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khammond on DSKJM1Z7X2PROD with NOTICES3

Federal Register / Vol. 86, No. 145 / Monday, August 2, 2021 / Notices would include the relevant securitybased swap and funds related to it, to be held by a third party, the risks of the Covered Entity holding client assets in an omnibus account, the risks of holding client assets that are not segregated from the assets of the Covered Entity or a third party holding the clients assets and the risks of the Covered Entity entering into securities financing transactions using client assets. A Covered Entity also would have to inform the client when the relevant security-based swap is held in an account subject to the laws of a jurisdiction other than France and indicate that client rights relating to the security-based swap may differ from those under French law. A Covered Entity also would have to inform the client about any security interest, lien or right of set-off that the Covered Entity or a depository may have over client assets. In comparison, Exchange Act rule 15Fh3b1 requires a Covered Entity, before entering into a securitybased swap, to disclose to certain counterparties material information about the security-based swap in a manner reasonably designed to allow the counterparty to assess the material risks and characteristics of the securitybased swap, which may include market, credit, liquidity, foreign currency, legal, operational and any other applicable risks of the security-based swap. Legal and operational risks of a security-based swap include the types of risks to client assets that MiFID Org Reg article 49
would require the Covered Entity to disclose. Accordingly, the Commission is retaining the references to these provisions.
The commenter stated that MiFID Org Reg 50 relates to the disclosure of costs and charges and thus goes beyond the scope of Exchange Act material risks and characteristics disclosure requirements.402 Exchange Act rule 15Fh3b1 requires a Covered Entity, before entering into a security-based swap, to disclose to certain counterparties material information about the security-based swap in a manner reasonably designed to allow the counterparty to assess the material risks and characteristics of the securitybased swap, which may include the material economic terms of the securitybased swap and the rights and obligations of the parties during the term of the security-based swap. The material economic terms of a securitybased swap and the rights and obligations of the parties include the costs and charges associated with the security-based swap. Accordingly, the
Commission is retaining the references to these provisions.
Additionally, the commenter requested that MiFID article 244 and MFC D. 53315 be narrowed to only require compliance with MiFID article 244b and MFC D. 53315.2, because the parts proposed for removal relate
to whether the advice is provided on an independent basis and . . . to costs and charges. 403 As noted above, Exchange Act rule 15Fh3b1 requires a Covered Entity, before entering into a security-based swap, to disclose to certain counterparties material information about the security-based swap in a manner reasonably designed to allow the counterparty to assess the material risks and characteristics of the security-based swap, which may include the material economic terms of the security-based swap and the rights and obligations of the parties during the term of the security-based swap. The Commission believes that a counterparty would consider the independence of the Covered Entity in the counterpartys assessment of these risks and characteristics. The Commission addressed the provisions related to costs and charges above. The holistic approach taken by the Commission in considering whether regulatory requirements are comparable further warrants the inclusion of these provisions in the Order. Accordingly, the Commission is retaining the references to these provisions.
2. Disclosure of Information Regarding Material Incentives or Conflicts of Interest The commenter requested that the Commission not require a Covered Entity to be subject to and comply with MiFID article 249 and MFC L. 53312
4.404 The commenter stated that these provisions relate to third-party payments and thus go beyond the scope of Exchange Act material incentives or conflicts of interest disclosure requirements. These provisions would require a Covered Entity to refrain from paying to, or accepting from, third parties certain fees, commissions or non-monetary benefits in connection with providing an investment service inducements and, in circumstances in which the general prohibition on inducements does not apply, to disclose to the client the existence, nature and amount of the inducement prior to providing the service and in a manner that is comprehensive, accurate and understandable. In comparison, Exchange Act rule 15Fh3b2 requires
402 Id.

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a Covered Entity, before entering into a security-based swap, to disclose to certain counterparties material information about the security-based swap in a manner reasonably designed to allow the counterparty to assess the material incentives or conflicts of interest that the Covered Entity may have in connection with the securitybased swap, including any compensation or other incentives from any source other than the counterparty.
Disclosure of this compensation or other incentives would include disclosure of the existence, nature and amount of an inducement that MiFID article 249 and MFC L. 533124 would require the Covered Entity to disclose. Accordingly, the Commission is retaining the references to these provisions.
The Commission is issuing the disclosure of information regarding material incentives or conflicts of interest section of the Order largely as proposed, with the inclusion of two additional EU requirements.405 MAR
Investment Recommendations Regulation articles 5 and 6 enumerate specific obligations in relation to disclosure of interests or of conflicts of interest. Article 5 requires that persons who produce recommendations disclose in their recommendations all relationships and circumstances that may reasonably be expected to impair the objectivity of the recommendation, including interests or conflicts of interest. Article 6 imposes additional obligations on certain entities, including the disclosure of information on their interests and conflicts of interest concerning the issuer to which a recommendation relates. The Commission believes that requiring Covered Entities to be subject to and comply with MAR Investment Recommendations Regulation articles 5
and 6 contributes to a determination that relevant French and EU
requirements produce regulatory outcomes that are comparable to relevant requirements of Exchange Act rule 15Fh3b. Accordingly, the Commission is adding these two requirements to the Orders list of French and EU disclosure of information regarding material incentives or conflicts of interest requirements that the Covered Entity must be subject to and comply with.406
3. Know your counterparty The commenter requested that the Commission not require a Covered Entity to be subject to and comply with a series of French and EU know your
403 Id.

405 See
404 Id.

406 See
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para. e2 of the Order.
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