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Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices
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report would be inconsistent with its mandate to make a positive substituted compliance determination only when the Covered Entity complies with comparable foreign requirements, and is not amending the Order to provide this option. A Covered Entity that produces multiple UK compliance reports each year, but wishes to prepare a single annual compliance report addressing its compliance with Exchange Act requirements, is not required to use substituted compliance for chief compliance officer requirements, even if it chooses to use substituted compliance for other Exchange Act requirements.
Such a Covered Entity instead could choose to comply directly with Exchange Act chief compliance officer requirements, including requirements related to the annual compliance report, rather than use substituted compliance for those requirements.
Third, the commenter requested that the proposed Order be modified to narrow the scope of the compliance reports provided to the Commission, stating that the Covered Entity should be permitted to provide the Commission its UK compliance reports only to the extent that they are related to a Covered Entitys business as an SBS Entity. 364
The commenter stated that it would be disproportionate and unnecessary to require the Covered Entity to provide the Commission all of its UK
compliance reports prepared pursuant to UK MiFID Org Reg article 222c.365
The Commission disagrees, and believes that the Commission should be fully informedconsistent with the scope of UK MiFID Org Reg article 222cas to the implementation and effectiveness of the Covered Entitys overall control environment for investment services and activities, as well as associated risks, complaints handling and remedies. The alternative approach of apportioning compliance reports into two buckets, and providing the Commission reports in only one of the buckets, does not match the analytic approach of considering the Exchange Act and UK frameworks as a whole.
Accordingly, the Commission is retaining the requirement that a Covered Entity provide all reports required pursuant to UK MiFID Org Reg article 222c to the Commission.
3. Antitrust Requirements The Commission did not receive any comments on the absence of a positive substituted compliance determination for antitrust requirements in Exchange 364 See
SIFMA 5/3/2021 Letter at 21 and Appendix A part d2.
365 See SIFMA 5/3/2021 Letter at 21.

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Act section 15Fj6 and related internal supervision requirements of Exchange Act rule 15Fh3h2iiiI
in the proposed Order. The Commission continues to believe that allowing an alternative means of compliance would not lead to outcomes comparable to the Exchange Act, and is not making a positive substituted compliance determination for those requirements.366
VII. Substituted Compliance for Counterparty Protection Requirements A. Proposed Approach The FCA Application in part requested substituted compliance in connection with counterparty protection requirements relating to:
Disclosure of material risks and characteristics and material incentives or conflicts of interestRequirements that an SBS Entity disclose to certain security-based swap counterparties certain information about the material risks and characteristics of the securitybased swap, as well as material incentives or conflicts of interest that the SBS Entity may have in connection with the security-based swap.
Know your counterparty Requirements that an SBS Entity establish, maintain, and enforce written policies and procedures to obtain and retain certain information regarding a security-based swap counterparty that is necessary for conducting business with that counterparty.
SuitabilityRequirements for a security-based swap dealer to undertake reasonable diligence to understand the potential risks and rewards of any recommendation of a security-based swap or trading strategy involving a security-based swap that it makes to certain counterparties and to have a reasonable basis to believe that the recommendation is suitable for the counterparty.
Fair and balanced communicationsRequirements that an SBS Entity communicate with securitybased swap counterparties in a fair and balanced manner based on principles of fair dealing and good faith.
Daily mark disclosure Requirements that an SBS Entity provide daily mark information to certain security-based swap counterparties.
Clearing rights disclosure Requirements that an SBS Entity provide certain counterparties with information regarding clearing rights under the Exchange Act.
366 Non-U.S. SBS Entities should assess the applicability of the Exchange Acts antitrust prohibitions to their security-based swap businesses.

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Taken as a whole, these counterparty protection requirements help to bring professional standards of conduct to, and increase transparency in, the security-based swap market and to require registered entities to treat parties to these transactions fairly. 367
The proposed Order provided for substituted compliance in connection with disclosure of material risks and characteristics, disclosure of material incentives or conflicts of interest, know your counterparty, suitability, fair and balanced communications, and daily mark disclosure requirements.368
In proposing to provide conditional substituted compliance for these requirements, the Commission preliminarily concluded that the relevant UK requirements in general would produce regulatory outcomes that are comparable to requirements under the Exchange Act, by subjecting Covered Entities to obligations that promote standards of professional conduct, transparency, and the fair treatment of parties.
As proposed, substituted compliance for these requirements would be subject to certain conditions to help ensure the comparability of outcomes. First, under the proposed Order, substituted compliance for disclosure of material risks and characteristics, disclosure of material incentives or conflicts of interest, know your counterparty, suitability, and fair and balanced communications requirements would be conditioned on Covered Entities being subject to, and complying with, relevant UK requirements.369 Second, the 367 See Business Conduct Adopting Release, 81
FR at 30065. These transaction-level requirements apply only to a non-U.S. SBS Entitys transactions with U.S. counterparties apart from certain transactions conducted through a foreign branch of the U.S. counterparty, or to transactions arranged, negotiated, or executed in the United States. See Exchange Act rule 3a713c exception from business conduct requirements for a security-based swap dealers foreign business; see also Exchange Act rule 3a713a3, 8, and 9
definitions of transaction conducted through a foreign branch, U.S. business and foreign business.
368 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 1841415.
369 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18392 n.134. Each of the comparable UK requirements listed in the proposed Order applies to a uniquely defined set of UKauthorized firms. See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18392 n.137.
To assist UK firms in determining whether they are subject to these requirements, the Commission preliminarily determined that any Covered Entity would be subject to the required UK requirements related to disclosure of material risks and characteristics, disclosure of material incentives or conflicts of interest, suitability, and fair and balanced communications and thus eligible to apply substituted compliance in these areas. The Commission also preliminarily determined that any
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