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Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices
requirements.385 As described above, 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 the material economic terms of the security-based swap and the rights and obligations of the parties during the term of the security-based swap. The Commission believes that a counterparty would consider the independence of the Covered Entitys advice and the presence or absence of a periodic suitability assessment in the counterpartys assessment of these risks and characteristics. The holistic approach taken by the Commission in considering whether regulatory requirements are comparable further warrants the inclusion of these provisions in the Order. Accordingly, the Commission is retaining the references to these provisions.

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2. Disclosure of Information Regarding Material Incentives or Conflicts of Interest A commenter requested that the Commission not require a Covered Entity to be subject to and comply with FCA COBS 2.3A.5R, 2.3A.6R, 2.3A.7E, or 2.3A.11R through 2.3A.14R, stating that these provisions relate to thirdparty payments and thus go beyond the scope of Exchange Act material incentives or conflicts of interest disclosure requirements.386 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. 387 These provisions would require a Covered Entity to refrain from paying to, or accepting from, third parties certain fees, commissions or non-monetary benefits in connection with providing an investment service inducements and, in circumstances in which the general prohibition on inducements does not apply, to disclose to the client the existence, nature, and amount of the inducement prior to providing the service and in a manner that is comprehensive, accurate, and understandable. In comparison, 385 See SIFMA 5/3/2021 Letter Appendix A part e1.
386 See SIFMA 5/3/2021 Letter at 21 and Appendix A part e1.
387 See Better Markets Letter at 2.

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Exchange Act rule 15Fh3b2 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 incentives or conflicts of interest that the Covered Entity may have in connection with the securitybased swap, including any compensation or other incentives from any source other than the counterparty.
Disclosure of this compensation or other incentives would include disclosure of the existence, nature, and amount of an inducement that FCA COBS 2.3A.5R, 2.3A.6R, 2.3A.7E, and 2.3A.11R through 2.3A.14R would require the Covered Entity to disclose. Accordingly, the Commission is retaining the references to these provisions.
3. Know Your Counterparty A commenter requested that the Commission not require a Covered Entity to be subject to and comply with some of these specified requirements.388
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. 389 The Commission details below its consideration of each of these requests.
First, the commenter stated that UK
MiFID Org Reg articles 21, 22, 25, and 26 and applicable parts of Annex I relate to organizational requirements, compliance, responsibility of senior management, complaints handling, and associated recordkeeping and thus go beyond the scope of Exchange Act know your counterparty requirements. In addition to these provisions cited by the commenter, the proposed Order would require with no objection from the commenter a Covered Entity using substituted compliance for Exchange Act know your counterparty requirements to be subject to and comply with FCA SYSC
6.1.1R, which implements MiFID article 162 in the UK and would require a Covered Entity to establish, implement, and maintain adequate policies and procedures sufficient to ensure the Covered Entitys compliance with its obligations under UK financial services laws. This requirement relates to the requirement in Exchange Act rules 15Fh3e1 and 2 for the Covered Entity to establish, maintain, and 388 See SIFMA 5/3/2021 Letter at 21 and Appendix A part e3.
389 See Better Markets Letter at 2.

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enforce written policies and procedures to obtain and retain a record of the essential facts about the counterparty that are necessary for complying with applicable laws, regulations, and rules and for implementing the Covered Entitys credit and operational risk management policies. UK MiFID Org Reg articles 21, 22, 25, and 26 and applicable parts of Annex I are regulations that implement MiFID
article 162. They provide additional detail about the Covered Entitys required policies and procedures under the UK framework, and as such are relevant to the policies and procedures required under Exchange Act rule 15Fh3e. Accordingly, the Commission is retaining the references to these provisions.
Second, the commenter stated that FCA SYSC 4.1.1R1 relates to general organizational requirements and thus goes beyond the scope of Exchange Act know your counterparty requirements. FCA SYSC 4.1.1R1
would require the Covered Entity to have robust governance arrangements, including effective processes to identify, manage, monitor, and report the risks it is or might be exposed to. This requirement relates to the requirement in Exchange Act rule 15Fh3e2 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.
Third, the commenter recommended deleting FCA IFPRU 2.2.7R2 and 2.2.32R because they do not apply to banks or PRA-designated investment firms and the commenter expects only banks and PRA-designated investment firms to apply substituted compliance pursuant to the Order. These FCA
IFPRU provisions apply to smaller investment firms not regulated by the PRA and are nearly identical to provisions that apply to banks and PRAdesignated investment firms. The proposed Order would not require a Covered Entity that is a bank or PRAdesignated investment firm to be subject to and comply with these provisions.
Rather, the proposed Order would require each Covered Entity to be subject to and comply with either these IFPRU provisions if it is a smaller investment firm or analogous PRA
requirements if it is a bank or PRAdesignated investment firm. Moreover, the FCA Application requested substituted compliance for all MiFID

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