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Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices may use substituted compliance for another set of Exchange Act requirements addressed in the Order if it complies with the conditions to the relevant parts of the Order.
Under the Order, substituted compliance for counterparty protection requirements relating to disclosure of information regarding material risks and characteristics, disclosure of information regarding material incentives or conflicts of interest, know your counterparty, suitability, fair and balanced communications, and daily mark disclosure is not subject to a condition that the Covered Entity apply substituted compliance for related recordkeeping requirements in Exchange Act rules 18a5 and 18a6. A
Covered Entity that applies substituted compliance for one or more counterparty protection requirements, but does not apply substituted compliance for the related recordkeeping requirements in Exchange Act rules 18a5 and 18a6, will remain subject to the relevant provisions of Exchange Act rules 18a5
and 18a6. Those rules require the Covered Entity to make and preserve records of its compliance with Exchange Act counterparty protection requirements and of its security-based swap activities required or governed by those requirements. A Covered Entity that applies substituted compliance for a counterparty protection requirement, but complies directly with related recordkeeping requirements in rules 18a5 and 18a6, therefore must make and preserve records of its compliance with the relevant conditions to the Order and of its security-based swap activities required or governed by those conditions and/or referenced in the relevant parts of rules 18a5 and 18a 6.
The Commission details below its consideration of comments on the proposed Order.

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1. Disclosure of Information Regarding Material Risks and Characteristics A commenter requested that the Commission not require a Covered Entity to be subject to and comply with some of these specified requirements.383
By contrast, another commenter stated that, if the Commission makes a positive substituted compliance determination, it must at a minimum ensure that the conditions in the proposed Order are applied with full force and without exceptions or dilution. 384 The 383 See SIFMA 5/3/2021 Letter at 21 and Appendix A part e1.
384 See Better Markets Letter at 2.

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Commission details below its consideration of each of these requests.
First, the commenter stated that FCA
COBS 2.2A.2R1d, 6.1ZA.11R, 6.1ZA.12R, and 6.1ZA.14UK and UK
MiFID Org Reg article 50 relate to disclosure of costs and charges and thus go beyond the scope of Exchange Act material risks and characteristics disclosure requirements. 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 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.
Second, the commenter stated that FCA COBS 2.2A.2R1c relates to insurance-based investments and thus goes beyond the scope of Exchange Act material risks and characteristics disclosure requirements. FCA COBS
2.2A.2R1c would require a Covered Entity to provide its client in good time appropriate information about the distribution of insurance-based investment products. The Commission is not making a determination whether an insurance-based investment product, as defined for purposes of this provision, could also be a security-based swap. However, even without this provision, FCA COBS 2.2A.2Rb would require the Covered Entity to provide its client in good time appropriate information about any relevant financial instruments, which are a defined set of instruments to which this and other MiFID-based provisions apply. The general condition in paragraph a3 of the Order would require any Covered Entity using substituted compliance for Exchange Act material risks and characteristics disclosure requirements to ensure that its relevant security-based swap activities in this case, disclosure to counterparties before entering into a security-based swap constitute MiFID
or equivalent third country business, which is defined to include the same set of instruments in the definition of financial instruments. As a result, the disclosures of a Covered Entity applying substituted compliance for Exchange
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Act material risks and characteristics disclosure requirements would always be in relation to a security-based swap that is a financial instrument.
Accordingly, the Commission believes it is appropriate to delete the reference to FCA COBS 2.2A.2R1c in the Order.
Third, the commenter stated that FCA
COBS 6.1ZA.9UK and UK MiFID Org Reg article 49 relate to information about the safeguarding of client assets and thus go beyond the scope of Exchange Act material risks and characteristics disclosure requirements.
These provisions would require a Covered Entity to inform its client about the risks of the Covered Entity placing client assets, which would include the relevant security-based 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 nonUK jurisdiction and indicate that client rights relating to the security-based swap may differ from those under UK
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 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 market, credit, liquidity, foreign currency, legal, operational, and any other applicable risks of the securitybased swap. Legal and operational risks of a security-based swap include the types of risks to client assets that FCA
COBS 6.1ZA.9UK and UK MiFID Org Reg article 49 would require the Covered Entity to disclose. Accordingly, the Commission is retaining the references to these provisions.
Finally, the commenter stated that FCA COBS 6.2B.33R and 9A.3.6R relate to disclosure about whether a firm is providing independent advice or will undertake a periodic suitability assessment and thus go beyond the scope of Exchange Act material risks and characteristics disclosure
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