The SEC is seeking comment on a proposed substituted compliance determination for German firms that register as security-based swap dealers ("SBSDs"). The Order comes in response to an application submitted by Bundesanstalt für Finanzdienstleistungsaufsicht ("BaFin"), Germany's Federal Financial Supervisory Authority, pursuant to SEA Rule 3a71-6 ("Substituted Compliance for SBSDs").
BaFin requested substituted compliance for requirements under Exchange Act Section 15F ("Registration and Regulation of SBSDs") regarding (i) risk controls, (ii) recordkeeping and reporting, (iii) internal supervision and compliance, and (iv) counterparty protection, including disclosures and the suitability of recommendations. The application and the proposed determination do not address margin and capital requirements.
Under the proposed order, substituted compliance would be granted subject to a number of conditions:
- valuation disputes would be provided directly to the SEC, based on EU timing requirements;
- an "eligible counterparty" exception available under MiFID would not apply to trading relationship documentation and certain SEC disclosure requirements would continue to apply;
- relevant compliance reports would be provided directly to the SEC;
- suitability exceptions would be available to non-special entities that are "per se professional clients" under German and EU requirements;
- various SEC recordkeeping and retention requirements (including format) would continue to apply;
- SEC financial and operational reporting requirements would continue to apply;
- the SBSD would need to submit to the SEC certain regulatory notices required under local law; and
- books and records would remain subject to SEC inspection.
Comments on the proposed order must be submitted within 25 days of its publication in the Federal Register.
The SEC action is primarily of significance to any German firm that will register as an SBSD. However, given that this is the first proposed substituted compliance determination, other non-U.S. firms should note the various exceptions to the determination (i.e., where the SEC will continue to expect compliance with U.S. requirements).
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