complying with comparable regulatory requirements of a foreign 
jurisdiction.\1\ Substituted compliance potentially is available in 
connection with requirements regarding business conduct and 
supervision, chief compliance officers, trade acknowledgment and 
verification, non-prudentially regulated capital and margin, 
recordkeeping and reporting, and portfolio reconciliation, portfolio 
compression and trading relationship documentation.\2\
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    \1\ The Commission has also discussed the parameters of 
substituted compliance in connection with a substituted compliance 
request and accompanying Order regarding the Federal Republic of 
Germany. See Exchange Act Release No. 34-90378 (Nov. 9, 2020), 85 FR 
72726 (Nov.13, 2020) (``German Notice and Proposed Order''); 
Exchange Act Release No. 34-90765 (Dec. 22, 2020), (``German 
Substituted Compliance Order'').
    \2\ See Exchange Act rule 3a71-6(d). Substituted compliance 
under rule 3a71-6 is not available in connection with certain 
antifraud prohibitions (Exchange Act sections 10(b) and 
15F(h)(4)(A), Exchange Act rules 10b-5 and 15Fh-4(a), and Securities 
Act of 1933 section 17(a)), information-related provisions 
(15F(j)(2) and 15F(j)(4)(B)), requirements related to transactions 
with counterparties that are not eligible contract participants 
(``ECPs'') (Exchange Act section 6(l) and Securities Act section 
5(e)), provisions related to segregation of customer assets 
(Exchange Act section 3E and Exchange Act rule 18a-4), required 
clearing upon counterparty election (Exchange Act section 3C(g)(5)), 
regulatory reporting and public dissemination (Regulation SBSR, 17 
CFR 242.900 et seq.) and registration of offerings (Securities Act 
section 5).
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    Substituted compliance in part is predicated on the Commission 
determining the analogous foreign requirements are ``comparable'' to 
the applicable requirements under the Exchange Act, after accounting 
for factors such as the ``scope and objectives'' of the relevant 
foreign regulatory requirements, and the effectiveness of the foreign 
authority's supervisory and enforcement frameworks.\3\ Substituted 
compliance further requires that the Commission and foreign financial 
regulatory authorities have entered into an effective supervisory and 
enforcement memorandum of understanding and/or other arrangement 
addressing cooperation and other matters related to substituted 
compliance.\4\ Also, foreign regulatory authorities may submit a 
substituted compliance application only if the authorities provide 
``adequate assurances'' that no law or policy would impede the ability 
of any entity that is directly supervised by the authorities and that 
may register with the Commission ``to provide prompt access to the 
Commission to such entity's books and records or to submit to onsite 
inspection or examination by the Commission.'' \5\
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    \3\ See Exchange Act rule 3a71-6(a)(2)(i).
    \4\ See Exchange Act rule 3a71-6(a)(2)(ii). The Commission and 
the French Authorities are in the process of negotiating a 
memorandum of understanding to address cooperation matters related 
to substituted compliance. In light of the ECB's authority with 
respect to certain requirements, including margin and capital, for 
which the French Authorities seek substituted compliance, the 
Commission and the ECB are also in the process of developing a 
memorandum of understanding or other arrangement to address 
cooperation matters related to substituted compliance. These MOUs or 
other arrangements will need to be in place before the Commission 
may allow Covered Entities to use substituted compliance to satisfy 
obligations under the Exchange Act. The Commission expects to 
publish any such memorandum of understanding or arrangement on its 
website at www.sec.gov under the ``Substituted Compliance'' tab, 
which is located on the ``Security-Based Swap Markets'' page in the 
Division of Trading and Markets section of the site.
    \5\ See Exchange Act rule 3a71-6(a)(3). The French Authorities 
have satisfied this prerequisite in the Commission's preliminary 
view, taking into account information and representations that 
French Authorities provided regarding certain French and EU 
requirements that are relevant to the Commission's ability to 
inspect, and access the books and records of, security-based swap 
dealers in France.
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    Commission rule 0-13 addresses procedures for filing substituted 
compliance applications, and provides that the Commission will publish 
notice when a completed application has been submitted, and that any 
person may submit to the Commission ``any information that relates to 
the Commission action requested in the application.'' \6\
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    \6\ See Commission rule 0-13(h). The Commission may take final 
action on a substituted compliance application no earlier than 25 
days following publication of the notice in the Federal Register.
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II. French Authorities' Substituted Compliance Request

    The French Authorities have submitted a complete substituted 
compliance application to the Commission.\7\ Pursuant to rule 0-13, the 
Commission is publishing notice of the application together with a 
proposed Order to conditionally grant substituted compliance to certain 
French SBS Entities in connection with certain requirements under the 
Exchange Act. The Commission will consider public comments on the 
French Authorities' Application and the proposed Order.
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    \7\ See Letter from Robert Oph[egrave]le, Chairman, AMF and 
Denis Beau, Chairmen, ACPR to Vanessa A. Countryman, Secretary, 
Commission, dated December 10, 2020 (``French Authorities' 
Application''). The application is available on the Commission's 
website at https://www.sec.gov/files/full-french-application.pdf.
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    The French Authorities seek substituted compliance for French 
market participants in connection with a number of requirements under 
Exchange Act section 15F:

A. Relevant Market Participants

    The Commission will consider whether to make substituted compliance 
available to any entity that: (i) Is registered with the Commission as 
a security-based swap dealer or major security-based swap participant; 
(ii) is not a U.S. person; (iii) has been authorized by the AMF as an 
investment firm or by the ACPR as a credit institution after approval 
by the AMF of the credit institution's program of operations; and (iv) 
is subject to relevant French and EU financial regulatory requirements 
and to supervision and enforcement by the French Authorities' in 
connection with its security-based swap activity.

B. Relevant Section 15F Requirements

    The French Authorities request that the Commission issue an order 
determining that--for substituted compliance purposes--applicable 
requirements in France are comparable with the following requirements 
under Exchange Act section 15F:
    Risk control requirements--Requirements related to internal risk 
management systems, trade acknowledgment and verification, portfolio 
reconciliation and dispute resolution, portfolio compression and 
trading relationship documentation.\8\
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    \8\ See part IV, infra.
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    Capital and margin requirements--Requirements related to capital 
and margin applicable to non-prudentially regulated security-based swap 
dealer and major security-based swap participants.\9\
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    \9\ See part V, infra. The French Authorities request 
substituted compliance in connection with capital and margin 
requirements that are applicable to non-prudentially regulated SBS 
Entities pursuant to Exchange Act section 15F(e) and Exchange Act 
rules 18a-1 through 18a-1d, and 18a-3. The proposed Order defines 
the term ``prudentially regulated'' to mean an SBS Entity that has a 
``prudential regulator'' as that term is defined in Exchange Act 
section 3(a)(74). See para. (g)(24) to the proposed Order.

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[[Page 85722]]

    Internal supervision, chief compliance officer and additional 
section 15F(j) requirements--Requirements related to diligent 
supervision and chief compliance officers, as well as requirements 
related to conflicts of interest and information gathering under 
Exchange Act section 15F(j).\10\
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    \10\ See part VI, infra.
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    Counterparty protection requirements--Requirements related to 
disclosure of material risks and characteristics and material 
incentives or conflicts of interest, disclosure of daily marks, fair 
and balanced communications, disclosure of clearing rights, ``know your 
counterparty'' and suitability of recommendations.\11\
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    \11\ See part VII, infra. The French Authorities are not 
requesting substituted compliance in connection with: Eligible 
contract participant (``ECP'') verification requirements (Exchange 
Act section 15F(h)(3)(A) and Exchange Act rule 15Fh-3(a)(1)); 
``special entity'' provisions (Exchange Act sections 15F(h)(4) and 
(5) and Exchange Act rules 15Fh-3(a)(2) and (3), 15Fh-4(b) and 15Fh-
5); and political contribution provisions (Exchange Act rule 15Fh-
6).
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    Recordkeeping, reporting, notification, and securities count 
requirements--Requirements related to making and keeping current 
certain prescribed records, the preservation of records, reporting, 
notification, and securities counts.\12\
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    \12\ See part VIII, infra.
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C. Comparability Considerations and Proposed Order

    Because France is a member of the European Union, market 
participants in France are subject to French regulations implemented 
pursuant to EU directives, and to applicable EU regulations. Those 
include requirements related to: Organization, compliance and conduct 
\13\; risk-mitigation; \14\ prudential matters; \15\ and certain other 
matters relevant to the application.\16\ In the view of the French 
Authorities, French and EU requirements taken as a whole produce 
regulatory outcomes that are comparable to those of the relevant 
requirements under the Exchange Act.\17\
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    \13\ See EU's Markets in Financial Instruments Directive 
(``MiFID''), Directive 2014/65/EU, which has been implemented in 
France as part of article L. 511 to the French Monetary and 
Financial Code--Code mon[eacute]taire et financier (``MFC''). These 
address, inter alia, organizational, compliance and conduct 
requirements applicable to nonbank ``investment firms.'' In relevant 
part, those requirements also apply to credit institutions that 
provide investment services or perform investment activities. 
Additional relevant requirements are: (i) Commission Delegated 
Regulation (EU) 2017/565 (``MiFID Org Reg''), which in part 
supplements MiFID with respect to organizational requirements for 
firms; (ii) Markets in Financial Instruments Regulation (``MiFIR''), 
Regulation (EU) 648/2012, which generally addressing trading venues 
and transparency; (iii) Commission Delegated Directive (EU) 2017/593 
(``MiFID Delegated Directive''), which in part supplements MiFID 
with regard to safeguarding client property, and in France is 
implemented in relevant part by the R[egrave]glement 
G[eacute]n[eacute]ral de L'Autorit[eacute] des March[eacute]s 
Financiers (``AMF General Regulation''); and (iv) Directive (EU) 
2015/849 (``MLD'') addresses requirements on the prevention of the 
use of the financial system for the purposes of money laundering or 
terrorist financing, and in France has been implemented by article 
L.561 to the MFC.
    \14\ Relevant requirements are: (i) European Market 
Infrastructure Regulation (``EMIR''), Regulation (EU) 648/2012, 
which in part imposes certain risk-mitigation requirements on 
counterparties in connection with uncleared OTC transactions; (ii) 
Delegated Regulation (EU) 149/2013 (``EMIR RTS''), which supplements 
EMIR with various regulatory technical standards, including 
standards addressing confirmations, portfolio reconciliation, 
portfolio compression and dispute resolution; and (iii) Delegated 
Regulation (EU) 2016/2251 (``EMIR Margin RTS''), which further 
supplements EMIR with regulatory technical standards related to risk 
mitigation techniques.
    \15\ The EU's Capital Requirements Directive IV (``CRD''), 
Directive 2013/36/EU has been adopted in France as part of article 
L.533 to the MFC, and set forth prudential requirements and certain 
related requirements applicable to credit institutions and certain 
nonbank investment firms. Certain CRD requirements regarding 
reporting obligations have been incorporated into French law as part 
of articles L. 511 and L.634 to the MFC. The Capital Requirements 
Regulation (``CRR''), Regulation (EU) 575/2013, further addresses 
prudential requirements and related recordkeeping requirements for 
credit institutions and certain investment firms. Commission 
Implementing Regulation (EU) 680/2014 (``CRR Reporting ITS'') sets 
forth implementing technical standard regarding supervisory 
reporting. Pursuant to amendments that will become effective in June 
2021, the requirements of CRD and the CRR will apply to credit 
institutions and to certain nonbank undertakings (that carry on 
activities involving dealing, portfolio management, investment 
advice and underwriting/placing) that meet specified thresholds 
(e.g., consolidated assets of [euro]30 billion or more). See 
generally Investment Firms Regulation (``IFR''), Regulation (EU) 
2019/2033, art. 62 (amending certain definitions in the CRR).
    \16\ The Market Abuse Regulation (``MAR''), Regulation (EU) 596/
2014, sets forth requirements to enhance market integrity and 
investor protection. The Investment Recommendations Regulation 
adopted pursuant to MAR (``MAR Investment Recommendations 
Regulation''), Commission Delegated Regulation (EU) 2016/958, 
supplements MAR with respect to regulatory technical standards 
regarding investment recommendations.
    \17\ In support, the application incorporates and relies on a 
series of European Commission analyses that compare EU requirements 
with applicable requirements under the Exchange Act, in addition to 
analyses specific to French law and practices. The application 
particularly incorporates and builds upon European Commission 
analyses related to: Risk control (see French Authorities' 
Application Annex 1 category 1), books and records (see the French 
Authorities' Application Annex 1 category 2), internal supervision 
and compliance (see the French Authorities' Application Annex 1 
category 3), and counterparty protection (see the French 
Authorities' Application Annex 1 category 4).
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    In the Commission's preliminary view, requirements under the 
Exchange Act and French/EU requirements maintain similar approaches 
with respect to achieving regulatory goals in several respects, but 
follow differing approaches or incorporate disparate elements in 
certain other respects. The Commission has considered those 
similarities and differences when analyzing comparability and 
developing preliminary views, while recognizing that differences in 
approach do not necessarily preclude substituted compliance in light of 
the Commission's holistic, outcomes-oriented framework for assessing 
comparability.\18\
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    \18\ In this context, the Commission recognizes that other 
regulatory regimes will have exclusions, exceptions and exemptions 
that may not align perfectly with the corresponding requirements 
under the Exchange Act. Where the Commission preliminarily has found 
that the French regime produces comparable outcomes notwithstanding 
those particular differences, the Commission proposes to make a 
positive determination on substituted compliance. Where the 
Commission preliminarily has found that those exclusions, exemptions 
and exceptions lead to outcomes that are not comparable, however, 
the proposal would not provide for substituted compliance.
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    Based on the Commission's analysis of the application and review of 
relevant French and EU requirements, the Commission is proposing an 
Order, located at Attachment A, granting substituted compliance subject 
to specific conditions and limitations. When SBS Entities seek to rely 
on substituted compliance to satisfy particular requirements under the 
Exchange Act, non-compliance with the applicable French and EU 
requirements would lead to a violation of those requirements under the 
Exchange Act and potential enforcement action by the Commission (as 
opposed to automatic revocation of the substituted compliance order).

[[Page 85723]]

III. Applicable Entities and General Conditions

A. Covered Entities for Which the Commission Is Proposing a Positive 
Conditional Substituted Compliance Determination

    Under the proposed Order, substituted compliance would be available 
to ``Covered Entities''--a term that would limit the scope of the 
substituted compliance determination to SBS Entities that are subject 
to applicable French and EU requirements and oversight. Consistent with 
the parameters of substituted compliance under Exchange Act rule 3a71-
6, the proposed ``Covered Entity'' definition would provide that the 
relevant entities must be security-based swap dealers or major 
security-based swap participants registered with the Commission, and 
that those entities cannot be U.S. persons.\19\
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    \19\ See para. (g)(1)(i) and (ii) to the proposed Order.
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    The proposed ``Covered Entity'' definition further would provide 
that the entities must be investment firms that the AMF authorize to 
provide investment services or perform investment activities in France 
or credit institutions that the ACPR authorize after approval by the 
AMF of the credit institution's program of operations to provide 
investment services or perform investment activities in France.\20\ 
This is intended to help ensure that those entities are subject to 
relevant French and EU requirements and oversight.
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    \20\ See para. (g)(1)(iii) to the proposed Order.
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B. General Conditions and Prerequisites

    Substituted compliance under the proposed Order would be subject to 
a number of conditions and other prerequisites, to help ensure that the 
relevant French and EU requirements that form the basis for substituted 
compliance in practice will apply to the SBS Entity's security-based 
swap business and activities, and to promote the Commission's oversight 
over entities that avail themselves of substituted compliance.
1. ``Subject to and Complies With'' Applicability Provisions
    Each relevant section of the proposed Order would be subject to the 
condition that the Covered Entity ``is subject to and complies with'' 
the applicable French and EU requirements that are needed to establish 
comparability. Accordingly, the proposed Order would not provide 
substituted compliance when an SBS Entity is excused from compliance 
with relevant foreign provisions, such as, for example, if relevant 
member French or EU requirements do not apply to the security-based 
swap activities of a third-country branch of a French SBS Entity.
2. Additional General Conditions
    Substituted compliance under the proposed Order further would be 
subject to general conditions intended to help ensure the applicability 
of relevant French and EU requirements, and to facilitate the 
Commission's oversight of firms that avail themselves of substituted 
compliance. In particular:
    <bullet> MiFID ``investment services or activities''--The Covered 
Entity's security-based swap activities must constitute ``investment 
services or activities'' for purposes of applicable provisions under 
MiFID, provisions under MFC that implement MiFID and/or other EU and 
French requirements adopted pursuant to those provisions, and must fall 
within the scope of the firm's authorization from the AMF or from the 
ACPR after approval by the AMF of the firm's program of operations.\21\
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    \21\ See para. (a)(1) to the proposed Order (relevant activities 
must constitute ``investment services'' or ``investment activities'' 
as defined in MiFID art. 4(1)(2) and MFC L. 321-1 in connection with 
applicable provisions). Under this condition, an SBS Entity's 
security-based swap activities must constitute ``investment services 
or activities'' only to the extent that the relevant part of the 
Order requires the entity to be subject to and comply with 
provisions of MiFID, MFC or related EU and French requirements. The 
security-based swap activities need not be ``investment services or 
activities'' when the relevant part of the Order does not require 
compliance with one of those provisions (e.g., paragraph (e)(6) 
addressing substituted compliance for daily mark disclosure 
requirements).
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    <bullet> MiFID ``clients''--The Covered Entity's counterparties (or 
potential counterparties) must be ``clients'' (or potential 
``clients'') for purposes of applicable provisions under MiFID, 
provisions under MFC that implement MiFID and/or other EU and French 
requirements adopted pursuant to those provisions.\22\
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    \22\ See para. (a)(2) to the proposed Order (relevant 
counterparties or potential counterparties must be ``clients'' or 
potential ``clients'' as defined in MiFID art. 4(1)(9) and as used 
in the relevant provision of MFC, in connection with applicable 
provisions).
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    <bullet> MiFID ``financial instruments''--The relevant security-
based swaps must be ``financial instruments'' for purposes of 
applicable provisions under MiFID, provisions of MFC that implement 
MiFID and/or other EU and French requirements adopted pursuant to those 
provisions.\23\
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    \23\ See para. (a)(3) to the proposed Order (relevant security-
based swaps must be ``financial instruments'' as defined in MiFID 
art. 4(1)(15) and MFC L. 211-1 and D. 211-1A in connection with 
applicable provisions).
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    <bullet> CRD ``institutions''--The Covered Entity must be an 
``institution'' for purposes of applicable provisions under CRD, 
provisions of MFC that implement CRD, CRR and/or other EU and French 
requirements adopted pursuant to those provisions.\24\
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    \24\ See para. (a)(4) to the proposed Order (relevant Covered 
Entities must be ``institutions,'' as defined in CRD art. 3(1)(3) 
and CRR art. 4(1)(3), and either a credit institution or finance 
company, each as defined in MFC L. 511-1).
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    <bullet> Memoranda of Understanding--The Commission and the AMF and 
ACPR must have an applicable memorandum of understanding or other 
arrangement addressing cooperation with respect to the Order at the 
time the Covered Entity makes use of substituted compliance.\25\ For 
Covered Entities that are credit institutions, the AMF, ACPR and ECB 
share responsibility for supervising compliance with some of the 
provisions of EU and French law addressed by the proposed Order.\26\ To 
ensure the Commission's ability to receive information about these 
Covered Entities that may belong to the ECB, the proposed Order would 
require that, at the time such a Covered Entity makes use of 
substituted compliance with respect to those requirements, the 
Commission and the ECB, and/or AMF and/or the ACPR also must have a 
memorandum of understanding and/or other arrangement addressing 
cooperation with respect to the Order as it pertains to this ECB-owned 
information.\27\
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    \25\ See para. (a)(5) to the proposed Order.
    \26\ See, e.g., para. (c)(1) to the proposed Order (substituted 
compliance for Exchange Act capital requirements available to 
Covered Entities that are subject to and comply with certain 
provisions of CRR, BRRD, CRD and provisions of French law that 
implement BRRD and/or CRD and/or other EU and French requirements 
adopted pursuant to those provisions); para. (c)(2) of the proposed 
Order (substituted compliance for Exchange Act margin requirements 
available to Covered Entities that are subject to and comply with 
certain provisions of CRR, CRD and provisions of French law that 
implement CRD and/or other EU and French requirements adopted 
pursuant to those provisions).
    \27\ See para. (a)(6) to the proposed Order. In accordance with 
the terms of the proposed Order, this arrangement will need to be in 
place at the time a Covered Entity makes use of substituted 
compliance by complying with any EU or French requirements for which 
the ECB, AMF and ACPR share supervisory responsibility.
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    <bullet> Notice of reliance on substituted compliance--An SBS 
Entity relying on the substituted compliance order must provide notice 
of its intent to rely on the order by notifying the Commission in 
writing.\28\
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    \28\ See para. (a)(7) to the proposed Order.
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3. European Union Cross-Border Matters
    The cross-border application of MiFID, MAR and EU and Member State

[[Page 85724]]

requirements adopted pursuant to MiFID or MAR raises special issues. 
For some EU requirements under MiFID (and other EU and French 
requirements adopted pursuant to MiFID), EU law allocates the 
responsibility for supervising and enforcing those requirements to 
authorities of the Member State in whose territory a Covered Entity 
provides certain services.\29\ To help ensure that the prerequisites to 
substituted compliance with respect to supervision and enforcement are 
satisfied in fact, when the proposed Order requires a Covered Entity to 
be subject to or comply with one of those MiFID requirements (or other 
EU or French requirements adopted pursuant to MiFID), the AMF or the 
ACPR must be the authority responsible for supervision and enforcement 
of those requirements in relation to the particular service for which 
substituted compliance is used.\30\ Similarly, for some of the EU 
requirements under MAR (and other EU requirements adopted pursuant to 
MAR), EU law allocates the responsibility for supervising and enforcing 
those requirements to authorities of potentially multiple Member 
States. To help ensure that the prerequisites to substituted compliance 
with respect to supervision and enforcement are satisfied in fact, when 
the proposed Order requires a Covered Entity to be subject to or comply 
with one of those MAR requirements (or other EU requirements adopted 
pursuant to MAR), the Covered Entity may use substituted compliance 
only if one of the authorities responsible for supervision and 
enforcement of those requirements is the AMF or the ACPR.\31\
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    \29\ See MiFID art. 35(8).
    \30\ See para. (a)(8) to the proposed Order.
    \31\ See para. (a)(8) to the proposed Order.
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IV. Substituted Compliance for Risk Control Requirements

A. The French Authorities' Request and Associated Analytic 
Considerations

    The French Authorities' Application in part requests substituted 
compliance in connection with risk control requirements under the 
Exchange Act relating to:
    <bullet> Risk management systems--Internal risk management system 
requirements pursuant to Exchange Act section 15F(j)(2) and relevant 
aspects of Exchange Act rule 15Fh-3(h)(2)(iii)(I). Those provisions 
address the obligation of registered entities to follow policies and 
procedures reasonably designed to help manage the risks associated with 
their business activities.\32\
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    \32\ See Exchange Act Release No. 68071 (Oct. 18, 2012), 77 FR 
70214, 70250 (Nov. 23, 2012) (proposing capital and margin 
requirements for security-based swap dealers and major security-
based swap participants). The French Authorities' application 
discusses French and EU requirements that address SBS Entities' 
obligations related to risk management. See French Authorities' 
Application Annex 1 category 1 at 66-79.
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    <bullet> Trade acknowledgment and verification--Trade 
acknowledgment and verification requirements pursuant to Exchange Act 
section 15F(i) and Exchange Act rule 15Fi-2. Those provisions help 
avoid legal and operational risks by requiring definitive written 
records of transactions and for procedures to avoid disagreements 
regarding the meaning of transaction terms.\33\
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    \33\ See Exchange Act Release No. 78011 (Jun. 8, 2016), 81 FR 
39808, 39809 & 39820 (Jun. 17, 2019) (``Trade Acknowledgment and 
Verification Adopting Release''). The French Authorities' 
Application discusses French and EU requirements that address SBS 
Entities' obligations related to confirmations and to information to 
be provided to clients regarding executed orders. See French 
Authorities' Application Annex 1 category 1 at 80-102.
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    <bullet> Portfolio reconciliation and dispute reporting--Portfolio 
reconciliation and dispute reporting requirements pursuant to Exchange 
Act section 15F(i) and Exchange Act rule 15Fi-3. Those provisions 
require that counterparties engage in portfolio reconciliation and 
resolve discrepancies in connection with uncleared security-based 
swaps, and promptly notify the Commission and applicable prudential 
regulators regarding certain valuation disputes.\34\
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    \34\ See Exchange Act Release No. 87782 (Dec. 18, 2019), 85 FR 
6359, 6360-61 (Feb. 4, 2020) (``Risk Mitigation Adopting Release''). 
The French Authorities' Application discusses French and EU 
requirements that address portfolio reconciliation and dispute 
resolution and reporting. See French Authorities' Application Annex 
1 category 1 at 104-12.
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    <bullet> Portfolio compression--Portfolio compression requirements 
pursuant to Exchange Act section 15F(i) and Exchange Act rule 15Fi-4. 
Those provisions require that SBS Entities have procedures addressing 
bilateral offset, bilateral compression and multilateral compression in 
connection with uncleared security-based swaps.\35\
---------------------------------------------------------------------------

    \35\ See Risk Mitigation Adopting Release, 85 FR at 6361. The 
French Authorities' Application discusses EU portfolio compression 
requirements. See French Authorities' Application Annex 1 category 1 
at 113-16.
---------------------------------------------------------------------------

    <bullet> Trading relationship documentation--Trading relationship 
documentation requirements pursuant to Exchange Act section 15F(i) and 
Exchange Act rule 15Fi-5. Those provisions require that SBS Entities 
have procedures to execute written security-based swap trading 
relationship documentation with their counterparties prior to, or 
contemporaneously with, executing certain security-based swaps.\36\
---------------------------------------------------------------------------

    \36\ See Risk Mitigation Adopting Release, 85 FR at 6361. The 
French Authorities' Application discusses French and EU requirements 
regarding records of rights, obligations and terms of investment 
firm services. See French Authorities' Application Annex 1 category 
1 at 116-32.
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    Taken as a whole, these risk control requirements help to promote 
market stability by mandating that registered entities follow practices 
that are appropriate to manage the market, credit, counterparty, 
operational and legal risks associated with their security-based swap 
businesses. The Commission's comparability assessment accordingly 
focuses on whether the analogous foreign requirements--taken as a 
whole--produce comparable outcomes with regard to providing that 
registered entities follow risk mitigation and documentation practices 
that are appropriate to the risks associated with their security-based 
swap businesses.

B. Preliminary Views and Proposed Order

1. General Considerations
    In the Commission's preliminary view based on the French 
Authorities' Application and the Commission's review of applicable 
provisions, relevant French and EU requirements would produce 
regulatory outcomes that are comparable to those associated with these 
risk control requirements, by subjecting French SBS Entities to risk 
mitigation and documentation practices that are appropriate to the 
risks associated with their security-based swap businesses. Substituted 
compliance accordingly would be conditioned on Covered Entities being 
subject to the French and EU provisions that in the aggregate establish 
a framework that produces outcomes comparable to those associated with 
these risk control requirements under the Exchange Act.\37\
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    \37\ In connection with risk management system requirements, 
Covered Entities particularly must comply with: MiFID art. 16(4)-(5) 
and MFC L. 533-10.II (4) and (5) (addressing administrative and 
accounting procedures, internal control mechanisms, risk assessment 
procedures and information processing system safeguards); MiFID Org 
Reg art. 21-24 (addressing risk management and internal audit); CRD 
art. 74, 76 and 79-87 and MFC L. 511-41-1-B and L. 511-41-1-C, L. 
511-55 through L. 511-57, L. 511-60 through L. 511-66, L. 511-89 
through L. 511-97; Internal Control Order articles 106, 111, 114-15, 
121-22, 130-34, 146-86, 211-12, 214-15; Prudential Supervision and 
Risk Assessment Order article 7 (addressing internal governance and 
the treatment of various categories of risk); EMIR Margin RTS art. 2 
(addressing required risk management procedures for the exchange of 
collateral for non-centrally cleared over-the-counter derivatives 
contracts); CRR art. 286-88 and 293 (addressing counterparty credit 
risk management and risk management systems); and EMIR Margin RTS 
art. 2 (addressing general provisions for risk management 
procedures). See para. (b)(1) to the proposed Order. In connection 
with trade acknowledgement and verification requirements, firms must 
comply with MiFID art. 25(6) and MFC L. 533-15 (addressing reports 
on services), MiFID Org Reg art. 59-61 (addressing essential 
information regarding executed orders and portfolio management), 
EMIR art. 11(1)(a) (addressing required bilateral confirmations for 
uncleared over-the-counter derivatives) and EMIR RTS art. 12 
(addressing timeliness of confirmations). See para. (b)(2) to the 
proposed Order. In connection with portfolio reconciliation and 
dispute reporting requirements, firms must comply with EMIR art. 
11(1)(b) (addressing required portfolio reconciliation and dispute 
resolution for uncleared over-the-counter derivatives) and EMIR RTS 
art. 13 and 15 (addressing further requirements related to portfolio 
reconciliation and dispute resolution). See para. (b)(3) to the 
proposed Order. In connection with portfolio compression 
requirements, firms must comply with EMIR RTS art. 14 (also 
addressing portfolio protection). See para. (b)(4) to the proposed 
Order. In connection with trading relationship documentation 
requirements, firms must comply with: MiFID art. 25(5) and MFC L. 
533-14 (addressing required records of documents regarding parties' 
rights and obligations and other terms on which the investment firm 
will provide services); MiFID Org Reg art. 24, 58, 73 and applicable 
parts of Annex I (addressing audit requirements, records related to 
appropriateness assessments, client agreements and parties' rights 
and obligations); and EMIR Margin RTS art. 2 (addressing general 
provisions for risk management procedures, including procedures 
providing for or specifying the terms of agreements). See para. 
(b)(5) to the proposed Order. The above EMIR requirements apply only 
to ``OTC derivatives contracts,'' which are defined as derivatives 
contracts not executed on certain ``regulated markets'' or 
equivalent ``third-country markets.'' See EMIR art. 2(7). The EMIR-
related conditions accordingly will not impede substituted 
compliance in connection with exchange-traded or market-traded 
security-based swaps that do not constitute ``OTC derivatives 
contracts.''

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[[Page 85725]]

    While the Commission recognizes that there are certain differences 
between those French and EU requirements and the applicable risk 
control requirements under the Exchange Act, in the Commission's 
preliminary view those differences on balance would not preclude 
substituted compliance for these requirements, particularly as 
requirement-by-requirement similarity is not needed for substituted 
compliance.
2. Additional Conditions and Scope Issues
    Substituted compliance in connection with these requirements would 
be subject to certain additional conditions to help ensure the 
comparability of outcomes:
a. Trading Relationship Documentation--MiFID ``Eligible Counterparty'' 
Exception Not Applicable
    Under the proposed Order, substituted compliance in connection with 
the trading relationship documentation provisions of Exchange Act rule 
15Fi-5 would be conditioned on the requirement that the non-U.S. firm 
not treat its counterparties as ``eligible counterparties'' for 
purposes of the relevant MiFID provisions needed to establish 
comparability.\38\
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    \38\ See para. (b)(5)(ii) to the proposed Order (incorporating 
condition that the Covered Entity cannot treat applicable 
counterparties as ``eligible counterparties'' for purposes of MiFID 
art. 30 or MFC article L. 533-14 in relation to the relevant MiFID 
and MFC provisions). Because trading relationship documentation is 
an entity-level requirement, this condition generally would disapply 
the ``eligible counterparty'' exception in connection with the 
relevant MiFID and MFC provisions for all of the entity's applicable 
counterparties, including non-U.S. counterparties. Rule 15Fi-5 does 
not apply to existing security-based swaps, or to cleared and 
certain security-based swaps executed anonymously on a national 
security exchange or a security-based swap execution facility. See 
rule 15Fi-5(a)(1).
---------------------------------------------------------------------------

    Certain of the relevant French and EU requirements that provide for 
this type of documentation \39\ do not apply to investment firms' 
transactions with ``eligible counterparties.'' \40\ Frameworks that 
completely exclude compliance in connection with a particular category 
of security-based swap counterparty would not promote the associated 
risk control purposes sufficiently to produce a comparable regulatory 
outcome.
---------------------------------------------------------------------------

    \39\ E.g., MiFID art. 25(5) (requiring that investment firms 
establish a record that includes documents ``that set out the rights 
and obligations of the parties, and the other terms on which the 
investment firm will provide services to the client''); MFC L.533-
14; MiFID Org Reg art. 58.
    \40\ See MiFID art. 30(1); MFC L.533-20.
---------------------------------------------------------------------------

    The Commission is mindful that compliance with this condition may 
require French SBS Entities that wish to rely on substituted compliance 
to supplement their existing practices and incur additional time and 
cost burdens to follow relevant French and EU documentation 
requirements in connection with their security-based swap business 
involving ``eligible counterparties.'' On balance, however, this 
prerequisite to substituted compliance is necessary to promote 
comparability in light of the risk control purposes of the trading 
relationship documentation requirement, and that requirement's lack of 
a comparable carveout based on counterparty categories.
b. Trading Relationship Documentation--Disclosure Regarding Legal and 
Bankruptcy Status
    Under the proposed Order, substituted compliance in connection with 
trading relationship documentation would not extend to disclosures 
regarding legal and bankruptcy status that are required by paragraph 
(b)(5) to rule 15Fi-5 when the counterparty is a U.S. person.\41\ 
Documentation requirements under applicable French and EU law do not 
address the disclosure of information related to insolvency procedures 
under U.S. law.
---------------------------------------------------------------------------

    \41\ Those disclosures address information regarding the status 
of the SBS Entity or its counterparty as an insured depository 
institution or financial counterparty, and regarding the possibility 
that in certain circumstances the SBS Entity or its counterparty may 
be subject to the insolvency regime set forth under Title II of the 
Dodd-Frank Act or the Federal Deposit Insurance Act, which may 
affect rights to terminate, liquidate or net security-based swaps. 
See Risk Mitigation Adopting Release, 85 FR at 6374 (discussing 
potential application of alternatives to the liquidation schemes 
established under the Securities Investor Protection Act of 1970 or 
the U.S. Bankruptcy Code). The absence of such disclosure would not 
appear to preclude a comparable regulatory outcome when the 
counterparty is not a U.S. person, as the insolvency-related 
consequences that are the subject of the disclosure would not be 
applicable to non-U.S. counterparties in most cases. See also EMIR 
Margin RTS (in part addressing procedures providing for or 
specifying the terms of agreements entered into by counterparties, 
including applicable governing law for non-cleared derivatives, and 
further providing that counterparties which enter into a netting or 
collateral exchange agreement must perform an independent legal 
review regarding enforceability).
---------------------------------------------------------------------------

c. Dispute Reporting--Provision of Dispute Reports Consistent With EU 
Law
    Under the proposed Order, substituted compliance further would be 
conditioned on Covered Entities having to provide the Commission with 
reports regarding disputes between counterparties, on the same basis as 
the Covered Entities provide those reports to competent authorities 
pursuant to EU law.\42\ This condition promotes comparability with the 
Exchange Act rule requiring reporting to the Commission regarding 
significant valuation disputes,\43\ while leveraging EU reporting 
provisions to avoid the need for Covered Entities to create additional 
de novo reporting frameworks.\44\
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    \42\ See para. (b)(3)(ii) to the proposed Order (requiring that 
the Covered Entity provide the Commission with reports regarding 
counterparty disputes on the same basis that it provides those 
reports to competent authorities pursuant to EMIR RTS art. 15(2)).
    \43\ In proposing the notice provision, the Commission 
recognized that valuation inaccuracies may lead to uncollaterialized 
credit exposure and the potential for loss in the event of default. 
See Exchange Act Release No. 84861 (Dec. 19, 2018), 84 FR 4614, 4621 
(Feb. 15, 2019). It thus is important that the Commission be 
informed regarding valuation disputes affecting registered entities.
    \44\ The principal difference between the two sets of 
requirements concerns the timing of notices. Under Exchange Act rule 
15Fi-3, SBS Entities must promptly report, to the Commission, 
valuation disputes in excess of $20 million that have been 
outstanding for three or five business days (depending on 
counterparty types). Under EMIR RTS art. 15(2), firms must report at 
least monthly, to competent authorities, disputes between 
counterparties in excess of [pound]15 million and outstanding for at 
least 15 business days. The Commission is mindful that the EU 
provision does not provide for notice as quickly as rule 15Fi-3(c), 
but in the Commission's preliminary view, on balance this difference 
would not be inconsistent with the conclusion that the two sets of 
risk control requirements--taken as a whole--produce comparable 
regulatory outcomes.

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[[Page 85726]]

V. Substituted Compliance for Capital and Margin Requirements

A. The French Authorities' Request and Associated Analytic 
Considerations

    The French Authorities' Application in part requests substituted 
compliance in connection with requirements under the Exchange Act 
relating to:
    <bullet> Capital--Capital requirements pursuant to Exchange Act 
section 15F(e) and Exchange Act rule 18a-1 et seq. (for non-
prudentially regulated security-based swap dealers). The capital 
provisions for non-prudentially regulated security-based swap dealers 
help to ensure the registered entity maintains at all times sufficient 
liquid assets to promptly satisfy its liabilities, and to provide a 
cushion of liquid assets in excess of liabilities to covered potential 
market, credit, and other risks.\45\ This net liquid assets test 
standard protects customers and counterparties and mitigates the 
consequences of a firm's failure by promoting the ability of the firm 
to absorb financial shocks and, if necessary, to self-liquidate in an 
orderly manner.\46\ As part of the capital requirements, non-
prudentially regulated security-based swap dealers also must comply 
with the internal risk management control requirements of Exchange Act 
Rule 15c3-4 with respect to certain activities.\47\
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    \45\ See Exchange Act Release No. 86175 (June 21, 2019), 84 FR 
42872, 43947 (August 22, 2019) (``Capital and Margin Adopting 
Release''). The French Authorities' Application discusses French and 
EU requirements that address firms' capital requirements. See the 
French Authorities' Application Annex 1 category 1 capital portion 
at 1-24. See also French Authorities' Application Annex 1 category 1 
at 75-79 (generally discussing internal risk management 
requirements).
    \46\ See Capital and Margin Adopting Release, 84 FR at 43881. 
The Exchange Act rule 18a-1 capital requirement (applicable to non-
prudentially regulated security-based swap dealers that are not also 
registered broker-dealers, other than OTC derivatives dealers) is 
grounded in the net liquid asset test applicable to registered-
broker dealers. The net liquid asset test seeks to promote liquidity 
by requiring that a firm maintain sufficient liquid assets to meet 
all liabilities, including obligations to customers, counterparties, 
and other creditors, and, in the event a firm fails financially, to 
have adequate additional resources to wind-down its business in an 
orderly manner without the need for a formal proceeding. See Capital 
and Margin Adopting Release, 84 FR at 43879.
    \47\ See Exchange Act rule 18a-1(f).
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    <bullet> Margin--Margin requirements pursuant to Exchange Act 
section 15F(e) and Exchange Act rule 18a-3 for non-prudentially 
regulated security-based swap dealers and major security-based swap 
participants. The margin provisions are designed to protect the 
registered entity from the consequences of a counterparty's 
default.\48\
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    \48\ See Capital and Margin Adopting Release, 84 FR at 43947; 
see also id. at 43949 (``Obtaining collateral is one of the ways OTC 
derivatives dealers manage their credit risk exposure to OTC 
derivatives counterparties. Prior to the financial crisis, in 
certain circumstances, counterparties were able to enter into OTC 
derivatives transactions without having to deliver collateral. When 
``trigger events'' occurred during the financial crisis, those 
counterparties faced significant liquidity strains when they were 
required to deliver collateral''). The French Authorities' 
Application discusses French and EU requirements that address firms' 
margin requirements. See the French Authorities' Application Annex 1 
category 1 at 7-74.
---------------------------------------------------------------------------

    Taken as a whole, these capital and margin requirements help to 
promote market stability by mandating that registered entities follow 
practices that are appropriate to manage the market, credit, liquidity, 
solvency, counterparty, and operational risks associated with their 
security-based swap businesses. The Commission's comparability 
assessment accordingly focuses on whether the analogous foreign 
requirements--taken as a whole--produce comparable outcomes with regard 
to providing that registered entities follow capital and margin 
requirements that are appropriate to the risks associated with their 
security-based swap businesses.

B. Preliminary Views and Proposed Order

    In the Commission's preliminary view, based on the French 
Authorities' Application and the Commission's review of applicable 
provisions, relevant French and EU requirements would produce 
regulatory outcomes that are comparable to those associated with the 
above capital and margin requirements, by subjecting French SBS 
Entities to financial responsibility practices that are appropriate to 
the risks associated with their security-based swap businesses. 
Substituted compliance accordingly would be conditioned on SBS Entities 
being subject to the French and EU provisions that, in the aggregate, 
establish a framework that produces outcomes comparable to those 
associated with the capital and margin requirements under the Exchange 
Act.\49\ For example, in adopting its final margin requirements for 
non-cleared security-based swaps, the Commission stated that it 
modified the proposal to more closely align the final rule with the 
margin rules of the Commodity Futures Trading Commission and the U.S. 
prudential regulators and, in doing so, with the recommendations made 
by the Basel Committee on Banking Supervision (``BCBS'') and the Board 
of the International Organizations of Securities Commissions 
(``IOSCO'') with respect to margin requirements for non-centrally 
cleared derivatives.\50\
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    \49\ In connection with capital requirements, Covered Entities 
must comply with: The capital requirements of the CRR, including 
recitals 40, 43 and 87, and articles 26, 28, 50-52, 61-63, 92, 111, 
113(1), 114-122, 143, 153(8), 177(2), 283, 290, 300-311, 312(2), 
362-377, 382-383, 412(1), 413(1), 416(1), 427(1), 413, 429, 430, and 
499; MiFid Org. Reg., article 23(1); BRRD, articles 27(1), 31(2), 
31(1)(a) and (5), 32(5), 45(6) and 81(1); CRD, articles 73, 79, 86, 
97, 98(1)(e), 98(6), 99, 100(1), 102(1), 104, 104(1), 105, 129, 
129(1), 130, 130(1), 130(5), 131, 133, 133(1), 133(4), 141, 142, 
142(2), and 142(4); MFC articles L. 511-13, L. 511-15, 511-41-1 A, 
511-41-1 A(XIV), L. 511-41-1 B, L. 511-41-1 C, L. 511-41-3, L. 511-
41-3.II, L. 511-41-3.III, L. 511-41-3.IV, L. 511-41-4, L. 511-41-5, 
L. 511-42, L. 532-6, L. 533-2-1, L. 533-2-2, L. 533-2-3, L. 612-24, 
R. 612-30, L. 612-32, R. 612-32, L. 612-33.I, L. 612-33.II, L. 612-
40, L. 613-44, L. 613-49. L. 613-49.II, L. 613-50.I, L. 631-2-1; 
Decree of 3 November 2014 on internal control, articles 10, 94-197, 
and 211-230; Ministerial Order on the Supervisory Review and 
Evaluation Process, articles 6-10; Decree of 3 November 2014 
relating to capital buffers, articles 2, 16, 23, 37, 38, 56-64; and 
EMIR Margin RTS, recital 31, articles 2, 3(b), 7, and 19(1)(d)-(e), 
(3) and (8). In connection with margin requirements, Covered 
Entities must comply with: EMIR article 11; EMIR Margin RTS; CRR 
articles 103, 105(3); 105(10); 111(2), 224, 285, 286, 286(7), 290, 
295, 296(2)(b), 297(1), 297(3), and 298(1); MiFID Org Reg. article 
23(1); CRD articles 74 and 79(b); MFC articles L. 511-41-1-B, L. 
533-2-2, L. 533-29, I al. 1, and L. 511-55 al. 1; and Decree of 3 
November 2014 on internal control, article 114.
    \50\ See Capital and Margin Adopting Release, 84 FR at 43908-
43909. See also BCBS/IOSCO, Margin Requirements for Non-centrally 
Cleared Derivatives (April 2020), available at https://www.bis.org/bcbs/publ/d499.pdf (``BCBS/IOSCO Paper''). The EU and French margin 
requirements also are based on the recommendation in the BCBS/IOSCO 
Paper.
---------------------------------------------------------------------------

    While the Commission recognizes that there are certain differences 
between those French and EU requirements and the applicable risk 
control requirements under the Exchange Act, in the Commission's 
preliminary view, those differences on balance would not preclude 
substituted compliance for these requirements, particularly as 
requirement-by-requirement similarity is not needed for substituted 
compliance.

VI. Substituted Compliance for Internal Supervision, Chief Compliance 
Officers and Additional Exchange Act Section 15F(j) Requirements

A. The French Authorities' Request and Associated Analytic 
Considerations

    The French Authorities also request substituted compliance in 
connection with requirements under the Exchange Act relating to:

[[Page 85727]]

    <bullet> Internal supervision--Diligent supervision is required 
pursuant to Exchange Act section 15F(h)(1)(B) and Exchange Act rule 
15Fh-3(h), and additional conflict of interest provisions under 
Exchange Act section 15F(j)(5). These provisions generally require that 
SBS Entities establish, maintain and enforce supervisory policies and 
procedures that reasonably are designed to prevent violations of 
applicable law, and implement certain systems and procedures related to 
conflicts of interest.\51\
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    \51\ The French Authorities' Application addresses French and EU 
provisions that address firms' supervisory frameworks, persons with 
supervisory authority, supervisory policies and procedures, general 
compliance and internal recordkeeping, investigation of personnel, 
conflicts of interest, personal trading and remuneration. See French 
Authorities' Application Annex 1 category 3 at 3-27, 29-74.
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    <bullet> Chief compliance officers--Chief compliance officer 
requirements are set out in Exchange Act section 15F(k) and Exchange 
Act rule 15Fk-1. These provisions in general require that SBS Entities 
designate individuals with the responsibility and authority to 
establish, administer and review compliance policies and procedures, to 
resolve conflicts of interest, and to prepare and certify an annual 
compliance report to the Commission.\52\
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    \52\ The French Authorities' Application discusses French and EU 
requirements that address compliance officers and their 
responsibilities, compliance officer appointment, removal and 
compensation, related conflict of interest provisions, and 
compliance-related reports. See French Authorities' Application 
Annex 1 category 3 at 75-108.
---------------------------------------------------------------------------

    <bullet> Additional Exchange Act section 15F(j) requirements--
Additional requirements related to information-gathering pursuant to 
Exchange Act section 15F(j)(4)(A), and certain antitrust prohibitions 
specified by Exchange Act section 15F(j)(6).\53\
---------------------------------------------------------------------------

    \53\ Section 15F(j)(4)(A) particularly requires firms to have 
systems and procedures to obtain necessary information to perform 
functions required under section 15F. The French Authorities' 
application in turn discusses French and EU provisions generally 
addressing information gathering and disclosure. See French 
Authorities' Application Annex 1 category 3 at 27-28. Section 
15F(j)(6) prohibits firms from adopting any process or taking any 
action that results in any unreasonable restraint of trade, or to 
impose any material anticompetitive burden on trading or clearing. 
The French Authorities' application addresses EU antitrust 
requirements. See French Authorities' Application Annex 1 category 3 
at 32.
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    Taken as a whole, these internal supervision, chief compliance 
officer and additional Exchange Act section 15F(j) requirements help to 
promote SBS Entities' use of structures, processes and responsible 
personnel reasonably designed to promote compliance with applicable 
law, to identify and cure instances of non-compliance, and to manage 
conflicts of interest. The comparability assessment accordingly may 
focus on whether the analogous foreign requirements--taken as a whole--
produce comparable outcomes with regard to providing that registered 
entities have structures and processes reasonably designed to promote 
compliance with applicable law, identify and cure instances of non-
compliance, and to manage conflicts of interest, in part through the 
designation of an individual with responsibility and authority over 
compliance matters.

B. Preliminary Views and Proposed Order

1. General Considerations
    Based on the French Authorities' Application and the Commission's 
review of applicable provisions, in the Commission's preliminary view 
the relevant French and EU requirements would produce regulatory 
outcomes that are comparable to those associated with the above-
described internal supervision, chief compliance officer, conflict of 
interest and information-related requirements by providing that French 
SBS Entities have structures and processes that reasonably are designed 
to promote compliance with applicable law and to identify and cure 
instances of non-compliance and manage conflicts of interest.\54\ As 
elsewhere, this part of the proposed Order conditions substituted 
compliance on SBS Entities being subject to and complying with 
specified French and EU requirements that are necessary to establish 
comparability.\55\
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    \54\ This portion of the proposed Order accordingly would extend 
generally to the internal supervision provisions of Exchange Act 
rule 15Fh-3(h), the information gathering provisions of Exchange Act 
section 15F(j)(4)(A), and the conflict of interest provisions of 
Exchange Act section 15F(j)(5). See para. (d)(1) to the proposed 
Order. This portion of the proposed Order does not extend to 
applicable portions of rule 15Fh-3(h) as that rule mandates 
supervisory policies and procedures in connection with: The risk 
management system provisions of Exchange Act section 15F(j)(2) 
(which are addressed by proposed paragraph (b)(1) to the Order in 
connection with internal risk management); the information-related 
provisions of Exchange Act sections 15F(j)(3) and (j)(4)(B) (for 
which substituted compliance is not available); and the antitrust 
provisions of Exchange Act section 15F(j)(6) (for which the 
Commission is not proposing to provide substituted compliance). See 
para. (d)(1)(iii) to the proposed Order.
    \55\ In connection with these internal supervision, chief 
compliance officer and conflict of interest and information 
gathering provisions, SBS Entities particularly must comply with: 
MiFID art. 16 and 23 and MFC articles L. 533-2, L. 533-10.II and 
III, L. 533-24 and L. 533-24-1 (addressing organizational 
requirements and conflicts of interest); MiFID Org Reg art. 21-37 
(addressing organizational requirements, compliance, risk 
management, internal audit, senior management responsibility, 
complaints handling, remuneration policies and practices, personal 
transaction restrictions, outsourcing, conflicts of interest and 
investment research and marketing); MiFID Org Reg 72-76 and Annex IV 
(addressing recordkeeping, including records of orders, transactions 
and communications); and CRD articles 74, 76, 79-87, 88(1) and 
91(1)-(2), 91(7)-(9), 92-95 and MFC articles L. 511-41-1-B and L. 
511-41-1-C, L. 511-51, L. 511-52 I, L. 511.53, L. 511-55 through L. 
511-69, L. 511-71 through 86, L. 511-89 through L. 511-97, L. 511-
102, R. 511-16-2 and R. 511-16-3; Internal Control Order articles 
106, 111, 114, 115, 121-22, 130-34, 146-86, 211-12, 214-15; and 
Prudential Supervision and Risk Assessment Order article 7 
(addressing internal governance, recovery and resolution plans, risk 
management policies, and management body and remuneration policies). 
See para. (d)(3) to the proposed Order.
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    In taking this proposed approach, the Commission recognizes that 
certain differences are present between those French and EU 
requirements and the applicable requirements under the Exchange Act. In 
the Commission's preliminary view, on balance, however, those 
differences would not preclude substituted compliance within the 
relevant outcomes-oriented context.
2. Additional Conditions and Scope Issues
    Substituted compliance in connection with these requirements would 
be subject to certain additional conditions to help ensure the 
comparability of outcomes.
a. Application of French and EU Supervisory and Compliance Requirements 
to Residual U.S. Requirements and Order Conditions
    Under the proposed Order, substituted compliance for the relevant 
internal supervision requirements would be conditioned on relevant 
French SBS Entities complying with applicable French and EU supervisory 
and compliance provisions as if those provisions also require SBS 
Entities to comply with applicable requirements under the Exchange Act 
and the other applicable conditions to the Order.\56\
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    \56\ See para. (d)(4) to the proposed Order.
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    This condition addresses the fact that, even with substituted 
compliance, SBS Entities still would be subject directly to a number of 
requirements under the Exchange Act and to the conditions to the final 
Order.\57\ In some cases,

[[Page 85728]]

particular requirements under the Exchange Act are outside the ambit of 
substituted compliance.\58\ In other cases, certain requirements under 
the Exchange Act may not have comparable French or EU requirements, or 
may be outside the scope of the French Authorities' request.\59\ While 
the French and EU regulatory frameworks in general reasonably appear to 
promote SBS Entities' compliance with applicable French and EU laws, 
those requirements do not appear to promote SBS Entities' compliance 
with requirements under the Exchange Act that are not subject to 
substituted compliance, or promote SBS Entities' compliance with the 
applicable conditions to substituted compliance. This condition would 
allow SBS Entities to use their existing internal supervision and 
compliance frameworks to comply with the relevant Exchange Act 
requirements and order conditions, rather than having to establish 
separate special-purpose supervision and compliance frameworks.
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    \57\ As noted, substituted compliance does not extend to 
antifraud prohibitions or to certain other requirements under the 
Exchange Act (e.g., requirements related to transactions with 
counterparties that are not eligible contract participants 
(``ECP''), segregation requirements). See note 2, supra. Also, 
substituted compliance also does not extend to requirements under 
the Exchange Act that are outside of the scope of the French 
Authorities' request (e.g., ECP verification and special entity 
requirements), see note 11, supra, or to requirements under the 
Exchange Act for which the Commission has not found comparability.
    \58\ Substituted compliance does not extend to certain Exchange 
Act antifraud prohibitions and other requirements under the Exchange 
Act (e.g., requirements related to transactions with non-ECPs, and 
segregation requirements). Substituted compliance also does not 
extend to requirements under the Exchange Act that are outside of 
the scope of the French Authorities' request (e.g., ECP verification 
and special entity requirements), or to requirements under the 
Exchange Act for which the Commission has not found comparability.
    \59\ For example, the French Authorities are not requesting 
substituted compliance in connection with ECP verification 
requirements, ``special entity'' provisions and political 
contribution provisions. See note 11, supra.
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b. Compliance Reports
    Under the proposed Order, substituted compliance in connection with 
the compliance report requirements under Exchange Act section 15F(k)(3) 
and Exchange Act rule 15Fk-1(c) also would be subject to the condition 
that the compliance reports required pursuant to MiFID Org Reg article 
22(2)(c) must: (a) Be provided to the Commission annually and in the 
English language, (b) include a certification under penalty of law that 
the report is accurate and complete, and (c) address the SBS Entity's 
compliance with other applicable conditions to this Order.\60\
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    \60\ See para. (d)(2)(ii) to the proposed Order. MiFID Org Reg 
art. 22(2)(c) particularly requires that a firm's compliance 
function ``report to the management body, on at least an annual 
basis, on the implementation and effectiveness of the overall 
control environment for investment services and activities, on the 
risks that have been identified and on the complaints-handling 
reporting as well as remedies undertaken or to be undertaken[.]'' 
Under the proposed condition, those reports, as submitted to the 
Commission and the firm's management body, also would address SBS 
Entities' compliance with the other conditions to the Order (in 
addition to addressing those firms' compliance with applicable 
French and EU provisions).
---------------------------------------------------------------------------

    Although certain French and EU requirements address firms' use of 
internal compliance reports, those provisions do not require those 
entities to submit compliance reports to the Commission. Under this 
condition, SBS Entities could leverage the compliance reports that they 
otherwise are required to produce, by extending those reports to 
address compliance with the conditions to the Order.\61\
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    \61\ In practice, SBS Entities may satisfy this condition by 
identifying relevant Order conditions, and reporting on the 
implementation and effectiveness of their controls with regard to 
compliance with those Order conditions.
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c. Antitrust Considerations
    Under the proposed Order, substituted compliance would not extend 
to Exchange Act section 15F(j)(6) (and related internal supervision 
requirements of Exchange Act rule 15Fh-3(h)(2)(iii)(I)). Allowing an 
alternative means of compliance would not appear to lead to outcomes 
comparable to that statutory prohibition.\62\
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    \62\ See also German Substituted Compliance Order part IV.B, 85 
FR at __. The Commission is not taking any position regarding the 
applicability of the section 15F(j)(6) antitrust prohibitions in the 
cross-border context. Non-U.S. SBS Entities should assess the 
applicability of those prohibitions to their security-based swap 
businesses.
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VII. Substituted Compliance for Counterparty Protection Requirements

A. The French Authorities' Request and Associated Analytic 
Considerations

    The French Authorities further request substituted compliance in 
connection with provisions under the Exchange Act relating to:
    <bullet> Disclosure of material risks and characteristics and 
material incentives or conflicts of interest--Exchange Act rule 15Fh-
3(b) requires that SBS Entities disclose to certain counterparties to a 
security-based swap certain information about the material risks and 
characteristics of the security-based swap, as well as material 
incentives or conflicts of interest that the SBS Entity may have in 
connection with the security-based swap. These provisions address the 
need for security-based swap market participants to have information 
that is sufficient to make informed decisions regarding potential 
transactions involving particular counterparties and particular 
financial instruments.\63\
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    \63\ See Release No. 77617 (Apr. 14, 2016), 81 FR 29960, 29983-
86 (May 13, 2016) (``Business Conduct Adopting Release''). The 
French Authorities' Application discusses French and EU requirements 
that address disclosure of product information and firm information. 
See French Authorities' Application Annex 1 category 4 at 24-41.
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    <bullet> Daily mark disclosure--Exchange Act rule 15Fh-3(c) 
requires that SBS Entities provide daily mark information to certain 
counterparties. These provisions address the need for market 
participants to have effective access to daily mark information 
necessary to manage their security-based swap positions.\64\
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    \64\ See Business Conduct Adopting Release, 81 FR at 29986-91. 
The French Authorities' Application discusses French and EU 
requirements that address valuation, portfolio reconciliation and 
trade reporting. See French Authorities' Application Annex 1 
category 4 at 42-53.
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    <bullet> Fair and balanced communications--Exchange Act rule 15Fh-
3(g) requires that SBS Entities communicate with counterparties in a 
fair and balanced manner based on principles of fair dealing and good 
faith. These provisions promote complete and honest communications as 
part of SBS Entities' security-based swap businesses.\65\
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    \65\ See Business Conduct Adopting Release, 81 FR at 30000-02. 
The French Authorities' Application discusses French and EU 
requirements that address communications standards. See French 
Authorities' Application Annex 1 category 4 at 2-24.
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    <bullet> Clearing rights disclosure--Exchange Act rule 15Fh-3(d) 
requires that SBS Entities provide certain counterparties with 
information regarding clearing rights under the Exchange Act.\66\
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    \66\ Exchange Act section 3C(g)(5) [15 U.S.C. 78c-3(g)(5)] 
provides certain rights for counterparties to select the clearing 
agency at which a security-based swap is cleared. For all security-
based swaps that an SBS Entity enters into with certain 
counterparties, the counterparty has the sole right to select the 
clearing agency at which the security-based swap is cleared. For 
security-based swaps that are not subject to mandatory clearing 
(pursuant to Exchange Act sections 3C(a) and (b)) and that an SBS 
Entity enters into with certain counterparties, the counterparty 
also may elect to require clearing of the security-based swap. 
Substituted compliance is not available in connection with this 
provision. The French Authorities' Application discusses French and 
EU provisions that address clearing rights. See French Authorities' 
Application Annex 1 category 4 at 76-83.
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    <bullet> ``Know your counterparty''--Exchange Act rule 15Fh-3(e) 
requires that SBS Entities establish, maintain and enforce written 
policies and procedures to obtain and retain certain information 
regarding a counterparty that is necessary for conducting business with 
that counterparty. This provision accounts for the need that SBS 
Entities obtain essential counterparty information necessary to promote 
effective compliance and risk management.\67\
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    \67\ See Business Conduct Adopting Release, 81 FR at 29993-94. 
The French Authorities' Application discusses French and EU 
suitability requirements regarding information that firms must 
obtain regarding counterparties. See French Authorities' Application 
Annex 1 category 4 at 54-62.>

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[[Page 85729]]

    <bullet> Suitability--Exchange Act rule 15Fh-3(f) requires a 
security-based swap dealer that recommends to certain counterparties a 
security-based swap or trading strategy involving a security-based 
swap, to undertake reasonable diligence to understand the potential 
risks and rewards associated with the recommendation and to have a 
reasonable basis to believe that the recommendation is suitable for the 
counterparty.\68\ This provision accounts for the need to guard against 
security-based swap dealers making unsuitable recommendations.\69\
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    \68\ See Business Conduct Adopting Release, 81 FR at 29994-
30000. A security-based swap dealer may satisfy its counterparty-
specific suitability obligation with respect to an ``institutional 
counterparty,'' as defined in Exchange Act rule 15Fh-3(f)(4), if the 
security-based swap dealer reasonably determines that the 
counterparty or its agent is capable of independently evaluating 
relevant investment risks, the counterparty or its agent represents 
in writing that it is exercising independent judgment in evaluating 
the recommendation, and the security-based swap dealer discloses 
that it is acting as counterparty and is not undertaking to assess 
the suitability of the recommendation for the counterparty. See 
Exchange Act rules 15Fh-3(f)(2) and (3).
    \69\ See Business Conduct Adopting Release, 81 FR at 29997. The 
French Authorities' Application discusses French and EU suitability 
requirements that are more targeted for transactions with 
``professional clients.'' See French Authorities' Application Annex 
1 category 4 at 63-75.
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    Taken as a whole, the counterparty protection requirements under 
section 15F of the Exchange Act help to ``bring professional standards 
of conduct to, and increase transparency in, the security-based swap 
market and to require registered [entities] to treat parties to these 
transactions fairly.'' \70\ The comparability assessment accordingly 
may focus on whether the analogous foreign requirements--taken as a 
whole--produce similar outcomes with regard to promoting professional 
standards of conduct, increasing transparency and requiring SBS 
Entities to treat parties fairly.
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    \70\ See Business Conduct Adopting Release, 81 FR at 30065. 
These transaction-level requirements generally apply only to a non-
U.S. SBS Entity's activities involving U.S. counterparties (unless 
the transaction is arranged, negotiated or executed in the United 
States). In particular, for non-U.S. SBS Entities, the counterparty 
protection requirements under Exchange Act section 15F(h) apply only 
to the SBS Entity's transactions with U.S. counterparties (apart 
from certain transactions conducted through a foreign branch of the 
U.S. counterparty), or to transactions arranged, negotiated or 
executed in the United States. See Exchange Act rule 3a71-3(c) [17 
CFR 240.3a71-3(c)] (exception from business conduct requirements for 
a security-based swap dealer's ``foreign business''); see also 
Exchange Act rules 3a71-3(a)(3), (8) and (9) [17 CFR 240.3a71-
3(a)(3), (8) and (9)] (definitions of ``transaction conducted 
through a foreign branch,'' ``U.S. business'' and ``foreign 
business'').
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B. Preliminary Views and Proposed Order

1. General Considerations
    Based on the French Authorities' Application and the Commission's 
review of applicable provisions, in the Commission's preliminary view, 
the relevant French and EU requirements produce regulatory outcomes 
that are comparable to counterparty protection requirements under 
Exchange Act section 15F(h) related to fair and balanced 
communications; disclosure of material risks and characteristics; 
disclosure of material incentives or conflicts of interest; ``know your 
counterparty''; suitability; and daily mark disclosure, by subjecting 
French SBS Entities to obligations that promote standards of 
professional conduct, transparency and the fair treatment of parties.
    The proposed Order accordingly would provide conditional 
substituted compliance in connection with those requirements.\71\ The 
proposed Order preliminarily does not provide substituted compliance in 
connection with requirements related to clearing rights disclosure, 
however, for reasons addressed below.
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    \71\ See generally para. (e) to the proposed Order.
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    In taking this proposed approach, the Commission recognizes that 
there are certain differences between relevant French and EU 
requirements, on the one hand, and the relevant communications, 
disclosure, ``know your counterparty'' and suitability requirements 
under the Exchange Act, on the other hand. On balance, however, in the 
Commission's preliminary view, those differences, when coupled with the 
conditions in the proposed Order, are not so material as to be 
inconsistent with substituted compliance within the requisite outcomes-
oriented context. As elsewhere, the counterparty protection provisions 
of the proposed Order in part condition substituted compliance on SBS 
Entities being subject to, and complying with, specified French and EU 
requirements that are necessary to establish comparability.\72\ 
Substituted compliance in connection with these counterparty protection 
requirements also would be subject to specific conditions and 
limitations necessary to promote consistency in regulatory outcomes.
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    \72\ In connection with requirements related to disclosure of 
information regarding material risks and characteristics, Covered 
Entities must be subject to and comply with: MiFID art. 24(4); MFC 
L. 533-12.II and D. 533-15; and MiFID Org Reg art. 48-50, in each 
case in relation to the security-based swap for which substituted 
compliance is applied. See para. (e)(1) to the proposed Order. In 
connection with requirements related to disclosure of information 
regarding material incentives or conflicts of interest, Covered 
Entities must be subject to and comply with either: (i) MiFID art. 
23(2)-(3); MFC L .533-10.II(3); and MiFID Org Reg art. 33-35; (ii) 
MiFID art. 24(9); MFC L. 533-12-4; MiFID Delegated Directive art. 
11(5); and AMF General Regulation art. 314-17; or (iii) MAR art. 
20(1), in each case in relation to the security-based swap for which 
substituted compliance is applied. See para. (e)(2) to the proposed 
Order. In connection with ``know your counterparty'' requirements, 
Covered Entities must be subject to and comply with: MiFID art. 
16(2); MFC L. 533-10.II(2); MiFID Org Reg art. 21-22, 25-26 and 
applicable parts of Annex I; CRD art. 74(1) and 85(1); MFC L. 511-55 
and L. 511-41-1-B; MLD art. 11 and 13; MFC L. 561-5, L. 561-5-1, L. 
561-6, L. 561-10, L. 561-4-1, R. 561-5, R. 561-5-1, R. 561-5-2, R. 
561-5-4, R. 561-7, R. 561-10-3, R. 561-11-1 and R. 561-12; MLD art. 
8(3) and 8(4)(a) as applied to internal policies, controls and 
procedures regarding recordkeeping of customer due diligence 
activities; and MFC L. 561-4-1 as applied to vigilance measures 
regarding recordkeeping of customer due diligence activities, in 
each case in relation to the security-based swap for which 
substituted compliance is applied. See para. (e)(3) to the proposed 
Order. In connection with suitability requirements, Covered Entities 
must be subject to and comply with: MiFID art. 24(2)-(3) and 25(1)-
(2); MFC L. 533-24, L. 533-24-1, L. 533-12.I, L. 533-12-6 and L. 
533-13.I; and MiFID Org Reg art. 21(1)(b) and (d), 54 and 55, in 
each case in relation to the recommendation of a security-based swap 
or trading strategy involving a security-based swap for which 
substituted compliance is applied. See para. (e)(4)(i) to the 
proposed Order. In connection with fair and balanced communications 
requirements, Covered Entities must be subject to and comply with: 
(i) either MiFID art. 24(1), (3) and MFC L. 533-11 and L. 533-12.I 
or MiFID art. 30(1) and MFC L. 533-20; and (ii) MiFID art. 24(4)-
(5); MFC L. 533-12.II-III and D. 533-15; MiFID Org Reg art. 46-48; 
MAR art. 12(1)(c) and 15; and MAR Investment Recommendations 
Regulation art. 5, in each case in relation to the communication for 
which substituted compliance is applied. See para. (e)(5) to the 
Proposed Order. In connection with daily mark disclosure 
requirements, Covered Entities must be required to reconcile, and in 
fact reconcile, the portfolio containing the security-based swap for 
which substituted compliance is applied, on each business day 
pursuant to EMIR articles 11(1)(b) and 11(2) and EMIR RTS article 
13. See para. (e)(6) to the Proposed Order.
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2. Additional Conditions and Scope Issues
a. Daily Mark Disclosure
    The proposed Order would provide substituted compliance in 
connection with daily mark disclosure requirements pursuant to Exchange 
Act rule 15Fh-3(c) to the extent that the Covered Entity participates 
in daily portfolio reconciliation exercises that include the relevant 
security-based swap pursuant to French and EU requirements.\73\ The

[[Page 85730]]

French Authorities' Application takes the view that EU requirements 
directing certain types of derivatives counterparties to mark-to-market 
(or mark-to-model) uncleared transactions each day are comparable to 
Exchange Act requirements. In the Commission's preliminary view, 
however, these EU mark-to-market (or mark-to-model) requirements are 
not comparable to Exchange Act requirements because the EU requirements 
do not require disclosure to counterparties. In the alternative, the 
French Authorities' Application notes that certain derivatives 
counterparties must report to an EU trade repository updated daily 
valuations for each OTC derivative contract and that all counterparties 
have the right to access these valuations at the relevant EU trade 
repository. In the Commission's preliminary view, in practice, U.S. 
counterparties may encounter challenges when attempting to access daily 
marks for different security-based swaps reported to multiple EU trade 
repositories with which they may not otherwise have business 
relationships. In addition, the information may be less current, given 
the time necessary for reporting and for the trade repository to make 
the information available.\74\ For these reasons, in the Commission's 
preliminary view, these EU reporting requirements also are not 
comparable to Exchange Act requirements. Finally, the French 
Authorities' Application describes the EU's portfolio reconciliation 
requirements for uncleared OTC derivative contracts, which include a 
requirement to exchange valuations of those contracts directly between 
counterparties. The required frequency of portfolio reconciliations 
varies depending on the types of counterparties and the size of the 
portfolio of OTC derivatives between them, with daily reconciliation 
required only for the largest portfolios. For security-based swaps to 
which the EU's daily portfolio reconciliation requirements apply (i.e., 
security-based swaps of a financial counterparty or non-financial 
counterparty subject to the clearing obligation in EMIR, if the 
counterparties have 500 or more OTC derivatives contracts outstanding 
with each other \75\), the Commission preliminarily views these 
requirements as comparable to Exchange Act requirements. For all other 
security-based swaps in portfolios that are not required to be 
reconciled on each business day, the Commission preliminarily views the 
EU's portfolio reconciliation requirements as not comparable to 
Exchange Act requirements.
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    \73\ The Commission received a comment on the German Notice and 
Proposed Order suggesting that a similar condition should apply only 
to security-based swaps with U.S. counterparties; for all other 
transactions subject to Exchange Act daily mark requirements, the 
commenter proposed that the Commission grant substituted compliance 
if the Covered Entity complies with EU mark-to-market (or mark-to-
model) and reporting requirements. See Letter from Kyle Brandon, 
Managing Director, Head of Derivative Policy, SIFMA (Dec. 8, 2020) 
(``SIFMA Letter'') at 6. The Commission did not adopt that 
bifurcated approach in response to BaFin's application. See German 
Substituted Compliance Order. Similarly, the Commission is proposing 
one approach to substituted compliance for daily mark requirements 
in response to the French Authorities' Application. This approach 
would provide substituted compliance for daily mark requirements 
based on comparability of outcomes with respect to transactions with 
U.S. counterparties to the same extent as it would provide 
substituted compliance with respect to all other transactions.
    \74\ The Commission received a comment on the German Notice and 
Proposed Order that the same EU reporting requirements cited by the 
French Authorities are comparable to Exchange Act daily mark 
requirements. See SIFMA Letter at 5. The commenter stated that these 
access and timing challenges should not be as relevant for EU and 
other non-U.S. counterparties if they are already subject to EU 
reporting obligations and that in its experience data is available 
promptly from trade repositories. See id. The commenter's position, 
however, highlights that U.S. counterparties, as well as non-U.S. 
counterparties without existing business relationships with multiple 
EU trade repositories, still may encounter challenges in receiving 
timely marks from these trade reports. See also German Substituted 
Compliance Order.
    \75\ See EMIR RTS article 13(3)(a)(i); EMIR article 10.
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b. No Substituted Compliance in Connection With Clearing Rights 
Disclosure
    The proposed Order would not provide substituted compliance in 
connection with clearing rights disclosure requirements pursuant to 
Exchange Act rule 15Fh-3(d). For those requirements, the French 
Authorities' Application cites certain provisions related to clearing 
rights in the EU that are unrelated to the clearing rights provided by 
Exchange Act section 3C(g)(5).\76\ The section 3C(g)(5) clearing rights 
are not eligible for substituted compliance, and the EU provisions do 
not require disclosure of these section 3C(g)(5) clearing rights. In 
the Commission's preliminary view, substituted compliance based on EU 
clearing provisions would not lead to comparable disclosure of a 
counterparty's clearing rights under the Exchange Act.
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    \76\ See note 66, supra.
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c. Suitability
    Under the proposed Order, substituted compliance in connection with 
the suitability provisions of Exchange Act rule 15Fh-3(f) in part would 
be conditioned on the requirement that the counterparty be a per se 
``professional client'' as defined in MiFID and not be a ``special 
entity'' as defined in Exchange Act section 15F(h)(2)(C) and Exchange 
Act rule 15Fh-2(d).\77\ Accordingly, the proposed Order would not 
provide substituted compliance for Exchange Act suitability 
requirements for a recommendation made to a counterparty that is a 
``retail client'' or an elective ``professional client,'' as such terms 
are defined in MiFID,\78\ or for a ``special entity'' as defined in the 
Exchange Act. In the Commission's preliminary view, absent such a 
condition the MiFID suitability requirement would not be expected to 
produce a counterparty protection outcome that is comparable with the 
outcome produced by the suitability requirements under the Exchange 
Act.\79\
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    \77\ See para. (e)(4)(ii) to the proposed Order.
    \78\ Annex II of MiFID describes which clients are 
``professional clients.'' Section I of Annex II describes the types 
of clients considered to be professional clients unless the client 
elects non-professional treatment; these clients are per se 
professional clients. Section II of Annex II describes the types of 
clients who may be treated as professional clients on request; these 
clients are elective professional clients. See MiFID Annex II.
    \79\ The Commission recognizes that Exchange Act rules permit 
security-based swap dealers, when making a recommendation to an 
``institutional counterparty,'' to satisfy some elements of the 
suitability requirement if the security-based swap dealer reasonably 
determines that the counterparty or its agent is capable of 
independently evaluating relevant investment risks, the counterparty 
or its agent represents in writing that it is exercising independent 
judgment in evaluating recommendations, and the security-based swap 
dealer discloses to the counterparty that it is acting as 
counterparty and is not undertaking to assess the suitability of the 
recommendation for the counterparty. See Exchange Act rule 15Fh-
3(f)(2). However, the institutional counterparties to whom this 
alternative applies are only a subset of the ``professional 
clients'' to whom more narrowly tailored suitability requirements 
apply under MiFID. The Commission notes that the institutional 
counterparty alternative under the Exchange Act would remain 
available, in accordance with its terms, for recommendations that 
are not eligible for, or for which a Covered Entity does not rely 
on, substituted compliance.
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VIII. Substituted Compliance for Recordkeeping, Reporting, 
Notification, and Securities Count Requirements

A. French Authorities' Request and Associated Analytic Considerations

    The French Authorities' Application in part requests substituted 
compliance for requirements applicable to SBS Entities under the 
Exchange Act relating to:
    <bullet> Recordmaking--Exchange Act rule 18a-5 requires prescribed 
records to be made and kept current.\80\
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    \80\ The French Authorities' Application discusses French and EU 
requirements that address firms' record creation obligations related 
to matters such as transactions, counterparties and their property, 
personnel and business conduct. See the French Authorities' 
Application Annex 1 category 2 at 2-42.

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[[Page 85731]]

    <bullet> Record Preservation--Exchange Act rule 18a-6 requires 
preservation of records.\81\
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    \81\ The French Authorities' Application discusses French and EU 
requirements that address firms' record preservation obligations 
related to records that firms are required to create, as well as 
additional records such as records of communications. See the French 
Authorities' Application Annex 1 category 2 at 43-81.
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    <bullet> Reporting--Exchange Act rule 18a-7 requires certain 
reports.\82\
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    \82\ The French Authorities' Application discusses French and EU 
requirements that address firms' obligations to make certain 
reports. See the French Authorities' Application Annex 1 category 2 
at 82-95, 98-104.
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    <bullet> Notification--Exchange Act rule 18a-8 requires 
notification of the Commission when certain financial or operational 
problems occur.\83\
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    \83\ The French Authorities' Application discusses French and EU 
requirements that address firms' obligations to make certain 
notifications. See the French Authorities' Application Annex 1 
category 2 at 95-98.
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    <bullet> Securities Count--Exchange Act rule 18a-9 requires non-
prudentially regulated SBS Entities to perform a quarterly securities 
count.\84\
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    \84\ The French Authorities' Application discusses French and EU 
requirements that address firms' obligations to perform securities 
counts. See the French Authorities' Application Annex 1 category 2 
at 32-38.
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    Taken as a whole, the recordkeeping, reporting, notification, and 
securities count requirements that apply to SBS Entities are designed 
to promote the prudent operation of the firm's security-based swap 
activities, assist the Commission in conducting compliance examinations 
of those activities, and alert the Commission to potential financial or 
operational problems that could impact the firm and its customers. The 
comparability assessment accordingly may focus on whether the analogous 
foreign requirements--taken as a whole--produce comparable outcomes 
with regard to recordkeeping, reporting, notification, securities 
counts, and related practices that support the Commission's oversight 
of these registrants. A foreign jurisdiction need not have analogues to 
every requirement under Commission rules.\85\
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    \85\ Rule 3a71-6 sets forth additional analytic considerations 
in connection with substituted compliance for the Commission's 
recordkeeping, reporting, notification, and securities count 
requirements. In particular, Exchange Act rule 3a71-6(d)(6) provides 
that the Commission intends to consider (in addition to any 
conditions imposed) ``whether the foreign financial regulatory 
system's required records and reports, the timeframes for recording 
or reporting information, the accounting standards governing the 
records and reports, and the required format of the records and 
reports'' are comparable to applicable provisions under the Exchange 
Act, and whether the foreign provisions ``would permit the 
Commission to examine and inspect regulated firms' compliance with 
the applicable securities laws.''
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    For certain of the recordkeeping, reporting, and notification 
requirements, the comparability assessment also appropriately may 
consider the extent to which those requirements are linked to separate 
requirements in the Exchange Act that may be subject to a substituted 
compliance application. In particular, a number of recordkeeping 
requirements serve a primary purpose of promoting and/or documenting 
SBS Entities' compliance with associated Exchange Act requirements.\86\ 
When substituted compliance is permitted for the associated Exchange 
Act requirements, substituted compliance also may be appropriate for 
the linked recordkeeping, reporting, and notification requirements. 
Conversely, when substituted compliance is not available or requested 
for Exchange Act requirements, substituted compliance may not be 
appropriate for linked recordkeeping, reporting, or notification 
requirements.
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    \86\ Recordkeeping, reporting, and notification rules that are 
linked to other Exchange Act rules include provisions that address: 
(1) Unverified security-based swap transactions (Exchange Act rules 
18a-5(a)(15) and (b)(11), and 18a-6(b)(1)(i) and (b)(2)(i)); (2) 
compliance with business conduct requirements (Exchange Act rules 
18a-5(a)(16) and (17) and (b)(12) and (13), 18a-6(b)(1)(i), 
(b)(1)(xii), (b)(2)(i), and 18a-6(b)(2)(vii)); (3) preservation of 
records relating to certain risk mitigation requirements (Exchange 
Act rules 18a-6(d)(4) and (5); (4) segregation requirements 
(Exchange Act rules 18a-5(a)(13) and (14) and (b)(9) and (10), 18a-
6(b)(1)(viii)(L) and (b)(2)(v), 18a-7(c)(3) and (4), and 18a-8(g)); 
(5) capital requirements (Exchange Act rules 18a-5(a)(9) and 
(b)(1)(v), 18a-7(a)(3), and 18a-8(b); and (6) margin requirements 
(Exchange Act rules 18a-5(a)(12) and (b)(1)(viii)).
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B. Preliminary Views and Proposed Order

1. General Considerations
    Based on the French Authorities' Application and the Commission's 
review of applicable provisions, in the Commission's preliminary view, 
the relevant French and EU requirements, subject to the conditions and 
limitations of the proposed Order, would produce regulatory outcomes 
that are comparable to the outcomes associated with the recordkeeping, 
reporting, notification, and securities count requirements under the 
Exchange Act applicable to SBS Entities pursuant to Exchange Act rules 
18a-5, 18a-6, 18a-7, 18a-8, and 18a-9.
    In reaching this preliminary conclusion, the Commission recognizes 
that there are certain differences between those French and EU 
requirements and the applicable recordkeeping, reporting, notification, 
and securities count requirements under the Exchange Act. In the 
Commission's preliminary view, on balance, those differences generally 
would not be inconsistent with substituted compliance for these 
requirements. As noted, ``requirement-by-requirement similarity'' is 
not needed for substituted compliance.
    As discussed below, in select areas, substituted compliance in 
connection with these requirements is subject to specific conditions 
necessary to promote consistency in regulatory outcomes, or to reflect 
the scope of substituted compliance that would be available in 
connection with associated Exchange Act rules.
2. Additional Conditions
i. Additional Conditions Applicable to Exchange Act Rule 18a-5
    Under the proposed Order, substituted compliance in connection with 
the recordmaking requirements of Exchange Act rule 18a-5 is subject to 
the condition that the SBS Entity: (1) Preserves all of the data 
elements necessary to create the records required by Exchange Act rules 
18a-5(a)(1), (2), (3), (4), and (7) (if not prudentially regulated) or 
Exchange Act rules 18a-5(b)(1), (2), (3), and (7) (if prudentially 
regulated); and (2) upon request furnishes promptly to representatives 
of the Commission the records required by those rules.\87\ This 
condition is modeled on the alternative compliance mechanism in 
paragraph (c) of Exchange Act rule 18a-5. In effect, a firm will not be 
required to create a record formatted pursuant to the Commission's 
rules each day, but instead only when requested to do so by Commission 
staff. The objective is to require--on a very limited basis--the 
production of a record that consolidates the information required by 
Exchange Act rules 18a-5(a)(1), (2), (3), (4), and (7) (if not 
prudentially regulated) or Exchange Act rules 18a-5(b)(1), (2), (3), 
and (7) (if prudentially regulated) in a single record and, as 
applicable, in a blotter or ledger format. This will assist the 
Commission staff in reviewing the information on the record.
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    \87\ See para. (f)(1)(ii) to the proposed Order.
---------------------------------------------------------------------------

    Under the proposed Order, substituted compliance in connection with 
the recordmaking requirements of Exchange Act rule 18a-5 is subject to 
the condition that the SBS Entity make and keep current the records 
required by Exchange Act rules 18a-5(a)(13) and (14) (if not 
prudentially regulated) or Exchange Act rules 18a-5(b)(9) and (10) (if 
prudentially regulated) if the firm is not exempt from the requirements 
of Exchange Act rule 18a-4.\88\ These recordmaking rules require the 
SBS Entity to make a record of compliance with the possession or 
control

[[Page 85732]]

requirements of Exchange Act rule 18a-4 and a record of the reserve 
computation required by Exchange Act rule 18a-4, respectively. 
Substituted compliance is not available with respect to Exchange Act 
rule 18a-4. Instead, provisions of the rule address cross-border 
transactions and provide exemptions from its requirements depending on 
the nature of the transaction.\89\ For example, a security-based swap 
dealer that is a foreign bank is subject to the possession or control 
and reserve account requirements of Exchange Act rule 18a-4 with 
respect to a security-based swap customer that is a U.S. person or, in 
the case of a non-U.S. person, if the security-based swap dealer holds 
funds or other property arising out of a transaction had by such non-
U.S. person with a branch or agency in the United States of the foreign 
security-based swap dealer. Further, Exchange Act rule 18a-4 contains a 
complete exemption from its requirements if the security-based swap 
dealer limits its business activities and meets certain conditions.\90\ 
SBS Entities that are not subject to the requirements of Exchange Act 
rule 18a-4 will not need to make the records required by Exchange Act 
rules 18a-5(a)(13) and (14) (if not prudentially regulated) or Exchange 
Act rules 18a-5(b)(9) and (10) (if prudentially regulated) under this 
condition in the proposed Order. However, if a firm is subject to 
Exchange Act rule 18a-4, it will need to make these records under this 
condition of the Order.
---------------------------------------------------------------------------

    \88\ See para. (f)(1)(iii) to the proposed Order.
    \89\ See 17 CFR 240.18a-4(e).
    \90\ See 17 CFR 240.18a-4(f).
---------------------------------------------------------------------------

    Under the proposed Order, substituted compliance in connection with 
the recordmaking requirements of Exchange Act rule 18a-5 is subject to 
the condition that the prudentially regulated SBS Entity makes and 
keeps current the records required by Exchange Act rule 18a-5(a)(16) 
(if not prudentially regulated) or Exchange Act rule 18a-5(b)(12) (if 
prudentially regulated).\91\ This rule requires the firm to document 
compliance with Exchange Act rule 15Fh-6, which imposes restrictions 
related to political contributions to municipal entities. The French 
Authorities have not requested substituted compliance with respect to 
Exchange Act rule 15Fh-6.
---------------------------------------------------------------------------

    \91\ See para. (f)(1)(iv) to the proposed Order.
---------------------------------------------------------------------------

    Finally, under the proposed Order, substituted compliance in 
connection with the recordmaking requirements of Exchange Act rule 18a-
5 is subject to the condition that the SBS Entity makes and keeps 
current records documenting compliance with requirements referenced in 
Exchange Act rule 18a-5(a)(17) (if not prudentially regulated) or 
Exchange Act rule 18a-5(b)(13) (if prudentially regulated) for which 
substituted compliance is not available.\92\ Exchange Act rules 18a-
5(a)(17) and (b)(13) require the firm to document compliance with 
Exchange Act rules 15Fh-1 through 15Fh-5 and Exchange Act rule 15Fk-1--
which, as discussed more fully in sections VI and VII of this notice, 
establish certain obligations with respect to diligent supervision, 
compliance, and counterparty protection. Under the proposed Order, when 
substituted compliance is available with respect to such an obligation, 
substituted compliance also would be available with respect to the 
corresponding recordmaking requirement of Exchange Act rule 18a-
5(a)(17) or (b)(13). In circumstances where substituted compliance is 
not permitted,\93\ has not been requested,\94\ or is otherwise not 
available under the proposed Order, direct compliance with the relevant 
Exchange Act obligation would be required, and so, too, would direct 
compliance with the corresponding recordmaking requirement of Exchange 
Act rule 18a-5(a)(17) (if not prudentially regulated) or Exchange Act 
rule 18a-5(b)(13) (if prudentially regulated).
---------------------------------------------------------------------------

    \92\ See para. (f)(1)(v) to the proposed Order.
    \93\ See Exchange Act rule 3a71-6(d)(1) (specifying that 
substituted compliance is not available in connection with the 
antifraud provisions of Exchange Act rule 15Fh-4(a)).
    \94\ The French Authorities have not requested substituted 
compliance in connection with the ECP verification requirements of 
Exchange Act rule 15Fh-3(a)(1)) or the ``special entity'' provisions 
of Exchange Act rules 15Fh-3(a)(2) and (3), 15Fh-4(b) and 15Fh-5.
---------------------------------------------------------------------------

ii. Additional Conditions Applicable to Exchange Act Rule 18a-6
    Under the proposed Order, substituted compliance in connection with 
the record preservation requirements of Exchange Act rule 18a-6 is 
subject to the condition that the SBS Entity preserves the records 
required by Exchange Act rule 18a-6(b)(1)(viii)(L) (if not prudentially 
regulated) or Exchange Act rule 18a-6(b)(2)(v) (if prudentially 
regulated) if the firm is not exempt from the requirements of Exchange 
Act rule 18a-4.\95\ Exchange Act rules 18a-6(b)(1)(viii)(L) and 
(b)(2)(v) require the preservation of detail relating to information 
for the possession or control requirements of Exchange Act rule 18a-4. 
As discussed above, substituted compliance is not available for 
Exchange Act rule 18a-4. Consequently, under this condition, an SBS 
Entity will need to preserve the records required by Exchange Act rule 
18a-6(b)(1)(viii)(L) (if not prudentially regulated) or Exchange Act 
rule 18a-6(b)(2)(v) (if prudentially regulated), but only if the firm 
is not exempt from Exchange Act rule 18a-4.
---------------------------------------------------------------------------

    \95\ See para. (f)(2)(ii) to the proposed Order.
---------------------------------------------------------------------------

    Under the proposed Order, substituted compliance in connection with 
the record preservation requirements of Exchange Act rule 18a-6 is 
subject to the condition that the SBS Entity preserves records with 
respect to requirements referenced in Exchange Act rule 18a-
6(b)(1)(xii) (if not prudentially regulated) or Exchange Act rule 18a-
6(b)(2)(vii) (if prudentially regulated) for which substituted 
compliance is not available.\96\ Under Exchange Act rules 18a-
6(b)(1)(xii) and (b)(2)(vii), the firm must preserve copies of 
documents, communications, disclosures, and notices required pursuant 
to Exchange Act rules 15Fh-1 through 15Fh-6 and Exchange Act rule 15Fk-
1--which establish certain obligations with respect to diligent 
supervision, compliance, and counterparty protection. Under the 
proposed Order, when substituted compliance is available with respect 
to such an obligation, substituted compliance also would be available 
with respect to the corresponding record preservation requirement of 
Exchange Act rule 18a-6 (b)(1)(xii) or (b)(2)(vii). In circumstances 
where substituted compliance is not permitted, has not been requested, 
or is otherwise not available under the proposed Order, direct 
compliance with the relevant Exchange Act obligation would be required, 
and so, too, would direct compliance with the corresponding record 
preservation requirement of Exchange Act rule 18a-6(b)(1)(xii) (if not 
prudentially regulated) or Exchange Act rule 18a-6(b)(2)(vii) (if 
prudentially regulated).
---------------------------------------------------------------------------

    \96\ See para. (f)(2)(iii) to the proposed Order.
---------------------------------------------------------------------------

    Under the proposed Order, substituted compliance in connection with 
the record preservation requirements of Exchange Act rule 18a-6 is 
subject to the condition that the security-based swap dealer or major 
security-based swap participant, with respect to a security-based swap 
transaction, preserves the information required by Exchange Act rule 
18a-6(b)(1)(xi) (if not prudentially regulated) or Exchange Act rule 
18a-6(b)(2)(vi) (if prudentially regulated).\97\ This condition is 
designed to ensure that the firm preserves information if the 
transaction is required to be reported to a registered security-based 
swap data

[[Page 85733]]

repository pursuant to Regulation SBSR,\98\ because the French 
Authorities have not requested substituted compliance with respect to 
Regulation SBSR.
---------------------------------------------------------------------------

    \97\ See para. (f)(2)(iv) to the proposed Order.
    \98\ See 17 CFR 242.900-909.
---------------------------------------------------------------------------

    Under the proposed Order, substituted compliance in connection with 
the record preservation requirements of Exchange Act rule 18a-6 is 
subject to the condition that the SBS Entity preserves the records 
required by Exchange Act rule 18a-6(b)(1)(xiii) (if not prudentially 
regulated) or Exchange Act rule 18a-6(b)(2)(viii) (if prudentially 
regulated).\99\ These rules require the preservation of documents used 
to make a reasonable determination with respect to special entities, 
including information relating to the financial status, the tax status, 
and the investment or financing objectives of the special entity as 
required under Exchange Act sections 15F(h)(4)(C) and (5)(A). The 
French Authorities are not seeking substituted compliance with respect 
to these Exchange Act requirements.
---------------------------------------------------------------------------

    \99\ See para. (f)(2)(iv) to the proposed Order.
---------------------------------------------------------------------------

iii. Additional Conditions Applicable to Exchange Act Rule 18a-7
    Under the proposed Order, substituted compliance with respect to 
the requirement in Exchange Act rule 18a-7 to file periodic unaudited 
financial and operational information on the FOCUS Report Part II and 
Part IIC is subject to the condition that the SBS Entity file with the 
Commission periodic unaudited financial and operational information in 
the manner and format specified by the Commission by order or rule and 
present the financial information in accordance with generally accepted 
accounting principles (``GAAP'') that the firm uses to prepare general 
purpose publicly available or available to be issued financial 
statements in France.\100\ Rule 18a-7 requires SBS Entities, on a 
monthly basis (if not prudentially regulated) or on a quarterly basis 
(if prudentially regulated), to file an unaudited financial and 
operational report known as FOCUS Report Part II (if not prudentially 
regulated) or Part IIC (if prudentially regulated). The Commission will 
use the FOCUS Report to both monitor the financial and operational 
condition of individual SBS Entities and to perform comparisons across 
SBS Entities. The FOCUS Report Parts II and IIC are standardized forms 
that elicit specific information through numbered line items. This 
facilitates cross-firm analysis and comprehensive monitoring of all SBS 
Entities registered with the Commission. Further, the Commission has 
designated the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') to receive the FOCUS reports from SBS Entities.\101\ 
Broker-dealers registered with the Commission currently file their 
FOCUS reports with FINRA through the eFOCUS system it administers. 
FINRA's eFOCUS system will enable broker-dealers, security-based swap 
dealers, and major security-based swap participants to file FOCUS 
reports on the same platform using the same preexisting templates, 
software, and procedures.
---------------------------------------------------------------------------

    \100\ See para. (f)(3)(ii) to the proposed Order. Under this 
approach, SBS Entities would be permitted to present the information 
reported in the FOCUS Report in accordance with GAAP that the SBS 
Entity uses to prepare publicly available or available to be issued 
general purpose financial statements in its home jurisdiction 
instead of U.S. GAAP if other GAAP, such as International Financial 
Reporting Standards (IFRS) as issued by the International Accounting 
Standards Board (IASB), is used by the SBS Entity in preparing 
publicly available or available to be issued general purpose 
financial statements in France.
    \101\ See Order Designating Financial Industry Regulatory 
Authority, Inc., to Receive Form X-17A-5 (FOCUS Report) from Certain 
Security-Based Swap Dealers and Major Security-Based Swap 
Participants, Exchange Release No. 34-88866 (May 14, 2020).
---------------------------------------------------------------------------

    The Commission preliminarily believes that it would be appropriate 
to condition substituted compliance with respect to Exchange Act rule 
18a-7 on the SBS Entity filing unaudited financial and operational 
information in a manner and format that facilitates cross-firm analysis 
and comprehensive monitoring of all SBS Entities registered with the 
Commission.\102\ For example, the Commission could by order or rule 
require SBS Entities to file the financial and operational information 
with FINRA using the FOCUS Report Part II (if not prudentially 
regulated) or Part IIC (if prudentially regulated) but permit the 
information input into the form to be the same information the SBS 
Entity reports to the French Authorities or other European 
supervisors.\103\
---------------------------------------------------------------------------

    \102\ See para. (f)(3)(ii) to the proposed Order.
    \103\ The Commission anticipates that it would be appropriate to 
tailor the line items required to be reported pursuant to this 
condition and is requesting comment on which, if any, line items in 
FOCUS Report Part II (if not prudentially regulated) and Part IIC 
(if prudentially regulated) the SBS Entity does not otherwise report 
or record pursuant to applicable laws or regulations. Further, the 
Commission is requesting comment on whether it would be appropriate 
as a condition to substituted compliance for SBS Entities to file a 
FOCUS Report Part II (if not prudentially regulated) or Part IIC (if 
prudentially regulated) with a limited number of the required line 
items filled out for two years. During this time, the Commission 
could further evaluate the scope of information SBS Entities should 
file.
---------------------------------------------------------------------------

    Under the proposed Order, substituted compliance in connection with 
the requirement for non-prudentially regulated SBS Entities to file 
audited annual reports under Exchange Act rule 18a-7 is subject to four 
conditions. The first condition is that the SBS Entity simultaneously 
transmits to the principal office of the Commission or to an email 
address provided on the Commission's website a copy of the financial 
statements the Covered Entity is required to file annually with French 
and/or European authorities, including a report of an independent 
public accountant covering the financial statements.\104\ Because 
French or EU laws would not otherwise require the financial statements 
and report of the independent public accountant covering the financial 
statements to be filed with the Commission, the purpose of this 
condition is to ensure the Commission receives the financial statements 
and report to more effectively supervise and monitor SBS Entities.
---------------------------------------------------------------------------

    \104\ See para. (f)(3)(iii)(A) to the proposed Order.
---------------------------------------------------------------------------

    The second condition is that the SBS Entity includes with the 
transmission of the annual financial statements and report the contact 
information of an individual who can provide further information about 
the financial statements and reports.\105\ This would assist the 
Commission staff in promptly contacting an individual at the SBS Entity 
who can respond to questions that information on the financial 
statements or report may raise about the SBS Entity's financial or 
operational condition.
---------------------------------------------------------------------------

    \105\ See para. (f)(3)(iii)(B) to the proposed Order.
---------------------------------------------------------------------------

    The third condition is that the SBS Entity includes with the 
transmission the report of an independent public accountant required by 
Exchange Act rule 18a-7(c)(1)(i)(C) covering the annual financial 
statements if French or EU laws do not require the Covered Entity to 
engage an independent public accountant to prepare a report covering 
the annual financial statements.\106\ The third condition further 
provides that the report of the independent public accountant may be 
prepared in accordance with generally accepted auditing standards 
(``GAAS'') in France or the EU that are used to perform audit and 
attestation services. According to the French Authorities' Application, 
French or EU laws only require certain investment firms (depending on 
their size) to have their financial statements audited, so this 
condition ensures that all SBS Entities subject to the requirement in 
rule 18a-7 to file audited

[[Page 85734]]

annual reports are required to have their financial statements audited.
---------------------------------------------------------------------------

    \106\ See para. (f)(3)(iii)(C) to the proposed Order.
---------------------------------------------------------------------------

    The fourth condition is that the SBS Entity files the reports 
required by Exchange Act rule 18a-7(c)(1)(i)(B) and (C) addressing the 
statements identified in Exchange Act rule 18a-7(c)(3) or (c)(4), as 
applicable, that relate to Exchange Act rule 18a-4.\107\ These reports 
are designed to provide the Commission with information about an SBS 
Entity's compliance with Rule 18a-4. As discussed above, substituted 
compliance is not available for Exchange Act rule 18a-4 and, therefore, 
this condition is designed to provide the Commission with similar 
compliance information. Under this condition, SBS Entities will need to 
file a limited compliance report that includes the statements relating 
to Rule 18a-4 \108\ or exemption report if the SBS Entity claims an 
exemption from Rule 18a-4. The SBS Entity also will need to file the 
report of an independent public accountant covering the limited 
compliance report or exemption report. The fourth condition further 
provides that the report of the independent public accountant may be 
prepared in accordance with GAAS in France or the EU that are used to 
perform audit and attestation services.
---------------------------------------------------------------------------

    \107\ See para. (f)(3)(iii)(D) to the proposed Order.
    \108\ The limited compliance report would not need to address 
Exchange Act rules 18a-1, 18a-9, or 17a-13.
---------------------------------------------------------------------------

iv. Additional Conditions Applicable to Exchange Act Rule 18a-8
    Under the proposed Order, substituted compliance in connection with 
the notification requirements of Exchange Act rule 18a-8 is subject to 
the condition that the SBS Entity: (1) Simultaneously transmits to the 
principal office of the Commission or to an email address provided on 
the Commission's website a copy of any notice required to be sent by 
the French notification laws; and (2) includes with the transmission 
the contact information of an individual who can provide further 
information about the matter that is the subject of the notice.\109\ 
The purpose of this condition is to alert the Commission to financial 
or operational problems that could adversely affect the firm--the 
objective of Exchange Act rule 18a-8.
---------------------------------------------------------------------------

    \109\ See para. (f)(4)(ii) to the proposed Order.
---------------------------------------------------------------------------

    In addition, under the proposed Order, substituted compliance in 
connection with the notification requirements of Exchange Act rule 18a-
8 is subject to the conditions that if the firm is not exempt from 
Exchange Act rule 18a-4, the SBS Entity complies with the notification 
requirements of Exchange Act rules 18a-8(e) and 18a-8(g) that relate to 
Exchange Act rule 18a-4.\110\ Exchange Act rule 18a-8(e) requires 
notification if the firm discovers or is notified by an independent 
public accountant the existence of any material weakness that relates 
to Exchange Act rule 18a-4. Exchange Act rule 18a-8(g) requires 
notification if the firm fails to make in its special reserve account 
for the exclusive benefit of security-based swap customers a deposit, 
as required by Exchange Act rule 18a-4(c). As discussed above, 
substituted compliance is not available for Exchange Act rule 18a-4.
---------------------------------------------------------------------------

    \110\ See para. (f)(4)(iii) and (iv) to the proposed Order.
---------------------------------------------------------------------------

3. Examination and Production of Records
    Every SBS Entity registered with the Commission, whether complying 
directly with Exchange Act requirements or relying on substituted 
compliance as a means of complying with the Exchange Act, is required 
to satisfy the inspection and production requirements imposed on such 
entities under the Exchange Act.\111\ Covered entities may make, keep, 
and preserve records, subject to the conditions described above, in a 
manner prescribed by applicable European and French requirements. The 
Commission notes that as an element of its substituted compliance 
application, the French Authorities have provided the Commission with 
adequate assurances that no law or policy would impede the ability of 
any entity that is directly supervised by the authority and that may 
register with the Commission ``to provide prompt access to the 
Commission to such entity's books and records or to submit to onsite 
inspection or examination by the Commission.'' Consistent with those 
assurances and the requirements that apply to all registered SBS 
Entities under the Exchange Act, SBS Entities will need to keep books 
and records open to inspection by any representative of the Commission 
and to furnish promptly to a representative of the Commission legible, 
true, complete, and current copies of those records of the firm that 
these entities are required to preserve under Exchange Act rule 18a-6 
(which would include records for which a positive substituted 
compliance determination is being made with respect to Exchange Act 
rule 18a-6 under this order), or any other records of the firm that are 
subject to examination or required to be made or maintained pursuant to 
Exchange Act section 15F that are requested by a representative of the 
Commission.\112\
---------------------------------------------------------------------------

    \111\ See Exchange Act section 15F(f); Exchange Act rule 18a-
6(g).
    \112\ See para. (f)(6) to the proposed Order.
---------------------------------------------------------------------------

IX. Additional Considerations Regarding Supervisory and Enforcement 
Effectiveness in France

A. General Considerations

    As noted above, Exchange Act rule 3a71-6 provides that the 
Commission's assessment of the comparability of the requirements of the 
foreign financial regulatory system must account for ``the 
effectiveness of the supervisory program administered, and the 
enforcement authority exercised'' by the foreign financial regulatory 
authority. This prerequisite accounts for the understanding that 
substituted compliance determinations should reflect the reality of the 
foreign regulatory framework, in that rules that appear high-quality on 
paper nonetheless should not form the basis for substituted compliance 
if--in practice--market participants are permitted to fall short of 
their regulatory obligations. This prerequisite, however, also 
recognizes that differences among the supervisory and enforcement 
regimes should not be assumed to reflect flaws in one regime or 
another.\113\
---------------------------------------------------------------------------

    \113\ See generally Business Conduct Adopting Release, 81 FR at 
30079.
---------------------------------------------------------------------------

    In connection with these considerations, the French Authorities' 
Application includes information regarding the French supervisory and 
enforcement framework applicable to derivatives markets and market 
participants. This includes information regarding the supervisory and 
enforcement authority afforded to the AMF and the ACPR to promote 
compliance with applicable requirements, applicable supervisory and 
enforcement tools and capabilities, consequences of non-compliance, and 
the application of the AMF's and ACPR's supervisory and enforcement 
practices in the cross-border context. After review of this 
information, the Commission preliminarily believes that the framework 
is reasonably designed to promote compliance with the laws where 
substituted compliance has been requested.

B. Supervisory Framework in France

    Supervision of credit institutions located in France is conducted 
by the AMF, the ACPR, and the ECB. Supervision of investment firms 
located in France is conducted by the AMF and

[[Page 85735]]

the ACPR (together, credit institutions and investment firms are 
referred to as ``firms'').\114\ The day-to-day supervision of the 
firms' security-based swap activities is conducted by the AMF; the 
ACPR's supervisory powers pertain to licensing matters and prudential 
requirements. The ACPR is the primary supervisor for margin and AML 
requirements. The AMF and the ACPR cooperate closely and have frequent 
communications regarding the supervision of firms to accomplish their 
respective missions. The ECB, through joint supervisory teams 
(``JSTs''), supervises firms for compliance with the CRD and CRR, 
including all capital requirements. The AMF, the ACPR, and the ECB have 
the ability to request records needed for supervision from firms 
through the supervisory process. In addition, the AMF, the ACPR, and 
the ECB set annual priorities and conduct thematic reviews, which are 
used to enhance supervision in specific regulatory areas. The results 
of these thematic reviews are made public to provide transparency to 
the industry.
---------------------------------------------------------------------------

    \114\ Starting in 2021, the ECB will also supervise significant 
investment firms under the framework described in this section.
---------------------------------------------------------------------------

    The AMF uses a risk-based approach to supervision whereby 
investment firms are categorized within four Tiers. Tier 1 firms 
receive the most supervisory attention and the staff has been told that 
all firms that use substituted compliance will be treated as Tier 1 
firms. The AMF's supervisory team maintains a constant dialogue with 
Tier 1 firms, including weekly calls with compliance officers and 
regular in-person meetings with senior operational management. The AMF 
assigns two portfolio managers to each firm that provides investment 
services.\115\ One portfolio manager covers market activity and one 
portfolio manager covers the retail, private banking, depository 
activities, and marketing activities of the firm.
---------------------------------------------------------------------------

    \115\ The staff was told that all firms applying to be a 
security-based swap dealer with the SEC provide investment services.
---------------------------------------------------------------------------

    The AMF's supervision of a Tier 1 firm focuses in part on review 
and analysis of numerous types of data that is submitted by firms to 
the AMF or the ACPR. The portfolio manager in charge of monitoring 
market activity works closely with the data driven supervision 
(``DDS'') team, a group that analyzes the regulatory reporting data 
submitted by each firm to understand changes at the firm. The portfolio 
managers also review the annual compliance report submitted by the 
firms each year. The report covers numerous topics at the firm 
including compliance with the recordkeeping requirements, the best 
execution requirements, the anti-market abuse regulations, and how 
conflicts of interest are handled and controlled. In addition, the ACPR 
requires firms to file an internal control report each year, and the 
parts of the report that are applicable to the AMF's remit are shared 
with the AMF. The portfolio manager reviews these reports and compares 
the reports from one year to the next. Where inconsistencies are noted, 
the portfolio manager will compare them against other internal AMF 
information about the firm, as well as complaints that have been 
submitted and significant incidents that are reported to the AMF.
    If the AMF identifies an issue at a Tier 1 firm, the AMF will 
follow up with the firm in a variety of ways. The AMF may schedule a 
follow-up meeting or request additional information. The AMF may also 
send the firm a letter from the General Secretary of the AMF or one of 
the AMF directors describing the violation of law. In addition, the AMF 
may ask the firm to carry out an internal or external audit on the 
topic, or request that the firm undertake specific corrective measures 
and report back with details on corrective action taken. The AMF could 
also start an onsite inspection of the firm. Inspections are carried 
out through an inspection division separate and apart from the 
supervisory team.
    The ACPR also uses a risk-based approach to supervision, assessing 
the size, business model, complexity, and risk profile of the 
supervised entity. Supervisors are assigned based on this risk profile 
ranging in number from two supervisors for the least complex investment 
firms to up to twenty supervisors for the most significant banks. At 
least two supervisors for each Tier 1 firm focus on AML issues. All 
supervisors interact with the firm on a daily basis through phone calls 
and meetings, and review the annual report on internal controls, which 
includes information on capital and liquidity as well as the AML 
control framework of the firm. The ACPR also uses onsite inspectors to 
investigate areas of concern, conduct a general review of the firm, or 
validate a specific risk methodology. The ACPR allocates about a 
quarter of its onsite inspectors to AML inspections every year.
    Where the ACPR detects issues at a firm, it will take corrective 
measures that its staff believe are proportional to the conduct. For 
example, the first step may be asking the firm, in writing, to take 
corrective measures, which is accompanied by enhanced monitoring and 
communication with the ACPR on the matter. The ACPR may also conduct on 
onsite inspections. When these corrective measures fail, the ACPR may 
open an enforcement proceeding.
    Supervision of the CRD and CRR, which includes a firm's capital 
requirements, is conducted through the ECB's single supervisory 
mechanism and executed by JSTs comprising of ECB staff, ACPR staff, and 
staff from other countries in the EU where the significant institution 
has a subsidiary or branch. The ACPR assigns multiple supervisors to 
the JST for a significant institution headquartered in France. The head 
of the JST is from the ECB and generally is not from the country where 
the significant institution is located. As part of its day-to-day 
supervision, the JST analyzes the supervisory reporting, financial 
statements, and internal documentation of supervised entities. The JSTs 
hold regular and ad hoc meetings with the supervised entities at 
various levels of staff seniority. They conduct ongoing risk analyses 
of approved risk models, and analyze and assess the recovery plans of 
supervised entities. The various supervisory activities typically 
result in supervisory measures addressed to the supervised institution. 
Supervisory activities and decisions result in a number of routine 
steps such as the monitoring of compliance by the JST and, if 
necessary, enforcement measures and sanctions. In addition to ongoing 
supervision, the JST may conduct in-depth reviews on certain topics by 
organizing a dedicated onsite mission (e.g., an inspection or an 
internal model investigation). The onsite inspections are carried out 
by an independent inspection team, which works in close cooperation 
with the respective JST.
    For each firm, the JST conducts a Supervisory Review and Evaluation 
Process (``SREP''), which measures the risks for each bank. The SREP 
shows where a firm stands in terms of capital requirements and the way 
it handles risks. To develop the SREP, supervisors review the 
sustainability of each firm's business model, governance and risk 
management at the firm, capital risks, and liquidity and funding risks. 
Once the SREP is developed, the firm will receive a letter setting 
forth specific measures that must be implemented the following year 
based on the firm's individual profile. For example, the SREP may ask 
the firm to hold additional capital or set forth qualitative 
requirements related to the firm's governance structure or management.

C. Enforcement Authority in France

    The MFC and SSM Regulations are applicable to the distribution of

[[Page 85736]]

enforcement authority relating to security-based swaps in France. With 
respect to regulated entities, the AMF is primarily responsible for 
enforcement of recordkeeping and reporting requirements. ACPR is 
primarily responsible for the enforcement of prudential recordkeeping 
and reporting requirements regarding investment firms; and the ECB is 
primarily responsible for the enforcement of prudential recordkeeping 
and reporting requirements regarding credit institutions.
i. The AMF
    The AMF's investigations may arise from information gathered during 
market supervision, monitoring of listed companies, alerts raised by 
the AMF's Market Surveillance Directorate or other AMF divisions, and 
information sent to the AMF by foreign authorities. AMF's investigative 
powers include, but are not limited to, obtaining hard copy and 
electronic documents, interviewing external experts, accessing business 
premises, and summoning persons likely to provide useful information 
for interviews.
    The Enforcement Committee is the body empowered to determine 
sanctions in an enforcement matter. Sanctions available to the 
Enforcement Committee include freezing assets, banning a person from 
certain professional activity, imposing a monetary penalty, withdrawing 
the authorization of an asset management company or the status of a 
market operator, and requiring corrective statements to be published. 
The AMF also has the power to enter into settlements with respondents 
and as part of a settlement may require the respondent to cease all 
ongoing violations. Settlements may also include the payment of 
compensation to harmed investors. French law imposes a five year 
statute of limitations for AMF matters.
ii. The ECB and the ACPR
    As noted above, the ACPR conducts supervisory inspections relating 
to prudential recordkeeping and reporting requirements for investment 
firms. When breaches of the requirements occur, the Supervisory Board 
of the ACPR is empowered to decide on the appropriate measures whether 
administrative, enforcement or disciplinary. These measures may include 
injunctions, ``mesures de police administrative'' (including warnings, 
formal notices, conservative measures and the appointment of a 
provisional administrator), and coercive fines. Additionally, the 
Supervisory Board may decide to introduce disciplinary proceedings for 
anti-money laundering and counter terrorist financing. The decision-
making body in charge of the decision to sanction is a separate body, 
the Sanctions Committee, to which the Supervisory Board refers the 
case.
    With respect to credit institutions, the ACPR conducts supervisory 
activity through JSTs, under the SSM Regulation. Where it identifies a 
failure to comply with obligations under applicable regulations, a JST 
may decide effective, proportionate and dissuasive sanctions. 
Misconduct detected by the JSTs is addressed primarily by the ECB. 
Under the SSM Regulations, the ECB is empowered to address issues of 
noncompliance with applicable European Union law by directly imposing 
enforcement measures on supervised entities or requiring the ACPR to 
use its national enforcement powers. It also may choose to impose 
administrative penalties or request that the ACPR open sanctioning 
proceedings. In particular, the ECB may impose administrative pecuniary 
penalties, and may impose fines and periodic penalty payments per day 
of infringement. Where appropriate, the ECB may exercise its 
enforcement authority in parallel with supervisory measures.

X. Request for Comment

    Commenters are invited to address all aspects of the application, 
the Commission's preliminary views and the proposed Order.

A. General Aspects of the Comparability Assessments and Proposed Order

    The Commission requests comment regarding the preliminary views and 
proposed Order in connection with each of the general ``regulatory 
outcome'' categories addressed above. Commenters particularly are 
invited to address, among other issues, whether the relevant French and 
EU provisions generally are sufficient to produce regulatory outcomes 
that are comparable to the outcomes associated with requirements under 
the Exchange Act, and whether the conditions and limitations of the 
proposed Order would adequately address potential gaps in the relevant 
regulatory outcomes.
    Commenters also are invited to address any differences between 
French regulatory requirements and frameworks and the German 
requirements and frameworks that formed the basis for the Commission's 
grant of substituted compliance in connection with Germany.\116\ Given 
the Commission's substituted compliance determination with respect to 
Germany, should the Commission allow German branches of French Covered 
Entities to use substituted compliance in circumstances where 
responsibility for ensuring compliance with any provision of MiFID, MAR 
or any other EU requirement adopted pursuant to MiFID or MAR listed in 
paragraphs (b) through (f) of this Order is allocated to the 
Bundesanstalt f[uuml]r Finanzdienstleistungsaufsicht (``BaFin''), the 
German financial authority? If so, should such reliance be conditioned 
on the MOU between the SEC and BaFin addressing substituted compliance 
under those circumstances? Similarly, should the Commission allow 
French branches of German Covered Entities to use substituted 
compliance in circumstances where responsibility for ensuring 
compliance with any provision of MiFID, MAR or any other EU requirement 
adopted pursuant to MiFID or MAR listed in paragraphs (b) through (e) 
of the German Substituted Compliance Order is allocated to the AMF and/
or the ACPR? If so, should such reliance be conditioned on the MOU 
between the SEC and the French Authorities addressing substituted 
compliance under those circumstances?
---------------------------------------------------------------------------

    \116\ See note 1, supra.
---------------------------------------------------------------------------

B. Risk Control Requirements

    The Commission further requests comment regarding the proposed 
grant of substituted compliance in connection with requirements under 
the Exchange Act related to risk management systems, trade 
acknowledgement and verification, portfolio reconciliation and dispute 
reporting, portfolio reconciliation and trading relationship 
documentation. Commenters particularly are invited to address the basis 
for substituted compliance in connection with those risk control 
requirements, and the proposed conditions and limitations connected to 
substituted compliance for those requirements.
    Commenters further are invited to address any differences between 
French regulatory requirements and frameworks and the German 
requirements and frameworks that formed the basis for the Commission's 
conditional grant of substituted compliance in connection with Germany 
for those risk control requirements.\117\
---------------------------------------------------------------------------

    \117\ See generally German Notice and Proposed Order, 85 FR at 
72730-32.
---------------------------------------------------------------------------

C. Capital and Margin Requirements

    The Commission further requests comment regarding the comparability 
analysis of French and EU capital requirements with Exchange Act 
capital

[[Page 85737]]

requirements for non-prudentially regulated security-based swap 
dealers. Are there any conditions that should be applied to substituted 
compliance for these capital requirements to promote comparable 
regulatory outcomes? For example, given the objectives of Rule 18a-1, 
should the Commission consider including a condition that requires a 
non-prudentially regulated security-based swap dealer to maintain a 
minimum amount of liquid assets, such a minimum ratio of liquid assets 
to illiquid assets? If so, should the ratio of liquid assets to 
illiquid assets be 80% to 20%, 70% to 30%, 60% to 40% or some other 
ratio? In terms of defining liquid and illiquid assets, should the 
Commission consider assets that are allowable as capital under Exchange 
Act rule 18a-1 as liquid and assets that are not allowable as capital 
under that rule as illiquid?
    In addition, should the Commission consider including a condition 
that would require non-prudentially regulated security-based swap 
dealers to be subject to a specific liquidity requirement, such as a 
requirement to maintain a pool of highly liquid assets to cover cash 
outflows during a 30-day period of stress?
    The Commission further requests comment on whether it should 
consider including a condition that non-prudentially regulated 
security-based swap dealers must maintain equity capital equal or Tier 
1 capital at least equal to the minimum fixed-dollar capital 
requirements under Exchange Act rule 18a-1? For example, should there 
be a condition that that firm maintain equity capital or Tier 1 capital 
of at least $20 million?
    The Commission further requests comment on what specific types of 
non-prudentially regulated security-based swap dealers in France would 
be relying on a substituted compliance determination with respect to 
capital requirements under Exchange Act rule 18a-1. For example, what 
are the primary business lines engaged in by these entities and what 
types of assets and liabilities do they typically carry on their 
balance sheets? Are the balance sheets of these entities primarily 
composed of liquid or illiquid assets?
    The Commission notes that the comparability analysis for capital 
for France focuses on Covered Entities that are subject to the 
prudential capital regime under CRR and CRD. The Commission requests 
comment on how the Commission should consider the effects of subsequent 
amendments to the capital requirements of the CRR and CRD on Covered 
Entities in the context of the proposed order, particularly with 
respect to amendments to the CRD (e.g., CRD V), which would require 
changes to implementing French laws.
    The Commission further requests comment on whether any investment 
firms that may be relying on the Commission's proposed substituted 
compliance determination would be covered under the new capital regime 
under the EU's IFR. If so, should these capital requirements be 
included in any Commission final order regarding the determination of 
substituted compliance with respect to the capital requirements of the 
Commission and the EU and France? If so, explain how they are 
comparable to the capital requirements for non-prudentially regulated 
security-based swap dealers under the Exchange Act.
    The Commission further requests comment on whether there would be 
any non-prudentially regulated major security-based swap participants 
that would be seeking substituted compliance with respect to Exchange 
Act rule 18a-2.
    The Commission further requests comment regarding the Commission's 
preliminary view that French and EU margin requirements are comparable 
to the Exchange Act margin requirements for non-prudentially regulated 
security-based swap dealers and major security-based swap participants. 
Are there any conditions that should be applied to substituted 
compliance for the margin requirements to promote comparable regulatory 
outcomes?

D. Internal Supervision, Chief Compliance Officer and Additional 
Exchange Act Section 15F(j) Requirements

    The Commission requests comment regarding the proposed grant of 
substituted compliance in connection with requirements under the 
Exchange Act related to internal supervision and chief compliance 
officers, as well as additional Exchange Act section 15F(j) 
requirements. Commenters particularly are invited to address the basis 
for substituted compliance in connection with those risk control 
requirements, and the proposed conditions and limitations connected to 
substituted compliance for those requirements.
    Commenters further are invited to address any differences between 
French regulatory requirements and frameworks and the German 
requirements and frameworks that formed the basis for the Commission's 
conditional grant of substituted compliance in connection with Germany 
for those internal supervision and chief compliance officers 
requirements, as well as additional Exchange Act section 15F(j) 
requirements.\118\
---------------------------------------------------------------------------

    \118\ See generally German Notice and Proposed Order, 85 FR at 
72732-34.
---------------------------------------------------------------------------

E. Counterparty Protection Requirements

    The Commission requests comment regarding the proposed grant of 
substituted compliance in connection with counterparty protection 
requirements under the Exchange Act. Commenters particularly are 
invited to address the basis for substituted compliance in connection 
with the counterparty protection requirements, and the proposed 
conditions and limitations connected to substituted compliance for 
those requirements.
    Commenters further are invited to address any differences between 
French regulatory requirements and frameworks and the German 
requirements and frameworks that formed the basis for the Commission's 
conditional grant of substituted compliance in connection with Germany 
for certain of those counterparty protection requirements. Would the 
responses to any of the questions about counterparty protection 
requirements that the Commission asked in connection with the German 
substituted compliance request differ if those questions applied to 
French regulatory requirements and frameworks?

F. Recordkeeping, Reporting, Notification, and Securities Count

    The Commission requests comment regarding the proposed grant of 
substituted compliance in connection with requirements under the 
Exchange Act related to recordkeeping, reporting, notification, and 
securities counts, as well as additional Exchange Act section 15F(f) 
requirements. Commenters particularly are invited to address the basis 
for substituted compliance in connection with those requirements, and 
the proposed conditions and limitations connected to substituted 
compliance for those requirements. Do French and EU law taken as a 
whole produce regulatory outcomes that are comparable to those of 
Exchange Act section 15(f) and Exchange Act rules 18a-5, 18a-6, 18a-7, 
18a-8, and 18a-9 thereunder?
    Commenters further are invited to address any differences between 
French regulatory requirements and frameworks and the German 
requirements and frameworks that formed the basis for the Commission's 
conditional grant of substituted compliance in connection with Germany 
for recordkeeping, reporting, notification, and securities

[[Page 85738]]

count requirements, as well as additional Exchange Act section 15F(f) 
requirements
    Commenters particularly are invited to address the proposed 
condition with respect to Exchange Act rule 18a-5 that the SBS Entity: 
(a) Preserve all of the data elements necessary to create the records 
required by Exchange Act rules 18a-5(a)(1), (2), (3), (4), and (7) (if 
not prudentially regulated) or Exchange Act rules 18a-5(b)(1), (2), 
(3), and (7) (if prudentially regulated); and (b) upon request furnish 
promptly to representatives of the Commission the records required by 
those rules. Do the relevant French and EU laws require SBS Entities to 
retain the data elements necessary to create the records required by 
these rules? If not, please identify which data elements are not 
preserved pursuant to the relevant French and EU laws. Further, how 
burdensome would it be for an SBS Entity to format the data elements 
into the records required by these rules (e.g., a blotter, ledger, or 
securities record, as applicable) if the firm was requested to do so? 
In what formats do SBS Entities in France produce this information to 
the French Authorities or other European authorities? How do those 
formats differ from the formats required by Exchange Act rules 18a-
5(a)(1), (2), (3), (4), and (7) (if not prudentially regulated) or 
Exchange Act rules 18a-5(b)(1), (2), (3), and (7) (if prudentially 
regulated)?
    Commenters also are invited to address the proposal that a positive 
substituted compliance determination with respect to Exchange Act rule 
18a-7 would be conditioned on the SBS Entity filing financial and 
operational information with the Commission in the manner and format 
specified by the Commission by order or rule. With respect to FOCUS 
Report Part II, not all of the line items on the report may be as 
pertinent to a non-prudentially regulated SBS Entity if a positive 
substituted compliance determination is made with respect to capital or 
margin. With respect to FOCUS Report Part IIC, because the Commission 
does not have responsibility to administer capital and margin 
requirements for prudentially regulated SBS Entities, the FOCUS Report 
Part IIC elicits much less information than the FOCUS Report Part II or 
the financial reports SBS Entities file with the French Authorities 
and/or other European authorities. Should the Commission require SBS 
Entities to file the financial and operational information using the 
FOCUS Report Part II (if not prudentially regulated) or Part IIC (if 
prudentially regulated)? Are there line items on the FOCUS Report Part 
II or Part IIC that elicit information that is not included in the 
reports SBS Entities file with the French Authorities and/or other 
European authorities? If so, do SBS Entities record that information in 
their required books and records? Please identify any information that 
is elicited in the FOCUS Report Part II (if not prudentially regulated) 
or Part IIC (if prudentially regulated) that is not: (1) Included in 
the financial reports filed by SBS Entities with the French Authorities 
and/or other European authorities; or (2) recorded in the books and 
records required of SBS Entities. With respect to FOCUS Report Part 
IIC, would the answer to these questions change if references to FFIEC 
Form 031 were not included in the FOCUS Report Part IIC? If so, how? As 
a preliminary matter, as a condition of substituted compliance should 
SBS Entities file a limited amount of financial and operational 
information on the FOCUS Report Part II (if not prudentially regulated) 
or Part IIC (if prudentially regulated) for a period of two years to 
further evaluate the burden of requiring all applicable line items to 
be filled out? If so, which line items should be required? To the 
extent that SBS Entities otherwise report or record information that is 
responsive to the FOCUS Report Part II or Part IIC, how could the 
information on these reports be integrated into a database of filings 
the Commission or its designee will maintain for filers of the FOCUS 
Report Parts II and IIC (e.g., the eFOCUS system) to achieve the 
objective of being able to perform cross-form analysis of information 
entered into the uniquely numbered line items on the forms?
    Commenters also are invited to address the proposal that a positive 
substituted compliance determination with respect to the requirement to 
file annual audited reports pursuant to Exchange Act rule 18a-7 would 
be subject to four conditions. For example, comment is sought on the 
element of the third and fourth conditions that would permit the 
reports of the independent public accountant to be prepared in 
accordance with GAAS in France or the EU. How do those standards 
compare to U.S. GAAS? In addition, should the Commission include a 
condition in the final order that the independent public accountant 
must meet the Commission's independence standards for public 
accountants? Further, the third condition would require SBS Entities 
that are not required under French or EU laws to file a report of an 
independent public accountant covering their financial statements to 
file such an accountant's report. This condition is based on the fact 
that French or EU laws only require certain investment firms (depending 
on their size) to have their financial statements audited. Do the firms 
in France that are not subject to the requirement to file audited 
financial reports engage in security-based swap activities? If so, are 
they likely to register with the Commission as a non-prudentially 
regulated security-based swap dealer or major security-based swap 
participant?
    Further, if the Commission makes a positive substituted compliance 
determination with respect to a substantive requirement, should the 
Commission make a positive substituted compliance determination with 
respect to the linked record making and record preservation 
requirement? In particular, in this circumstance, should a positive 
substituted compliance determination be made with respect to the 
recordkeeping, reporting, and notification rules that are linked to 
other Exchange Act rules which include provisions that address: (1) 
Unverified security-based swap transactions (Exchange Act rules 18a-
5(a)(15) and (b)(11), and 18a-6(b)(1)(i) and (b)(2)(i)); (2) compliance 
with business conduct requirements (Exchange Act rules 18a-5(a)(16) and 
(17), and (b)(12) and (13), 18a-6(b)(1)(i), (b)(1)(xii), (b)(2)(i), and 
18a-6(b)(2)(vii)); (3) preservation of records relating to certain risk 
mitigation requirements (Exchange Act rules 18a-6(d)(4) and (5); (4) 
segregation requirements (Exchange Act rules 18a-5(a)(13) and (14), and 
(b)(9) and (10), 18a-6(b)(1)(viii)(L) and (b)(2)(v), 18a-7(c)(3) and 
(4), and 18a-8(g)); (5) capital requirements (Exchange Act rules 18a-
5(a)(9) and (b)(1)(v), 18a-7(a)(3), and 18a-8(b); and (6) margin 
requirements (Exchange Act rules 18a-5(a)(12) and (b)(1)(viii))? If so, 
explain why.
    Finally, commenters are invited to address whether the French 
substituted compliance order should be conditioned on the SBS Entity 
furnishing to a representative of the Commission upon request an 
English translation of any record, report, or notification of the SBS 
Entity that is required to be made, preserved, filed, or subject to 
examination pursuant to Exchange Act section 15F or the French 
substituted compliance order. Should this condition be included in any 
substituted compliance order addressing a jurisdiction where SBS 
Entities' records, reports, or notifications are not required to use 
the English language? Should the German substituted compliance order be 
amended to include such a condition?
    Are there any French SBS Entities that are not expected to be 
exempt from Exchange Act rule 18a-4? If so, should the final Order 
include a condition

[[Page 85739]]

requiring SBS Entities to file with the Commission the supporting 
schedules required by Exchange Act rule 18a-7(c)(2)(ii) that relate to 
Exchange Act rule 18a-4 (i.e., Computation for Determination of 
Security-Based Swap Customer Reserve Requirements and Information 
Relating to the Possession or Control Requirements for Security-Based 
Swap Customers) if the SBS Entity is not exempt from Exchange Act rule 
18a-4?

G. Supervisory and Enforcement Issues

    The Commission further requests comment regarding how to weigh 
considerations regarding supervisory and enforcement effectiveness in 
France as part of the comparability assessments. Commenters 
particularly are invited to address relevant issues regarding the 
effectiveness of French supervision and enforcement over firms that may 
register with the Commission as SBS Entities, including but not limited 
to issues regarding:
    <bullet> French supervisory and enforcement authority, supervisory 
inspection practices and the use of alternative supervisory tools, and 
enforcement tools and practices;
    <bullet> French supervisory and enforcement effectiveness with 
respect to derivatives such as security-based swaps; and
    <bullet> French supervision and enforcement in the cross-border 
context (e.g., any differences between the oversight of firms' 
businesses within France and the oversight of activities and branches 
outside of France, including within the United States).

    By the Commission.

    Dated: December 22, 2020.
Vanessa A. Countryman,
Secretary.

Attachment A

    It is hereby determined and ordered, pursuant to rule 3a71-6 under 
the Exchange Act, that a Covered Entity (as defined in paragraph (g)(1) 
of this Order) may satisfy the requirements under the Exchange Act that 
are addressed in paragraphs (b) through (f) of this Order so long as 
the Covered Entity is subject to and complies with relevant 
requirements of the French Republic and the European Union and with the 
conditions to this Order, as amended or superseded from time to time.
    (a) General conditions.
    This Order is subject to the following general conditions, in 
addition to the conditions specified in paragraphs (b) through (f):
    (1) Activities as ``investment services or activities.'' For each 
condition in paragraphs (b) through (f) of this Order that requires the 
application of, and the Covered Entity's compliance with, provisions of 
MiFID, provisions of MFC that implement MiFID and/or other EU and 
French requirements adopted pursuant to those provisions, the Covered 
Entity's relevant security-based swap activities constitute 
``investment services'' or ``investment activities,'' as defined in 
MiFID article 4(1)(2) and in MFC L.321-1, and fall within the scope of 
the Covered Entity's authorization from the AMF or from the ACPR after 
approval by the AMF of the Covered Firm's program of operations to 
provide investment services and/or perform investment activities in the 
French Republic.
    (2) Counterparties as ``clients.'' For each condition in paragraphs 
(b) through (f) of this Order that requires the application of, and the 
Covered Entity's compliance with, provisions of MiFID, provisions of 
MFC that implement MiFID and/or other EU and French requirements 
adopted pursuant to those provisions, the relevant counterparty (or 
potential counterparty) to the Covered Entity is a ``client'' (or 
potential ``client''), as defined in MiFID article 4(1)(9) and as used 
in the relevant provision of MFC.
    (3) Security-based swaps as ``financial instruments.'' For each 
condition in paragraphs (b) through (f) of this Order that requires the 
application of, and the Covered Entity's compliance with, provisions of 
MiFID, provisions of MFC that implement MiFID and/or other EU and 
French requirements adopted pursuant to those provisions, the relevant 
security-based swap is a ``financial instrument,'' as defined in MiFID 
article 4(1)(15) and in MFC L.211-1 and D.211-1A.
    (4) Covered Entity as ``institution.'' For each condition in 
paragraph (b) through (f) of this Order that requires the application 
of, and the Covered Entity's compliance with, the provisions of CRD, 
provisions of MFC that implement CRD, CRR and/or other EU and French 
requirements adopted pursuant to those provisions, the Covered Entity 
is an ``institution,'' as defined in CRD article 3(1)(3) and CRR 
article 4(1)(3), and is either a credit institution or finance company, 
each as defined in MFC L.511-1.
    (5) Memorandum of Understanding with the French Authorities. The 
Commission and the AMF and the ACPR have a supervisory and enforcement 
memorandum of understanding and/or other arrangement addressing 
cooperation with respect to this Order at the time the Covered Entity 
complies with the relevant requirements under the Exchange Act via 
compliance with one or more provisions of this Order.
    (6) Memorandum of Understanding Regarding ECB-Owned Information. 
The Commission and the ECB and/or the AMF and/or the ACPR have a 
supervisory and enforcement memorandum of understanding and/or other 
arrangement addressing cooperation with respect to this Order as it 
pertains to information owned by the ECB at the time the Covered Entity 
complies with the relevant requirements under the Exchange Act via 
compliance with one or more provisions of this Order.
    (7) Notice to Commission. A Covered Entity relying on this Order 
must provide notice of its intent to rely on this Order by notifying 
the Commission in writing. Such notice must be sent to an email address 
provided on the Commission's website. The notice must include the 
contact information of an individual who can provide further 
information about the matter that is the subject of the notice.
    (8) European Union Cross-Border Matters. If, in relation to a 
particular service provided by a Covered Entity, responsibility for 
ensuring compliance with any provision of MiFID or any other EU or 
French requirement adopted pursuant to MiFID listed in paragraphs (b) 
through (f) of this Order is allocated to an authority of the Member 
State of the European Union in whose territory a Covered Entity 
provides the service, the AMF or the ACPR must be the authority 
responsible for supervision and enforcement of that provision or 
requirement in relation to the particular service. If responsibility 
for ensuring compliance with any provision of MAR or any other EU 
requirement adopted pursuant to MAR listed in paragraphs (b) through 
(f) of this Order is allocated to one or more authorities of a Member 
State of the European Union, one of such authorities must be the AMF or 
the ACPR.
    (b) Substituted compliance in connection with risk control 
requirements.
    This Order extends to the following provisions related to risk 
control:
    (1) Internal risk management. The requirements of Exchange Act 
section 15F(j)(2) and related aspects of Exchange Act rule 15Fh-
3(h)(2)(iii)(I), provided that the Covered Entity is subject to and 
complies with the requirements of: MiFID articles 16(4) and 16(5); MFC 
L. 533-10.II (4) and (5); MiFID Org Reg articles 21-24; CRD articles 
74, 76 and 79-87; MFC L. 511-41-1-B and L. 511-41-1-C, L. 511-55 
through L. 511-57, L. 511-60 through L.

[[Page 85740]]

511-66, L. 511-89 through L. 511-97; Internal Control Order articles 
106, 111, 114-15, 121-22, 130-34, 146-86, 211-12, 214-15; Prudential 
Supervision and Risk Assessment Order article 7; CRR articles 286-88 
and 293; and EMIR Margin RTS article 2.
    (2) Trade acknowledgement and verification. The requirements of 
Exchange Act rule 15Fi-2, provided that the Covered Entity is subject 
to and complies with the requirements of MiFID article 25(6), MFC 
article L. 533-15, MiFID Org Reg articles 59-61, EMIR article 11(1)(a) 
and EMIR RTS article 12.
    (3) Portfolio reconciliation and dispute reporting. The 
requirements of Exchange Act rule 15Fi-3, provided that:
    (i) The Covered Entity is subject to and complies with the 
requirements of EMIR article 11(1)(b) and EMIR RTS article 13 and 15;
    (ii) The Covered Entity provides the Commission with reports 
regarding disputes between counterparties on the same basis as it 
provides those reports to competent authorities pursuant to EMIR RTS 
article 15(2).
    (4) Portfolio compression. The requirements of Exchange Act rule 
15Fi-4, provided that the Covered Entity is subject to and complies 
with the requirements of EMIR RTS article 14.
    (5) Trading relationship documentation. The requirements of 
Exchange Act rule 15Fi-5, other than paragraph (b)(5) to that rule when 
the counterparty is a U.S. person, provided that:
    (i) The Covered Entity is subject to and complies with the 
requirements of MiFID article 25(5), MFC article L. 533-15, MiFID Org 
Reg articles 24, 58, 73 and applicable parts of Annex I, and EMIR 
Margin RTS article 2; and
    (ii) The Covered Entity does not treat the applicable counterparty 
as an ``eligible counterparty'' for purposes of MiFID article 30 and 
MFC article L. 533-14, in relation to the MiFID and MFC provisions 
specified in paragraph (b)(5)(i).
    (c) Substituted compliance in connection with capital and margin.
    (1) Capital. The requirements of Exchange Act section 15F(e) and 
Exchange Act rules 18a-1 through 18a-1d, provided that the Covered 
Entity is subject to and complies with the capital requirements of the 
CRR, including recitals 40, 43 and 87, and articles 26, 28, 50-52, 61-
63, 92, 111, 113(1), 114-122, 143, 153(8), 177(2), 283, 290, 300-311, 
312(2), 362-377, 382-383, 412(1), 413(1), 416(1), 427(1), 413, 429, 
430, and 499; MiFid Org. Reg., article 23(1); BRRD, articles 27(1), 
31(2), 31(1)(a) and (5), 32(5), 45(6) and 81(1); CRD, articles 73, 79, 
86, 97, 98(1)(e), 98(6), 99, 100(1), 102(1), 104, 104(1), 105, 129, 
129(1), 130, 130(1), 130(5), 131, 133, 133(1), 133(4), 141, 142, 
142(2), and 142(4); MFC articles L. 511-13, L. 511-15, 511-41-1 A, 511-
41-1 A(XIV), L. 511-41-1 B, L. 511-41-1 C, L. 511-41-3, L. 511-41-3.II, 
L. 511-41-3.III, L. 511-41-3.IV, L. 511-41-4, L. 511-41-5, L. 511-42, 
L. 532-6, L. 533-2-1, L. 533-2-2, L. 533-2-3, L. 612-24, R. 612-30, L. 
612-32, R. 612-32, L. 612-33.I, L. 612-33.II, L. 612-40, L. 613-44, L. 
613-49. L. 613-49.II, L. 613-50.I, L. 631-2-1; Decree of 3 November 
2014 on internal control, articles 10, 94-197, and 211-230; Ministerial 
Order on the Supervisory Review and Evaluation Process, articles 6-10; 
Decree of 3 November 2014 relating to capital buffers, articles 2, 16, 
23, 37, 38, 56-64; and EMIR Margin RTS, recital 31, articles 2, 3(b), 
7, and 19(1)(d)-(e), (3) and (8).
    (2) Margin. The requirements of Exchange Act section 15F(e) and 
Exchange Act rule 18a-3, provided that the Covered Entity is subject to 
and complies with the requirements of: EMIR article 11; EMIR Margin 
RTS; CRR articles 103, 105(3); 105(10); 111(2), 224, 285, 286, 286(7), 
290, 295, 296(2)(b), 297(1), 297(3), and 298(1); MiFID Org Reg. article 
23(1); CRD articles 74 and 79(b); MFC articles L.511-41-1-B, L.533-2-2, 
L.533-29, I al. 1, and L. 511-55 al. 1; and Decree of 3 November 2014 
on internal control, article 114.
    (d) Substituted compliance in connection with internal supervision 
and compliance requirements and certain Exchange Act section 15F(j) 
requirements.
    This Order extends to the following provisions related to internal 
supervision and compliance and Exchange Act section 15F(j) 
requirements:
    (1) Internal supervision. The requirements of Exchange Act rule 
15Fh-3(h) and Exchange Act sections 15F(j)(4)(A) and (j)(5), provided 
that:
    (i) The Covered Entity is subject to and complies with the 
requirements identified in paragraph (d)(3);
    (ii) The Covered Entity complies with paragraph (d)(4) to this 
Order; and
    (iii) This paragraph (d) does not extend to the requirements of 
paragraph (h)(2)(iii)(I) to rule 15Fh-3 to the extent those 
requirements pertain to compliance with Exchange Act sections 
15F(j)(2), (j)(3), (j)(4)(B) and (j)(6), or to the general and 
supporting provisions of paragraph (h) to rule 15Fh-3 in connection 
with those Exchange Act sections.
    (2) Chief compliance officers. The requirements of Exchange Act 
section 15F(k) and Exchange Act rule 15Fk-1, provided that:
    (i) The Covered Entity is subject to and complies with the 
requirements identified in paragraph (d)(3) to this Order;
    (ii) All reports required pursuant to MiFID Org Reg article 
22(2)(c) must also:
    (A) Be provided to the Commission at least annually, and in the 
English language;
    (B) Include a certification that, under penalty of law, the report 
is accurate and complete; and
    (C) Address the firm's compliance with other applicable conditions 
to this Order in connection with requirements for which the Covered 
Entity is relying on this Order.
    (3) Applicable supervisory and compliance requirements. Paragraphs 
(d)(1) and (d)(2) are conditioned on the Covered Entity being subject 
to and complying with the following requirements: MiFID articles 16 and 
23; MFC articles L. 533-2, L.533-10.II and III, L. 533-24 and L. 533-
24-1; MiFID Org Reg articles 21-37, 72-76 and Annex IV; CRD articles 
74, 76, 79-87, 88(1), 91(1)-(2), 91(7)-(9) and 92-95; and MFC L. 511-
41-1-B and L. 511-41-1-C, L. 511-51, L. 511-52.I, L. 511.53, L. 511-55 
through L. 511-69, L. 511-71 through 86, L. 511-89 through L. 511-97, 
L. 511-102, R. 511-16-2 and R. 511-16-3; Internal Control Order 
articles 106, 111, 114, 115, 121-22, 130-34, 146-86, 211-12, 214-15; 
Prudential Supervision and Risk Assessment Order article 7.
    (4) Additional condition to paragraph (d)(1). Paragraph (d)(1) 
further is conditioned on the requirement that Covered Entities comply 
with the provisions specified in paragraph (d)(3) as if those 
provisions also require compliance with:
    (i) Applicable requirements under the Exchange Act; and
    (ii) The other applicable conditions to this Order in connection 
with requirements for which the Covered Entity is relying on this 
Order.
    (e) Substituted compliance in connection with counterparty 
protection requirements.
    This Order extends to the following provisions related to 
counterparty protection:
    (1) Disclosure of information regarding material risks and 
characteristics. The requirements of Exchange Act rule 15Fh-3(b) 
relating to disclosure of material risks and characteristics of a 
security-based swap, provided that the Covered Entity is subject to and 
complies with the requirements of MiFID article 24(4);

[[Page 85741]]

MFC L. 533-12.II and D. 533-15; and MiFID Org Reg articles 48-50, in 
each case in relation to that security-based swap.
    (2) Disclosure of information regarding material incentives or 
conflicts of interest. The requirements of Exchange Act rule 15Fh-3(b) 
relating to disclosure of material incentives or conflicts of interest 
that a Covered Entity may have in connection with a security-based 
swap, provided that the Covered Entity, in relation to that security-
based swap, is subject to and complies with the requirements of either:
    (i) MiFID article 23(2)-(3); MFC L. 533-10.II(3); and MiFID Org Reg 
articles 33-35;
    (ii) MiFID article 24(9); MFC L. 533-12-4; MiFID Delegated 
Directive article 11(5); and AMF General Regulation article 314-17; or
    (iii) MAR article 20(1).
    (3) ``Know your counterparty.'' The requirements of Exchange Act 
rule 15Fh-3(e), provided that the Covered Entity is subject to and 
complies with the requirements of MiFID article 16(2); MFC L 533-
10.II(2); MiFID Org Reg articles 21-22, 25-26 and applicable parts of 
Annex I; CRD articles 74(1) and 85(1); MFC L. 511-55 and L. 511-41-1-B; 
MLD articles 11 and 13; MFC L. 561-5, L. 561-5-1, L. 561-6, L. 561-10, 
L. 561-4-1, R. 561-5, R. 561-5-1, R. 561-5-2, R. 561-5-4, R. 561-7, R. 
561-10-3, R. 561-11-1 and R. 561-12; MLD articles 8(3) and 8(4)(a) as 
applied to internal policies, controls and procedures regarding 
recordkeeping of customer due diligence activities; and MFC L. 561-4-1 
as applied to vigilance measures regarding recordkeeping of customer 
due diligence activities, in each case in relation to that security-
based swap.
    (4) Suitability. The requirements of Exchange Act rule 15Fh-3(f), 
provided that:
    (i) The Covered Entity is subject to and complies with the 
requirements of MiFID articles 24(2)-(3) and 25(1)-(2); MFC L. 533-24, 
L. 533-24-1, L. 533-12(I), L. 533-12-6 and L. 533-13(I); and MiFID Org 
Reg articles 21(1)(b) and (d), 54 and 55, in each case in relation to 
the recommendation of a security-based swap or trading strategy 
involving a security-based swap that is provided by or on behalf of the 
Covered Entity; and
    (ii) The counterparty to which the Covered Entity makes the 
recommendation is a ``professional client'' mentioned in MiFID Annex II 
section I and MFC D. 533-11 and is not a ``special entity'' as defined 
in Exchange Act section 15F(h)(2)(C) and Exchange Act rule 15Fh-2(d).
    (5) Fair and balanced communications. The requirements of Exchange 
Act rule 15Fh-3(g), provided that the Covered Entity, in relation to 
the relevant communication, is subject to and complies with the 
requirements of:
    (i) Either MiFID articles 24(1), (3) and MFC L. 533-11 and L. 533-
12.I or MiFID article 30(1) and MFC L. 533-20; and
    (ii) MiFID articles 24(4)-(5); MFC L. 533-12(II)-(III) and D. 533-
15; MiFID Org Reg articles 46-48; MAR articles 12(1)(c) and 15; and MAR 
Investment Recommendations Regulation article 5.
    (6) Daily mark disclosure. The requirements of Exchange Act rule 
15Fh-3(c), provided that the Covered Entity is required to reconcile, 
and does reconcile, the portfolio containing the relevant security-
based swap on each business day pursuant to EMIR articles 11(1)(b) and 
11(2) and EMIR RTS article 13.
    (f) Substituted compliance in connection with recordkeeping, 
reporting, notification, and securities count requirements.
    This Order extends to the following provisions related to 
Commission requirements to:
    (1) Make and keep current certain records. The requirements to make 
and keep current records of Exchange Act rule 18a-5 applicable to 
security-based swap dealers and major security-based swap participants; 
provided that:
    (i) The Covered Entity is subject to and complies with the 
following requirements: CRR articles 103 and 105; EMIR articles 9(2), 
11(1), and 39(4)-(5); EMIR RTS 148/2013; MiFID articles 9(1), 16(3), 
16(6)-16(9), 25(1), 25(2), 25(5), and 25(6); MiFID Delegated Directive 
articles 2 and 8; MiFID Org Reg. articles 16(7), 21(1)(a), 35, 59, 72, 
73, 74, 75, 76, Annex I, and Annex IV; MiFIR article 25; MLD4 articles 
11 and 13; EBA/ESMA Guidelines on Management Suitability guidelines 74, 
75, and 172, and Annex III; CRD articles 73, 88, 91(1), and 91(8); MFC 
articles L. 511-41-1-B, L. 511-51 through L. 511-103, L. 533-2-2, L. 
533-10 II and III, L. 533-13, L. 533-14, L. 533-15, L. 533-25, L. 561-
4-1, L. 561-5, L. 561-5-1, L. 561-6, R. 561-5, R. 561-5-1, R. 561-5-2, 
R. 561-5-3, R. 561-7, R. 561-10 II, R. 561-10-3, R. 561-11-1, R. 561-
12, R. 561-15, R. 561-16, R. 561-18, R. 561-19; Internal Control Order; 
Decree of 6 September 2017 articles 3 and 10; Ministerial Order on the 
Supervisory Review and Evaluation Process; and AMF General Regulation 
article 312-6;
    (ii)(A) The Covered Entity preserves all of the data elements 
necessary to create the records required by Exchange Act rules 18a-
5(a)(1), (2), (3), (4), and (7) (if not prudentially regulated) or 
Exchange Act rules 18a-5(b)(1), (2), (3), and (7) (if prudentially 
regulated); and
    (B) The Covered Entity upon request furnishes promptly to 
representatives of the Commission the records required by those rules;
    (iii) The Covered Entity makes and keeps current the records 
required by Exchange Act rules 18a-5(a)(13) and (14) (if not 
prudentially regulated) or Exchange Act rules 18a-5(b)(9) and (10) (if 
prudentially regulated) if the Covered Entity is not exempt from the 
requirements of Exchange Act rule 18a-4;
    (iv) The Covered Entity makes and keeps current the records 
required by Exchange Act rule 18a-5(a)(16) (if not prudentially 
regulated) or Exchange Act rule 18a-5(b)(12) (if prudentially 
regulated); and
    (v) Except with respect to requirements of Exchange Act rules 15Fh-
3 and 15Fk-1 to which this Order extends pursuant paragraphs (d)(2) and 
(e), the Covered Entity makes and keeps current the records required by 
Exchange Act rule 18a-5(a)(17) (if not prudentially regulated) or 
Exchange Act rule 18a-5(b)(13) (if prudentially regulated).
    (2) Preserve records. The record preservation requirements of 
Exchange Act rule 18a-6 applicable to security-based swap dealers and 
major security-based swap participants; provided that:
    (i) The Covered Entity is subject to and complies with the 
following requirements: CRD articles 73, 75-88, 91(1), and 91(8); CRR 
articles 99, 104(1)(j), 176, 286, 293(1)(d), 294, 394, 415-428, and 
430; CRR Reporting ITS article 14 and Annexes I-V, VIII-XIII; EMIR 
articles 9(1), 9(2), and 11; MiFID articles 9(1), 16(2), 16(3), 16(5), 
16(6) 24(9), 25(5), 25(6), and 69(2); MiFID Org Reg. articles 21(1)(a), 
21(2), 22(3)(c), 23, 24, 25(2), 26, 29(2)(c), 31(1), 35, 58, 59, 72(1), 
72(3), 73, and 76; MiFIR articles 16(2), 16(5), 16(6), 16(7), 25(1), 
25(5), 31(1) and 72; MLD4 articles 11 and 13; EMIR RTS; EBA/ESMA 
Guidelines on Management Suitability guidelines 74, 75, and 172, and 
Annex III; EBA/GL/2016/10 on ICAAP/ILAAP; EBA Guidelines on Outsourcing 
section 13.3; MiFID Delegated Directive article 11; MFC articles L. 
321-8-4, L. 511-41-1-B, L. 511-51 through L. 511-88, L. 533-2, L. 533-
10, L. 533-14, L. 533-15, L. 561-4-1, L. 561-5, L. 561-5-1, L. 561-6, 
L. 621-8-4, L. 621-9, L. 621-10, R. 561-5, R. 561-5-1, R. 561-5-2, R. 
561-5-3, R. 561-7, R. 561-10 II, R. 561-10-3, R. 561-11-1, R. 561-12, 
R. 561-15, R. 561-16, R. 561-18, R. 561-19; AMF General Regulation 
articles 314-16 and

[[Page 85742]]

314-17; Internal Control Order article 258; Ministerial Order on the 
Supervisory Review and Evaluation Process; and ACPR Instruction no. 
2017-I-24, as amended or superseded from time to time;
    (ii) The Covered Entity preserves the records required by Exchange 
Act rule 18a-6(b)(1)(viii)(L) (if not prudentially regulated) or 
Exchange Act rule 18a-6(b)(2)(v) (if prudentially regulated) if the 
Covered Entity is not exempt from the requirements of Exchange Act rule 
18a-4;
    (iii) Except with respect to requirements of Exchange Act rules 
15Fh-3 and 15Fk-1 to which this Order extends pursuant to paragraphs 
(d)(2) and (e), the Covered Entity preserves the records required by 
Exchange Act rule 18a-6(b)(1)(xii) (if not prudentially regulated) or 
Exchange Act rule 18a-6(b)(2)(vii) (if prudentially regulated); and
    (iv) The Covered Entity preserves the records required by Exchange 
Act rule 18a-6(b)(1)(xi) and (b)(1)(xiii) (if not prudentially 
regulated) or Exchange Act rule 18a-6(b)(2)(vi) and (b)(2)(viii) (if 
prudentially regulated).
    (3) File Reports. The reporting requirements of Exchange Act rule 
18a-7 applicable to security-based swap dealers and major security-
based swap participants; provided that:
    (i) The Covered Entity is subject to and complies with the 
following requirements: CRR articles 26(2), 99, 104(1)(j), 132(5), 154, 
191, 321, 325bi, 350, 353, 368, 394, 415-428, 430, and 431-455; CRR 
Reporting ITS chapter 2 and Annexes I-V and VII-XIII; CRD article 89; 
MiFID article 16(8)-(10); MiFID Delegated Directive articles 2, 8, 
72(2), Annex I; Commission Delegated Regulation (EU) 2017/1443, as 
amended or superseded from time to time; MFC articles L. 511-45 and L. 
533-10; Accounting Directive article 34; Decree of 6 September 2017 
articles 3 and 10; French Commerce Code articles L. 232-1, R. 232-1 
through R. 232-8, and L. 823-1 through L. 823-8-1; and AMF General 
Regulation articles 312-6 and 312-7;
    (ii) The Covered Entity files periodic unaudited financial and 
operational information with the Commission or its designee in the 
manner and format required by Commission rule or order and presents the 
financial information in the filing in accordance with generally 
accepted accounting principles that the Covered Entity uses to prepare 
general purpose publicly available or available to be issued financial 
statements in France;
    (iii) With respect to financial statements the Covered Entity is 
required to file annually with French and/or European authorities, 
including a report of an independent public accountant covering the 
financial statements, the Covered Entity (if not prudentially 
regulated):
    (A) Simultaneously transmits to the principal office of the 
Commission or to an email address provided on the Commission's website 
a copy of such annual financial statements and the report of the 
independent public accountant covering the annual financial statements;
    (B) Includes with the transmission the contact information of an 
individual who can provide further information about the annual 
financial statements and report;
    (C) Includes with the transmission the report of an independent 
public accountant required by Exchange Act rule 18a-7(c)(1)(i)(C) 
covering the annual financial statements if French or EU laws do not 
require the Covered Entity to engage an independent public accountant 
to prepare a report covering the annual financial statements; provided, 
however, that such report of the independent public accountant may be 
prepared in accordance with generally accepted auditing standards in 
France or the EU that the independent public accountant uses to perform 
audit and attestation services; and
    (D) Includes with the transmission the reports required by Exchange 
Act rule 18a-7(c)(1)(i)(B) and (C) addressing the statements identified 
in Exchange Act rule 18a-7(c)(3) or (c)(4), as applicable, that relate 
to Exchange Act rule 18a-4; provided, however, that the report of the 
independent public accountant required by Exchange Act Rule 18a-
7(c)(1)(i)(C) may be prepared in accordance with generally accepted 
auditing standards in France or the EU that the independent public 
accountant uses to perform audit and attestation services.
    (4) Provide Notification. The notification requirements of Exchange 
Act rule 18a-8 applicable to security-based swap dealers and major 
security-based swap participants; provided that:
    (i) The Covered Entity is subject to and complies with the 
following requirements: CRD IV article 71; MiFID article 73; MFC 
articles L. 511-33 II, L. 634-1, and L. 634-2;
    (ii) The Covered Entity:
    (A) Simultaneously transmits to the principal office of the 
Commission or to an email address provided on the Commission's website 
a copy of any notice required to be sent by the French and EU laws 
referenced in paragraph (f)(3)(i) of this order; and
    (B) Includes with the transmission the contact information of an 
individual who can provide further information about the matter that is 
the subject of the notice;
    (iii) The Covered Entity complies with notification requirements of 
Exchange Act rule 18a-8(e) that relate to Exchange Act rule 18a-4 if 
the Covered Entity is not exempt from Exchange Act rule 18a-4; and
    (iv) The Covered Entity complies with notification requirements of 
Exchange Act rule 18a-8(g) if the Covered Entity is not exempt from 
Exchange Act rule 18a-4.
    (5) Perform Securities Count. The securities count requirements of 
Exchange Act rule 18a-9 applicable to non-prudentially regulated 
security-based swap dealers and major security-based swap participants; 
provided that:
    (i) The Covered Entity is subject to and complies with the 
following requirements: MiFID Delegated Directive articles 2 and 8; 
MiFID Org Reg. articles 74 and 75; EMIR article 11(1)(b); Decree of 6 
September 2017 articles 3 and 10; AMF General Regulation articles 312-6 
and 312-7.
    (6) Examination and Production of Records. Notwithstanding the 
forgoing provisions of paragraph (f) of this Order, security-based swap 
dealers and major security-based swap participants remains subject to 
the requirement of Exchange Act section 15F(f) to keep books and 
records open to inspection by any representative of the Commission and 
the requirement of Exchange Act rule 18a-6(g) to furnish promptly to a 
representative of the Commission legible, true, complete, and current 
copies of those records of the Covered Entity that are required to be 
preserved under Exchange Act rule 18a-6, or any other records of the 
Covered Entity that are subject to examination or required to be made 
or maintained pursuant to Exchange Act section 15F that are requested 
by a representative of the Commission.
    (g) Definitions.
    (1) ``Covered Entity'' means an entity that:
    (i) Is a security-based swap dealer or major security-based swap 
participant registered with the Commission;
    (ii) Is not a ``U.S. person,'' as that term is defined in rule 
3a71-3(a)(4) under the Exchange Act; and
    (iii) Is an investment firm authorized by the AMF to provide 
investment services or perform investment activities in the French 
Republic or a credit institution authorized by the ACPR after approval 
by the AMF of the credit institution's program of operations to provide 
investment services or perform investment activities in the French 
Republic.

[[Page 85743]]

    (2) ``MiFID'' means the ``Markets in Financial Instruments 
Directive,'' Directive 2014/65/EU, as amended or superseded from time 
to time.
    (3) ``MFC'' means France's ``Code mon[eacute]taire et financier,'' 
as amended or superseded from time to time.
    (4) ``Internal Control Order'' means the French AMF's 
Arr[ecirc]t[eacute] of 3 November 2014 on Internal Control of Companies 
in the Banking, Payment Services and Investment Services Sector Subject 
to the Supervision of the Authorit[eacute] de Contr[ocirc]le Prudentiel 
et de R[eacute]solution, as amended or superseded from time to time.
    (5) ``Prudential Supervision and Risk Assessment Order'' means the 
French ministerial order on prudential supervision and risk assessment, 
as amended or superseded from time to time.
    (6) ``MiFID Org Reg'' means Commission Delegated Regulation (EU) 
2017/565, as amended or superseded from time to time.
    (5) ``MiFID Delegated Directive'' means Commission Delegated 
Directive (EU) 2017/593, as amended or superseded from time to time.
    (6) ``MLD'' means Directive (EU) 2015/849, as amended or superseded 
from time to time.
    (7) ``MiFIR'' means Regulation (EU) 600/2014, as amended or 
superseded from time to time.
    (8) ``EMIR'' means the ``European Market Infrastructure 
Regulation,'' Regulation (EU) 648/2012, as amended or superseded from 
time to time.
    (9) ``EMIR RTS'' means Commission Delegated Regulation (EU) 149/
2013, as amended or superseded from time to time.
    (10) ``EMIR Margin RTS'' means Commission Delegated Regulation (EU) 
2016/2251, as amended or superseded from time to time.
    (11) ``CRR Reporting ITS'' means Commission Implementing Regulation 
(EU) 680/2014, as amended or superseded from time to time.
    (12) ``CRD'' means Directive 2013/36/EU, as amended or superseded 
from time to time.
    (13) ``CRR'' means Regulation (EU) 575/2013, as amended or 
superseded from time to time.
    (14) ``MAR'' means the ``Market Abuse Regulation,'' Regulation (EU) 
596/2014, as amended or superseded from time to time.
    (15) ``MAR Investment Recommendations Regulation'' means Commission 
Delegated Regulation (EU) 2016/958, as amended or superseded from time 
to time.
    (16) ``AMF'' means the French Autorit[eacute] des March[eacute]s 
Financiers.
    (17) ``ACPR'' means the French Authorit[eacute] de Contr[ocirc]le 
Prudentiel et de R[eacute]solution.
    (18) ``ECB'' means the European Central Bank.
    (19) ``Accounting Directive'' means Directive 2013/34/EU of the 
European Parliament and of the Council of 26 June 2013, as amended or 
superseded from time to time.
    (20) ``Decree of 6 September 2017'' means France's Decree number 
2017-1324 of 6 September 2017, as amended or superseded from time to 
time.
    (21) ``AMF General Regulation'' means France's ``R[egrave]glement 
G[eacute]n[eacute]ral de L'Autorit[eacute] des March[eacute]s 
Financiers,'' as amended or superseded from time to time.
    (22) ``Ministerial Order on the Supervisory Review and Evaluation 
Process'' means France's Arr[ecirc]t[eacute] of 3 November 2014 on the 
Process for Prudential Supervision and Risk Assessment of Banking 
Service Providers and Investment Firms Other than Portfolio Management 
Companies, as amended or superseded from time to time.
    (23) ``French Commerce Code'' means the French Commercial Code, as 
amended or superseded from time to time.
    (24) ``Prudentially regulated'' means a Covered Entity that has a 
``prudential regulator'' as that term is defined in Exchange Act 
section 3(a)(74).
    (25) ``Decree of 3 November 2014 on internal control'' means 
Arr[ecirc]t[eacute] of 3 November 2014 on internal control of companies 
in the banking, payment services and investment services sector subject 
to the supervision of the ACPR.
    (26) ``Decree of 3 November 2014 relating to capital buffers'' 
means Arr[ecirc]t[eacute] of 3 November 2014 relating to the capital 
buffers of banking service providers and investment firms other than 
portfolio management companies.
    (27) ``BRRD'' means Bank Recovery and Resolution Directive 2014/59/
EU of the European Parliament and of the Council of 15 May 2014, as 
amended or superseded from time to time.

[FR Doc. 2020-28697 Filed 12-28-20; 8:45 am]
BILLING CODE 8011-01-P


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