Alert October 25, 2011

SEC Issues Proposal Regarding Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants

As part of its ongoing rulemaking efforts to implement the regulatory scheme for OTC derivatives mandated by the Dodd-Frank Act, the SEC issued a release proposing new rules and forms under the Securities Exchange Act of 1934 (the “Exchange Act”) for the registration of (a) security-based swap dealers, as defined in Section 3(a)(71)(A) of the Exchange Act (“SBS Dealers”), and (b) major security-based swap participants, as defined in Section 3(a)(67)(A) of the Exchange Act (“Major SBS Participants”; collectively with SBS Dealers, “SBS Entities”).  Proposed Rules 15Fb1-1 through 15Fb6-1 would establish procedures for registering an SBS Entity with the SEC and for amending, withdrawing or revoking an SBS Entity's registration.  In addition to the requirement to register, key elements of the proposed rules include (1) the requirement for certification by a senior officer of an SBS Entity with respect to the operational, financial and compliance capabilities of the SBS Entity, and (2) certification by an SBS Entity that none of its associated persons involved in effecting security-based swaps is statutorily disqualified.

Registration 

Once final registration rules and forms are adopted, SBS Entities would be required to register by the last compliance date set forth in the final registration rules.  During the initial transition period (the period between adoption of the final rules and the last compliance date), SBS Entities would be permitted to apply for conditional registration. 

  • Conditional Registration.  Conditional registration would allow an SBS Entity to file an application for registration without the senior officer certification.  As a consequence, the SEC could proceed with reviewing and commenting on an application while the SBS Entity took appropriate measures to comply with the applicable requirements of the rule.  A registrant would be able to convert conditional registration to full or “ongoing” registration once all applicable requirements had been met, including the filing of the senior officer certification.  A conditionally registered SBS Entity that could not satisfy the applicable conditions to convert its registration to an ongoing registration would be required to cease its security-based swap business.

Conditional registration would no longer be permitted for SBS Dealers following the last compliance date and all applications by SBS Dealers would be required to meet all applicable requirements when filed.  As an accommodation to Major SBS Participants, who may need time to prepare compliance systems following the end of a fiscal quarter in which their security-based swap portfolios cross the threshold for registration, the SEC proposes to allow Major SBS Participants two months to conditionally register following the end of the triggering fiscal quarter, followed by an additional four-month period during which they would have to complete the requirements for ongoing registration.

  • Ongoing Registration.  To obtain ongoing registration, an SBS Entity would need to submit a completed application for registration, including disclosures about persons who are statutorily disqualified, and a senior officer certification.  Ongoing registration status would be given only after the SEC finds that all requirements under the rules are satisfied.  The SEC could deny ongoing registration status to an SBS Entity through formal proceedings involving notice and an opportunity for hearing.  Ongoing registration would be effective until any cancellation, revocation or withdrawal of the registration or for any other event the SEC determines should trigger expiration of the registration.

Senior Officer Certification 

The proposed rules require that a knowledgeable senior officer certify, on Form SBSE-C, that, after due inquiry, the senior officer has reasonably determined that the SBS Entity has the operational, financial and compliance capabilities to act as an SBS Entity, and that the senior officer has documented the process used to reach this determination.  The SEC has not proposed specific definitions of “operational, financial and compliance capabilities,” but instead has proposed the following with respect to these terms:

  • Operational Capability.  The SEC expects that the capability of an SBS Entity to comply with the obligations included in “Trade Acknowledgement and Verification of Security-Based Swap Transactions,” Exchange Act Release No. 63727 (Jan. 14, 2011), as well as the SBS Entity’s capability to conduct its business as represented in its application for ongoing registration, would be important considerations underlying a senior officer certification.

  • Financial Capability.  The ability to comply with such capital rules for SBS Entities, e.g., working capital and liquidity requirements, as the SEC may eventually adopt under the Dodd-Frank Act would be important considerations underlying a senior officer certification.

  • Compliance Capability.  The development and implementation of a compliance regime for security-based swaps along the lines contemplated in “Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants,” Exchange Act Release No. 64766 (Jun. 29, 2011), as corrected by Exchange Act Release No. 64766, 76 FR 46668 (Aug. 3, 2011), would be important considerations underlying a senior officer certification.

SBS Entities that conditionally register during the transition period would need to submit the senior officer certification on or prior to the last compliance date.  For applications made after the last compliance date, an SBS Dealer would need to submit the certification with its application and a Major SBS Participant would need to submit the certification within four months after filing its application.

Certification - Statutory Disqualification of Associated Persons

The proposed rules would require an SBS Entity to certify that none of its associated persons involved in effecting security-based swaps is subject to statutory disqualification, as defined in Section 3(a)(39) of the Exchange Act.  As part of this certification requirement, the SBS Entity would be required to obtain a questionnaire or application for employment executed by each of its associated persons involved in effecting security-based swaps.  The SEC’s proposal does not include a form of questionnaire to be used by SBS Entities, but does list certain requirements the questionnaire would have to address; the proposing release notes that these requirements are similar to information broker-dealers are already required to collect under Exchange Act Rule 17a‑3(a)(12)(i).  An SBS Entity’s chief compliance officer, or a designee, would be required to review and sign each questionnaire or application.  The SBS Entity would be required to maintain a copy of the questionnaire or application as part of its books and records for at least three years following termination of an associated person’s association with the SBS Entity.

Application Forms 

The SEC has proposed the following three application forms, which are generally based on Form BD, for SBS Entities seeking to register:

  • Form SBSE-BD.  SBS Entities registered or registering with the SEC as broker-dealers would apply for registration using Form SBSE-BD, a short one-page form intended to supplement the information already disclosed in Form BD.

  • Form SBSE-A.  SBS Entities registered or registering with the CFTC as swap dealers or major swap participants (and not also registered or registering with the SEC as broker‑dealers) would apply for registration using Form SBSE-A.

  • Form SBSE.  All other SBS Entities would apply for registration using Form SBSE.

Public Comment Requested 

The SEC has requested public comment on its proposal, which must be submitted no later than December 19, 2011.