Document ID: SEC-2018-1706-0001
Agency: sec
Document Type: Rule
Title: Statement on Certain Provisions of Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants
Posted Date: 2018-11-06T05:00Z

[Federal Register Volume 83, Number 215 (Tuesday, November 6, 2018)]
[Rules and Regulations]
[Pages 55486-55488]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-24213]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-84511; File No. S7-24-18]
RIN 3235-AL10

Commission Statement on Certain Provisions of Business Conduct 
Standards for Security-Based Swap Dealers and Major Security-Based Swap 
Participants

AGENCY: Securities and Exchange Commission.

ACTION: Commission statement.

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SUMMARY: The Commission is issuing a statement regarding certain 
provisions of its Business Conduct Standards for Security-Based Swap 
Dealers and Major Security-Based Swap Participants. The statement sets 
forth the Commission's position, for five years after the compliance 
date for the security-based swap dealer and major security-based swap 
participant registration rules, that certain actions with respect to 
provisions of the Commission's business conduct standards will not 
provide a basis for a Commission enforcement action.

DATES: The Commission's statement is effective November 6, 2018.

FOR FURTHER INFORMATION CONTACT: Lourdes Gonzalez, Assistant Chief 
Counsel; Joanne Rutkowski, Assistant Chief Counsel; Devin Ryan, Senior 
Special Counsel; Kelly Shoop, Special Counsel; or Neel Maitra, Special 
Counsel, at 202-551-5550, in the Division of Trading and Markets, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549.

SUPPLEMENTARY INFORMATION: 

I. Introduction

    In 2012 the U.S. Commodity Futures Trading Commission (``CFTC'') 
adopted business conduct rules for swap dealers and major swap 
participants (``CFTC's Business Conduct Rules'').\1\ To assist the 
swaps industry in implementing and complying with the CFTC's Business 
Conduct Rules, industry participants developed standardized 
counterparty

[[Page 55487]]

relationship documentation that has been in force since 2012, and is 
currently used by over 22,000 counterparties.\2\
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    \1\ Business Conduct Standards for Swap Dealers and Major Swap 
Participants with Counterparties, 77 FR 9734 (Feb. 17, 2012).
    \2\ See International Swaps and Derivatives Association, Inc. 
(``ISDA'') DF Protocol, List of Adhering Parties, available at 
https://www.isda.org/protocol/isda-august-2012-df-protocol/adhering-parties.
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    In 2016, pursuant to Section 15F of the Securities Exchange Act of 
1934 (``Exchange Act''),\3\ the Commission adopted final rules imposing 
business conduct standards (the ``SEC's Business Conduct Rules'') for 
security-based swap dealers (``SBS Dealers'') and major security-based 
swap participants (``Major SBS Participants'' and, together with SBS 
Dealers, ``SBS Entities'').\4\ As noted in the Commission's Adopting 
Release, the Commission endeavored to harmonize its rules with 
analogous CFTC requirements where possible to create efficiencies for 
entities that have already established infrastructure for compliance 
with analogous CFTC requirements.\5\ In certain instances, however, the 
Commission's requirements, and the associated representations that 
would be required under standardized counterparty relationship 
documentation, diverge from those of the analogous CFTC requirements, 
which are reflected in existing standardized counterparty relationship 
documentation. Market participants have expressed concerns about 
practical compliance difficulties presented by certain of these 
differences.\6\
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    \3\ In this document, all references to ``Rules'' shall mean 
those under the Exchange Act.
    \4\ Business Conduct Standards for Security-Based Swap Dealers 
and Major Security-Based Swap Participants, 81 FR 29960 (May 13, 
2016) (``Adopting Release''). Although the rules are now effective, 
the Commission determined not to require compliance with them until 
entities are required to register as SBS Dealers or Major SBS 
Participants. See id. at 30081.
    \5\ Id. at 29964.
    \6\ See, e.g., Letter from Securities Industry and Financial 
Markets Association (``SIFMA'') and Institute of International 
Bankers, June 21, 2018 (``SIFMA June 2018 Letter''); Letter from 
Church Alliance to Brett Redfearn, June 26, 2018 (``Church Alliance 
June 2018 Letter'').
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    The Commission is mindful of the time and costs that may be 
associated with a documentation initiative that would be undertaken 
solely to address the SEC's Business Conduct Rules. Therefore, to 
minimize potential market disruptions to existing counterparty 
relationships resulting solely from documentation implementation issues 
(upon their compliance date when compliance will first be required), 
for a limited time period, the Commission takes the position that 
certain actions with respect to provisions of the SEC's Business 
Conduct Rules will not provide a basis for a Commission enforcement 
action, as set forth below.\7\
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    \7\ To the extent there are additional differences between the 
CFTC's Business Conduct Rules and the SEC's Business Conduct Rules 
that otherwise present documentation implementation difficulties 
that could result in potential for market disruption, the Commission 
encourages market participants to provide that information to the 
Commission.
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II. Commission Position

    The Commission's position \8\ is expressly limited to the SEC's 
Business Conduct Rules, 17 CFR 240.15Fh-1 (Rule 15Fh-1) through 
240.15Fh-6 (Rule 15Fh-6), set forth below. The Commission emphasizes 
that its position is limited to the Commission's enforcement discretion 
with respect to Rules 15Fh-1 through 15Fh-6, and does not modify or 
change any contractual rights between counterparties to security-based 
swaps. Further, nothing in the Commission's position excuses compliance 
with Rule 15Fh-1(b), under which an SBS Entity cannot rely on a 
representation if it has information that would cause a reasonable 
person to question the accuracy of the representation.\9\ Unless 
specified below, all terms shall have the definitions set forth in 
Exchange Act Section 15F(h) and Rules 15Fh-1 through 15Fh-6. Finally, 
the Commission's position applies only to the exercise of its 
enforcement discretion as set forth in subsections A. through D. below, 
and only until five years after the compliance date for the SBS Entity 
registration rules.
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    \8\ The Commission's position is an agency statement of general 
applicability with future effect designed to implement, interpret, 
or prescribe law or policy.
    \9\ See Section II.D., infra, for the Commission's position on 
written representations that were previously obtained in connection 
with swaps.
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A. Non-ERISA Employee Benefit Plans

    For purposes of the provisions relating to special entities under 
Rules 15Fh-1 through 15Fh-6, it would not provide a basis for an 
enforcement action if an SBS Entity considers an employee benefit plan 
as defined in Rule 15Fh-2(d)(4) \10\ not to be a special entity where: 
(i) The plan has previously represented in writing to the SBS Entity 
that it is not a special entity for swap purposes under the CFTC's 
Business Conduct Rules; (ii) at a reasonably sufficient time \11\ prior 
to entering into a security-based swap with the plan, the SBS Entity 
notifies the plan in writing that it may opt into special entity status 
under Rule 15Fh-2(d)(4); \12\ and (iii) the plan does not opt into 
special entity status.
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    \10\ Rule 15Fh-2(d)(4) defines ``special entity'' to include: 
``An employee benefit plan as defined in section 3 of the Employee 
Retirement Income Security Act of 1974 (29 U.S.C. 1002) and not 
otherwise defined as a special entity, unless such employee benefit 
plan elects not to be a special entity by notifying a security-based 
swap dealer or major security-based swap participant of its election 
prior to entering into a security-based swap with the particular 
security-based swap dealer or major security-based swap 
participant.''
    \11\ See, e.g., Adopting Release, 81 FR at 29982 (``[I]t is 
important that the required disclosures be made at a reasonably 
sufficient time before the execution of the transaction to allow the 
counterparty to assess the disclosures.'').
    \12\ This notification requirement mirrors the approach set 
forth in CFTC Regulation at 17 CFR 23.401(c)(6).
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B. Written Representations: SBS Dealers Not Acting as Advisors

    Reliance on the representations described below during the five 
years in which this Commission position is in effect would not provide 
a basis for an enforcement action:
     An SBS Dealer seeking to establish that it is not acting 
as an advisor to a special entity within the meaning of Rule 15Fh-2(a) 
relies on a written representation that a special entity will not rely 
on recommendations provided by the SBS Dealer \13\ instead of having 
the special entity represent in writing that it acknowledges that the 
SBS Dealer is not acting as an advisor when the SBS Dealer recommends a 
security-based swap or a trading strategy that involves the use of a 
security-based swap to the special entity.\14\
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    \13\ This written representation mirrors the requirement set 
forth in CFTC Regulation at 17 CFR 23.440(b)(2)(ii), the analogous 
provision to Rule 15Fh-2(a)(2)(i)(A).
    \14\ See Rule 15Fh-2(a)(2)(i)(A).
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     With respect to a special entity as defined in Rule 15Fh-
2(d)(3) (e.g., an employment plan subject to Title I of the Employee 
Retirement Income Security Act of 1974 (29 U.S.C. 1002) (``ERISA 
Special Entity'')), an SBS Dealer relies on a representation from the 
ERISA Special Entity's fiduciary that such fiduciary is not relying on 
recommendations provided by the SBS Dealer \15\ instead of having the 
fiduciary represent in writing that it acknowledges that the SBS Dealer 
is not acting as an advisor when it recommends a security-based swap or 
a trading strategy that involves the use of a security-based swap to 
the ERISA Special Entity.\16\
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    \15\ This written representation mirrors the requirement set 
forth in CFTC Regulation 23.440(b)(1)(ii), the analogous provision 
to Rule 15Fh-2(a)(1)(ii).
    \16\ See Rule 15Fh-2(a)(1)(ii).
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     An SBS Dealer relies on a written representation from the 
ERISA Special Entity that any recommendation it receives from the SBS 
Dealer materially affecting a security-based swap transaction will be 
evaluated by a

[[Page 55488]]

fiduciary before the transaction occurs, instead of having an ERISA 
Special Entity represent in writing that any recommendation it receives 
from the SBS Dealer involving a security-based swap transaction will be 
evaluated by a fiduciary before the transaction is entered into.\17\
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    \17\ See Rule 15Fh-2(a)(1)(iii)(B). This written representation 
mirrors the requirement set forth in CFTC Regulation 23.440(b), the 
analogous provision to Rule 15Fh-2(a)(1)(iii)(B).
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C. Safe Harbor for SBS Dealers and Major SBS Participants Acting as 
Counterparties to Special Entities

    Rule 15Fh-5(b) provides a safe harbor for SBS Entities acting as 
counterparties to a special entity other than an ERISA Special Entity. 
As set forth in Rule 15Fh-5(b)(1)(ii)(B), to avail itself of the safe 
harbor the SBS Entity must among other things, obtain written 
representations from the representative of the special entity (the 
``qualified independent representative'') that such representative: (1) 
Meets the independence test as required by Rule 15Fh-5(a)(1)(vii); (2) 
has the knowledge required under Rule 15Fh-5(a)(1)(i); (3) is not 
subject to a statutory disqualification under Rule 15Fh-5(a)(1)(ii); 
(4) undertakes a duty to act in the best interests of the special 
entity as required by Rule 15Fh-5(a)(1)(iii); and (5) is subject to the 
requirements regarding political contributions, as applicable, under 
Rule 15Fh-5(a)(1)(vi).
    It would not provide a basis for an enforcement action with respect 
to relying on the safe harbor in Rule 15Fh-5(b)(1)(ii)(B) if, during 
the five years in which this Commission position is in effect, instead 
of obtaining these written representations, an SBS Entity relies on a 
written representation from the qualified independent representative 
that the representative has written policies and procedures reasonably 
designed to ensure that the representative satisfies the requirements 
for acting as a qualified independent representative.\18\ This position 
is applicable only to the written representations set forth in Rule 
15Fh-5(b)(1)(ii)(B) and is only applicable where the SBS Entity meets 
all other Commission requirements as set forth in Rule 15Fh-5(b).
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    \18\ The Commission notes that this written representation is 
already required by Rule 15Fh-5(b)(1)(ii)(A), and mirrors the 
analogous requirement set forth in CFTC Regulation at 17 CFR 
23.450(d)(1)(ii)(A).
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D. Reliance on Previously-Obtained Written Representations

    Finally, Rule 15Fh-1(b), as noted above, permits an SBS Entity to 
rely on written representations from the counterparty or its 
representative to satisfy its due diligence requirements under Rules 
15Fh-1 through 15Fh-6, unless the SBS Entity has information that would 
cause a reasonable person to question the accuracy of the 
representation. As the Commission stated when adopting the rule, the 
question of whether reliance on representations that had been obtained 
with respect to the CFTC's Business Conduct Rules would satisfy an SBS 
Entity's obligations under the SEC's Business Conduct Rules will depend 
on the facts and circumstances of the particular matter.\19\ The 
Commission's position is that, for purposes of Rule 15Fh-1(b), it would 
not provide a basis for an enforcement action if, during the five years 
in which this Commission position is in effect, an SBS Dealer relies on 
representations from a counterparty or representative that were 
previously provided in relation to swaps if the SBS Dealer is not aware 
of information that would cause a reasonable person to question the 
accuracy of the representation if the representation were given in 
relation to security-based swaps.\20\
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    \19\ See Adopting Release, 81 FR at 29976.
    \20\ This position applies equally to the written 
representations addressed in Sections II.B. and C., supra.

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    By the Commission.

    Dated: October 31, 2018.
Brent J. Fields,
Secretary.
[FR Doc. 2018-24213 Filed 11-5-18; 8:45 am]
 BILLING CODE 8011-01-P