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Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices
1. General Considerations The Commission structured its preliminary substituted compliance determinations in the proposed Order with respect to Exchange Act rules 18a 5, 18a6, 18a7, and 18a8 to provide Covered Entities with greater flexibility to select which distinct requirements within the broader rules for which they want to apply substituted compliance.415 This flexibility was intended to permit Covered Entities to leverage existing recordkeeping and reporting systems that are designed to comply with the broker-dealer recordkeeping and reporting requirements on which the
recordkeeping and reporting requirements applicable to SBS Entities are based. For example, it may be more efficient for a Covered Entity to comply with certain Exchange Act requirements within a given recordkeeping or reporting rule rather than apply substituted compliance because it can utilize systems that its affiliated brokerdealer has implemented to comply with them.
As applied to Exchange Act rules 18a5 and 18a6, this approach of providing greater flexibility resulted in preliminary substituted compliance determinations with respect to the different categories of records these rules require SBS Entities to make, keep current, and/or preserve. The objectives of these rulestaken as a wholeis to assist the Commission in monitoring and examining for compliance with Exchange Act requirements applicable to SBS Entities as well as to promote the prudent operation of these firms.416 The Commission preliminarily found that the comparable UK recordkeeping rules achieve these outcomes with respect to compliance with the substantive UK
requirements for which preliminary positive substituted compliance determinations were made e.g., capital and margin requirements. At the same time, the recordkeeping rules address different categories of records through distinct requirements within the rules.
Each requirement with respect to a specific category of records e.g., paragraph a2 of Exchange Act rule 18a5 addressing ledgers or other records reflecting all assets and liabilities, income and expense, and capital accounts can be viewed in isolation as a distinct recordkeeping rule. Therefore, the Commission preliminarily found it appropriate to make substituted compliance determinations at this level of Exchange Act rules 18a5 and 18a6.
A commenter generally supported the Commissions proposed granular approach to making substituted compliance determinations.417 The Order implements this granular approach substantially as proposed.
The Commissions preliminary substituted compliance determinations for the Exchange Act Recordkeeping and Reporting Requirements were subject to the condition that the Covered Entity is subject to and complies with the relevant UK laws.418 Further, the Commission proposed limitations and
additional conditions for certain of the proposed preliminary substituted compliance determinations. The limitations and conditions are discussed below as well any comments on them and the Commissions response to those comments.
First, the Commission did not make a preliminary positive substituted compliance determination with respect to a discrete provision of the Exchange Act Recordkeeping and Reporting Requirements if it was fully or partially linked to a substantive Exchange Act requirement for which substituted compliance was not available or for which a preliminary positive substituted compliance determination was not being made.419 In this regard, the Commission linked a requirement in Exchange Act rule 18a5 to Exchange Act rule 10b10.420 A commenter pointed out that Covered Entities will not be subject to Exchange Act rule 10b 10.421 The Commission agrees with the commenter that there are no provisions in the Exchange Act Recordkeeping and Reporting Requirements that are linked to Exchange Act rule 10b10.
Consequently, the Order does not contain this exclusion.
In addition, Exchange Act rule 18a 6c, in part, requires firms to preserve Forms SBSE, SBSEA, SBSEC, SBSE
W, all amendments to these forms, and all other licenses or other documentation showing the firms registration with any securities regulatory authority or the U.S.
Commodity Futures Trading Commission. Because these requirements are linked to the Commissions and other U.S. regulators registration rules, for which substituted compliance is not granted, the Order excludes the requirement to preserve these records from the Commissions positive substituted compliance determination with respect to Exchange Act rule 18a6c.422
Aside from these modifications, the Order does not extend substituted compliance to discrete Exchange Act Recordkeeping and Reporting Requirements that are linked to substantive Exchange Act requirements for which there is no substituted compliance, as proposed. In particular, a positive substituted compliance determination is not being made, in full or in part, for recordkeeping, reporting, or notification requirements linked to
413 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18394404, 1841520.
414 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 1839596.
415 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18394404, 1841520.

416 See, e.g., Exchange Act Release No. 71958
Apr. 17, 2014, 79 FR 25194, 25199200 May 2, 2014.
417 See SIFMA 5/3/2021 Letter at 2123.
418 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18394404, 1841520.

419 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18395 discussing this limitation.
420 17 CFR 240.10b10.
421 See SIFMA 5/3/2021 Letter at 2223.
422 See para. f2iL of the Order.

Exchange Act rules 18a5, 18a6, 18a 7, 18a8, and 18a9 and Exchange Act section 15Fg collectively, the Exchange Act Recordkeeping and Reporting Requirements.413
Finally, the proposed structure of the substituted compliance determinations with respect to Exchange Act rules 18a 5, 18a6, 18a7, 18a8, and 18a9, as well as Exchange Act Section 15Fg would have permitted a covered entity to apply substituted compliance with respect to certain of these rules e.g., Exchange Act rules 18a5 and 18a6
and comply with the Exchange Act requirements of the remaining rules and statute i.e., Exchange Act rules 18a7, 18a8, and 18a9, as well as Exchange Act Section 15Fg.414 Moreover, the proposed structure of the substituted compliance determinations with respect to the recordkeeping rules would have provided Covered Entities with greater flexibility to select distinct requirements within the broader rules for which they want to apply substituted compliance.
Because the Exchange Act Recordkeeping and Reporting Requirements were entity-level requirements, the Covered Entity needed to apply substituted compliance at the entity level for each of the substituted compliance determinations with respect to these requirements with one limited exception. Under the exception, a Covered Entity could apply substituted compliance at the transaction level with respect to requirements in Exchange Act rules 18a5 and 18a6 linked to counterparty protection rules i.e., Exchange Act rules 15Fh3b, c, e, f, and g.

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