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SEC Staff Provides Guidance on Requirements for Substituted Compliance Applications

nihal.patel@cwt.com's picture
Commentary by Nihal Patel

The SEC Division of Trading and Markets issued guidance to "facilitate applications" for certain substituted compliance based on the security-based swap requirements of a non-U.S. jurisdiction.

According to the SEC staff, the guidance is intended to help persons submitting applications under SEA Rule 3a71-6 by (i) posing relevant questions regarding the relevant foreign requirements in comparison with the Exchange Act requirements, and (ii) describing the relevant Exchange Act requirements in detail.

The staff provided information on five categories of requirements that will be applicable to security-based swap dealers and/or major security-based swap participants:

  • risk control: (i) capital, (ii) margin, (iii) risk management system, and (iv) trade acknowledgment and verification requirements;

  • recordkeeping and reporting: (i) record creation, (ii) record maintenance, and (iii) reporting and notice requirements;

  • internal supervision and compliance: (i) supervision, (ii) conflict of interest, and (iii) chief compliance officer requirements;

  • counterparty protection: (i) fair and balanced communications, (ii) disclosure of certain risks, characteristics, incentives and conflicts, (iii) daily mark disclosure, (iv) "know your counterparty", (v) suitability of recommendations, and (vi) disclosure of clearing rights requirements; and

  • additional requirements: (i) eligible contract participant verification and (ii) special entities and political contributions.

Commentary

The staff outline provides useful detail to persons who will be submitting applications. Submitters may include (potentially) regulated entities, groups of such entities, and foreign regulatory authorities. The staff (and Commissioner Peirce) stressed that the reviews would focus on "regulatory outcomes" rather than undertake a rule-by-rule review.

It will be interesting to see how far that "outcomes-based" view leads the SEC. Certain aspects of the regulatory regime under Title VII are quirky in the sense that other jurisdictions generally don't have equivalent requirements, or even policies. The staff acknowledges as much, particularly for the "additional requirements" category (see p. 54). For these types of requirements, the staff said that it will look at "whether foreign regulatory requirements adequately reflect the same particular interests and protections [as under relevant U.S. statutes]."

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