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Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices investment firms and third country investment firms, and was not limited to banks and PRA-designated investment firms. Accordingly, the Commission is retaining the references to these provisions.
Fourth, the commenter stated that PRA General Organisational Requirement 2.1 relates to high-level governance requirements and thus goes beyond the scope of Exchange Act know your counterparty requirements. The provision is identical in all material respects to FCA SYSC
4.1.1R1 and serves as the PRAs version of that requirement for PRAregulated Covered Entities. Accordingly, the Commission is retaining the reference to this provision.
Finally, the commenter stated that PRA Internal Capital Adequacy Assessment Rule 10.1 relates to assessment of the capital needed to cover risks and thus goes beyond the scope of Exchange Act know your counterparty requirements. This provision would require a Covered Entity to implement policies and processes to evaluate and manage the exposure to operational risk. These policies and processes are related to the requirement in Exchange Act rule 15Fh 3e2 for the Covered Entity to establish, maintain, and enforce written policies and procedures to obtain and retain a record of the essential facts about the counterparty that are necessary for implementing the Covered Entitys credit and operational risk management policies. Accordingly, the Commission is retaining the reference to this provision.

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4. Suitability A commenter requested that the Commission amend these conditions.390
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. 391 The Commission details below its consideration of each of these requests.
First, the commenter requested that the Commission not require a Covered Entity to be subject to and comply with some of the UK suitability requirements specified in the proposed Order.392 The commenter stated that FCA COBS
4.2.1R is more appropriately addressed in the section of the order relating to fair 390 See SIFMA 5/3/2021 Letter at 21 and Appendix A part e4.
391 See Better Markets Letter at 2.
392 See SIFMA 5/3/2021 Letter at 21 and Appendix A part e4.

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and balanced communications and that MiFID Org Reg article 211b is more appropriately addressed in the section of the order relating to internal supervision. The commenter further stated that FCA SYSC 5.1.5AAR and 5.1.5ABR and UK MiFID Org Reg article 211d go beyond the scope of Exchange Act suitability requirements.
Exchange Act rule 15Fh3f requires an SBS Entity, when making certain security-based swap recommendations to a counterparty, to undertake reasonable diligence to understand the potential risks and rewards associated with the recommendation the reasonable basis suitability standard and to have a reasonable basis to believe that the recommendation is suitable for the counterparty the counterpartyspecific suitability standard.393 FCA
SYSC 5.1.5AAR and 5.1.5ABR, which implement MiFID article 251, would require a Covered Entity to ensure that individuals making personal recommendations to clients in relation to a relevant security-based swap have the necessary knowledge and competence so as to ensure that the Covered Entity is able to meet its obligations under FCA rules that implement MIFID articles 24 and 25 and the related provisions of the UK MiFID
Org Reg. FCA COBS 9A.2.1R and 9A.2.16R, which implement MiFID
article 252, would require the Covered Entity to obtain information about a client necessary to ensure that it makes only recommendations that are suitable for the client, and thus are relevant to the Exchange Act counterparty-specific suitability standard. FCA SYSC
5.1.5AAR and 5.1.5ABR thus would require the Covered Entity to ensure that recommendations to clients are made with the knowledge and competence necessary to fulfill the Covered Entitys obligation under FCA COBS 9A.2.1R
and 9A.2.16R to make only suitable recommendations. This knowledge and competence requirement in FCA SYSC
5.1.5AAR and 5.1.5ABR is directly related to the Exchange Act reasonable basis suitability standard.
Moreover, FCA COBS 4.2.1R, which implements MiFID article 243, is particularly relevant to the Exchange Act reasonable basis standard. FCA
COBS 4.2.1R, together with FCA SYSC
5.1.5AAR and 5.1.5ABR, would require the Covered Entity to ensure that individuals making recommendations have the knowledge and competence to communicate about the relevant security-based swap in a way that is fair, clear, and not misleading. The Commission believes that in order to 393 See
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Exchange Act rule 15Fh3f1.

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meet the FCA requirement to communicate in a fair, clear, and not misleading manner, the Covered Entitys due diligence would reflect that individuals engaged in such communication understand the potential risks and rewards of the recommendation in a manner that is comparable to the requirement in Exchange Act rule 15Fh3f1i.
MiFID Org Reg articles 211b and d, in turn, would require the Covered Entity to ensure that its personnel have the skills, knowledge, and expertise, and be aware of the procedures, necessary to properly discharge their responsibilities, which include their suitability obligations. These requirements again relate to the Exchange Act reasonable basis standard because they would require the Covered Entity to ensure that personnel making recommendations are equipped with the requisite training and information to be able to communicate about the relevant security-based swap in a way that complies with its communication and suitability obligations in FCA COBS and FCA SYSC.
For these reasons, the Commission is retaining in the Order the references to these UK requirements that the commenter asked to delete, and thus is requiring a Covered Entity to be subject to and comply with these UK
requirements if the Covered Entity wishes to make use of substituted compliance for Exchange Act suitability requirements. Separately, as stated by the commenter, the proposed Order erroneously referred to FCA COBS
9A.1.16R instead of FCA COBS
9A.2.16R, and the Commission is amending the Order to correct this error.394
Second, the commenter requested that the Commission change the condition to substituted compliance for Exchange Act suitability requirements that would require the Covered Entitys counterparty to be a professional client mentioned in FCA COBS 3.5.2R.
Professional clients mentioned in FCA
COBS 3.5.2R are per se professional clients, a category of clients that generally includes those with more experience, knowledge, expertise, and resources and that excludes elective professional clients and retail clients.
The commenter requested that the Commission replace FCA COBS 3.5.2R
with FCA COBS 3.5.1R, a provision that refers to both per se and elective professional clients. Elective professional clients generally have less experience, knowledge, expertise, and/
or resources than per se professional 394 See
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para. e4iA of the Order.

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