(Release No. 34-92484; File No. S7-22-20) Order Granting Conditional Substituted Compliance in Connection with Certain Requirements Applicable to Non-U.S. Security-Based Swap Dealers and Major Security-Based Swap Participants Subject to Regulation

Order Granting Conditional Substituted Compliance in Connection with Certain Requirements Applicable to Non-U.S. Security-Based Swap Dealers and Major Security-Based Swap Participants Subject to Regulation in the French Republic (Release No. 34-92484; File No. S7-22-20)

EDIT: This thing is 208 pages big and dropped on a Friday night. Trying to get interesting sections added before running out of the max images for the post.

https://www.sec.gov/rules/other/2021/34-92484.pdf

The memorandum of understanding will set forth the conditions under which supervisory and enforcement information for certain subject matters, including but not limited to margin and capital, that is owned by the ECB, can be requested, shared, used and protected from unauthorized disclosure by the SEC and ECB. The memorandum of understanding will also serve as a framework for consultation, cooperation and the exchange of information between the SEC and the ECB in the supervision, enforcement and oversight of the covered firms.

The Commission, the AMF and the ACPR have entered into a memorandum of understanding to address substituted compliance cooperation, a copy of which is on the Commission’s website at www.sec.gov under the “Substituted Compliance” tab, which is located on the “Security-Based Swap Markets” page in the Division of Trading and Markets section of the site (“AMF and ACPR MOU”). The AMF, ACPR and the ECB share responsibility for supervising compliance with certain provisions of EU and French law.

EDIT 3? sorry, been trying to add in and field comments, this next section from page 8:

A foreign financial regulatory authority may submit a substituted compliance application only if the authority provides “adequate assurances” that no law or policy would impede the ability of any entity that is directly supervised by the authority and that may register with the Commission “to provide prompt access to the Commission to such entity’s books and records or to submit to onsite inspection or examination by the Commission.” In the French Substituted Compliance Notice and Proposed Order, the Commission stated that the French Authorities had satisfied this prerequisite in the Commission’s preliminary view, taking into account information and representations that the French Authorities provided regarding certain French and EU requirements that are relevant to the Commission’s ability to inspect, and access the books and records of, firms using substituted compliance pursuant to the Order. The Commission received no comments on this preliminary view and has not changed its view.

EDIT 4:

Reopening Release, 86 FR at 18343 (expressing the view that the interplay of those MiFID conditions and the proposed EU cross-border condition “in practice would undermine the availability of substituted compliance for Covered Entities that have branches in EU Member States for which the Commission has not entered into an applicable substituted compliance memorandum of understanding”).

EDIT 5: New post since automod nuked the 1st.

EDIT 6 Page 10 and 11:

Effects of non-complianceOne commenter addressed a Commission statement that non-compliance with applicable French and EU requirements would lead to a violation of relevant requirements under the Exchange Act. The commenter particularly requested that the Commission represent that SBS Entities “would not violate the Commission’s requirements where the relevant foreign regulatory authority has found no violation of the comparable French or EU requirement and the SBS Entity’s conduct would have complied with the Commission’s requirements (even if the SBS Entity relied on French and EU rules that imposed stricter or additional requirements).”33 The commenter also expressed a concern that the Commission might find a violation of the foreign laws even where the Commission’s own requirements would be fulfilled.34 The commenter further requested that the Commission state that it “will not independently examine for or otherwise assess whether an SBS Entity is complying with EU or French requirements.” 35Although the Commission expects to take the views of foreign regulatory authorities into account when it considers whether registered entities have complied with the conditions to substituted compliance, the Commission cannot make the requested representations. It is for the Commission – not foreign regulators – to determine whether a non-U.S. SBS Entity has complied with the conditions to substituted compliance and with the Federal securities laws.Moreover, as noted, even with substituted compliance the Commission retains its full authority to inspect, examine and supervise registered entities’ compliance with the Federal securities laws, and to take enforcement action as appropriate.36

EDIT 7: Back to this post from here. Deleting that post and updating here moving forward.

EDIT 8:

In addition, the Commission recognizes that other regulatory regimes will have exclusions, exceptions and exemptions that may not align perfectly with the corresponding requirements under the Exchange Act. Accordingly, where French and EU requirements produce comparable outcomes – with or without conditions as discussed in part III.B below – notwithstanding those particular differences, and taking into account the scope and objectives and the effectiveness of supervision and enforcement of those requirements, the Commission has determined that the relevant French and EU requirements are comparable and has made a positive substituted compliance determination. Conversely, where those exclusions, exemptions and exceptions lead to outcomes that are not comparable – taking into account potential conditions – the Commission has not made a positive substituted compliance determination.

EDIT 9:

Pursuant to rule 3a71-6, the Commission may make a conditional or unconditional substituted compliance determination.⁴⁸ As described in greater detail in part III.B below, many of the conditions in the Order are designed to make substituted compliance available to Covered Entities only when the relevant French and EU requirements in fact apply to the relevant security-based swap activity in a way that promotes comparable regulatory outcomes. The commenter correctly notes that the Order also employs conditions to promote comparability.⁴⁹ **For example, substituted compliance in connection with Exchange Act rule 15Fi-3(c) dispute reporting provisions is conditioned in part on the Covered Entity providing the Commission with the dispute reports required under French law.**⁵⁰ Consistent with rule 3a71-6, conditioning substituted compliance on the Commission receiving those reports helps to promote timely notice of disputes to support a comparable regulatory outcome.

^{48 See Exchange Act rule 3a71-6(a}(1).)

<sup>49 See Better Markets Letter at 2.

50 See para. (b</sup>(3)(ii) of the Order.)

EDIT 10:

The Commission concurs that the ongoing availability of substituted compliance should account for relevant changes in the foreign jurisdiction’s regulatory requirements and in the effectiveness of that jurisdiction’s supervisory and enforcement program.⁵³ **Accordingly, the Commission and the French Authorities 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.**⁵⁴

**Additionally, the Commission and the ECB are in the process of developing a memorandum of understanding to address cooperation matters related to substituted compliance. 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 French and EU requirements, including the scope and objectives of those requirements and the effectiveness of the French Authorities’ 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 French and EU requirements, or may withdraw the Order if the relevant French or EU requirements are no longer comparable.**⁵⁵

Moreover, substituted compliance under the Order is conditioned on the Commission having these memoranda of understanding, or another arrangement with the French Authorities and ECB addressing cooperation with respect to the Order, at the time the Covered Entity makes use of substituted compliance.⁵⁶ If the arrangements in the memoranda of understanding prove in practice not to provide information about relevant developments, the Commission could terminate the memoranda of understanding in accordance with its terms and/or amend or withdraw the Order. ⁵⁷

If the Commission, the French Authorities or the ECB terminates either 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 Commission’s view, the Order’s memoranda of understanding conditions, coupled with the ongoing information-sharing provisions in the memoranda of understanding with the French Authorities and with the ECB, establish the commenter’s suggested mechanism to apprise the Commission of changes that may affect the ongoing appropriateness of substituted compliance.

^{53 See Business Conduct Adopting Release, 81 FR at 30078-79 (stating that order conditions and memoranda of understanding are possible tools for providing that the Commission be notified of material changes}.)

^{54 The memorandum of understanding between the Commission and the French Authorities in part provides that the French Authorities 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 French Authorities that may have a material impact on the firms at issue with respect to their relevant activities).) ^{See note 17, supra (information on publication of memoranda of understanding with the French Authorities and ECB}.)

^{55 Any such amendment or withdrawal may be at the Commission’s own initiative after appropriate notice and opportunity for comment. See Exchange Act rule 3a71-6(a}(3).)

Wow, commenters try to kick the can down the road, but they are having none of it with this is effective October 6th, you've known since February 2020, were available if you have any questions.

EDIT 11:

In the Commission’s view, the conditions are structured appropriately to predicate a positive substituted compliance determination on the applicability of relevant French and EU requirements needed to establish comparability, as well as on the continued effectiveness of the requisite MOU, and the provision of notice to the Commission regarding the Covered Entity’s intent to rely on substituted compliance.

As noted above, the proposed Order would require a Covered Entity to be “subject to and comply with” relevant MiFID-based requirements. The Commission proposed that requirement of the proposed Order to ensure that comparable MiFID-based requirements in practice would apply to a Covered Entity using substituted compliance. **The condition in paragraph (a)(2) to the proposed Order would ensure that the Covered Entity’s counterparty—i.e., the entity to whom it owes its various duties under the Exchange Act—is the “client” to whom the Covered Entity owes its performance of the duties to which it is subject under the comparable MiFID-based requirements.**⁸⁴

The Commission believes that, in the case of an agent acting on behalf of a principal, if the principal is the counterparty for purposes of the relevant Exchange Act requirement, then this condition should require the principal, as the counterparty, to be the “client” for purposes of the relevant MiFID-based requirements. If the Covered Entity instead treats the agent as the “client,” then the Covered Entity would not be “subject to” French and EU requirements that are comparable to Exchange Act requirements related to counterparties. Accordingly, the Commission is not amending the Order to modify the condition in paragraph (a)(2) to permit a Covered Entity to treat an agent, rather than the agent’s principal, as its client with regard to the relevant MiFID-based requirements. In taking this position, the Commission does not prohibit Covered Entities from working with agents or others acting on behalf of a counterparty. **Rather, the Covered Entity must ensure that, in working with the agent, it fulfills any duties owed to a “client” (or potential “client”) in relation to the counterparty.**<sup>85

84 Some provisions of the MiFID-based requirements cited in the condition, such as certain organizational requirements, do not pertain to counterparties or clients. In those cases, there is no “relevant counterparty (or potential counterparty</sup>” for purposes of the condition, and the condition would have no effect.)

^{85 MiFID article 26 permits firms to rely upon information about a client received from another French and EU-regulated firm. Under that provision, the other firm is legally responsible for the completeness and accuracy of any information about the client that the other firm receives from the first firm. The Commission believes that it is appropriate to permit a Covered Entity to rely on information about its client communicated by another French and EU-regulated firm on behalf of the client. Accordingly, the application of this provision would not cause the Covered Entity to be not “subject to” the relevant French and EU requirements listed in the Order, and thus would not impact the Covered Entity’s ability to use substituted compliance in relation to those communications. On the other hand, MiFID article 26 also provides that the other firm is legally responsible for the suitability of advice and recommendations provided to the client. The other firm, however, may not be a Covered Entity applying substituted compliance pursuant to the Order. Accordingly, the Commission believes that a Covered Entity relying on the suitability assessment of another firm pursuant to MiFID article 26 is not “subject to” the relevant French suitability requirements listed in the Order, and thus may not apply substituted compliance for those recommendations.}

The second new general condition accounts for the fact that: (a) the relevant trade acknowledgement and verification and trading relationship documentation rules under the Exchange Act do not apply to security-based swaps cleared by a clearing agency registered with the Commission or a clearing agency that is exempt from registration with the Commission, and (b) the analogous EMIR provisions only apply to over-the-counter derivatives that are not cleared on a CCP (as defined in EMIR article 2(1)). To help ensure that substituted compliance is not precluded in connection with instruments that have been cleared in the EU, this second condition provides that for the applicable EMIR-related conditions, the relevant security-based swap must be an “OTC derivative” or “OTC derivative contract” (as defined under EMIR) that has not been cleared and otherwise is subject to the provisions of the relevant requirements under EMIR, or else that the relevant security-based swap must have been cleared by a central counterparty that has been authorized or recognized by a relevant authority to clear derivatives contracts in the EU.<sup>101

101 See para. (a</sup>(6) of the Order. Absent this type of condition, instruments that have been cleared at an EU-authorized or recognized central counterparty neither would be excluded from the application of those Exchange Act rules nor would be subject to the EMIR requirements that otherwise would underpin substituted compliance. That would make direct compliance with the Exchange Act rules problematic, but compliance with the conditions of a positive substituted compliance order unworkable.)

The Commission has modified the condition to clarify that it extends to instruments cleared by central counterparties that have been authorized or recognized by a “relevant authority” in the EU, but the Commission declines to extend it to instruments cleared on “any” central counterparty, as such a standard would provide no safeguard against the risks potentially associated with central counterparties that are not subject to adequate safeguards. In application, the central counterparties described by the provision would extend to those that have been authorized by a competent authority pursuant to EMIR article 14, and those that have been recognized by the European Securities and Markets Authority (“ESMA”) pursuant to EMIR article 25.¹⁰⁴

Finally, the Commission is amending the condition to clarify that the condition applies only if the relevant EMIR-based provision applies to OTC derivatives that have not been cleared by a central counterparty, as some provisions of EMIR cited in the Order, such as EMIR articles 39(4) and (5), are not limited in their application to non-centrally cleared OTC derivatives. Consistent with the condition in paragraph (a)(6) of the Order, the Commission is also adding to the condition references to EMIR RTS and EMIR Margin RTS

^{104 In light of these considerations, the condition does not extend to clearing permitted pursuant to the equivalence framework of EMIR article 13.}

The Commission continues to believe that requiring that the AMF or ACPR have responsibility for applicable MiFID and MAR provisions will help ensure that the supervision and enforcement prerequisites to substituted compliance are satisfied. 119 Additionally, the proposed approach helps ensure that applicable MiFID and MAR provisions are interpreted and applied in a consistent manner by entities that are party to the MOUs and/or other arrangements which are a prerequisite to substituted compliance.120 In light of these considerations the Commission is issuing the general conditions related to EU cross-border matters largely as proposed.121 In the Commission’s view, these conditions are structured appropriately to permit the use of substituted compliance only when the AMF or the ACPR is the entity responsible for supervising a Covered Entity’s compliance with a relevant provision of MiFID, MAR or related EU or French requirements.

EDIT 12:

The Commission agrees, however, that in light of the EU cross-border implications, further consideration of the specific conditions cited with respect to internal risk management, trade acknowledgment and verification, trading relationship documentation, internal supervision and compliance and recordkeeping, reporting, notification, and securities counts is warranted to ensure that the scope of substituted compliance is appropriate. The Commission addresses those specific requirements below. This part of the Order has been modified from the proposed Order to incorporate references to conditions requiring compliance with MiFIR, given that certain relevant MiFIR conditions to substituted compliance are subject to the same principles regarding the allocation of authority.

Substituted Compliance for Risk Control Requirements A. Proposed approach The French Authorities’ Application in part requested substituted compliance in connection with risk control requirements relating to:

• Internal risk management – Internal risk management system requirements that address the obligation of registered entities to follow policies and procedures reasonably designed to help manage the risks associated with their business activities.

• Trade acknowledgment and verification – Trade acknowledgment and verification requirements intended to help avoid legal and operational risks by requiring definitive written records of transactions and procedures to avoid disagreements regarding the meaning of transaction terms.

• Portfolio reconciliation and dispute reporting – Portfolio reconciliation and dispute reporting provisions that require that counterparties engage in portfolio reconciliation and resolve discrepancies in connection with uncleared security-based swaps, and to provide prompt notification to the Commission and applicable prudential regulators regarding certain valuation disputes.

• Portfolio compression – Portfolio compression provisions that require that SBS Entities have procedures addressing bilateral offset, bilateral compression and multilateral compression in connection with uncleared security-based swaps.

• Trading relationship documentation – Trading relationship documentation provisions that require SBS Entities to have procedures to execute written security-based swap trading relationship documentation with their counterparties prior to, or contemporaneously with, executing certain security-based swaps. 124 Taken as a whole, these risk control requirements help to promote market stability by mandating that registered entities follow practices that are appropriate to manage the market, counterparty, operational, and legal risks associated with their security-based swap businesses. In considering conditional substituted compliance for the risk control portion of the French Authorities’ Application, the Commission preliminarily concluded that the relevant French and EU requirements generally would help to produce regulatory outcomes that are comparable to those under the Exchange Act by subjecting Covered Entities to risk mitigation and documentation practices that are appropriate to the risks associated with their security-based swap businesses. 125

Substituted compliance under the proposed Order was to be conditioned in part on Covered Entities being subject to and complying with the specified French and EU provisions that in the aggregate help to produce regulatory outcomes that are comparable to those associated with the risk control requirements under the Exchange Act.126

Substituted compliance under the proposed Order also was to be subject to certain additional conditions to help ensure the comparability of outcomes: (a) substituted compliance in connection with the trading relationship documentation provisions would be conditioned on the requirement that the Covered Entity not treat its counterparties as “eligible counterparties” for purposes of relevant MiFID provisions127; (b) substituted compliance related to trading relationship documentation under the proposed Order would not extend to certain disclosures regarding legal and bankruptcy status128; and (c) substituted compliance in connection with portfolio reconciliation and dispute reporting requirements would be conditioned on the Covered Entity having to provide the Commission with reports regarding disputes between counterparties on the same basis as they provide those reports to competent authorities pursuant to EU law. 129

<sup>125 Id. at 85724.

126 Id. at 85724 n.37.

127 Id. at 85725. Certain relevant French and EU requirements that provide for this type of documentation do not apply to investment firms’ transactions with “eligible counterparties.”

128 Id. The trading relationship documentation provisions of rule 15F(b</sup>(5) require certain disclosures regarding the status of the SBS Entity or its counterparty as an insured depository institution or financial counterparty, and regarding the possible application of the insolvency regime set forth under Title II of the Dodd-Frank Act or the Federal Deposit Insurance Act. Documentation requirements under applicable French and EU law would not be expected to address the disclosure of information related to insolvency procedures under U.S. law.)

^{129 Id. Under the Exchange Act requirement, SBS Entities must promptly report, to the Commission, valuation disputes in excess of $20 million that have been outstanding for three or five business days (depending on counterparty types}. EU requirements provide that firms must report at least)

Gah, just about at page 50 and running out of steam. Going to have to pick this back up after some zzz's.

my big takeaway though is, by and large, SEC is calling out and highlighting ways it's going to work together with the French.

All with the new Director of the Division of Enforcement starting Monday? SPICY

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