The Securities and Exchange Commission today announced that it has voted to adopt Rule of Practice 194.  In general, this rule creates a transparent, efficient, and comprehensive process for a registered security-based swap dealer or major security-based swap participant, collectively known as SBS Entities, to apply to the Commission for relief from the statutory disqualification prohibition found in Exchange Act Section 15F(b)(6).  Rule of Practice 194 also provides an exclusion for an SBS Entity from the prohibition in Exchange Act Section 15F(b)(6) with respect to associated persons entities, consistent with the Commodity Futures Trading Commission's (CFTC) approach with respect to the statutory prohibition for swap entities. 

"Not only does adopting Rule of Practice 194 mark a significant milestone in the SEC's implementation of Title VII of the Dodd-Frank Act, but like the Commission's recent issuance of a Statement concerning certain provisions of its business conduct standards for SBS Entities, Rule of Practice 194 further reflects the Commission staff's shared commitment with their counterparts at the CFTC, to achieve greater harmonization of Title VII rules," said SEC Chairman Jay Clayton. 

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FACT SHEET



Applications by Security-Based Swap Dealers or Major Security-Based Swap Participants for Statutorily Disqualified Associated Persons to Effect or Be Involved in Effecting Security-Based Swap Transactions (Rule of Practice 194)

Action



The Securities and Exchange Commission has adopted Rule of Practice 194, which creates a process for a registered SBS Entity to apply to the Commission for an order permitting an associated person that is a natural person who is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on behalf of the SBS Entity if the Commission finds, subject to certain conditions, that such association is consistent with the public interest.  Rule of Practice 194 also provides an exclusion for an SBS Entity from the prohibition in Exchange Act Section 15F(b)(6) with respect to associated persons entities. 

Background

In 2010, Congress passed Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which established a comprehensive framework for regulating the over-the-counter swaps markets.  Section 764 of the Dodd-Frank Act, among other things, added Section 15F(b)(6) to the Exchange Act, which makes it unlawful, unless otherwise provided by rule, regulation or order of the Commission, for an SBS Entity to permit an associated person who is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on behalf of the SBS Entity if the SBS Entity knew, or in the exercise of reasonable care should have known, of the statutory disqualification.

On August 5, 2015, the Commission proposed Rule of Practice 194 to establish a process by which an SBS Entity could apply to the Commission to permit an associated person who is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on behalf of the SBS Entity.   As discussed in the Commission's proposal, the federal securities laws provide various procedural avenues that allow certain registered entities to associate, where warranted, with persons subject to a statutory disqualification or other bar, including for example the Commission's Rule of Practice 193 and FINRA's eligibility proceedings.  The Commission modeled proposed Rule of Practice 194 on these existing processes.  The Commission requested comment on all aspects of the proposal as well as two alternative approaches, and received comments in response.

Highlights

The Commission is adopting Rule of Practice 194 largely as proposed, with certain modifications.  In particular, the Commission is adopting the following provisions in Rule of Practice 194:

Next Steps

Rule of Practice 194 is effective 60 days after publication in the Federal Register.  However, the compliance date for the SBS Entity registration rules depends on the adoption of two pending rules, and will be the later of:  six months after the date of publication in the Federal Register of a final rule release adopting rules establishing capital, margin and segregation requirements for SBS Entities or the compliance date of final rules establishing recordkeeping and reporting requirements for SBS Entities.