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Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices Commission on November 1, 2021.10
Substituted compliance should assist relevant non-U.S. security-based swap market participants in preparing for registration.
B. Specific Prerequisites 1. Comparability of Regulatory Outcomes
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Rule 3a716, adopted by the Commission in 2016, describes the requirements for the Commission to make a substituted compliance determination. Under that rule, the Commission must determine that the analogous foreign requirements are comparable to otherwise applicable requirements under the Exchange Act i.e., the relevant requirements in the Exchange Act and the rules and regulations thereunder, after accounting for factors such as the scope and objectives of the relevant foreign regulatory requirements and the effectiveness of the supervisory compliance program administered, and the enforcement authority exercised by the foreign authority.11 The comparability assessments are to be based on a holistic approach that will focus on the comparability of regulatory outcomes rather than predicating substituted compliance on requirement-by-requirement similarity. 12
10 See Key Dates for Registration of SecurityBased Swap Dealers and Major Security-Based Swap Participants, available at: https
www.sec.gov/page/key-dates-registration-securitybased-swap-dealers-and-major-security-basedswap-participants.
11 See Exchange Act rule 3a716a2.
12 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18380; see also Business Conduct Adopting Release, 81 FR at 3007879
recognizing that different regulatory systems may be able to achieve some or all of those regulatory outcomes by using more or fewer specific requirements than the Commission, and that in assessing comparability the Commission may need to take into account the manner in which other regulatory systems are informed by business and market practices in those jurisdictions. The Commissions assessment of a foreign authoritys supervisory and enforcement effectivenessas part of the broader comparability analysiswould be expected to consider not only overall oversight activities, but also oversight specifically directed at conduct and activity relevant to the substituted compliance determination. For example, it would be difficult for the Commission to make a comparability determination in support of substituted compliance if oversight is directed solely at the local activities of foreign securitybased swap dealers, as opposed to the cross-border activities of such dealers. Business Conduct Adopting Release, 81 FR at 30079 footnote omitted. In the UK Substituted Compliance Notice and Proposed Order, the Commission preliminarily concluded that this comparability prerequisite was met in connection with a number of requirements under the Exchange Act, in some cases with the addition of conditions to help ensure the comparability of regulatory outcomes.

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2. Memorandum of Understanding Exchange Act rule 3a716a2ii further predicates the availability of substituted compliance on the Commission having entered into a memorandum of understanding and/or other arrangement with the relevant foreign financial regulatory authority or authorities addressing supervisory and enforcement cooperation and other matters arising under the substituted compliance determination. 13 The FCA
Application asked the Commission to permit certain entities regulated and supervised by both the FCA and the UKs Prudential Regulation Authority PRA to use substituted compliance.
Accordingly, the Commission recently entered into a memorandum of understanding with the FCA and the Bank of England including in its capacity as the PRA, thus satisfying this prerequisite.14
3. Adequate Assurances A foreign financial regulatory authority may submit a substituted compliance application only if the authority provides adequate assurances that no law or policy would impede the ability of any entity that is directly supervised by the authority and that may register with the Commission to provide prompt access to the Commission to such entitys books and records or to submit to onsite inspection or examination by the Commission. 15
In the UK Substituted Compliance Notice and Proposed Order, the Commission stated that the FCA had satisfied this prerequisite in the Commissions preliminary view, taking into account information and representations that the FCA provided regarding certain UK requirements that are relevant to the Commissions ability to inspect, and access the books and records of, firms using substituted compliance pursuant to the Order.16
The Commission received no comments on this preliminary view and has not changed its view.
C. Commenter Views 1. Prerequisites to Substituted Compliance One commenter stated that the Commission should make a positive substituted compliance determination 13 Exchange
Act rule 3a716a2ii.
Commission expects to publish a copy of the memorandum of understanding on its website at www.sec.gov under the Substituted Compliance tab, which is located on the SecurityBased Swap Markets page in the Division of Trading and Markets section of the site.
15 See Exchange Act rule 3a716c3.
16 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18379 n.8.
14 The
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only when the Commission determines that granting substituted compliance promotes the protection of the U.S.
financial system.17 The commenter also stated that grants of substituted compliance must be predicated on a well-supported, evidence-based determination that the relevant foreign requirements will produce substantially similar regulatory outcomes.18 Congress gave the Commission authority in Title VII to implement a security-based swap framework to address the potential effects of security-based swap activity on U.S. market participants, the financial stability of the United States, the transparency of the U.S. financial system and the protection of counterparties.19 When adopting rules regarding the application of Title VIIs definitions of security-based swap dealer and major security-based swap participant in the cross-border context, the Commission was guided by the purposes of Title VII and the applicable requirements of the Exchange Act, which include consideration of not only risk to the U.S. financial system but also other factors such as counterparty protection, transparency, prevention of evasion, economic impacts and consultation and coordination with other U.S. financial regulatory authorities and foreign financial regulatory authorities.20 In its 17 See Letter from Dennis M. Kelleher, President and CEO, Stephen Hall, Legal Director and Securities Specialist, and Jason Grimes, Senior Counsel, Better Markets, Inc. May 3, 2021 Better Markets Letter at 34. Comments may be found on the Commissions website at: https
www.sec.gov/comments/s7-04-21/s70421.htm.
18 See Better Markets Letter at 4.
19 See Exchange Act Release No. 72472 June 25, 2014, 79 FR 47278, 47286 Aug. 12, 2014 CrossBorder Entity Definitions Adopting Release citing Pub. L. 111203, Preamble stating that the DoddFrank Act was enacted to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end too big to fail, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes; Public Law 111203, sections 701774 providing for, among other things, a comprehensive new regulatory framework for security-based swaps, including by:
i Providing for the registration and comprehensive regulation of security-based swap dealers and major security-based swap participants; ii imposing clearing and trade execution requirements on security-based swaps, subject to certain exceptions;
and iii creating real-time reporting and public dissemination regimes for security-based swaps.
20 See Cross-Border Entity Definitions Adopting Release, 79 FR at 47292 purposes of Title VII
include consideration of risk to the U.S. financial system and promotion of transparency in the U.S.
financial system; Exchange Act section 30c, 15
U.S.C. 78ddc Commission rulemaking authority to prevent evasion of Title VII; Exchange Act section 3f, 15 U.S.C. 78cf requirement to consider whether certain Commission rulemaking
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