Document ID: SEC-2020-1767-0001
Agency: sec
Document Type: Notice
Title: Order: Exemptions in Connection with the Revision of the Definition of "Security" to Encompass Security-Based Swaps
Posted Date: 2020-11-05T05:00Z

[Federal Register Volume 85, Number 215 (Thursday, November 5, 2020)]
[Notices]
[Pages 70667-70678]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-24598]

[[Page 70667]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90308; File Nos. S7-27-11 and S7-24-11]

Order Granting Exemptions From Sections 8 and 15(a)(1) of the 
Securities Exchange Act of 1934 and Rules 3b-13(b)(2), 8c-1, 10b-10, 
15a-1(c), 15a-1(d) and 15c2-1 Thereunder in Connection With the 
Revision of the Definition of ``Security'' To Encompass Security-Based 
Swaps and Determining the Expiration Date for a Temporary Exemption 
From Section 29(b) of the Securities Exchange Act of 1934 in Connection 
With Registration of Security-Based Swap Dealers and Major Security-
Based Swap Participants

November 2, 2020.

I. Exemptions in Connection With the Revision of the Definition of 
``Security'' To Encompass Security-Based Swaps

A. Background

    Title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act \1\ amended the definition of ``security'' under the 
Exchange Act to expressly encompass security-based swaps. The expansion 
of the definition of the term ``security'' to include security-based 
swaps had the effect of changing the scope of the Exchange Act 
regulatory provisions that apply to security-based swaps and, in doing 
so, raised certain complex questions that required further 
consideration. In July 2011, the Commission issued an order, granting 
temporary exemptions from compliance with certain provisions of the 
Exchange Act, and the rules and regulations thereunder.\2\ The overall 
approach of that order was directed toward maintaining the status quo 
during the implementation process for the Dodd-Frank Act.\3\
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    \1\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010) (``Dodd-Frank Act'').
    \2\ See Order Granting Temporary Exemptions under the Securities 
Exchange Act of 1934 in Connection with the Pending Revisions of the 
Definition of ``Security'' to Encompass Security-Based Swaps, 
Exchange Act Release No. 64795 (Jul. 1, 2011), 76 FR 39927 (Jul. 7, 
2011) (``2011 Exchange Act Exemptive Order''). The 2011 Exchange Act 
Exemptive Order included two relevant exemptions. First, the 
Commission granted to any person who meets the definition of 
``eligible contract participant'' set forth in Section 1a(12) of the 
Commodity Exchange Act as in effect on July 20, 2010 (i.e., the day 
prior to the date the Dodd-Frank Act was signed into law) and who is 
not a registered broker or dealer or a self-regulatory organization 
a temporary exemption from certain provisions of the Exchange Act, 
and the rules and regulations thereunder, solely in connection with 
the person's activities involving security-based swaps. This 
temporary exemption was made available to a broker or dealer 
registered under Exchange Act Section 15(b)(11) and to a self-
regulatory organization in limited circumstances. Second, the 
Commission granted to a broker or dealer registered under Section 
15(b) of the Exchange Act (other than a broker or dealer registered 
under Section 15(b)(11) of the Exchange Act), a temporary exemption 
from certain provisions of the Exchange Act, and the rules and 
regulations thereunder, solely with respect to security-based swaps. 
See 2011 Exchange Act Exemptive Order, 76 FR at 39938-39. The 2011 
Exchange Act Exemptive Order did not provide exemptive relief for 
any provisions or rules prohibiting fraud, manipulation, or insider 
trading (other than prophylactic reporting or recordkeeping 
requirements such as the confirmation requirements of Exchange Act 
Rule 10b-10). In addition, the 2011 Exchange Act Exemptive Order did 
not affect the Commission's investigative, enforcement, and 
procedural authority related to those provisions and rules. See 2011 
Exchange Act Exemptive Order, 76 FR at 39931 n.34. The 2011 Exchange 
Act Exemptive Order also did not address Sections 12, 13, 14, 15(d), 
16, and 17A of the Exchange Act and the rules and regulations 
thereunder.
    \3\ See 2011 Exchange Act Exemptive Order, 76 FR at 39929. Under 
the 2011 Exchange Act Exemptive Order, instruments that were 
security-based swap agreements before July 16, 2011 (360 days after 
the enactment of the Dodd-Frank Act) (``Effective Date'') and 
constituted security-based swaps after the Effective Date were still 
subject to the application of those Exchange Act provisions. See 
2011 Exchange Act Exemptive Order, 76 FR at 39930 nn.24-25.
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    The Commission in 2011 set the temporary exemptions to expire on 
the compliance date for final rules defining the terms ``security-based 
swap'' and ``eligible contract participant,'' \4\ and since that time 
periodically has extended this deadline.\5\ Notably, in 2014, the 
Commission extended the expiration date for the temporary exemptions, 
distinguishing between: (1) The temporary exemptions related to pending 
security-based swap rulemakings (``Linked Temporary Exemptions''), the 
expiration dates for which were extended to the compliance dates for 
the specific rulemakings to which they were ``linked''; and (2) the 
temporary exemptions that generally were not directly related to a 
specific security-based swap rulemaking (``Unlinked Temporary 
Exemptions'').\6\

[[Page 70668]]

The approach to the Linked Temporary Exemptions was designed to 
facilitate timely, phased-in application of the relevant provisions of 
the Exchange Act to security-based swaps based on the Commission's 
finalization of the relevant rules mandated by the Dodd-Frank Act.\7\ 
The approach to the Unlinked Temporary Exemptions provided the 
Commission with flexibility, while its relevant rulemaking was still in 
progress, to determine whether continuing relief should be provided for 
any of the Exchange Act provisions subject to the Unlinked Temporary 
Exemptions.\8\ In January 2020, the Commission issued an order 
extending until November 5, 2020, the temporary exemptions related to 
three commenter requests discussed below.\9\ The remainder of the 
Unlinked Temporary Exemptions expired on February 5, 2020.\10\
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    \4\ See 2011 Exchange Act Exemptive Order, 76 FR at 39938.
    \5\ See Further Definition of ``Swap,'' ``Security-Based Swap,'' 
and ``Security-Based Swap Agreement''; Mixed Swaps; Security-Based 
Swap Agreement Recordkeeping, Exchange Act Release No. 67453 (Jul. 
18, 2012), 77 FR 48208 (Aug. 13, 2012) (``Product Definitions 
Adopting Release'') (extending the expiration date of the temporary 
exemptions to February 11, 2013); Order Extending Temporary 
Exemptions under the Securities Exchange Act of 1934 in Connection 
with the Revision of the Definition of ``Security'' to Encompass 
Security-Based Swaps, and Request for Comment, Exchange Act Release 
No. 68864 (Feb. 7, 2013), 78 FR 10218 (Feb. 13, 2013) (``2013 
Extension Order'') (extending the expiration date of the temporary 
exemptions to February 11, 2014); Order Extending Temporary 
Exemptions under the Securities Exchange Act of 1934 in Connection 
with the Revision of the Definition of ``Security'' to Encompass 
Security-Based Swaps, and Request for Comment, Exchange Act Release 
No. 71485 (Feb. 5, 2014), 79 FR 7731 (Feb. 10, 2014) (``2014 
Extension Order'') (extending the expiration dates (i) for certain 
``linked'' temporary exemptions related to then-pending security-
based swap rulemakings to the compliance dates for the related 
rulemakings and (ii) for certain other ``unlinked'' temporary 
exemptions not related to then-pending rulemakings to February 5, 
2017); Order Extending Certain Temporary Exemptions Under the 
Securities Exchange Act of 1934 in Connection With the Revision of 
the Definition of ``Security'' To Encompass Security-Based Swaps and 
Request for Comment, Exchange Act Release No. 79833 (Jan. 18, 2017), 
82 FR 8467 (Jan. 25, 2017) (``2017 Extension Order'') (extending the 
expiration date for the unlinked temporary exemptions to February 5, 
2018); Order Extending Until February 5, 2019 Certain Temporary 
Exemptions under the Securities Exchange Act of 1934 in Connection 
with the Pending Revision of the Definition of ``Security'' to 
Encompass Security-Based Swaps and Request for Comment, Exchange Act 
Release No. 82626 (Feb. 2, 2018), 83 FR 5665 (Feb. 18, 2018) (``2018 
Extension Order'') (extending the expiration date for the unlinked 
temporary exemptions to February 5, 2019); Order Granting a Limited 
Exemption from the Exchange Act Definition of ``Penny Stock'' for 
Security-Based Swap Transactions between Eligible Contract 
Participants; Granting a Limited Exemption from the Exchange Act 
Definition of ``Municipal Securities'' for Security-Based Swaps; and 
Extending Certain Temporary Exemptions under the Exchange Act in 
Connection with the Revision of the Definition of ``Security'' to 
Encompass Security-Based Swaps, Exchange Act Release No. 84991 (Jan. 
25, 2019), 84 FR 863 (Jan. 31, 2019) (``2019 Extension Order'') 
(extending the expiration date for the unlinked temporary exemptions 
to February 5, 2020); Order Extending Temporary Exemptions from 
Exchange Act Section 8 and Exchange Act Rules 8c-1, 10b-16, 15a-1, 
15c2-1 and 15c2-5 in Connection with the Revision of the Definition 
of ``Security'' to Encompass Security-Based Swaps, Exchange Act 
Release No. 87943 (Jan. 10, 2020), 85 FR 2763 (Jan. 16, 2020) 
(``January 2020 Extension Order'') (extending the expiration date 
for the unlinked temporary exemptions to November 5, 2020).
    \6\ See 2014 Extension Order, 79 FR at 7732-35. The 2014 
Extension Order identified the Linked Temporary Exemptions as those 
Expiring Temporary Exemptions related to: (1) Capital and margin 
requirements applicable to a broker or dealer (Exchange Act Sections 
7 and 15(c)(3), Regulation T, and Exchange Act Rules 15c3-1, 15c3-3, 
and 15c3-4); (2) recordkeeping requirements applicable to a broker 
or dealer (Exchange Act Sections 17(a) and 17(b) and Exchange Act 
Rules 17a-3, 17a-4, 17a-5, 17a-11, and 17a-13); (3) registration 
requirements under Exchange Act Section 15(a)(1), and the other 
requirements of the Exchange Act and the rules and regulations 
thereunder that apply to a ``broker'' or ``dealer'' that is not 
registered with the Commission; (4) Exchange Act Rule 10b-10; and 
(5) Regulation ATS. The remaining Expiring Temporary Exemptions are 
the Unlinked Temporary Exemptions. The Commission extended the 
Linked Temporary Exemptions until the compliance date for pending 
rulemakings concerning, as applicable: Capital, margin, and 
segregation requirements for security-based swap dealers and major 
security-based swap participants; recordkeeping and reporting 
requirements for security-based swap dealers and major security-
based swap participants; security-based swap trade acknowledgement 
and verification requirements; and registration requirements for 
security-based swap execution facilities. The Linked Temporary 
Exemptions linked to registration requirements for security-based 
swap execution facilities are not addressed in this Order and will 
be separately considered in connection with the rulemaking 
concerning those requirements. The Commission already has addressed 
other Linked Temporary Exemptions in the related security-based swap 
rulemakings. See, e.g., Capital, Margin, and Segregation 
Requirements for Security-Based Swap Dealers and Major Security-
Based Swap Participants and Capital and Segregation Requirements for 
Broker-Dealers, Exchange Act Release No. 86175 (Jun. 21, 2019), 84 
FR 43872, 43955-56 (Aug. 22, 2019) (``Capital, Margin and 
Segregation Adopting Release''); Recordkeeping and Reporting 
Requirements for Security-Based Swap Dealers, Major Security-Based 
Swap Participants, and Broker-Dealers, Exchange Act Release No. 
87005 (Sept. 19 2019), 84 FR 68550, 68601-02 (Dec. 16, 2019) 
(``Recordkeeping and Reporting Adopting Release''); Trade 
Acknowledgment and Verification of Security-Based Swap Transactions, 
Exchange Act Release No. 78011 (Jun. 8, 2016), 81 FR 39807, 39824-25 
n.189 (Jun. 17, 2016) (``Trade Acknowledgment and Verification 
Adopting Release'').
    \7\ See 2014 Extension Order, 79 FR at 7731.
    \8\ See 2014 Extension Order, 79 FR at 7731.
    \9\ See January 2020 Extension Order, 85 FR at 2766.
    \10\ See January 2020 Extension Order, 85 FR at 2766.
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    The Commission has requested comment on the initial issuance and 
subsequent extensions of these temporary exemptions several times 
during consideration of the various exemptive orders.\11\ In response, 
some commenters requested that the Commission make permanent some of 
the Linked Temporary Exemptions and Unlinked Temporary Exemptions.\12\ 
The Commission has addressed some aspects of these requests in two 
previous orders.\13\ Some of the requests for permanent exemptions have 
been withdrawn \14\ or superseded.\15\
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    \11\ See 2011 Exchange Act Exemptive Order, 76 FR at 39938; 2013 
Extension Order, 78 FR at 10219-20 (discussion of comments on 2011 
Exchange Act Exemptive Order and additional request for comment); 
2014 Extension Order, 79 FR at 7734 (additional request for 
comment); 2017 Extension Order, 82 FR at 8469 (additional request 
for comment); 2018 Extension Order, 83 FR at 5667-68 (discussion of 
comments on 2017 Extension Order and additional request for 
comment). In response to its 2018 request for comment, the 
Commission received four letters from two different commenters. See 
letter from Kyle Brandon, Managing Director, Securities Industry and 
Financial Markets Association (``SIFMA''), dated Nov. 8, 2018 
(``SIFMA November 2018 Letter'') (requesting that the Commission 
further extend the Unlinked Temporary Exemptions, and also 
requesting certain permanent exemptive and other relief); letter 
from Kyle Brandon, Managing Director, SIFMA, dated Dec. 20, 2018 
(``SIFMA December 2018 Letter'') (supplementing the SIFMA November 
2018 Letter with additional detail regarding the Unlinked Temporary 
Exemptions and recommending a twelve-month transition period before 
expiration of any Unlinked Temporary Exemptions); letter from Walt 
L. Lukken, President and Chief Executive Officer, Futures Industry 
Association, dated Nov. 14, 2018 (``FIA November 2018 Letter I'') 
(expressing support for the permanent exemptions requested in the 
SIFMA November 2018 Letter); letter from Walt L. Lukken, President 
and Chief Executive Officer, Futures Industry Association, dated 
Nov. 29, 2018 (``FIA November 2018 Letter II'') (same). All comments 
received are available at https://www.sec.gov/comments/s7-27-11/s72711.shtml.
    \12\ See SIFMA November 2018 Letter at 1-4; SIFMA December 2018 
Letter at 1-7; see also FIA November 2018 Letter I at 10; FIA 
November 2018 Letter II at 10-11.
    \13\ In 2019, the Commission provided limited exemptions from 
the definition of ``penny stock'' in Exchange Act Section 3(a)(51) 
and Exchange Act Rule 3a51-1 for transactions in security-based 
swaps between eligible contract participants and from the definition 
of ``municipal securities'' in Exchange Act Section 3(a)(29) for 
security-based swaps. See 2019 Extension Order, 84 FR at 867. In 
response to the commenter's request for guidance regarding the 
definition of ``government securities,'' the Commission noted that 
the Unlinked Temporary Exemptions did not include an exemption from 
the definition of ``government securities'' in Section 3(a)(42) of 
the Exchange Act and noted that the Exchange Act does not permit the 
Commission to provide such relief. See 2019 Extension Order, 84 FR 
at 866 & n.40. In response to the commenter's request for exemptions 
for security-based swap execution facilities, the Commission noted 
that it would consider the request in connection with the 
Commission's finalization of rules for security-based swap execution 
facilities. See 2019 Extension Order, 84 FR at 864 n.10. In January 
2020, the Commission allowed all of the Unlinked Temporary 
Exemptions except for those related to three of the commenter's 
requests to expire on February 5, 2020. See January 2020 Extension 
Order, 85 FR at 2766.
    \14\ See letter from Kyle Brandon, Managing Director, SIFMA, 
dated Jan. 8, 2020 (``SIFMA January 2020 Letter''), at 5; letter 
from Kyle L. Brandon, Managing Director, Head of Derivatives Policy, 
SIFMA, dated September 10, 2020 (``SIFMA September 2020 Letter''), 
at 8. All comments received are available at https://www.sec.gov/comments/s7-27-11/s72711.shtml.
    \15\ See SIFMA September 2020 Letter at 5-6.
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    On January 8, 2020, the Commission received a letter from SIFMA 
supplementing its requests regarding the Unlinked Temporary 
Exemptions.\16\ The commenter requested that the Commission make 
permanent three aspects \17\ of the Unlinked Temporary Exemptions: (1) 
A limited exemption from the hypothecation requirements of Exchange Act 
Section 8 and in Exchange Act Rules 8c-1 and 15c2-1 for certain 
securities carried for the account of a customer with respect to a 
security-based swap transaction,\18\ (2) exemptions from broker and 
dealer disclosure requirements relating to extensions of credit in 
Exchange Act Rules 10b-16 and 15c2-5 as applied to security-based 
swaps,\19\ and (3) exemptions for security-based swaps from certain 
limitations on an OTC derivatives dealer's activities in Exchange Act 
Rule 15a-1.\20\ On September 10, 2020, the Commission received a letter 
supplementing the commenter's requests regarding those three aspects of 
the Unlinked Temporary Exemptions, as well as three additional aspects 
of the Linked Temporary Exemptions.\21\ In that letter, the commenter 
requested that the Commission make permanent three aspects of the 
Linked Temporary Exemptions: (1) an exemption from the broker and 
dealer registration requirement in Exchange Act Section 15(a)(1) \22\ 
for a foreign broker or dealer, otherwise operating in compliance with 
Exchange Act Rule 15a-6, solely in connection with security-based swap 
dealing with or for an eligible contract participant,\23\ (2) an 
exemption from the broker registration requirement in Section 15(a)(1) 
for a registered security-

[[Page 70669]]

based swap dealer that arranges, negotiates or executes a security-
based swap with or for an eligible contract participant on behalf of a 
majority-owned affiliate that is a registered security-based swap 
dealer,\24\ and (3) an exemption from certain confirmation requirements 
under Exchange Act Rule 10b-10 for a broker or dealer that arranges, 
negotiates or executes a security-based swap with or for an eligible 
contract participant on behalf of a majority-owned affiliate that is a 
registered security-based swap dealer.\25\
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    \16\ See SIFMA January 2020 Letter.
    \17\ The commenter confirmed that it was no longer requesting 
additional extensions for any Unlinked Temporary Exemptions other 
than for the three issues cited in the letter. See SIFMA January 
2020 Letter at 5.
    \18\ See SIFMA January 2020 Letter at 3-4; SIFMA December 2018 
Letter at 5; SIFMA November 2018 Letter at 3; Exchange Act Section 
8, 15 U.S.C. 78h; Exchange Act Rule 8c-1, 17 CFR 240.8c-1; Exchange 
Act Rule 15c2-1, 17 CFR 240.15c2-1. Section 8 of the Exchange Act 
and Exchange Act Rules 8c-1 and 15c2-1 limit a broker or dealer's 
ability to hypothecate securities carried for the account of a 
customer.
    \19\ See SIFMA January 2020 Letter at 4; SIFMA December 2018 
Letter at 5-6; SIFMA November 2018 Letter at 3; Exchange Act Rule 
10b-16, 17 CFR 240.10b-16; Exchange Act Rule 15c2-5, 17 CFR 
240.15c2-5. Exchange Act Rules 10b-16 and 15c2-5 govern the 
disclosures that a broker or dealer must provide to customers to 
whom they extend credit.
    \20\ See SIFMA January 2020 Letter at 4-5; SIFMA December 2018 
Letter at 6-7; SIFMA November 2018 Letter at 4; Exchange Act Rule 
15a-1, 17 CFR 240.15a-1. Exchange Act Rule 15a-1 limits an OTC 
derivatives dealer's ability to engage in dealer activities in 
listed instruments and in fungible instruments that are standardized 
as to their material economic terms.
    \21\ See SIFMA September 2020 Letter.
    \22\ 15 U.S.C. 78o(a)(1).
    \23\ See SIFMA September 2020 Letter at 3-4; Exchange Act 
Section 15(a)(1), 15 U.S.C. 78o(a)(1); Exchange Act Rule 15a-6, 17 
CFR 240.15a-6. This request updated the commenter's 2018 request for 
exemption from registration as a broker or dealer for Rule 15a-6-
reliant foreign brokers and dealers that induce or attempt to 
purchase or sell a security-based swap with or for an eligible 
contract participant. See SIFMA November 2018 Letter at 2.
    \24\ See SIFMA September 2020 Letter at 4; Exchange Act Section 
15(a)(1), 15 U.S.C. 78o(a)(1).
    \25\ See SIFMA September 2020 Letter at 4-5; Exchange Act Rule 
10b-10, 17 CFR 240.10b-10. This request updated the commenter's 2018 
request for exemption from broker and dealer confirmation 
requirements. See SIFMA November Letter at 2.
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    The Commission has finalized a majority of the rulemakings under 
Title VII of the Dodd-Frank Act, including rules regarding the 
registration and regulation of SBS Entities. The Commission also has 
set the compliance date for rules regarding registration and regulation 
of SBS Entities,\26\ which will be October 6, 2021. Market participants 
will be required to assess whether their activities meet the 
definitions of ``security-based swap dealer'' or ``major security-based 
swap participant'' beginning two months before this compliance date, or 
August 6, 2021.\27\ This Order addresses the commenter's current 
requests regarding the Linked Temporary Exemptions and the Unlinked 
Temporary Exemptions in light of those finalized rules and dates. The 
remainder of the Unlinked Temporary Exemptions extended in January 
2020, and not extended in this Order, will expire on November 5, 
2020.\28\
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    \26\ See Rule Amendments and Guidance Addressing Cross-Border 
Application of Certain Security-Based Swap Requirements, Exchange 
Act Release No. 87780 (Dec. 18, 2019), 85 FR 6270, 6345 (Feb. 4, 
2020) (``Cross-Border Adopting Release'').
    \27\ See Registration Process for Security-Based Swap Dealers 
and Major Security-Based Swap Participants, Exchange Act Release No. 
75611 (Aug. 5, 2015), 80 FR 48963, 48988 (Aug. 14, 2015) (``SBS 
Entity Registration Adopting Release'').
    \28\ See January 2020 Extension Order, 85 FR at 2766.
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B. Requests for Exemptions

    The Commission has considered the commenter's six current requests 
and is providing exemptions in response to five of those requests. Each 
of the requests is discussed in turn below.
1. Request for an Exemption From Broker and Dealer Registration for a 
Rule 15a-6-Reliant Foreign Broker or Dealer, Solely in Connection With 
Security-Based Swap Dealing With or for an Eligible Contract 
Participant
    Exchange Act Section 15(a)(1) requires a person to register as a 
broker or dealer if the person is a ``broker'' as defined in Exchange 
Act Section 3(a)(4) \29\ or a ``dealer'' as defined in Exchange Act 
Section 3(a)(5) \30\ and engages in certain activities in a 
``security'' as defined in Exchange Act Section 3(a)(10),\31\ a term 
that includes security-based swaps. Section 15(a)(1) currently is 
subject to Linked Temporary Exemptions that exempt from the 
registration requirement brokerage activities and dealing activities 
involving security-based swaps with eligible contract participants.\32\ 
These Linked Temporary Exemptions will expire on October 6, 2021.\33\
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    \29\ 15 U.S.C. 78c(a)(4).
    \30\ 15 U.S.C. 78c(a)(5).
    \31\ 15 U.S.C. 78c(a)(10).
    \32\ See 2011 Exchange Act Exemptive Order, 76 FR at 39938-39; 
2014 Extension Order, 79 FR at 7734-35.
    \33\ See 2014 Extension Order, 79 FR at 7734-35; Recordkeeping 
and Reporting Adopting Release, 84 FR at 68600; Cross-Border 
Adopting Release, 85 FR at 6345.
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    Dealing in security-based swaps with or for an eligible contract 
participant is excluded from the definition of the term ``dealer,'' 
\34\ and that will remain true after the Linked Temporary Exemptions 
expire. Similarly, market participants that conduct other activities 
meeting the definitions of ``broker'' and/or ``dealer'' may 
nevertheless avoid registration as a broker or dealer by availing 
themselves of the exemption from registration in Exchange Act Rule 15a-
6. Yet, the commenter expressed concern that if a person combines these 
types of securities activities--that is, dealing in a security-based 
swap with or for an eligible contract participant (which is excluded 
from the definition of the term ``dealer'') and Rule 15a-6-compliant 
securities activities (which cause the person to meet the definition of 
``broker'' and/or ``dealer'' but that do not require registration as 
such)--Section 15(a)(1) may require the person to register as a broker 
and/or dealer. The commenter's concern is that this result may follow 
from Section 15(a)(1)'s requirement for any person that meets the 
definition of ``broker'' or ``dealer'' \35\--a category that includes 
foreign brokers and dealers relying on Rule 15a-6--to register with the 
Commission if it makes use of the mails or any means or instrumentality 
of interstate commerce to effect any transactions in, or to induce or 
attempt to induce the purchase or sale of, any security,\36\ including 
security-based swaps. The commenter requested that foreign brokers and 
dealers relying on Exchange Act Rule 15a-6 be exempted from Section 
15(a)(1)'s broker and dealer registration requirement in connection 
with any security-based swap dealing with or for an eligible contract 
participant that is excluded from the definition of ``dealer.'' \37\ 
The commenter also provided an example unrelated to Rule 15a-6, 
expressing concern that if a non-U.S. person combines dealing in a 
security-based swap in the United States with or for an eligible 
contract participant, on the one hand, with brokerage activity outside 
the United States, on the other hand, Section 15(a)(1) would require 
the person to register as a broker and/or dealer.\38\
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    \34\ See Exchange Act Section 3(a)(5)(A).
    \35\ This registration requirement does not apply to a broker or 
dealer whose business is exclusively intrastate and who does not 
make use of any facility of a national securities exchange. See 
Exchange Act Section 15(a)(1).
    \36\ This registration requirement does not apply to activities 
in an exempted security or commercial paper, bankers' acceptances or 
commercial bills. See Exchange Act Section 15(a)(1).
    \37\ See SIFMA September 2020 Letter at 3-4; SIFMA November 2018 
Letter at 2.
    \38\ See SIFMA September 2020 Letter at 3-4.
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    The Commission agrees that broker-dealer registration should not be 
required in the circumstances described by the commenter. To provide 
certainty about this result, the Commission is providing an exemption 
from Section 15(a)(1) for security-based swap dealing with or for 
eligible contract participants, available to foreign brokers and 
dealers whose activities in securities other than security-based swaps 
with or for an eligible contract participant comply with Rule 15a-6. 
The Commission believes this exemption would further the purpose of the 
exclusion of that type of security-based swap dealing from the 
definition of ``dealer.'' Similarly, the Commission believes that a 
limited exemption from Section 15(a)(1) for security-based swap dealing 
with or for eligible contract participants, available to foreign 
brokers and dealers whose activities in securities other than security-
based swaps with or for an eligible contract participant lack a U.S. 
jurisdictional nexus, also would further the purpose of the exclusion 
of that type of security-based swap dealing from the definition of 
``dealer.'' This exemption addresses the commenter's concern that, 
without this limited exemptive relief from the registration requirement 
of

[[Page 70670]]

Section 15(a)(1), the exclusion of security-based swaps with or for 
eligible contract participants from the definition of ``dealer'' might 
effectively become unavailable to foreign brokers and dealers whose 
other securities activities either comply with Rule 15a-6 or lack any 
U.S. jurisdictional nexus. Requiring registration in this circumstance 
could undermine the market structure for security-based swaps by making 
it more costly and complex to engage in that type of security-based 
swap dealing with eligible contract participants in the United States, 
to the detriment of investors. Accordingly, pursuant to its authority 
under Exchange Act Section 15(a)(2), the Commission finds that it is 
consistent with the public interest and the protection of investors to 
exempt a ``foreign broker or dealer,'' as such term is defined in Rule 
15a-6(b)(3) under the Exchange Act, whose activities in securities 
other than security-based swaps with or for an eligible contract 
participant are conducted either in compliance with Rule 15a-6 under 
the Exchange Act or without the jurisdiction of the United States, from 
the registration requirement of Exchange Act Section 15(a)(1) solely in 
connection with the foreign broker or dealer's security-based swap 
dealing with or for an eligible contract participant. Consistent with 
the commenter's request, this exemption would not extend to foreign 
brokers' and dealers' security-based swap brokerage activity.
2. Request for Exemption From Broker Registration for a Registered 
Security-Based Swap Dealer That Arranges, Negotiates or Executes a 
Security-Based Swap With or for an Eligible Contract Participant on 
Behalf of a Majority-Owned Affiliate That Is a Registered Security-
Based Swap Dealer
    As described above, Exchange Act Section 15(a)(1) requires a person 
to register as a broker if the person is a ``broker'' as defined in 
Exchange Act Section 3(a)(4) and engages in certain activities in a 
``security'' as defined in Exchange Act Section 3(a)(10), a term that 
includes security-based swaps. Though dealing in security-based swaps 
with or for an eligible contract participant is excluded from the 
definition of the term ``dealer,'' \39\ the statutory definition of the 
term ``broker'' contains no such exclusion.\40\ Section 15(a)(1) 
currently is subject to Linked Temporary Exemptions that exempt from 
the registration requirement brokerage activities involving security-
based swaps with eligible contract participants.\41\ These Linked 
Temporary Exemptions will expire on October 6, 2021.\42\
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    \39\ See Exchange Act Section 3(a)(5)(A).
    \40\ See Exchange Act Section 3(a)(4).
    \41\ See 2011 Exchange Act Exemptive Order, 76 FR at 39938-39; 
2014 Extension Order, 79 FR at 7734.
    \42\ See 2014 Extension Order, 79 FR at 7734-35; SBS Entity 
Registration Adopting Release, 80 FR at 48988; Cross-Border Adopting 
Release, 85 FR at 6345.
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    As part of its consideration of cross-border issues in the 
registration of security-based swap dealers, the Commission recently 
determined that a limited exemption from the broker registration 
requirement was appropriate for a registered security-based swap dealer 
and its associated persons who conduct certain security-based swap 
``arranging, negotiating or executing'' activity (``ANE activity'') 
with or for a non-U.S. person eligible contract participant on behalf 
of a non-U.S. majority-owned affiliate that is relying on an exception 
to the de minimis thresholds for registration as a security-based swap 
dealer.\43\ The commenter requested that this limited exemption from 
the broker registration requirement be extended to situations in which 
the majority-owned affiliate is not relying on the de minimis exception 
but, rather, is a registered security-based swap dealer.\44\ When 
adopting this limited exemption in the context of the de minimis 
exception, the Commission noted that a security-based swap dealer not 
dually registered as a broker or dealer and approved to use models to 
compute deductions for market or credit risk is subject to a minimum 
net capital requirement of $20 million and a minimum tentative net 
capital requirement of $100 million, versus minimum requirements of $1 
billion and $5 billion, respectively, for a broker or dealer approved 
to use models.\45\ The Commission adopted that exemption to avoid a 
situation in which ``applying the heightened broker-dealer capital 
requirements to all security-based swap dealers approved to use models 
who serve as the registered entity for purposes of the [de minimis] 
exception could limit the usefulness of the exception.'' \46\ The 
commenter argued that extending the limited exemption would be 
appropriate because the same concerns also apply when the majority-
owned affiliate is a registered, rather than unregistered, security-
based swap dealer.\47\
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    \43\ See Exchange Act Rule 3a71-3(d)(4); Cross-Border Adopting 
Release, 85 FR at 6279-80.
    \44\ See SIFMA September 2020 Letter at 4.
    \45\ See Cross-Border Adopting Release, 85 FR at 6279.
    \46\ See Cross-Border Adopting Release, 85 FR at 6279.
    \47\ See SIFMA September 2020 Letter at 4.
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    The Commission continues to believe that ANE activity generally 
would constitute activity of a ``broker'' as that term is defined in 
Exchange Act Section 3(a)(4).\48\ The Commission acknowledges the 
concerns regarding the heightened capital requirements for brokers 
approved to use models as applied to the security-based swap ANE 
activity described in the commenter's request. At the same time, the 
statutory definition of ``broker'' does not contain an exclusion for 
this activity.\49\ Moreover, the Commission also is concerned that an 
exemption for ANE activity from the broker registration requirement 
could prompt changes in market structure that make it more difficult 
for the Commission to oversee that activity. In the Commission's view, 
however, a temporary exemption should not encourage such market 
structure changes, but could provide the Commission an opportunity to 
consider these concerns in light of market conditions prevailing after 
registration of security-based swap dealers begins.\50\ Accordingly, 
pursuant to its authority under Exchange Act Section 15(a)(2), the 
Commission finds that it is consistent with the public interest and the 
protection of investors to provide a conditional temporary exemption 
from the broker registration requirement of Section 15(a)(1) until 
November 1, 2022 (i.e., one year after the earliest due date for 
applications for registration as a security-based swap dealer) for a 
registered security-based swap dealer and its associated persons solely 
in connection with such registered security-based swap dealer or 
associated person arranging, negotiating or executing a security-based 
swap transaction with or for a non-U.S. person eligible contract 
participant on behalf of a non-U.S. person qualified majority-owned 
affiliate. Consistent with the exemption from broker registration in 
the context of the de minimis exception, this exemption is limited to 
ANE activity with or for a non-U.S. person eligible contract 
participant. The Commission continues to believe that requiring broker 
registration with respect to ANE activity with or for a counterparty 
that is not an eligible contract participant is consistent with the 
heightened

[[Page 70671]]

protections that Congress applied to security-based swap transactions 
with or for non-eligible contract participants.\51\ For purposes of 
this exemption, the term ``qualified majority-owned affiliate'' means a 
majority-owned affiliate (as such term is defined in Exchange Act Rule 
3a71-3(a)(10)) of the registered security-based swap dealer that is 
itself also a registered security-based swap dealer.
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    \48\ See Cross-Border Adopting Release, 85 FR at 6279 & n.104.
    \49\ See Exchange Act Section 3(a)(4).
    \50\ The Commission welcomes engagement with market participants 
to discuss developments that may occur in this market after 
security-based swap dealers begin to register.
    \51\ See Cross-Border Adopting Release, 85 FR at 6279 & n.109 
(citing Exchange Act Section 6(l), 15 U.S.C. 78f(l), and Exchange 
Act Section 3(a)(5), 15 U.S.C. 78c(a)(5)).
---------------------------------------------------------------------------

    To be eligible for the exemption, the registered security-based 
swap dealer must comply with two relevant conditions to the parallel 
exemption from broker registration in the context of the de minimis 
exception. First, the registered security-based swap dealer must create 
and maintain books and records relating to such ANE activity that are 
required by Exchange Act Rules 18a-5 and 18a-6. This condition differs 
slightly from the parallel condition in the context of the de minimis 
exception \52\ in that the required books and records relate only to 
the ANE activity by the registered security-based swap dealer relying 
on the exemption, rather than to the entire security-based swap 
transaction subject to the de minimis exception. The Commission 
believes this difference is appropriate because the de minimis 
exception applies to transactions on behalf of an unregistered 
affiliate, whereas the exemption granted in this Order applies only to 
ANE activity on behalf of a registered security-based swap dealer 
affiliate. Because the affiliate also must maintain books and records 
relating to the transaction, the Commission believes that the exemption 
should require the registered security-based swap dealer relying on 
this exemption to create and maintain only those books and records that 
relate to its own ANE activity. Second, if Exchange Act Rule 10b-10 
would apply to such ANE activity, the registered security-based swap 
dealer also must provide to the customer the disclosures required by 
Rule 10b-10(a)(2) (excluding Rule 10b-10(a)(2)(i) and (ii)) and Rule 
10b-10(a)(8) in accordance with the time and form requirements set 
forth in Exchange Act Rule 15Fi-2(b) and (c) or, alternatively, 
promptly after discovery of any defect in such registered security-
based swap dealer's good faith effort to comply with such 
requirements.\53\
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    \52\ See Exchange Act Rule 3a71-4(d)(1)(iii)(B)(1).
    \53\ The other conditions to the availability of the exemption 
from broker registration in the context of the de minimis exception 
are not applicable to ANE activity on behalf of a registered 
security-based swap dealer and thus are not included as conditions 
to the exemption granted in this Order. For example, registered 
security-based swap dealers already have to comply with the 
provisions listed in Exchange Act Rule 3a71-3(d)(1)(ii), provide the 
Commission with the access to books and records described in Rule 
3a71-3(d)(1)(iii)(A) and maintain the books and records and consent 
to service of process described in Rule 3a71-3(d)(1)(iii)(B)(3)-(4). 
The conditions described in Rule 3a71-3(d)(1)(iii)(B)(2) and 
(d)(1)(iv)-(vii) are specific to the operation of the de minimis 
exception and are not relevant to the exemption granted in this 
Order.
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3. Request for Exemption From Certain Confirmation Requirements for a 
Broker or Dealer That Arranges, Negotiates or Executes a Security-Based 
Swap With or for an Eligible Contract Participant on Behalf of a 
Majority-Owned Affiliate That Is a Registered Security-Based Swap 
Dealer
    Exchange Act Rule 10b-10 \54\ requires a broker or dealer to 
deliver to a customer certain disclosures about transactions in 
securities, including security-based swaps. Exchange Act Rule 15Fi-2 
\55\ requires an SBS Entity to deliver to a counterparty a trade 
acknowledgment containing certain terms of the security-based swap or 
to verify the trade acknowledgment received from the counterparty. 
Certain information required to be included in a Rule 10b-10 
confirmation is not required in the Rule 15Fi-2 trade acknowledgment, 
such as a description of the broker or dealer's role as agent for the 
customer, agent for some other person, agent for both the customer and 
another person or principal for its own account in the transaction, as 
well as information about the source and/or amount of certain other 
remuneration received or to be received by the broker or dealer in 
connection with the transaction.\56\ Rule 10b-10 currently is subject 
to a Linked Temporary Exemption that exempts brokers and dealers from 
these disclosure requirements with respect to security-based swaps.\57\ 
This Linked Temporary Exemption will expire on October 6, 2021.\58\
---------------------------------------------------------------------------

    \54\ 17 CFR 240.10b-10.
    \55\ 17 CFR 240.15Fi-2.
    \56\ See Exchange Act Rule 10b-10(a).
    \57\ See 2011 Exchange Act Exemptive Order, 76 FR at 39939; 2014 
Extension Order, 79 FR at 7734.
    \58\ See 2014 Extension Order, 79 FR at 7734; Trade 
Acknowledgment and Verification Adopting Release, 81 FR at 39828; 
Recordkeeping and Reporting Adopting Release, 84 FR at 68600; Cross-
Border Adopting Release, 85 FR at 6345.
---------------------------------------------------------------------------

    A registered broker that conducts ANE activity pursuant to the de 
minimis exception in Exchange Act Rule 3a71-3(d) is exempt from 
providing the disclosures described in Rule 10b-10, except for those 
regarding the broker's role as agent or principal in the transaction 
and the broker or dealer's status as a member of SIPC.\59\ In addition, 
a registered security-based swap dealer that conducts ANE activity 
pursuant to the de minimis exception is exempt from registration as a 
broker so long as it provides these same Rule 10b-10 disclosures.\60\ 
Because Rule 10b-10 and Rule 15Fi-2 have different form and timing 
requirements,\61\ the de minimis exception allows these Rule 10b-10 
disclosures to be provided in accordance with the form and timing 
requirements in Rule 15Fi-2(b) and (c).\62\
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    \59\ See Exchange Act Rule 3a71-(d)(5).
    \60\ See Exchange Act Rule 3a71-3(d)(4)(ii).
    \61\ Rule 10b-10(a) requires a broker or dealer to give or send 
a confirmation in the form of a ``written notification,'' whereas 
Rule 15Fi-2(c) requires a trade acknowledgment to be provided by 
``electronic means that provide reasonable assurance of delivery and 
a record of transmittal.'' A broker or dealer must give or send a 
transaction confirmation under Rule 10b-10(a) ``at or before the 
completion of such transaction,'' whereas a trade acknowledgment 
pursuant to Rule 15Fi-2(b) must be provided ``promptly, but in any 
event by the end of the first business day following the day of 
execution.''
    \62\ See Exchange Act Rule 3a71-3(d)(4)(ii), (5)(ii).
---------------------------------------------------------------------------

    The commenter requests that a parallel exemption from Rule 10b-10 
apply to situations in which a registered broker or dealer conducts ANE 
activity not pursuant to the de minimis exception but, rather, on 
behalf of a majority-owned affiliate that is a registered security-
based swap dealer.\63\ Though Rule 10b-10 requires disclosures not 
duplicated in the trade acknowledgment required under Rule 15Fi-2, the 
commenter claims that some of these disclosures are ``irrelevant'' in 
the situations covered by its request because a broker or dealer would 
be ``solely compensated by its [security-based swap dealer] 
affiliate.'' \64\ Rule 10b-10, however, contains no exemption for 
transactions in which compensation is paid by an affiliate. Moreover, 
compensation disclosure is not available through other means, as the 
trade acknowledgment required by Rule 15Fi-2 would disclose only the 
terms of the security-based swap transaction, which do not necessarily 
include compensation regarding the brokerage activity to which Rule 
10b-10 applies. Security-based swap trade acknowledgments thus do not 
duplicate or replace Rule 10b-10 disclosures for brokerage 
activity.\65\ In response to the commenter's previous request for 
exemption from Rule 10b-10 for

[[Page 70672]]

security-based swap brokerage activity,\66\ the Commission stated that, 
``since Rule 15Fi-2 does not require a trade acknowledgment for an SBS 
Entity's brokerage or agency transactions, and therefore would not 
result in any duplication of efforts by the SBS Entity effecting the 
brokerage or agency transaction, the Commission does not believe that 
there is a need to provide an exemption from providing a confirmation 
under Rule 10b-10 for an SBS Entity's brokerage or agency 
transactions.'' \67\ Indeed, the Commission believes that customers 
would benefit from disclosure about brokerage costs even when gross 
costs may be reflected in the transaction price reported in the trade 
acknowledgment. For these reasons, the Commission is not providing an 
exemption from Rule 10b-10's disclosure requirements in connection with 
a broker or dealer's security-based swap ANE activity.
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    \63\ See SIFMA September 2020 Letter at 5.
    \64\ See SIFMA September 2020 Letter at 5.
    \65\ See Trade Acknowledgment and Verification Adopting Release, 
81 FR at 39824-25 (``[Rule 15Fi-2] thus does not apply to brokerage 
or agency transactions, which are different in structure and involve 
different activity by a broker than principal transactions by [a 
security-based swap dealer].'').
    \66\ See letter from Securities Industry and Financial Markets 
Association, dated Dec. 5, 2011, available at https://www.sec.gov/comments/s7-27-11/s72711.shtml.
    \67\ See Trade Acknowledgment and Verification Adopting Release, 
81 FR at 39825.
---------------------------------------------------------------------------

    In the context described by the commenter--that is, a broker or 
dealer's ANE activity on behalf of a majority-owned affiliate that is a 
registered security-based swap dealer--the broker or dealer may wish to 
deliver the Rule 10b-10 disclosures regarding the ANE activity in the 
same document or communication as the trade acknowledgment or 
verification that its affiliate delivers pursuant to Rule 15Fi-2. The 
Commission recognizes, however, the potential for the different time 
and form requirements in Rule 10b-10 and Rule 15Fi-2(b) and (c) to 
frustrate attempts to deliver a single document or communication and 
could, as a result, increase the costs and other burdens to investors 
of responding to multiple communications regarding the ANE activity. As 
a result, the Commission is granting the commenter's request for an 
exemption from Rule 10b-10's requirement to deliver disclosures to a 
customer at or before completion of the transaction, so as to allow 
disclosures related to ANE activity to be provided at the time and in 
the form of a trade acknowledgment as required by Rule 15Fi-2(b) and 
(c), except that disclosures requested by the customer as allowed by 
Rule 10b-10, which are not addressed in Rule 15Fi-2, must be delivered 
in accordance with the deadlines specified in Rule 10b-10(c).\68\
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    \68\ Rule 10b-10(c) requires a broker or dealer to ``give or 
send to a customer information requested pursuant to [Rule 10b-10] 
within five business days of receipt of the request,'' except that 
``in the case of information pertaining to a transaction effected 
more than 30 days prior to receipt of the request, the information 
shall be given or sent to the customer within 15 business days.''
---------------------------------------------------------------------------

    Consistent with the Rule 10b-10-related exemptions and requirements 
in the de minimis exception, the commenter requested that any relief 
from Rule 10b-10's timing requirements also include the ability to 
avoid violation of Rule 10b-10 so long as the broker or dealer provides 
the disclosures promptly after discovery of a defect in its good faith 
efforts to comply.\69\ This ability to provide disclosures either at 
the time specified in the de minimis exception or promptly after 
discovery of a defect in good faith efforts to do so was necessary, in 
the context of the de minimis exception, to avoid a situation in which 
a ``foot fault'' in Rule 10b-10 compliance would make the exemption 
from broker registration unavailable.\70\ Because no exemption from 
broker registration is at risk if the broker or dealer does not comply 
with the conditions of the Rule 10b-10 exemption in this Order, this 
``foot fault'' relief is not necessary. Rather, the consequence of not 
complying with either Rule 10b-10's timing requirements, or Rule 15Fi-
2(b) and (c)'s form and timing requirements (and Rule 10b-10(c)'s 
timing requirements as applicable) if the broker or dealer is relying 
on this exemption, is that a broker or dealer would find itself out of 
compliance with Rule 10b-10.
---------------------------------------------------------------------------

    \69\ See SIFMA September 2020 Letter at 5.
    \70\ See Cross-Border Adopting Release, 85 FR at 6280 n.113.
---------------------------------------------------------------------------

    Accordingly, pursuant to its authority under Exchange Act Section 
36, the Commission finds that it is necessary or appropriate in the 
public interest, and consistent with the protection of investors, to 
exempt a broker or dealer from the requirement to give or send to a 
customer the disclosures required by Rule 10b-10(a) at or before 
completion of the transaction solely in connection with such broker or 
dealer or its associated persons arranging, negotiating or executing a 
security-based swap transaction on behalf of a qualified majority-owned 
affiliate, provided that such broker or dealer gives or sends to the 
customer written notification containing the disclosures required by 
Rule 10b-10(a) in connection with such arranging, negotiating or 
executing in accordance with the time and form requirements for a trade 
acknowledgment set forth in Rule 15Fi-2(b) and (c) under the Exchange 
Act and, as applicable, Rule 10b-10(c) under the Exchange Act. For 
purposes of this exemption, the term ``qualified majority-owned 
affiliate'' means a majority-owned affiliate (as such term is defined 
in Rule 3a71-3(a)(10) under the Exchange Act) of such broker or dealer 
that is a registered security-based swap dealer.
4. Request for Relief From the Hypothecation Requirements With Respect 
to Security-Based Swap Accounts
    Exchange Act Section 8 provides, in pertinent part, that it shall 
be unlawful for any broker or dealer, in contravention of such rules 
and regulations as the Commission shall prescribe for the protection of 
investors, to hypothecate or arrange for the hypothecation of any 
securities carried for the account of any customer under circumstances: 
(1) That will permit the commingling of the customer's securities 
without the customer's written consent with the securities of any other 
customer; (2) that will permit such securities to be commingled with 
the securities of any person other than a bona fide customer; or (3) 
that will permit such securities to be hypothecated, or subjected to 
any lien or claim of the pledgee, for a sum in excess of the aggregate 
indebtedness of such customers in respect of such securities.\71\ 
Pursuant to this authority, the Commission adopted Exchange Act Rules 
8c-1 and 15c2-1. Exchange Act Rule 8c-1 places limitations on the 
ability of a broker or dealer to hypothecate ``any securities carried 
for the account of any customer.'' \72\ Exchange Act Rule 15c2-1 
defines the phrase ``fraudulent, deceptive, or manipulative act or 
practice'' as used in Exchange Act Section 15(c)(2) to include the 
hypothecation of ``any securities carried for the account of any 
customer'' that would be inconsistent with the limitations imposed by 
Rule 8c-1.\73\ The commenter made two requests related to these 
provisions.
---------------------------------------------------------------------------

    \71\ 15 U.S.C. 78h.
    \72\ See 17 CFR 240.8c-1.
    \73\ See 17 CFR 240.15c2-1.
---------------------------------------------------------------------------

    First, the commenter asked the Commission to clarify how the phrase 
``securities carried for the account of any customer'' as used in 
Exchange Act Rules 8c-1 and 15c2-1 applies to security-based swaps.\74\ 
The commenter stated that, for the purposes of the possession or 
control requirements of Exchange Act Rule 15c3-3 as applied to 
security-based swaps, the Commission, among other amendments, added a 
definition of ``excess securities

[[Page 70673]]

collateral'' to the Rule 15c3-3.\75\ Rule 15c3-3 was further amended to 
require a broker or dealer to promptly obtain and thereafter maintain 
physical possession or control of all excess securities collateral 
carried for the security-based swap accounts of security-based swap 
customers.\76\ The commenter requested confirmation that, for the 
purposes of Exchange Act Rules 8c-1 and 15c2-1, the term ``securities 
carried for the account of any customer'' be interpreted in connection 
with security-based swaps to have the same meaning as ``excess 
securities collateral'' has for the purposes of Exchange Act Rule 15c3-
3. For the reasons discussed below, the Commission is not issuing the 
interpretation suggested by the commenter and instead is issuing a 
conditional exemption from Rules 8c-1 and 15c2-1 for securities and 
money market instruments carried in a security-based swap account of a 
security-based swap customer.
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    \74\ See SIFMA January 2020 Letter at 3-4.
    \75\ Id.; see also Capital, Margin and Segregation Adopting 
Release, 84 FR at 43935-38; 17 CFR 240.15c3-3(p)(1)(ii). Exchange 
Act Rule 18a-4 imposes segregation requirements on security-based 
swap dealers that are not brokers or dealers (other than OTC 
derivatives dealers). 17 CFR 240.18a-4. Exchange Act Rule 18a-4 has 
a parallel definition of ``excess securities collateral.'' See 17 
CFR 240.18a-4(a)(2).
    \76\ See 17 CFR 240.15c3-3(p)(2). Exchange Act Rule 18a-4 has a 
parallel requirement that the security-based swap dealer promptly 
obtain and thereafter maintain physical possession or control of all 
excess securities collateral carried for the security-based swap 
accounts of security-based swap customers. See 17 CFR 240.18a-4(b).
---------------------------------------------------------------------------

    The term ``excess securities collateral'' as used in Exchange Act 
Rules 15c3-3 and 18a-4 \77\ with respect to security-based swaps is 
modelled on the terms ``fully paid securities'' and ``excess margin 
securities'' as used in Exchange Act Rule 15c3-3 with respect to 
securities that are not security-based swaps.\78\ Exchange Act Rule 
15c3-3 requires a broker or dealer to promptly obtain and thereafter 
maintain physical possession or control of all fully paid and excess 
margin securities carried for the account of customers.\79\ Securities 
that have been hypothecated are not in the physical possession or 
control of the broker or dealer.\80\ However, securities that meet the 
definition of ``margin securities'' in Exchange Act Rule 15c3-3 may be 
hypothecated, subject to the requirements of that rule. Similarly, with 
respect to security-based swaps, Exchange Act Rules 15c3-3 and 18a-4 
require that a broker, dealer or security-based swap dealer promptly 
obtain and thereafter maintain physical possession or control of 
securities and money market instruments carried for the account of a 
security-based swap customer that meet the rules' definitions of 
``excess securities collateral.'' \81\ Securities or money market 
instruments carried in the accounts of security-based swap customers 
that do not meet the definition of ``excess securities collateral'' may 
be hypothecated subject to the requirements of Exchange Act Rules 15c3-
3 and 18a-4. Consequently, while the respective limitations and anti-
fraud provisions of Rules 8c-1 and 15c2-1 apply to ``any securities 
carried for the account of any customer,'' the possession or control 
requirements of Rules 15c3-3 and 18a-4 apply to fully paid and excess 
margin securities and excess securities collateral, respectively.
---------------------------------------------------------------------------

    \77\ 17 CFR 240.18a-4.
    \78\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43935; 17 CFR 240.15c3-3(a)(3), (a)(5) and (p)(1)(ii).
    \79\ See 17 CFR 240.15c3-3(b).
    \80\ See 17 CFR 240.15c3-3(c) and (d); see also 17 CFR 240.15c3-
3(p)(2); 17 CFR 240.18a-4(b).
    \81\ See 17 CFR 240.15c3-3(p)(2); 17 CFR 240.18a-4(b).
---------------------------------------------------------------------------

    Because Exchange Act Rules 8c-1 and 15c2-1 apply to any securities 
carried for the account of any customer, interpreting the term ``any 
securities carried for the account of any customer'' in those rules to 
mean ``excess securities collateral'' as defined in Rules 15c3-3 and 
18a-4 for the purposes of a security-based swap would not be 
appropriate. Doing so could imply that the hypothecation rules do not 
apply to certain securities carried for the accounts of customers when 
the rules, in fact, apply to ``any securities carried for the account 
of any customer.'' However, a limited exemption from Rules 8c-1 and 
15c2-1 with respect to securities and money market instruments carried 
in the security-based swap accounts of security-based swap customers 
would be appropriate for the following reasons.
    When adopting the segregation requirements for security-based 
swaps, the Commission did not contemplate imposing the respective 
limitations and anti-fraud provisions of Exchange Act Rules 8c-1 and 
15c2-1 to securities and money market instruments carried in security-
based swap accounts of security-based swap customers. Moreover, the 
Dodd-Frank Act did not mandate that the Commission implement 
requirements with respect to security-based swaps that are analogous to 
Rules 8c-1 and 15c2-1. Further, Rules 8c-1 and 15c2-1 were adopted in 
1940 and were not designed to address security-based swaps.\82\ 
Exchange Act Rule 15c3-3 was adopted in 1972 to provide comprehensive 
protection to customer funds and securities held by brokers and 
dealers.\83\ The Commission addressed the protection of securities and 
money market instruments carried in security-based swap accounts of 
security-based swap customers through the recent amendments to Exchange 
Act Rule 15c3-3 and the adoption of new Exchange Act Rule 18a-4.\84\ 
The amendments and new rule addressing security-based swaps were 
modelled on the requirements and limitations in Exchange Rule 15c3-3 
applicable to securities that are not security-based swaps. They were 
not modelled on Exchange Act Rules 8c-1 and 15c2-1. Finally, Rules 8c-1 
and 15c2-1 provide OTC derivatives dealers exemptions from their 
requirements. Therefore, it is not necessary to impose the limitations 
and anti-fraud provisions of Exchange Act Rules 8c-1 and 15c2-1 to 
securities and money market instruments carried in security-based swap 
accounts of security-based swap customers.\85\ This approach will 
achieve the objective sought by the commenter in proposing the 
interpretation discussed above: That Rules 8c-1 and 15c2-1 not apply to 
securities and money market instruments carried in a security-based 
swap account of a security-based swap customer.
---------------------------------------------------------------------------

    \82\ Hypothecation of Customers' Securities, 5 FR 4530 (Nov. 19, 
1940) (adopting Exchange Act Rule 8c-1); Hypothecation of Customers' 
Securities, 5 FR 4531 (Nov. 19, 1940) (adopting Exchange Act Rule 
15c2-1).
    \83\ See Broker-Dealers; Maintenance of Certain Basic Reserves, 
Exchange Act Release No. 9856 (Nov. 17, 1972), 37 FR 25224 (Nov. 29, 
1972) (``Rule 15c3-3 as adopted herein is well fashioned to furnish 
the protection for the integrity of customer funds and securities as 
envisioned by Congress when it amended section 15(c) (3) of the 
[Exchange] Act by adopting section 7(d) of the Securities Investor 
Protection Act of 1970 . . .''); see also Pub. L. 91-598 (Dec. 30, 
1970). The hypothecation rules (Rules 8c-1 and 15c2-1) require that 
a broker-dealer segregate customer securities from its own 
proprietary securities and prescribe limits on a broker-dealer's 
ability to hypothecate customer securities.
    \84\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43930-43, 17 CFR 240.15c3-3(p); 17 CFR 240.18a-4.
    \85\ A security-based swap dealer that is not also registered as 
a broker or dealer is not subject to Exchange Act Rules 8c-1 and 
15c2-1. Moreover, a security-based swap dealer that is also 
registered as an OTC derivatives dealer can provide notifications to 
its counterparties to remove them from the definitions of 
``customer'' in Exchange Act Rules 8c-1 and 15c2-1 and, thereby, 
avoid the requirement to comply with those rules. See 17 CFR 8c-
1(b); 17 CFR 240.15c2-1(b).
---------------------------------------------------------------------------

    However, Rules 8c-1 and 15c2-1 continue to apply to any securities 
carried for all other customers. For example, as discussed above, the 
requirement to promptly obtain and thereafter maintain physical 
possession or control of securities (other than security-based swaps) 
carried for the account of customers in Exchange Act Rule 15c3-3 does 
not apply to ``margin

[[Page 70674]]

securities'' as defined in the rule.\86\ The commenter did not request 
that ``margin securities,'' as defined in Rule 15c3-3, should be exempt 
from Exchange Act Rules 8c-1 and 15c2-1 or that the Commission 
interpret the term in a manner that removes them from the requirements 
of those rules.
---------------------------------------------------------------------------

    \86\ See 17 CFR 240.15c3-3(a)(3), (a)(4), (a)(5) and (b).
---------------------------------------------------------------------------

    For these reasons, the Commission finds that it is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors to exempt securities and money market 
instruments carried in a security-based swap account of a security-
based swap customer from the requirements of Exchange Act Rules 8c-1 
and 15c2-1; provided the account does not hold ``margin securities'' as 
defined in Exchange Act Rule 15c3-3.\87\ Further, this exemption does 
not modify the requirement that a broker, dealer or security-based swap 
dealer promptly obtain and thereafter maintain physical possession or 
control of securities or money market instruments carried for the 
accounts of security-based swap customers that meet the definition of 
``excess securities collateral'' as required by Exchange Act Rules 
15c3-3 and 18a-4, as applicable.
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    \87\ As indicated, the relief does not extend to accounts that 
hold ``margin securities'' as that term is defined in Exchange Act 
Rule 15c3-3. Therefore, the exemption would not apply if the account 
holds securities positions, other than security-based swaps, that 
trigger the margin requirements of Regulation T of the Board of 
Governors of the Federal Reserve System and/or the margin 
requirements of the self-regulatory organizations applicable to 
securities that are not security-based swaps (e.g., long securities 
positions (other than security-based swaps) that have been financed 
by the broker or dealer, short securities positions (other than 
security-based swaps), or listed options). However, as discussed 
above, the exemption applies to securities and money market 
instruments held in a security-based swap account of a security-
based swap customer; provided they are not ``margin securities'' as 
defined in Rule 15c3-3. For the purposes of this exemption, a broker 
or dealer need not treat fully paid securities and money market 
instruments in a security-based swap account of a security-based 
swap customer that serve as collateral for security-based swap 
positions and/or to meet the margin requirements of Exchange Act 
Rule 18a-3 as ``margin securities'' as that term is defined in Rule 
15c3-3.
---------------------------------------------------------------------------

    Second, the commenter asked the Commission to extend most, but not 
all, of the Unlinked Temporary Exemptions from the hypothecation 
requirements for security-based swaps. The current Unlinked Temporary 
Exemptions from the hypothecation requirements apply without regard to 
whether these requirements applied to the broker or dealer's security-
based swap positions or activities as of July 15, 2011 (i.e., the day 
before relevant provisions of the Dodd-Frank Act became effective),\88\ 
and are set to expire on November 5, 2020.\89\ By contrast, the Linked 
Temporary Exemptions from related customer protection requirements in 
Exchange Act Rule 15c3-3 are limited to security-based swap positions 
and activities not subject to that rule as of July 15, 2011, and are 
set to expire on October 6, 2021, which is the compliance date for the 
Commission's security-based swap-related amendments to Rule 15c3-3.\90\ 
The commenter asked the Commission to extend the Unlinked Temporary 
Exemptions from the hypothecation requirements so that they would 
expire on the compliance date for these security-based swap-related 
amendments to Rule 15c3-3.\91\ The commenter asked the Commission to 
extend these exemptions consistent with the scope of the Linked 
Temporary Exemptions from Rule 15c3-3--that is, only to the extent that 
the hypothecation requirements did not apply to the broker or dealer's 
security-based swap positions or activities as of July 15, 2011.\92\ 
The commenter stated that the policies, procedures, processes, systems 
and controls that brokers and dealers use to comply with Rules 8c-1 and 
15c2-1 are integrated with the policies, procedures, processes, systems 
and controls that they use to comply with Rule 15c3-3. Therefore, the 
commenter requested that the Unlinked Temporary Exemptions from Rules 
8c-1 and 15c2-1 be extended to align with the expiration date for the 
Linked Temporary Exemptions from Rule 15c3-3.\93\
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    \88\ See 2011 Exchange Act Exemptive Order, 76 FR at 39939.
    \89\ See January 2020 Extension Order, 85 FR at 2766.
    \90\ See 2014 Extension Order, 79 FR at 7734.
    \91\ See SIFMA January 2020 Letter at 3-4; SIFMA December 2018 
Letter at 5.
    \92\ See SIFMA January 2020 Letter at 3-4.
    \93\ See id.
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    For the reasons provided by the commenter, the Commission believes 
that it would be appropriate to extend the Unlinked Temporary 
Exemptions from Rules 8c-1 and 15c2-1 so that they expire at the same 
time as the Linked Temporary Exemptions from Rule 15c3-3. This 
extension would provide brokers and dealers time to implement a single 
set of policies, procedures, and controls to comply with Rules 8c-1, 
15c2-1 and 15c3-3 as they apply to security-based swap positions. 
Accordingly, pursuant to its authority under Exchange Act Section 36, 
the Commission finds that it is necessary or appropriate in the public 
interest, and consistent with the protection of investors, to extend 
the Unlinked Temporary Exemptions from Exchange Act Section 8 and 
Exchange Act Rules 8c-1 and 15c2-1 until October 6, 2021.
5. Request for Exemptions From Broker and Dealer Disclosure 
Requirements Relating to Extensions of Credit
    Exchange Act Rule 15c2-5(a)(1) imposes disclosure requirements, and 
Rule 15c2-5(a)(2) imposes suitability requirements, on brokers and 
dealers that that directly or indirectly offer to extend credit to or 
arrange any loan for, or extend to or participate in any loan for, any 
person in connection with the offer or sale of any security to, or the 
attempt to induce the purchase of any security by, such person, subject 
to certain exceptions. Exchange Act Rule 10b-16 imposes additional 
requirements on brokers and dealers that directly or indirectly extend 
credit to any customer in connection with any securities transaction. 
Subject to certain exceptions, these brokers and dealers must establish 
procedures to assure that each customer receives certain lending 
disclosures.\94\ Citing the Commission's 2002 guidance on the 
application of certain securities laws to security futures 
products,\95\ the commenter expressed the view that security-based 
swaps ``should not in and of themselves constitute extensions of 
credit'' subject to these suitability and disclosure requirements.\96\ 
The commenter asked the Commission to confirm this view or, in the 
alternative, exempt security-based swap activity from these extension 
of credit requirements.\97\
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    \94\ See Exchange Act Rule 10b-16(a).
    \95\ Commission Guidance on the Application of Certain 
Provisions of the Securities Act of 1933, the Securities Exchange 
Act of 1934, and Rules Thereunder to Trading in Security Futures 
Products, Exchange Act Release No. 46101 (Jun. 21, 2002), 67 FR 
43234 (Jun. 27, 2002) (``Security Futures Release'').
    \96\ See SIFMA January 2020 Letter at 4.
    \97\ See SIFMA September 2020 Letter at 6-7; SIFMA January 2020 
Letter at 4; SIFMA December 2018 Letter at 5-6; SIFMA November 2018 
Letter at 3.
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    The Commission believes that, based on the facts and circumstances 
of a particular transaction, an extension of credit subject to the 
suitability and disclosure requirements of Rules 15c2-5 and 10b-16 may 
or may not be made in connection with a security-based swap 
transaction. This belief is consistent with both the Commission's 2002 
guidance \98\ on the application of

[[Page 70675]]

extension of credit requirements to security futures products and the 
Commission and the Commodity Futures Trading Commission's 2012 joint 
release \99\ on the definition of ``security-based swap.'' The 
relationship between an extension of credit and a security-based swap 
thus does not shield the extension of credit from application of Rules 
15c2-5 and 10b-16. When an extension of credit is made in connection 
with a security-based swap transaction, however, brokers and dealers 
may as appropriate to the facts and circumstances devise a single 
suitability assessment to satisfy applicable provisions of Rule 15c2-
5(a)(2) and Exchange Act Rule 15Fh-3(f),\100\ as well as a single set 
of disclosures to satisfy applicable provisions of Rules 10b-16 and 
15c2-5(a)(1) and Exchange Act Rule 15Fh-3(b).\101\
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    \98\ This guidance noted that ``Rule 10b-16 applies to all 
extensions of credit, directly or indirectly, to any customer in 
connection with any securities transaction, including a security 
future. Investors in security futures, including those extended 
credit in connection with margining, should benefit from the 
transparency of credit terms fostered by this Rule.'' See Security 
Futures Release, 67 FR at 43246. An extension of credit could be 
part of a transaction involving a security future.
    \99\ The Commissions noted that, depending on the facts and 
circumstances, a loan participation may be a security but not a 
``security-based swap,'' the definition of which excludes certain 
agreements, contracts and transactions that provide for the purchase 
or sale of 1 or more securities on a fixed or contingent basis and 
that are subject to the Securities Act of 1933 and the Exchange Act. 
See Product Definitions Adopting Release, 77 FR at 48251; Exchange 
Act Section 3(a)(68)(A)(i) (a security-based swap must be a ``swap'' 
as defined in certain provisions of Section 1a of the Commodity 
Exchange Act); Commodity Exchange Act Section 1a(47)(B)(v)-(vi) 
(exclusion of these agreements, contracts and transactions from the 
definition of ``swap''). Alternatively, a loan participation could 
be a security-based swap if the grantor of the loan participation 
extends financing to the participant. See Product Definitions 
Adopting Release, 77 FR at 48251. This ``leverage could be 
indicative of an instrument that is merely an exchange of payments 
and not a transfer of the ownership of the underlying loan or 
commitment, such as may be the case with a . . . security-based 
swap.'' Product Definitions Adopting Release, 77 FR at 48251. An 
extension of financing could be part of a transaction classified as 
a security-based swap.
    \100\ 17 CFR 240.15Fh-3(f).
    \101\ 17 CFR 240.15Fh-3(b).
---------------------------------------------------------------------------

    Because an extension of credit may or may not be made in connection 
with a security-based swap transaction, the Commission believes that a 
permanent exemption from Rules 10b-16 and 15c2-5 for security-based 
swap activity is not warranted. The Commission thus is not further 
extending the Unlinked Temporary Exemptions from Exchange Act Rules 
10b-16 and 15c2-5.
6. Request for Exemptions From Certain Limitations on an OTC 
Derivatives Dealer's Activities
    Exchange Act Rule 15a-1 limits the securities activities of an OTC 
derivatives dealer. The commenter made three requests related to these 
limitations. First, Rule 15a-1(a)-(b) permits OTC derivatives dealers 
to engage in dealer activities when the security is an eligible OTC 
derivatives instrument. Eligible OTC derivatives instruments are 
defined to exclude any contract, agreement or transaction that is ``one 
of a class of fungible instruments that are standardized as to their 
material economic terms.'' \102\ The commenter noted that centrally 
cleared security-based swaps might not qualify as eligible OTC 
derivatives instruments and thus Rule 15a-1 might not permit OTC 
derivatives dealers to deal in them.\103\ Based on this specific 
concern, the commenter requested a permanent exemption for all 
security-based swaps with or for eligible contract participants from 
all provisions of Rule 15a-1.\104\
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    \102\ See Exchange Act Rule 3b-13(b)(2), 17 CFR 240.3b-13(b)(2).
    \103\ See SIFMA September 2020 Letter at 7; SIFMA January 2020 
Letter at 4-5. In earlier requests, the commenter also noted that 
``some [security-based swaps] might, in the future, be listed or 
traded on an exchange.'' See SIFMA December 2018 Letter at 6-7; 
SIFMA November 2018 Letter at 4. Because eligible OTC derivatives 
also exclude any contract, agreement or transaction that is listed 
or traded on a national securities exchange or registered national 
securities association or facility or market thereof, in earlier 
letters the commenter also requested an exemption from Rule 15a-1 to 
allow OTC derivatives dealers to deal in those instruments. See 
Exchange Act Rule 3b13(b)(2); SIFMA December 2018 Letter at 6-7; 
SIFMA November 2018 Letter at 4. The Commission is not providing an 
exemption or guidance regarding the application of Rule 15a-1 to 
those security-based swaps because at this time no security-based 
swap is listed or traded on a national securities exchange or 
registered national securities association or facility or market 
thereof. If a security-based swap becomes so listed or traded in the 
future, the Commission would consider a request for exemption from 
or guidance regarding Rule 15a-1 for those instruments based on the 
facts and circumstances at that time.
    \104\ See SIFMA January 2020 Letter at 4-5.
---------------------------------------------------------------------------

    Because centrally cleared security-based swaps typically contain 
standardized terms, they might be fungible instruments standardized as 
to their material economic terms and thus might not qualify as eligible 
OTC derivatives instruments. Though not raised in the commenter's 
request, the same also is true of security-based swaps that are 
eligible for central clearing even if they are not in fact centrally 
cleared. As a result, dealing in these types of security-based swaps 
could eliminate a market participant's OTC derivatives dealer status 
and require full registration as a dealer, even if that security-based 
swap dealing is with an eligible contract participant and thus excluded 
from the statutory definition of ``dealer.'' \105\ Because Exchange Act 
Section 3(a)(5) excludes security-based swap dealing with or for an 
eligible contract participant from the definition of ``dealer,'' the 
Commission believes that this same dealing activity should not cause an 
OTC derivatives dealer to lose its eligibility for Rule 15a-1's 
exemption from full dealer registration. Such a result could be avoided 
if eligible OTC derivative instruments included security-based swaps 
with or for an eligible contract participant whose terms are 
standardized to be eligible for central clearing. Because including 
these security-based swaps within the scope of eligible OTC derivative 
instruments would address the commenter's concern about OTC derivatives 
dealers' ability to deal in centrally cleared security-based swaps (and 
also allows OTC derivatives dealers to deal in security-based swaps 
whose terms are standardized to be eligible for central clearing but 
that are not in fact centrally cleared), the Commission does not 
believe that an exemption for these security-based swaps from all 
provisions of Rule 15a-1 is necessary. Accordingly, pursuant to its 
authority under Exchange Act Section 15(a)(2) and Exchange Act Rule 
15a-1(b)(2), the Commission finds that it is consistent with the public 
interest and the protection of investors to determine that security-
based swaps with or for an eligible contract participant whose terms 
are standardized to be eligible for central clearing are within the 
scope of an ``eligible OTC derivative instrument'' as defined in Rule 
3b-13(b)(2).
---------------------------------------------------------------------------

    \105\ See Exchange Act Rule 15a-1(a)(1)(i) (securities 
activities of an OTC derivatives dealer must be limited, in relevant 
part, to engaging in dealer activities in eligible OTC derivatives 
instruments that are securities). Rule 15a-1's requirement that OTC 
derivatives dealers limit their securities dealing to eligible OTC 
derivatives instruments does not contain an exception for security-
based swaps with an eligible contract participant that are not 
eligible OTC derivatives instruments.
---------------------------------------------------------------------------

    Second, Rule 15a-1(c) generally requires that all securities 
transactions of an OTC derivatives dealer, including OTC derivatives 
transactions, be effected through a full-purpose broker or dealer or 
full-purpose broker or dealer affiliate.\106\ Further, Rule 15a-1(d) 
requires OTC derivatives dealers to conduct certain customer-facing 
contacts through registered representatives of a full-purpose broker or 
full-purpose broker or dealer affiliate. These requirements do not 
apply to transactions with a registered broker or dealer, a bank acting 
in a dealer capacity, a foreign broker or dealer, or any affiliate of 
the OTC derivatives dealer.\107\ The commenter requested that

[[Page 70676]]

the Commission exempt OTC derivatives dealers from the requirement in 
Rule 15a-1(d) because standalone and bank-affiliated SBS Entities are 
not required to employ registered representatives for customer-facing 
SBS transactions.\108\ The commenter also requested a permanent 
exemption for all security-based swaps with or for eligible contract 
participants from all provisions of Rule 15a-1.\109\
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    \106\ See Exchange Act Rule 15a-1(c).
    \107\ See Exchange Act Rule 15a-1(c)-(d).
    \108\ See SIFMA January 2020 Letter at 5.
    \109\ See SIFMA January 2020 Letter at 4-5.
---------------------------------------------------------------------------

    SBS Entities are subject to the Title VII regulatory framework, 
while standalone OTC derivatives dealers are not. The Commission thus 
does not believe that it is necessary or appropriate to exempt 
standalone OTC derivatives dealers from Rule 15a-1 simply because its 
requirements do not apply to other market participants that are subject 
to a separate, comprehensive regulatory framework. By contrast, 
however, a dually-registered OTC derivatives dealer and SBS Entity 
would be subject to the Title VII regulatory framework in relation to 
its security-based swap transactions. Such a dually-registered entity 
could find that Rule 15a-1 requires it either to effect security-based 
swap transactions through a registered broker or dealer (in the case of 
Rule 15a-1(c)) or utilize registered representatives for certain 
customer-facing security-based swap transactions (in the case of Rule 
15a-1(d)), on the one hand, or to register as a full-purpose dealer, on 
the other hand, even if the security-based swap is with or for an 
eligible contract participant and thus excluded from the definition of 
``dealer.'' To avoid this result, the Commission believes that a 
dually-registered OTC derivatives dealer and SBS Entity's security-
based swap transactions with or for an eligible contract participant, 
and its communications and contacts with an eligible contract 
participant concerning a security-based swap transaction, should be 
exempt from Rules 15a-1(c) and (d), respectively.
    Accordingly, pursuant to its authority under Exchange Act Section 
15(a)(2), the Commission finds that it is consistent with the public 
interest and the protection of investors to exempt a registered OTC 
derivatives dealer that is also a registered SBS Entity from Rule 15a-
1(c) solely in connection with security-based swap transactions with or 
for an eligible contract participant, and from Rule 15a-1(d) solely in 
connection with communications and contacts with an eligible contract 
participant concerning a security-based swap transaction.
    Third, the commenter asked the Commission to extend the Unlinked 
Temporary Exemptions from Rule 15a-1 until the compliance date for the 
Commission's SBS Entity registration requirements,\110\ which is 
October 6, 2021.\111\ The current Unlinked Temporary Exemptions from 
Rule 15a-1 are set to expire on November 5, 2020.\112\
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    \110\ See SIFMA December 2020 Letter at 6.
    \111\ See Cross-Border Adopting Release, 85 FR at 6345.
    \112\ See January 2020 Extension Order, 85 FR at 2766.
---------------------------------------------------------------------------

    As discussed above, the Commission is exempting a registered OTC 
derivatives dealer that is also a registered SBS Entity from Rules 15a-
1(c) and (d) for certain security-based swap-related communications and 
contacts. OTC derivatives dealers will not, however, begin counting 
transactions towards the SBS Entity registration thresholds until 
August 6, 2021. The Commission believes that requiring OTC derivatives 
dealers to implement policies, procedures and controls to comply with 
Rules 15a-1(c) and (d) for the short period until they begin to 
register as SBS Entities potentially could impose undue cost and 
resource burdens and cause unnecessary market disruption. Rather, 
extending the Unlinked Temporary Exemptions from Rule 15a-1(c) and (d) 
until October 6, 2021, would allow market participants to implement 
policies, procedures and controls that take into account this new 
limited exemptive relief from Rule 15a-1(c) and (d) at the time when 
that relief can be utilized. Accordingly, pursuant to its authority 
under Exchange Act Section 36, the Commission finds that it is 
necessary or appropriate in the public interest, and consistent with 
the protection of investors, to extend the Unlinked Temporary 
Exemptions from Rules 15a-1(c) and (d) until October 6, 2021. This 
limited temporary exemption addresses the commenter's concern about OTC 
derivatives dealers' ability to conduct customer-facing contacts 
without a registered representative until they can begin to register as 
SBS Entities.
7. Exchange Act Section 29(b)
    Exchange Act Section 29(b) \113\ generally provides that contracts 
made in violation of any provision of the Exchange Act or the rules or 
regulations thereunder shall be void ``(1) as regards the rights of any 
person who, in violation of any such provision . . . shall have made or 
engaged in the performance of any such contract, and (2) as regards the 
rights of any person who, not being a party to such contracts, shall 
have acquired any right thereunder with actual knowledge of the facts 
by reason of which the making or performance of such contracts in 
violation of any such provision.'' In 2011, the Commission provided 
temporary exemptive relief from Section 29(b) in connection with the 
temporary exemptions that include the Linked Temporary Exemptions and 
Unlinked Temporary Exemptions discussed in this Order. By its terms, 
that exemption from Section 29(b) will expire on November 5, 2020 (for 
the Unlinked Temporary Exemptions discussed but not extended in this 
Order) or October 6, 2021 (for the remaining Linked Temporary 
Exemptions and Unlinked Temporary Exemptions discussed in this 
Order).\114\ The Commission made clear that it did not believe that 
Section 29(b) would apply to provisions subject to those temporary 
exemptions, and that it provided the exemption from Section 29(b) only 
to make that view clear to market participants and ``to eliminate any 
possible legal uncertainty or market disruption.'' \115\ Likewise, the 
Commission believes that Section 29(b) would not apply to circumstances 
in which a market participant complies with the permanent exemptive 
relief provided in this Order, and therefore, for the reasons discussed 
above, is not providing further exemptive relief from Section 29(b).
---------------------------------------------------------------------------

    \113\ 15 U.S.C. 78cc(b).
    \114\ See 2011 Exchange Act Exemptive Order, 76 FR at 39940 
(Section 29(b) exemptive relief in connection with temporary 
exemptive relief from other Exchange Act provisions expires at 
``such time as the underlying exemptive relief expires'').
    \115\ See 2011 Exchange Act Exemptive Order, 76 FR at 39926.
---------------------------------------------------------------------------

II. Exemption in Connection With Registration of Security-Based Swap 
Dealers and Major Security-Based Swap Participants

    Also in 2011, the Commission issued an order providing separate 
temporary exemptive relief from Section 29(b) in connection with the 
portion of the Dodd-Frank Act's security-based swap-related amendments 
to the Exchange Act for which the Commission has taken the view that 
compliance will be triggered by registration of a person or by adoption 
of final rules by the Commission, or for which the Commission provided 
an exception or exemptive relief.\116\ By its terms, most of

[[Page 70677]]

this exemptive relief expires on such date as the Commission 
specifies.\117\
---------------------------------------------------------------------------

    \116\ See Temporary Exemptions and Other Temporary Relief, 
Together with Information on Compliance Dates for New Provisions of 
the Securities Exchange Act of 1934 Applicable to Security-Based 
Swaps, Exchange Act Release No. 64678 (Jun. 15, 2011), 76 FR 36287, 
36307 (``2011 Compliance Date Order'').
    \117\ See 2011 Compliance Date Order, 76 FR at 36307. The 
Section 29(b) exemption related to exemptions from Exchange Act 
Sections 3E(f) and 15F(b)(6) provided in the 2011 Compliance Date 
Order expire on the compliance date for rules governing the 
registration of SBS Entities, which will be October 6, 2021. See 
Order Pursuant to Sections 15F(b)(6) and 36 of the Securities 
Exchange Act of 1934 Extending Certain Temporary Exemptions and a 
Temporary and Limited Exception Related to Security-Based Swaps, 
Exchange Act Release No. 75919 (Sep. 15, 2015), 80 FR 56519 (Sep. 
18, 2015). The exemption from Exchange Act Section 6(l) provided in 
the 2011 Compliance Date Order expired 60 days after the August 13, 
2012, publication of the Product Definitions Adopting Release in the 
Federal Register. See Order Extending Temporary Conditional 
Exemption in Connection with the Effectiveness of the Definition of 
Eligible Contract Participant, Exchange Act Release No. 67480 (Jul. 
20, 2012), 77 FR 43878, 43879 (Jul. 26, 2012). In a later release, 
the Commission implied that the 2011 Compliance Date Order had 
specified that the Section 29(b) exemption related to this exemption 
from Section 6(l) would expire at the same time as the exemption 
from Section 6(l). See Further Definition of ``Swap Dealer,'' 
``Security-Based Swap Dealer,'' ``Major Swap Participant,'' ``Major 
Security-Based Swap Participant'' and ``Eligible Contract 
Participant,'' Exchange Act Release No. 66868 (Apr. 27, 2012), 77 FR 
30596, 30700 n.1248 (May 23, 2012). Rather, the 2011 Compliance Date 
Order specified that this Section 29(b) exemption would expire on 
such date as the Commission specifies. See 2011 Compliance Date 
Order, 76 FR at 36307. Market participants thus may be uncertain 
whether this portion of the 29(b) exemption has expired.
---------------------------------------------------------------------------

    The Commission made clear then that it did not believe that Section 
29(b) would apply to the Dodd-Frank Act's security-based swap-related 
amendments to the Exchange Act for which the Commission has taken the 
view that compliance will be triggered by registration of a person or 
by adoption of final rules by the Commission, or for which the 
Commission provided an exception or exemptive relief, and that it 
provided the exemption from Section 29(b) only ``to avoid possible 
legal uncertainty or market disruption.'' \118\ The Commission granted 
this temporary exemptive relief, however, ``to avoid possible legal 
uncertainty or market disruption.'' \119\ The Commission believes now, 
more than nine years after the relevant amendments to the Dodd-Frank 
Act took effect, that the opportunity for possible legal uncertainty or 
market disruption related to the effective date of these amendments has 
passed. To provide market participants with certainty about when this 
separate temporary exemptive relief from Section 29(b) will expire, the 
Commission now believes that all of this exemptive relief from Section 
29(b) should expire on the same date. Because some of this relief is 
already scheduled to expire on the compliance date for rules regarding 
registration and regulation of SBS Entities,\120\ which will be October 
6, 2021, the Commission thus believes that it is appropriate for all of 
this Section 29(b) relief to expire on that date. Accordingly, the 
Commission has determined that this exemption from Section 29(b) shall 
expire on October 6, 2021.
---------------------------------------------------------------------------

    \118\ See 2011 Compliance Date Order, 76 FR at 36305.
    \119\ See id.
    \120\ See Cross-Border Adopting Release, 85 FR at 6345.
---------------------------------------------------------------------------

III. Conclusion

    It is hereby ordered, pursuant to Section 15(a)(2) of the Exchange 
Act, that a ``foreign broker or dealer,'' as such term is defined in 
Rule 15a-6(b)(3) under the Exchange Act, whose activities in securities 
other than security-based swaps with or for an eligible contract 
participant are conducted either in compliance with Rule 15a-6 under 
the Exchange Act or without the jurisdiction of the United States, 
shall be exempt from the registration requirement of Section 15(a)(1) 
of the Exchange Act solely in connection with the foreign broker or 
dealer's security-based swap dealing with or for an eligible contract 
participant.
    It is hereby ordered, pursuant to Section 15(a)(2) of the Exchange 
Act, that until November 1, 2022, a registered security-based swap 
dealer and its associated persons shall be exempt from the broker 
registration requirement of Section 15(a)(1) of the Exchange Act solely 
in connection with such registered security-based swap dealer or 
associated person arranging, negotiating or executing a security-based 
swap transaction with or for a non-U.S. person eligible contract 
participant on behalf of a non-U.S. person qualified majority-owned 
affiliate; provided that (A) such registered security-based swap dealer 
creates and maintains books and records relating to such arranging, 
negotiating or executing activity that are required by Rules 18a-5 and 
18a-6 under the Exchange Act and (B) if Rule 10b-10 under the Exchange 
Act would apply to such arranging, negotiating or executing activity, 
such registered security-based swap dealer provides to the customer the 
disclosures required by Rule 10b-10(a)(2) (excluding Rule 10b-
10(a)(2)(i) and (ii)) and Rule 10b-10(a)(8) in accordance with the time 
and form requirements set forth in Rule 15Fi-2(b) and (c) under the 
Exchange Act or, alternatively, promptly after discovery of any defect 
in such registered security-based swap dealer's good faith effort to 
comply with such requirements. For purposes of this exemption, the term 
``qualified majority-owned affiliate'' means a majority-owned affiliate 
(as such term is defined in Rule 3a71-3(a)(10) under the Exchange Act) 
of such registered security-based swap dealer that is itself also a 
registered security-based swap dealer.
    It is hereby further ordered, pursuant to Section 36 of the 
Exchange Act, that a broker or dealer shall be exempt from the 
requirement to give or send to a customer the disclosures required by 
Rule 10b-10(a) under the Exchange Act at or before completion of the 
transaction solely in connection with such broker or dealer or its 
associated persons arranging, negotiating or executing a security-based 
swap transaction on behalf of a qualified majority-owned affiliate; 
provided that such broker or dealer gives or sends to the customer 
written notification containing the disclosures required by Rule 10b-
10(a) under the Exchange Act in connection with such arranging, 
negotiating or executing in accordance with the time and form 
requirements for a trade acknowledgment set forth in Rule 15Fi-2(b) and 
(c) under the Exchange Act and, as applicable, Rule 10b-10(c) under the 
Exchange Act. For purposes of this exemption, the term ``qualified 
majority-owned affiliate'' means a majority-owned affiliate (as such 
term is defined in Rule 3a71-3(a)(10) under the Exchange Act) of such 
broker or dealer that is a registered security-based swap dealer.
    It is hereby further ordered, pursuant to Section 36 of the 
Exchange Act, that brokers and dealers are exempt from the requirements 
of Rules 8c-1 and 15c2-1 under the Exchange Act with respect to 
securities and money market instruments carried in a security-based 
swap account of a security-based swap customer; provided the account 
does not hold ``margin securities'' as defined in Rule 15c3-3 under the 
Exchange Act.
    It is hereby further ordered, pursuant to Section 15(a)(2) of the 
Exchange Act and Rule 15a-1(b)(2) under the Exchange Act, that a 
security-based swap with or for an eligible contract participant whose 
terms are standardized to make the security-based swap eligible for 
central clearing shall be within the scope of an ``eligible OTC 
derivative instrument'' as defined in Rule 3b-13 under the Exchange 
Act.
    It is hereby further ordered, pursuant to Section 15(a)(2) of the 
Exchange Act, that a registered OTC derivatives dealer also registered 
with the Commission as a security-based swap dealer or major security-
based swap participant shall be exempt from Rule 15a-1(c) under the

[[Page 70678]]

Exchange Act solely in connection with security-based swap transactions 
with or for an eligible contract participant and Rule 15a-1(d) under 
the Exchange Act solely in connection with communications and contacts 
with an eligible contract participant concerning a security-based swap 
transaction.
    It is hereby further ordered, pursuant to Section 36 of the 
Exchange Act, that the Unlinked Temporary Exemptions from Section 8 of 
the Exchange Act and from Rules 8c-1, 15c2-1, 15a-1(c) and 15a-1(d) 
under the Exchange Act in connection with the revision of the Exchange 
Act definition of ``security'' to encompass security-based swaps, in 
each case contained in the 2011 Exchange Act Exemptive Order and 
extended in the January 2020 Extension Order, are extended until 
October 6, 2021.
    It is hereby further ordered, pursuant to Section 36 of the 
Exchange Act, that the exemption from Section 29(b) of the Exchange Act 
contained in the 2011 Compliance Date Order shall expire on October 6, 
2021.

    By the Commission.
Vanessa A. Countryman,
Secretary.

[FR Doc. 2020-24598 Filed 11-4-20; 8:45 am]
BILLING CODE 8011-01-P