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Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices
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k. Notification Requirements Related to Changes in Capital In response to the French Substituted Compliance Notice and Proposed Order, a commenter requested that the Commission make more granular substituted compliance determinations with respect to the Exchange Act recordkeeping requirements.120 The commenter stated that for operational reasons a Covered Entity may prefer to comply directly with certain Exchange Act requirements i.e., not to rely on substituted compliance with those requirements. 121 The Commission took this approach in the proposed Order with respect to the Exchange Act recordkeeping, reporting, and notification requirements.122 As part of this approach, the Commission also conditioned substituted compliance with certain of the discrete recordkeeping, reporting, and notification requirements on the Covered Entity applying substituted compliance with respect to the substantive Exchange Act requirement to which they were linked.123 This linked condition was designed to ensure that a Covered Entity consistently applies substituted compliance with respect to the substantive Exchange Act requirement and the Exchange Act recordkeeping, reporting, or notification requirement that complements the substantive requirement.
On further consideration and in light of the more granular approach requested by the commenter, the Commission believes it necessary to do the reverse with respect to certain substantive financial responsibility requirements:
Condition substituted compliance with respect to the substantive requirement on the Covered Entity applying substituted compliance with respect to the linked recordkeeping, reporting, or notification requirement. The Exchange Act financial responsibility requirements addressed in this Order capital, margin, recordkeeping, reporting, notification, and securities count requirements are highly integrated. Therefore, implementing the reverse conditional link is designed to Entity would modify its reliance on the positive substituted compliance determinations in the Order, and thereby trigger the requirement to update its notice, if it adds or subtracts determinations for which it is applying substituted compliance or completely discontinues its reliance on the Order.
120 See Letter from Kyle Brandon, Managing Director, Head of Derivative Policy, SIFMA Jan. 25, 2021 SIFMA 1/25/2021 Letter at 8.
121 SIFMA 1/25/2021 Letter at 8.
122 See UK Substituted Compliance Notice and Proposed Order, 86 FR 18394403, 18415420.
123 See UK Substituted Compliance Notice and Proposed Order, 86 FR 18394403, 18415420.

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ensure that the granular approach requested by the commenter results in comparable regulatory outcomes in terms of obligations to make and preserve records, and to submit reports and notifications to the Commission concerning the Covered Entitys compliance with the financial responsibility rules. It also is designed to provide clarity as to the obligations of a Covered Entity under this Order when using the granular approach to the Exchange Act recordkeeping, reporting, and notification requirements linked to the financial responsibility rules.
For example, because of the granular approach, a Covered Entity could elect to apply substituted compliance with respect to a substantive Exchange Act requirement such as the capital requirements of Exchange Act rule 18a 1 but elect not to apply substituted compliance with respect to a linked requirement under Exchange Act rule 18a8 to provide the Commission notice of a capital deficiency under Exchange Act rule 18a1. In this scenario, the Covered Entity would not be subject to the condition for applying substituted compliance with respect to Exchange Act rule 18a8; namely, that the firm provide the Commission copies of notifications relating to UK capital requirements required under UK law.
Consequently, as discussed below in this section and other sections of this release, the Commission is conditioning substituted compliance with respect to certain substantive Exchange Act requirements on the Covered Entity applying substituted compliance with respect to linked recordkeeping, reporting, or notification requirements.
Exchange Act Rule 18a8c Exchange Act rule 18a8c generally requires every prudentially regulated security-based swap dealer that files a notice of adjustment of its reported capital category with the Federal Reserve Board, the Office of the Comptroller of the Currency, or the Federal Deposit Insurance Corporation to give notice of this fact that same day by transmitting a copy to the Commission of the notice of adjustment of reported capital category in accordance with Exchange Act rule 18a 8h.124 Exchange Act rule 18a8h sets forth the manner in which every notice or report required to be given or transmitted pursuant to Exchange Act rule 18a8 must be made.125 While Exchange Act rule 18a8c is not linked to a substantive Exchange Act requirement, it is linked to substantive 124 See 125 See
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capital requirements applicable to prudentially regulated SBS Entities in the U.S. i.e., capital requirements of the Federal Reserve Board, the Office of the Comptroller of the Currency, or the Federal Deposit Insurance Corporation.
Therefore, to implement the granular approach requested by the commenter, the Commission is adding a general condition that Covered Entities with a prudential regulator relying on the final Order for substituted compliance must apply substituted compliance with respect to the requirements of Exchange Act rule 18a8c and the requirements of Exchange Act rule 18a8h as applied to Exchange Act rule c.126
In its application, the FCA cited several UK provisions as providing similar outcomes to the notification requirements of Exchange Act rule 18a 8.127 This general condition is necessary 126 Better
Markets Letter at 23.
UK provisions include: 1 FCA PRIN
2.1.1R Principle 11 and PRA Fundamental Rule 7
requiring firms to deal with regulators in an open and cooperative way, and to disclose to regulators anything relating to the firm of which the regulator would reasonably expect notice; 2 Supervision Sourcebook of the FCA Handbook FCA SUP
15.3.1R and PRA Notification Rule 2.1, which require immediate notification if a firm becomes aware that certain events have occurred or may occur in the foreseeable future, including the failure of the firm to satisfy certain threshold conditions, any matter which could have a significant adverse impact on the firms reputation or that could affect the firms ability to continue to provide adequate services to its customers or result in serious detriment to its customers, or any matter which could result in serious financial consequences to the UK financial system or other firms; 3 FCA SUP
15.3.11R and PRA Notification Rule 2.4, which generally require, among other things, notification of a significant breach of a rule or certain specified provisions or regulations, or the bringing of a prosecution related to certain offenses; 4 FCA SUP
15.3.15R and PRA Notification Rule 2.6, which require a firm to provide immediate notification in the event that civil proceedings or other specified actions are brought against the firm, if disciplinary measures or sanctions are imposed on the firm, if the firm is prosecuted for, or convicted of, any offense involving fraud, or it is removed as a trustee of an occupational pension scheme by a court order;
5 FCA SUP 15.17R and PRA Notification Rule 2.8, which require a firm to provide notification in the event that, among other things, the firm becomes aware that an employee, or another person whether or not employed by the firm, may have committed a fraud against a customer, or the firm identifies irregularities in its accounting or other records; 6
FCA SUP 15.3.21R and PRA Notification Rule 2.9, which require a firm to provide immediate notification upon the calling of a meeting to consider a resolution, or the presentation of a petition, for winding up the firm, an application to dissolve the firm, or other similar matters; 7 FCA
CASS 6.6.57R and 7.15.33R, which require, among other things, notification if a firms internal records and accounts related to client assets and money are materially out of date, inaccurate, or invalid, the firm fails or is unable to respond to shortfalls as required, or the firm fails or is unable to conduct an internal asset reconciliation, external custody reconciliation, or internal and external client money reconciliations; and 8 FCA SYSC 18.6.1R
and PRA Organisational Requirements 2A.12, 2A.2, and 2A.3 through 2A.6, which require firms 127 These
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