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Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices material changes to the foreign regulatory regime.31
The Commission concurs that the ongoing availability of substituted compliance should account for relevant changes in the foreign jurisdictions regulatory requirements and in the effectiveness of that jurisdictions supervisory and enforcement program.32
Accordingly, the Commission and the FCA and the Bank of England in its capacity as the PRA recently entered into a substituted compliance memorandum of understanding that addresses ongoing information regarding potential changes to substantive legal requirements and supervisory and enforcement effectiveness.33 The Commission believes that these arrangements will provide timely information to ensure that the Commission is aware of material developments that may affect the comparability of the relevant UK
requirements, including the scope and objectives of those requirements and the effectiveness of the FCA and the Bank of Englands supervision and enforcement programs. In response to any such developments, the Commission may amend the Order as needed to ensure that it continues to require a Covered Entity to comply with comparable UK requirements, or may withdraw the Order if the relevant UK
requirements are no longer comparable.34 Moreover, substituted compliance under the Order is conditioned on the Commission having this memorandum of understanding, or another arrangement with the FCA and the Bank of England addressing cooperation with respect to the Order, at the time the Covered Entity makes use of substituted compliance.35 If the 31 See
Better Markets Letter at 5.
Business Conduct Adopting Release, 81 FR
at 3007879 stating that order conditions and memorandum of understanding were possible tools for providing that the Commission be notified of material changes.
33 The memorandum of understanding between the Commission and the FCA and the Bank of England in part provides that the FCA and the Bank of England will provide ongoing information sharing regarding Firm Information incorporating supervisory and related information as to the Covered Entities using substituted compliance and regarding Regulatory Change Information incorporating information about any material publicly available draft, proposed, or final change in law, regulation, or order of the jurisdiction of the FCA or the Bank of England that may have a material impact on the firms at issue with respect to their relevant activities. See supra note 14
information on publication of memorandum of understanding with the FCA and the Bank of England.
34 Any such amendment or withdrawal may be at the Commissions own initiative after appropriate notice and opportunity for comment. See Exchange Act rule 3a716a3.
35 See supra part II.B.2; para. a15 of the Order.

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arrangements in the memorandum of understanding prove in practice not to provide information about relevant developments, the Commission could terminate the memorandum of understanding in accordance with its terms and/or amend or withdraw the Order.36 If the Commission, the FCA, or the Bank of England terminates the memorandum of understanding, Covered Entities would not be able to rely on substituted compliance under the Order to satisfy Exchange Act compliance obligations that arise after the termination takes effect. For these reasons, in the Commissions view, the Orders memorandum of understanding condition, coupled with the ongoing information sharing provisions in the memorandum of understanding with the FCA and the Bank of England, establishes the commenters suggested mechanism to apprise the Commission of changes that may affect the ongoing appropriateness of substituted compliance.
III. General Availability of Substituted Compliance Under the Order A. Covered Entities 1. Proposed Approach Under the proposed Order, the definition of Covered Entity specified which entities could make use of substituted compliance. Consistent with the availability of substituted compliance under Exchange Act rule 3a716, the proposed definition in part would limit the availability of substituted compliance to registered SBS Entities that are not U.S. persons.
In addition, to help ensure that firms that rely on substituted compliance are subject to relevant UK requirements and oversight, the proposed definition would require that a Covered Entity is a MiFID investment firm or third country investment firm, as such terms are defined in the FCA Handbook Glossary, that a has permission from the FCA or PRA under Part 4A of the UKs Financial Services and Markets Act 2000 FSMA to carry on regulated activities relating to investment services and activities in the UK; b is supervised by the FCA under the fixed supervision model; and c if the firm is a PRA-authorized person, also is supervised by the PRA as a Category 1 firm.37
2. Final Provisions Commenters did not address the proposed Covered Entity definition, 36 See
supra note 14.
UK Substituted Compliance Notice and Proposed Order, 86 FR at 18380.
37 See
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and the Commission is issuing the definition as proposed.38 Substituted compliance accordingly is available only to non-U.S. SBS Entities that have the relevant UK regulatory permission and are subject to UK oversight.
B. Additional General Conditions and Other Prerequisites 1. Proposed Approach The proposed Order incorporated a number of additional general conditions and other prerequisites, to help ensure that the relevant UK requirements that form the basis for substituted compliance in practice will apply to the Covered Entitys security-based swap business and activities, and to promote the Commissions oversight over entities that avail themselves of substituted compliance:
Subject to and complies with applicability conditionFor each relevant section of the proposed Order, a positive substituted compliance determination would be subject to the condition that the Covered Entity be subject to and comply with the applicable UK requirements needed to establish comparability.39
Regulated activitiesFor each condition in the proposed Order that requires the application of, and compliance with, provisions of the Senior Management Arrangements, Systems and Controls Sourcebook of the FCA Handbook FCA SYSC 4, 5, 6, 7, 9, and/or 10, certain parts of the PRA
Rulebook and/or MLR 2017, the Covered Entitys relevant security-based swap activities must constitute regulated activities as defined for purposes of the relevant UK provisions, must be carried on by the Covered Entity from an establishment in the UK
and must fall within the scope of the Covered Entitys authorization from the FCA and/or PRA to conduct regulated activities in the UK.40
UK MiFID investment services or activitiesFor each condition in the proposed Order that requires the application of, and compliance with, provisions of the Product Intervention and Product Governance Sourcebook of the FCA Handbook FCA PROD 3
and/or the UK version of Commission Delegated Regulation EU 2017/565
38 See
para. g1 of the Order.
Commission stated, as an example, that this proposed condition would not be satisfied when the comparable UK requirements would not apply to the security-based swap activities of a nonUK branch of a MiFID investment firm or to a third country investment firm. See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18380.
40 See UK Substituted Compliance Notice and Proposed Order, 86 FR at 18381.
39 The
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