Cross-Border Final Rule Adopted: Countdown to the SBSD Registration Compliance Date Begins
December 31, 2019
On December 18, 2019, the Securities and Exchange Commission (“SEC”) adopted supplemental guidance and rule amendments (the “Final Rule”) addressing the cross-border application of certain rules regulating security-based swaps (“SBS”) pursuant to Title VII of the Dodd-Frank Act. In particular, the Final Rule includes:
- “Market Color” Guidance. Guidance excluding certain “market color” provided by U.S. personnel from triggering Title VII rules applicable to SBS transactions between non-U.S. persons that are arranged, negotiated, or executed by personnel located in a U.S. branch or office of a non-U.S. SBS dealer (“SBSD”) or its agent (“ANE Transactions”);
- De Minimis Counting Exception for Certain ANE Transactions. A conditional exception from the requirement that a non-U.S. SBSD count ANE Transactions towards its de minimis registration threshold, premised on the U.S. personnel involved in the ANE Transactions being associated with an SEC-registered SBSD or broker-dealer. The conditional exception is only available if the aggregate gross notional amount of covered inter-dealer SBS positions connected with dealing activity subject to the exception over the course of the immediately preceding 12 months does not exceed $50 billion. The Final Rule also provides a limited exemption from registration as a broker-dealer for an SBSD and its associated persons (“APs”) engaging in the “arranging, negotiating, or executing activity” on behalf of a non-U.S. person availing itself of the de minimis counting exception;
- Guidance on Non-U.S. SBSD Certifications and Legal Opinions; Conditional Registration. Guidance regarding the requirement that a non-U.S. SBSD, upon registration with the SEC, provide a certification and legal opinion that the SEC can promptly access the SBSD’s books and records and conduct on-site inspections and exams, as well as a conditional registration framework allowing a non-U.S. SBSD to provide the certification and opinion up to 24 months after the initial SBSD registration date (although this framework does not provide relief from corollary requirements that are triggered when parties (other than regulators) apply for substituted compliance); and
- Background Check Relief. Relief from certain rules requiring background checks for APs, including (a) an exclusion from the statutory disqualification prohibition for non-U.S. APs of an SBSD who do not effect, and are not involved in effecting, SBS transactions with U.S. counterparties, (b) an exception from the requirement that an SBSD make and keep a current questionnaire or application for employment for each AP who effects, or is involved in effecting, SBS transactions on the SBSD’s behalf for any AP who is excluded from the statutory disqualification prohibition, and (c) an exception that allows certain information to be excluded in a questionnaire or application for employment for a foreign AP that effects, or is involved in effecting, SBS transactions, unless the SBSD (1) is required to obtain such information under applicable law or (2) obtains such information in conducting a customary background check.
The Final Rule starts the clock on SBSD registration and compliance with related SBSD requirements, for which the compliance date will be 18 months after the later of (1) March 1, 2020 or (2) 60 days following publication of the release for the Final Rule in the Federal Register.
Although the SEC requested comment in the Proposal on the application of Regulation SBSR and SBS business conduct requirements to ANE Transactions, the Final Rule did not address the application of these requirements to ANE Transactions. Especially given concerns that commenters raised in response to those requests for comment, as well as the decision by the Commodity Futures Trading Commission (“CFTC”) in its recent cross-border proposal not to apply Title VII rules on the basis that U.S. personnel are involved in arranging, negotiating, or executing a swap, a fundamental question remains as to whether the SEC needs to apply Title VII rules to ANE Transactions. It accordingly remains possible that the SEC will continue to fine tune its treatment of ANE Transactions.
The following memorandum provides more details regarding the Final Rule.