FINAL DGL REVISED 2019 BCS Supporting Statement

FINAL FINAL DGL REVISED 2019 BCS Supporting Statement.pdf

Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants

OMB: 3235-0732

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SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based
Swap Participants
This submission is being made pursuant to the Paperwork Reduction Act of 1995, 44
U.S.C. Section 3501 et seq.
A.

JUSTIFICATION
1.

Necessity of Information Collection

In 2010, Congress passed the Dodd-Frank Act, establishing a comprehensive framework
for regulating the over-the-counter swaps markets. As required by Title VII of the Dodd-Frank
Act, new section 15F(h) of the Exchange Act established business conduct standards for
security-based swap (“SBS”) Dealers and Major SBS Participants (collectively “SBS Entities”)
in their dealings with counterparties, including special entities, and in May 2016, the
Commission adopted implementing rules.1 The rules also establish regulations for the chief
compliance officer functions within an SBS Entity.2
Rules 15Fh-1 through 15Fh-6 and 15Fk-1 require SBS Entities to:


Verify whether a counterparty is an eligible contract participant and whether it is a
special entity;



Disclose to the counterparty material information about the SBS, including material risks,
characteristics, incentives and conflicts of interest;



Provide the counterparty with information concerning the daily mark of the SBS;



Provide the counterparty with information regarding the ability to require clearing of the
SBS;

1

See Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap
Participants, Exchange Act Release 77617 (Apr. 14, 2016), 81 FR 29959 (May 13, 2016). See also
Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap
Participants; Correction, Exchange Act Release 77617A (May 19, 2016), 81 FR 32643 (May 24, 2016).
(together, “Adopting Release” or the “BCS Rules”)

2

Rules in addition to those addressed in this supporting statement were adopted under the BCS Rules.
Commission staff has prepared separate supporting statements pursuant to the Paperwork Reduction Act
(“PRA”) regarding Rule 3a71-3(c) and Rule 3a71-6, which address the cross-border application of the
business conduct standards and the availability of substituted compliance. The Office of Management and
Budget (“OMB”) has assigned control number 3235-0717 to Rule 3a71-3(c) and 3235-0715 to Rule 3a716. The remaining BCS Rules are either definitional rules, concern scope, or exempt respondents, see e.g.
Rule 3a67-10, and do not have a PRA burden associated with them.

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

Communicate with counterparties in a fair and balanced manner based on principles of
fair dealing and good faith;



Establish a supervisory and compliance infrastructure; and



Designate a chief compliance officer that is required to fulfill the described duties and
provide an annual compliance report.
The rules also require SBS Dealers to:



Determine that recommendations they make regarding security-based swaps are suitable
for their counterparties.



Establish, maintain and enforce written policies and procedures reasonably designed to
obtain and retain a record of the essential facts concerning each known counterparty that
are necessary to conduct business with such counterparty; and



Comply with rules designed to prevent “pay-to-play.”

The rules also define what it means to “act as an advisor” to a special entity, and require
an SBS Dealer who acts as an advisor to a special entity to:


Make a reasonable determination that any security-based swap or trading strategy
involving a security-based swap recommended by the SBS Dealer is in the best interests
of the special entity whose identity is known at a reasonably sufficient time prior to the
execution of the transaction to permit the SBS Dealer to comply with this obligation; and



Make reasonable efforts to obtain such information that the SBS Dealer considers
necessary to make a reasonable determination that a security-based swap or trading
strategy involving a security-based swap is in the best interests of the known special
entity.

In addition, the rules require SBS Entities acting as counterparties to special entities to
reasonably believe that the counterparty has an independent representative who meets the
following requirements:


Has sufficient knowledge to evaluate the transaction and risks;



Is not subject to a statutory disqualification;



Undertakes a duty to act in the best interests of the special entity;



Makes appropriate and timely disclosures to the special entity of material information
concerning the security-based swap;



Evaluates, consistent with any guidelines provided by the special entity, the fair pricing
and the appropriateness of the security-based swap;

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

Is independent of the security-based swap dealer or major security-based swap
participant that is the counterparty to a proposed security-based swap.

Under the rules, the special entity’s independent representative must also be subject to
pay-to-play regulations, and if the special entity is an ERISA plan, the independent
representative must be an ERISA fiduciary.
The information that must be collected pursuant to the rules is intended to increase
accountability and transparency in the market. The information will therefore help establish a
framework that protects investors and promotes efficiency, competition and capital formation.
2.

Purpose and Use of Information Collection
i.

Verification of Status

Rule 15Fh-3(a)(1) requires an SBS Entity to determine whether its counterparty is an
eligible contract participant (“ECP”) before the execution of a security-based swap other than on
a registered national securities exchange or security-based swap execution facility (“SEF”). An
SBS Entity would use this information to comply with Section 6(l) of the Exchange Act (15
U.S.C. 78(f)(l)), which prohibits a person from entering into a security-based swap with a
counterparty that is not an ECP other than on a national securities exchange.
Rule 15Fh-3(a)(2) requires the SBS Entity to determine whether a counterparty is a
special entity, unless the transaction is executed on a registered or exempt SEF or registered
national securities exchange, and the SBS Entity does not know the identity of the counterparty
at a reasonably sufficient time prior to the transaction to permit the SBS Entity to comply with
the obligations of the rule. An SBS Entity would use this information, in turn, to determine the
need to comply with the requirements applicable to dealings with special entities under Rules
15Fh-4(b) and 15Fh-5. In the event that a counterparty may elect to opt out of “special entity”
status (as defined in Rule 15Fh-2(d)(4)), Rule 15Fh-3(a)(3) requires an SBS Entity to notify such
counterparty of its right to opt out of special entity status. An SBS Entity may satisfy these
verification requirements through any reasonable means including, among other things,
obtaining written representations from the counterparty as to specific facts about the
counterparty.
In addition to assisting the CCO in determining compliance with the statute and proposed
rules, this collection of information would be used by staff in its examination and oversight
program.
ii.

Disclosures by SBS Entities

Rule 15Fh-3(b) requires an SBS Entity, prior to entering into an SBS, to disclose to a
counterparty (other than an SBS Entity or Swap Entity) material information concerning the
security-based swap in a manner reasonably designed to allow the counterparty to assess: (1) the
material risks and characteristics of a particular security-based swap; and (2) any material
incentives or conflicts of interest that the SBS Entity may have in connection with the security-

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based swap. These disclosure requirements do not apply unless the identity of the counterparty
is known to the SBS Entity at a reasonably sufficient time prior to execution of the transaction to
permit the SBS Entity to comply with the obligations of the rule. The rule also requires the SBS
Entity to make a written record of any non-written disclosures made pursuant to this provision,
and timely provide a written version of these disclosures to its counterparties no later than the
delivery of the trade acknowledgement of the particular transaction.
For cleared security-based swaps, Rule 15Fh-3(c)(1) requires an SBS Entity, upon
request of the counterparty, to disclose the daily mark to the counterparty (other than an SBS
Entity or Swap Entity) that the SBS Entity receives from the appropriate clearing agency. For
uncleared security-based swaps, Rule 15Fh-3(c)(2) requires an SBS Entity to disclose the daily
mark to the counterparty as specified in the rule. Rule 15Fh-3(c)(2) also requires disclosure of
the data sources and a description of the methodology and assumptions used to prepare the daily
mark for an uncleared security-based swap, as well as promptly disclose any material changes to
such data sources, methodology or assumptions during the term of the security-based swap.
Rule 15Fh-3(c)(3) also require an SBS Entity to provide the daily mark without charge to the
counterparty and without restrictions on the counterparty’s internal use of the daily mark.
Rule 15Fh-3(d) requires an SBS Entity to disclose information regarding clearing rights
to its counterparties (other than an SBS Entity or Swap Entity), so long as the identity of the
counterparty is known to the SBS Entity at a reasonably sufficient time prior to execution of the
transaction to permit the SBS Entity to comply with the obligations of the rule. Before entering
into a security-based swap that is subject to the clearing requirements of Section 3C(a) of the
Exchange Act, the SBS Entity must disclose to the counterparty the names of the clearing
agencies that accept the security-based swap for clearing, and through which of those clearing
agencies the SBS Entity is authorized or permitted, directly or through a designated clearing
member, to clear the security-based swap; disclose to the counterparty whether any of the named
clearing agencies satisfy the standard for clearing under Section 3C(a)(1) of the Exchange Act;
and notify the counterparty that it shall have the sole right to select which clearing agency shall
be used to clear the security-based swap. For security-based swaps that are not subject to the
clearing requirements of Section 3C(a) of the Exchange Act, before entering into a securitybased swap, the SBS Entity shall determine whether the security-based swap is accepted for
clearing by one or more clearing agencies; disclose to the counterparty the names of the clearing
agencies that accept the security-based swap for clearing, and whether the SBS Entity is
authorized or permitted, directly or through a designated clearing member, to clear the securitybased swap through such clearing agencies; and notify the counterparty that it may elect to
require clearing of the security-based swap and shall have the sole right to select the clearing
agency at which the security-based swap will be cleared, provided it is a clearing agency at
which the SBS Entity is authorized or permitted, directly or through a designated clearing
member, to clear the security-based swap. To the extent that the disclosures required by Rule
15Fh-3(d) are not provided in writing prior to the execution of the transaction, the SBS Entity is
required to make a written record of the non-written disclosures and provide the counterparty
with a written version of these disclosures no later than the delivery of the trade
acknowledgement for the transaction.

5
The disclosures that SBS Entities must provide to their counterparties (other than SBS
Entities), swap dealers, or major swap participants (together “Swap Entities”) are intended to
help counterparties understand the material risks and characteristics of a particular securitybased swap, the counterparty’s clearing rights, as well as the material incentives or conflicts of
interest that the SBS Entity may have in connection with the security-based swap. As a result,
these disclosures will assist the counterparty in assessing the transaction. The disclosures will
provide counterparties with a better understanding of the expected performance of the securitybased swap under various market conditions, and provide counterparties with additional
transparency and insight into the pricing and collateral requirements of security-based swaps.
iii.

Know Your Counterparty and Recommendations

Rule 15Fh-3(e) requires an SBS Dealer to establish, maintain and enforce written policies
and procedures reasonably designed to obtain and retain a record of the essential facts
concerning each counterparty whose identity is known to the SBS Dealer that are necessary for
conducting business with such counterparty. The essential facts are: (1) facts required to comply
with applicable laws, regulations and rules; (2) facts required to implement the SBS Dealer’s
credit and operational risk management policies in connection with transactions entered into with
such counterparty; and (3) information regarding the authority of any person acting for such
counterparty.
Rule 15Fh-3(f)(1) requires an SBS Dealer recommending a security-based swap or
trading strategy involving a security-based swap to a counterparty (other than an SBS Entity or a
Swap Entity) to: (i) undertake reasonable diligence to understand the potential risks and rewards
associated with the recommendation; and (ii) have a reasonable basis to believe that the
recommendation is suitable for the counterparty. To establish a reasonable basis for a
recommendation, an SBS Dealer must have or obtain relevant information regarding the
counterparty, including the counterparty’s investment profile, trading objectives, and its ability
to absorb potential losses associated with the recommended security-based swap or trading
strategy involving a security-based swap.
Under Rule 15Fh-3(f)(2), an SBS Dealer may also fulfill its suitability obligations under
Rule 15Fh-3(f)(1)(ii) with respect to an institutional counterparty (defined as a counterparty that
is an eligible contract participant as defined in clauses (A)(i), (ii), (iii), (iv), (viii), (ix) or (x), or
clause (B)(ii) (other than a person described in clause (A)(v)) of Section 1a(18) of the
Commodity Exchange Act and the rules and regulations thereunder, or any person (whether a
natural person, corporation, partnership, trust or otherwise) with total assets of at least $50
million) if: (i) the SBS Dealer reasonably determines that the counterparty (or its agent) is
capable of independently evaluating the investment risks with regard to the relevant securitybased swap or trading strategy involving a security-based swap; (ii) the counterparty (or its
agent) affirmatively represents in writing that it is exercising its independent judgment in
evaluating the recommendations of the SBS Dealer with regard to the relevant security-based
swap or trading strategy; and (iii) the SBS Dealer discloses to the counterparty that it is acting in
its capacity as a counterparty and is not undertaking to assess the suitability of the security-based
swap or trading strategy for the counterparty. Under Rule 15Fh-3(f)(3), an SBS Dealer will be
deemed to have satisfied the requirements of Rule 15Fh-3(f)(2)(i) if it receives written

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representations that: (i) in the case of a counterparty that is not a special entity, the counterparty
has complied in good faith with written policies and procedures that are reasonably designed to
ensure that the persons responsible for evaluating the recommendation and making trading
decisions on behalf of the counterparty are capable of doing so; and (ii) in the case of a
counterparty that is a special entity, satisfy the terms of the safe harbor in Rule 15Fh-5(b).
These collections of information will help an SBS Dealer comply with applicable laws,
regulations and rules. They will also assist an SBS Dealer in effectively dealing with the
counterparty, including by making recommendations that are appropriate for the counterparty,
and by collecting information from the counterparty necessary for the SBS Dealer’s credit and
risk management purposes. These collections of information will also assist an SBS Dealer in
determining whether it would be reasonable to rely on various representations from a
counterparty and evaluating the risks of trading with that counterparty. The information would
also assist the CCO in determining that the SBS Entity had policies and procedures reasonably
designed to obtain and retain essential facts concerning each known counterparty and to make
suitable recommendations to its counterparties. The Commission staff will also use these
collections of information in its examination and oversight program.
iv.

Fair and Balanced Communications

Rule 15Fh-3(g) requires an SBS Entity to communicate with its counterparties in a fair
and balanced manner based on principles of fair dealing and good faith. The rule requires that:
(1) communications provide a sound basis for evaluating the facts with regard to a particular
security-based swap or trading strategy involving a security-based swap; (2) communications not
imply that past performance will recur or make any exaggerated or unwarranted claim, opinion,
or forecast; and (3) any statement referring to potential opportunities or advantages presented by
a particular security-based swap be balanced by an equally detailed statement of the
corresponding risks.
The collection of information concerning the risks of a security-based swap will assist an
SBS Entity in communicating with counterparties in a fair and balanced manner. It will also
assist an SBS Dealer in making suitable recommendations to counterparties, and assist the CCO
in ensuring that the SBS Entity is communicating with counterparties in a fair and balanced
manner based on principles of fair dealing and good faith. The receipt of information in a fair
and balanced manner will assist the counterparty in making more informed investment decisions.
The Commission staff will also use this collection of information in its examination and
oversight program.
v.

Supervision

Rule 15Fh-3(h) requires an SBS Entity to establish and maintain a system to supervise,
and to diligently supervise, its business and the activities of its associated persons. Such a
system shall be reasonably designed to prevent violations of the provisions of applicable federal
securities laws and the rules and regulations thereunder relating to its business as an SBS Entity.
At a minimum, the supervisory system must: (i) designate at least one person with authority to
carry out supervisory responsibilities for each type of business in which the SBS Entity engages

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for which registration as an SBS Entity is required; (ii) use reasonable efforts to determine all
such supervisors are qualified, either by virtue of experience or training, to carry out their
assigned responsibilities; and (iii) establish, maintain and enforce written policies and
procedures addressing the supervision of the types of security-based swap business in which the
SBS Entity is engaged and the activities of it associated persons that are reasonably designed to
prevent violations of applicable securities laws and rules and regulations thereunder.
Rule 15Fh-3(h)(2) requires that such written policies and procedures must include, at a
minimum, procedures: (a) for the review by a supervisor of transactions for which registration as
an SBS Entity is required; (b) for the review by a supervisor of incoming and outgoing written
(including electronic) correspondence with counterparties or potential counterparties and internal
written communications relating to the SBS Entity’s security-based swap business; (c) for a
periodic review, at least annually, of the security-based swap business in which the SBS Entity
engages that is reasonably designed to assist in detecting and preventing violations of applicable
federal securities laws and regulations; (d) to conduct a reasonable investigation regarding the
good character, business repute, qualifications, and experience of any person prior to that
person’s association with the SBS Entity; (e) to consider whether to permit an associated person
to establish or maintain a securities or commodities account or a trading relationship in the name
of, or for the benefit of, such associated person at another financial institution, and if permitted,
to supervise the trading at such institution; (f) describing the supervisory system, including the
titles, qualifications and locations of supervisory persons and the responsibilities of each
supervisory person with respect to the types of business in which the SBS Entity is engaged; (g)
prohibiting an associated person who performs a supervisory function from supervising his or
her own activities or reporting to, or having his or her compensation or continued employment
determined by, a person or persons he or she is supervising; provided that if the SBS Entity
determines, with respect to any of its supervisory personnel, that compliance with this
requirement is not possible because of the firm’s size or a supervisory person’s position within
the firm, then the SBS Entity must document the factors used to reach such determination and
how the supervisory arrangement otherwise complies with this rule, and include a summary of
such determination in the annual compliance report prepared by the SBS Entity’s CCO pursuant
to Rule 15Fk-1(c); (h) reasonably designed to prevent the supervisory system from being
compromised due to conflicts of interest that may be present with respect to the associated
person being supervised, including the position of such person, the revenue such person
generates for the SBS Entity, or any compensation that the associated person conducting the
supervision may derive from the associated person being supervised; and (i) reasonably
designed, taking into consideration the nature of the SBS Entity’s business, to comply with the
duties set forth in Section 15F(j) of the Exchange Act.
Rule 15Fh-3(h)(3) provides that an SBS Entity (or associated person of an SBS Entity)
will not be deemed to have failed to diligently supervise another person if that person is not
subject to his or her supervision, or if: (i) the SBS Entity has established and maintained written
policies and procedures (as required in Rule15Fh-3(h)(2)(iii)), and a documented system for
applying those policies and procedures that would reasonably be expected to prevent and detect,
insofar as practicable, any violation of the federal securities laws and the rules and regulations
thereunder relating to security-based swaps; and (ii) the SBS Entity or associated person has
reasonably discharged the duties and obligations required by such written policies and

8
procedures and documented system and did not have a reasonable basis to believe that such
written policies and procedures and documented system were not being followed.
Rule 15Fh-3(h)(3) requires an SBS Entity promptly to amend its written supervisory
procedures when material changes occur in the applicable securities law or in its business or
supervisory system and to communicate such changes to all relevant associated persons.
The collection of information in connection with the establishment, maintenance and
enforcement of a supervisory system will assist an SBS Entity in achieving compliance with all
applicable securities laws, rules and regulations. The CCO may use these collections of
information in discharging his or her duties under proposed Rule 15Fk-1 and in determining
whether remediation efforts are required. The collection of information under Rule 15Fh-3(h)
will also be useful to supervisors in understanding and carrying out their supervisory
responsibilities. The Commission staff will also use this collection of information in its
examination and oversight program.
vi.

SBS Dealers Acting as Advisors to Special Entities

Rule 15Fh-4(a) imposes anti-fraud requirements on SBS Entities and (b)(1) imposes the
duty on an SBS Dealer that acts as an advisor to a special entity regarding a security-based swap
to make a reasonable determination that any security-based swap or trading strategy involving a
security-based swap recommended by the SBS Dealer is in the best interests of the special entity.
Paragraph (b)(2) also requires an SBS Dealer acting as an advisor to a special entity to make
reasonable efforts to obtain such information as it considers necessary to make a reasonable
determination that a security-based swap or related trading strategy is in the best interests of the
special entity. The information that must be obtained to make this reasonable determination
includes, but is not limited to: (i) the authority of the special entity to enter into a security-based
swap; (ii) the financial status and future funding needs of the special entity; (iii) the tax status of
the special entity; (iv) the hedging, investment, financing or other objectives of the special
entity; (v) the experience of the special entity with respect to security-based swaps, generally,
and security-based swaps of the type and complexity being recommended; (vi) whether the
special entity has the financial capability to withstand changes in market conditions during the
term of the security-based swap; and (vii) such other information as is relevant to the particular
facts and circumstances of the special entity, market conditions and the type of security-based
swap or trading strategy being recommended. However, the requirements of Rule 15Fh-4(b) do
not apply to a security-based swap if: (i) the transaction is executed on a registered or exempt
SEF or a registered national securities exchange; and (ii) the SBS Dealer does not know the
identity of the counterparty at a reasonably sufficient time prior to execution of the transaction to
permit the SBS Dealer to comply with the obligations of this rule.
Rule 15Fh-2(a) generally provides that an SBS Dealer acts as an advisor to a special
entity when it recommends a security-based swap or security-based swap trading strategy to that
special entity. Rule 15Fh-2(a)(1) provides a safe harbor under which an SBS Dealer will not be
deemed to act as an advisor to a special entity that is subject to Title I of ERISA if: (i) the special
entity represents in writing that it has a fiduciary as defined in Section 3 of ERISA that is
responsible for representing the special entity in connection with the security-based swap; (ii) the

9
fiduciary represents in writing that it acknowledges that the SBS Dealer is not acting as an
advisor; and (iii) the special entity represents in writing that (a) it will comply in good faith with
written policies and procedures reasonably designed to ensure that any recommendation the
special entity receives from the SBS Dealer involving a security-based swap transaction is
evaluated by a fiduciary before it is entered into; or (b) that any recommendation the special
entity receives from the SBS Dealer involving a security-based swap transaction will be
evaluated by a fiduciary before the transaction is entered into.
Rule 15Fh-2(a)(2) provides a safe harbor for transactions between an SBS Dealer and
any special entity. Under this rule, an SBS Dealer that recommends a security-based swap or
security-based swap trading strategy to any special entity (other than a special entity subject to
Title I of ERISA) will not be deemed to act as an advisor to that special entity if the special
entity represents in writing that it acknowledges that the SBS Dealer is not acting as an advisor,
and that it will rely on advice from a qualified independent representative, as defined in Rule
15Fh-5(a). The SBS Dealer must also disclose to the special entity that it is not undertaking to
act in the best interests of the special entity, as otherwise required by Section 15F(h)(4) of the
Exchange Act.
The information that will be collected pursuant to Rule 15Fh-4(b) will assist an SBS
Dealer that is acting as an advisor to a special entity to make a reasonable determination that any
security-based swap or trading strategy involving a security-based swap recommended by the
SBS Dealer is in the best interests of the special entity. Information collected pursuant to Rule
15Fh-2(a) will assist an SBS Dealer seeking to establish that it is not acting as an advisor to a
special entity. These collections of information will also assist a CCO in determining whether
the SBS Dealer has complied with the business conduct standards. The Commission staff will
also use this collection of information in its examination and oversight program.
vii.

SBS Entities Acting as Counterparties to Special Entities

Rule 15Fh-5(a)(1) requires an SBS Entity that offers to enter into or enters into a
security-based swap with a special entity (other than a special entity that is an employee benefit
plan subject to Title I of ERISA), to have a reasonable basis to believe that the special entity has
a qualified independent representative that meets certain specified qualifications. For purposes
of Rule 15Fh-5(a)(1), a qualified independent representative must: (i) have sufficient knowledge
to evaluate the transaction and related risks; (ii) not be subject to a statutory disqualification; (iii)
undertake a duty to act in the best interests of the special entity; (iv) make appropriate and timely
disclosures to the special entity of material information concerning the security-based swap; (iv)
evaluate, consistent with any guidelines provided by the special entity, the fair pricing and
appropriateness of the security-based swap; (v) in the case of a special entity defined in Rule
15Fh-2(d)(2) or (5), be subject to the pay-to-play prohibitions of the Commission, the CFTC, or
a self-regulatory organization that is subject to the jurisdiction of the Commission or the CFTC
(unless the independent representative is an employee of the special entity); and (vii) be
independent of the SBS Entity that is the counterparty to a proposed security-based swap.
Rule 15Fh-5(a)(1) also provides that a representative of a special entity will be
“independent” of an SBS Entity if the representative does not have a relationship with the SBS

10
Entity, whether compensatory or otherwise, that reasonably could affect the independent
judgment or decision-making of the representative. In addition, a special entity’s representative
will be deemed to be “independent” of an SBS Entity if: (1) the representative is not and was not
an associated person of the SBS Entity within one year of representing the special entity in
connection with the security-based swap; (2) the representative provides timely disclosures to
the special entity of all material conflicts of interest that could reasonably affect the judgment or
decision making of the representative with respect to its obligations to the special entity, and
complies with policies and procedures reasonably designed to manage and mitigate such material
conflicts of interest; and (3) the SBS Entity did not refer, recommend, or introduce the
representative to the special entity within one year of the representative’s representation of the
special entity in connection with the security-based swap.
Rule 15Fh-5(a)(2) provides that an SBS Entity that offers to enter into or enters into a
security-based swap with a special entity as defined in Rule 15Fh-2(d)(3) (any employee benefit
plan that subject to Title I of ERISA) must have a reasonable basis to believe the special entity
has a representative that is a fiduciary as defined in Section 3 of ERISA.
Rule 15Fh-5(b) provides safe harbors for SBS Dealers seeking to form a reasonable basis
regarding the qualifications of the independent representative. Under Rule 15Fh-5(b)(1), an SBS
Entity shall be deemed to have a reasonable basis to believe that a special entity (other than an
ERISA special entity) has a representative that satisfies the requirements of Rule 15Fh-5(a)(1) if:
(i) the special entity represents in writing to the SBS Entity that it has complied in good faith
with written policies and procedures reasonably designed to ensure that it has selected a
representative that satisfies the requirements of Rule 15Fh-5(a)(1), and that such policies and
procedures provide for ongoing monitoring of the performance of such representative consistent
with Rule 15Fh-5(a)(1); and (ii) the representative represents in writing to the special entity and
the SBS Entity that the representative: (a) has policies and procedures reasonably designed to
ensure that it satisfies the applicable requirements of Rule 15Fh-5(a)(1); (b) meets the
independence requirements of Rule 15Fh-5(a)(1)(vii); and (c) is legally obligated to comply with
the requirements of Rule 15Fh-5(a)(1) by agreement, condition of employment, law, rule,
regulation, or other enforceable duty.
Under Rule 15Fh-5(b)(2), an SBS Entity shall be deemed to have a reasonable basis to
believe that an ERISA special entity has a representative that satisfies the requirements of Rule
15Fh-5(a)(2), provided that the special entity provides in writing to the SBS Entity the
representative’s name and contact information, and represents in writing that the representative
is a fiduciary as defined in Section 3 of ERISA.
Under Rule 15Fh-5(c), before initiation of a security-based swap, an SBS Dealer must
disclose to the special entity in writing the capacity in which the SBS Dealer is acting in
connection with the security-based swap, and, if the SBS Dealer engages in business with the
counterparty in more than one capacity, the SBS Dealer must disclose the material differences
between such capacities and any other financial transaction or service involving the counterparty
to the special entity.
Under Rule 15Fh-5(d), formerly Rule 15Fh-5(c), the provisions of Rule 15Fh-5 do not
apply when two conditions are satisfied: (1) the transaction is executed on a registered or exempt

11
SEF or registered national securities exchange; and (2) the SBS Entity is unaware of the
counterparty’s identity, at a reasonably sufficient time prior to the execution of the transaction to
permit the SBS Entity to comply with the obligations of the rule.
The information collected under Rule 15Fh-5(a) will assist an SBS Entity in forming a
reasonable basis that the special entity has a qualified, independent representative that meets the
requirements of the rule. Disclosures under Rule 15Fh-5(c) regarding the capacity in which an
SBS Entity is operating will provide greater clarity to special entities regarding whether an SBS
Entity is acting in its interest, or as a counterparty or principal with interests that are potentially
adverse to the special entity. These collections of information will also assist the CCO in
determining whether the SBS Entity has complied with the relevant provisions of the Exchange
Act. The Commission staff will also use this collection of information in its examination and
oversight program.
viii.

Political Contributions

Rule 15Fh-6(b) prohibits an SBS Dealer from offering to enter into, or entering into a
security-based swap, or a trading strategy involving a security-based swap, with a municipal
entity within two years after any contribution by the SBS Dealer or its covered associates to an
official of such municipal entity, subject to certain exceptions. These prohibitions do not apply
to certain contributions made by an SBS Dealer’s covered associate if the SBS Dealer discovered
the contribution within 120 calendar days of the date of such contribution, the contribution did
not exceed $350, and the covered associate obtained a return of the contribution within 60
calendar days of the date of discovery of the contribution by the SBS Dealer. However, an SBS
Dealer may not rely on that provision more than three times in any 12-month period if it has
more than 50 covered associates, and no more than twice if it has 50 or fewer covered associates.
The Commission may also, upon application, exempt an SBS Dealer from the prohibitions of the
rule after consideration of several factors.
The provisions of Rule 15Fh-6 do not apply when two conditions are satisfied: (1) the
transaction is executed on a registered or exempt SEF or registered national securities exchange;
and (2) the SBS Dealer is unaware of the counterparty’s identity, at a reasonably sufficient time
prior to the execution of the transaction to permit the SBS Dealer to comply with the obligations
of the rule.
Rule 15Fh-6 is intended to deter SBS Dealers from participating, even indirectly, in pay
to play practices. The information collected pursuant to this rule related to political
contributions made by the security-based swap dealer or its covered associates will assist the
SBS Dealer and the Commission in verifying this deterrence. The rule will also assist the CCO
in determining whether the SBS Dealer has complied with relevant provisions of the Exchange
Act. The Commission staff will also use this collection of information in its examination and
oversight program.
ix.

Chief Compliance Officer

12
Rule 15Fk-1 requires an SBS Entity to designate an individual to serve as CCO on its
registration form. Under Rule 15Fk-1(b)(1) the CCO must report directly to the board of
directors or senior officer of the SBS Entity. Under Rule 15Fk-1(b)(2), the CCO must take
reasonable steps to ensure that the SBS Entity establishes, maintains, and reviews written
policies and procedures reasonably designed to achieve compliance with the Exchange Act and
the rules and regulations thereunder relating to its business as an SBS Entity by: (1) reviewing
the SBS Entity’s compliance with the SBS Entity requirements described in Section 15F of the
Exchange Act and the rules and regulations thereunder (where such review shall involve
preparing the SBS Entity’s annual assessment of its written policies and procedures reasonably
designed to achieve compliance with Section 15F of the Exchange Act and the rules and
regulations thereunder); (2) taking reasonable steps to ensure the SBS Entity establishes,
maintains, and reviews policies and procedures reasonably designed to remediate noncompliance issues identified by the CCO through any means, including any compliance office
review, look-back, internal or external audit finding, self-reporting to the Commission and other
appropriate authorities, or complaint that can be validated; and (3) taking reasonable steps to
ensure that the SBS Entity establishes and follows procedures reasonably designed for the
handling, management response, remediation, retesting, and resolution of non-compliance issues.
Under Rule 15Fk-1(b)(3), the CCO must take reasonable steps to resolve any material conflicts
of interest that may arise, in consultation with the board or the senior officer of the SBS Entity.
Under Rule 15Fk-1(b)(4), the CCO must administer each policy and procedure that is required to
be established pursuant to Section 15F of the Exchange Act and the rules and regulations
thereunder.
Under Rule 15Fk-1(c), the CCO must also prepare and sign an annual compliance report
that must be submitted to the Commission within 30 days following the deadline for filing the
SBS Entity’s annual financial report with the Commission pursuant to Section 15F of the
Exchange Act and the rules and regulations thereunder. This annual compliance report must
contain a description of the written policies and procedures of the SBS Entity described in Rule
15Fk-1(b), outlined above, including the code of ethics and conflict of interest policies. The
compliance report must also include, at a minimum, a description of: (1) the SBS Entity’s
assessment of the effectiveness of its policies and procedures relating to its business as an SBS
Entity; (2) any material changes to the policies and procedures since the date of the preceding
compliance report; (3) any areas for improvement and recommended potential or prospective
changes or improvements to its compliance program and resources devoted to compliance; (4)
any material non-compliance matters identified; and (5) the financial, managerial, operational,
and staffing resources set aside for compliance with the Exchange Act and the rules and
regulations thereunder relating to its business as an SBS Entity, including any material
deficiencies in such resources. The report must be submitted to the board of directors and audit
committee (or equivalent bodies) and the senior officer of the SBS Entity prior to submission to
the Commission. The report also must be discussed in one or more meetings (addressing the
obligations of this rule) that were conducted by the senior officer with the CCO in the preceding
12 months, and must include a certification by the CCO or senior officer that, to the best of his or
her knowledge and reasonable belief and under penalty of law, the information contained in the
compliance report is accurate and complete in all material respects.

13
The rule allows an SBS Entity to incorporate by reference sections of a compliance report
that has been submitted with the current or immediately preceding reporting period to the
Commission, and allows an SBS Entity to request from the Commission an extension of time to
submit its compliance report, provided that the SBS Entity’s failure to timely submit the report
could not be eliminated by the SBS Entity without unreasonable effort or expense. Extensions of
the deadline will be granted at the discretion of the Commission. The rule also requires an SBS
Entity to promptly submit an amended compliance report if material errors or omissions in the
report are identified.
Under Rule 15k-1(d), the compensation and removal of the CCO shall require the
approval of a majority of the board of directors of the SBS Entity.
The information collected under Rule 15Fk-1 will assist the CCO in overseeing and
administering the SBS Entity’s compliance with relevant provisions of the Exchange Act. The
Commission staff will also use this collection of information in its examination and oversight
program.
3.

Consideration Given to Information Technology

The rules do not prescribe particular forms or methods of compliance for SBS Entities so
as to allow flexibility with respect to new technologies as they develop.
4.

Duplication

Because security-based swaps were largely unregulated prior to these rules, the
information was not generally otherwise filed with the Commission. The staff expects that many
SBS Entities will be dually registered with the CFTC as Swap Entities. As the rules are largely
similar to those adopted by the CFTC, dually registered entities will already have procedures and
systems in place to collect the information. However, the information provided to the CFTC will
address swaps while the information provided to the Commission will address SBSs. With
respect to mixed swaps, duplicative information may be provided to both the CFTC and the
Commission, depending on the facts and circumstances.
5.

Effect on Small Entities

Based on the existing information about the SBS market, we believe that the SBS market,
while broad in scope, is largely dominated by large entities and their large institutional
customers. Under current law, all SBS market participants are required to be “eligible contract
participants.” The basic thresholds under the definition of “eligible contract participant” are
currently $10 million in total assets for natural persons and $25 million in total assets for
corporations and other legal entities. Thus, we believe it is unlikely that the collection of
information will have an impact on small entities.
6.

Consequences of Not Conducting Collection

14
The information is collected as each transaction warrants, and there is no way to reduce
the frequency of collection without undermining the statutory provisions or theirs intended
purposes.
7.

Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)

There are no special circumstances. This information collection is consistent with the
guidelines in 5 CFR 1320.5(d)(2).
8.

Consultations Outside the Agency

The required Federal Register notice with a 60-day comment period soliciting comments
on this collection of information was published. No public comments were received.
9.

Payment of Gift

Not applicable.
10.

Confidentiality

The Commission believes the information collected pursuant to Rules 15Fh-3 to 15Fh-6
and 15Fk-1 will not be publicly available. To the extent that the Commission receives
confidential information pursuant to this collection of information, such information will be kept
confidential, subject to the provisions of the Freedom of Information Act (“FOIA”).
11.

Sensitive Questions

As discussed above in Item 10, the collection of information will not include publicly
available information. Furthermore, we do not believe that the collection of information will
contain Personally Identifiable Information (“PII”).3
12.

Burden of Information Collection

The Commission estimates, based on data obtained from the CFTC and DTCC, that
approximately 50 entities may fit within the definition of SBS Dealer, and as many as 5 entities
may come within the definition of Major SBS Participant. Further, we estimate that
approximately 46 of these 55 SBS Entities will be dually registered with the CFTC as Swap
Entities. We also estimate that there are currently 13,137 security-based swap market
participants of which 8,802 are also swap market participants. We estimate that there are
approximately 13,706 unique SBS Dealer and non-SBS-Dealer pairs.4 Accordingly, we have
3

The term “Personally Identifiable Information” refers to information which can be used to distinguish or
trace an individual’s identity, such as their name, social security number, biometric records, etc. alone, or
when combined with other personal or identifying information which is linked or linkable to a specific
individual, such as date and place of birth, mother’s maiden name, etc.

4

Unless otherwise noted, estimates were derived from the DTCC-TIW data set (February 2019).

15
used these estimates for the calculation of hour and cost burdens for the rule provisions that we
anticipate have a “collection of information” burden within the meaning of the PRA of 1995.
The Commission estimates that the aggregate hour burden of the ongoing reporting and
disclosures required by the BCS Rules, as described above, is approximately 554,823 hours
calculated as follows:
The Commission estimates that:


15Fh-3(a) – Verification of Status
Approximately 55 SBS Entities (of which we expect approximately 46 will be dually
registered with the CFTC as Swap Entities) will be required to verify whether a
counterparty is an ECP or, is a special entity, as required by Rule 15Fh-3(a). These
verification requirements are generally the same under the business conduct standards
adopted by the CFTC. Rule 15Fh-3(a)(3) requires an SBS Entity to verify whether a
counterparty is eligible to elect not to be a special entity and if so, to notify the
counterparty if its right to opt out of special entity status. Rule 15Fh-2(d)(4) includes
employee benefit plans that are defined in Section 3 of ERISA, not otherwise defined as a
special entity, within the special entity definition, unless such employee benefit plan
elects to opt out of special entity status. In contrast, the corollary CFTC rule allows
employee benefit plans defined in Section 3 of ERISA to opt in to special entity status,
and requires SBS Entities to notify counterparties eligible to opt in of their ability to do
so. The Commission holds SBS Entities to a reasonable person standard with respect to
reliance on counterparty representations and required due diligence. As discussed in the
Adopting Release, the rule does not stipulate how SBS Entities must comply and would
permit the parties to follow industry practice whereby they agree in master agreement
documentation to update any material changes or to “bring down” or renew afresh the
counterparty representations previously made for any subsequent action.5 For such
instances, we consider this as part of the overall SBS Entity recordkeeping requirements.
SBS Entities – Adherence Letter [0 hours]
We estimate that approximately 55 SBS Entities (of which we expect approximately 46
will be dually registered with the CFTC as Swap Entities) will be required to verify
whether a counterparty is an ECP or special entity, as required by Rule 15Fh-3(a). As
noted above, Rule 15Fh-3(a)(3) differs from the CFTC’s rule, which instead includes an
opt-in for plans “defined in” ERISA, but not subject to Title I of ERISA. We understand
that the industry has developed protocols and questionnaires that allow the counterparty
to indicate its status, whether or not it is a special entity and whether it elects to be treated
as a special entity. As a result of these protocols and questionnaires, we continue to
believe that these dually registered SBS Entities will not incur any start-up or ongoing
burdens in complying with Rules 15Fh-3(a)(1) and (2) because they already adhere to the
relevant protocols to obtain the information under the CFTC’s business conduct
standards. We estimate the remaining 9 SBS Entities will have already incurred start-up

5

Adopting Release at 29,979-80.

16
costs to adhere to the relevant protocols, including submitting an adherence letter to
ISDA, and we anticipate will not have any ongoing burdens as well.
SBS Market Participants – Adherence Letter [0 hours]
We believe that approximately 8,802 of the 13,137 security-based swap market
participants (which include SBS Entities and counterparties) are also swap market
participants and likely already adhere to the relevant protocols. These 8,802 market
participants would not have any start-up burdens or ongoing burdens with respect to
verification. The remaining 4,335 market participants (less the 9 SBS Entities) would
have previously incurred one time start up burdens to comply with the relevant protocols,
including submitting an adherence letter to ISDA, and we anticipate would not have any
ongoing burdens with respect to this rule.
SBS Entities – Notice [0 hours]
The 55 SBS Entities would have previously incurred one-time, initial burdens in
connection with preparing the required notice under Rule 15Fh-3(a)(3) for counterparties
defined in Rule 15Fh-2(d)(4) and we anticipate would not have any ongoing burdens
with respect to this rule.
Counterparties – Representations [0 hours]
As discussed above, the Adopting Release states SBS Entities and counterparties may
follow industry practice and agree in master agreement documentation as to the required
representations, how to inform of material changes to representations and/or refresh such
representations by “bring down” or renewing the representations for subsequent actions.
Once the initial diligence is conducted and counterparty representations are made, we
consider this part of the overall SBS Entity recordkeeping requirements. We believe that
approximately 8,802 of the 13,137 security-based swap market participants (which
include SBS Entities and counterparties) are also swap market participants and likely
already adhere to the relevant protocol. These 8,802 market participants would not have
any start-up burdens or ongoing burdens with respect to verification. The remaining
4,335 market participants (less the 9 SBS Entities) would have previously incurred one
time start up burdens to comply with the protocols and representations and we anticipate
would not have any ongoing burdens with respect to this rule.


15Fh-3(b), (c), and (d) – Disclosure by SBS Entities:
Pursuant to Rules 15Fh-3(b), (c), and (d), SBS Entities would be required to provide
certain disclosures to market participants. Based on our experience with burden
estimates for similar disclosure requirements,6 as well as our discussions with market

6

For disclosures similar to the disclosure of methodologies and assumptions of daily mark, see Disclosure of
Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments and
Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial
Instruments, Other Financial Instruments and Derivative Commodity Instruments, Securities Act Release
No. 7386 (Jan. 31, 1997), 62 FR 6044 (Feb. 10, 1997).

17
participants, we understand that the SBS Entities that are dually registered with the CFTC
already provide their counterparties with disclosures similar to those that are required
under Rules 15Fh-3(b) and (c). To the extent that the material characteristics required by
Rule 15Fh-3(b)(1) are included in the documentation of a security-based swap, such as
the master agreement, credit support annex, trade confirmation or other documents, we
do not believe that any additional burden will be required for the disclosure of material
characteristics. For other required disclosures relating to material risks required by Rule
15Fh-3(b)(1) or disclosures relating to material incentives or conflicts of interest required
by Rule 15Fh-3(b)(2), we understand that certain market participants already have
developed standardized disclosures for some of these requirements.7 For example, many
SBS Dealers already provide a statement of potential risks related to investing in certain
security-based swaps to their counterparties. However, to the extent that an SBS Entity
and counterparty engage in a highly bespoke transaction, the standardized disclosure may
not satisfy all of the SBS Entities disclosure requirements. In those cases, the SBS Entity
will likely use a combination of standardized disclosures and de novo disclosures to
fulfill its obligations under Rules 15Fh-3(b)(1) and (2).
In some cases, such as disclosures about the daily mark for a cleared security-based
swap, the SBS Entity is obligated to provide the daily mark upon request. We understand
that in the current model of clearing security-based swaps, the security-based swap
between the SBS Entity and counterparty is terminated upon novation by the clearing
agency. The SBS Entity would no longer have any obligation to provide a daily mark to
the original counterparty because a security-based swap no longer exists between them.
Therefore, there would not be any ongoing burden on the SBS Entity. Depending on how
quickly the security-based swap is cleared, there may not be an initial burden on the SBS
Entity either. Unlike the CFTC’s rule, Rule 15Fh-3(c)(1) does not require a pre-trade
daily mark. So if the security-based swap is cleared before the end of the next day and
the clearing results in novation of the original swap, the SBS Entity would not have any
daily mark obligations for the cleared swap.
For uncleared security-based swaps, we believe that SBS Entities may need to slightly
modify the models used for calculating variation margin to calculate the daily mark. In
addition, the SBS Entity will need to provide the counterparty with a description of the
methodologies and assumptions used to calculate the daily mark.
Nevertheless, existing accounting standards and other disclosure requirements under the
Exchange Act, such as FASB Accounting Standards Codification Topic 820, Fair Value
Measurements and Disclosures, or Item 305 of Regulation S-K, require disclosures
similar to the description of the methodologies and assumptions of the daily mark. To
the extent that the model it uses and methodologies and assumptions are not already
7

See e.g., ISDA General Disclosure Statement for Transactions (August 2015). To the extent that
disclosures of material risks and characteristics under Rule 15Fh-3(b)(1) or disclosures of material
incentives and conflicts of interest under Rule 15Fh-3(b)(2) are initially provided orally, the additional
burden of providing a written version of the disclosure at or before delivery of the trade confirmation
pursuant to Rule 15Fh-3(b)(3) will be considered in connection with the overall reporting and
recordkeeping burdens of the SBS Entity.

18
prepared, the SBS Entity may need to prepare the initial description of the data sources,
methodologies and assumptions. In addition, the SBS Entity will have an ongoing
burden of updating the disclosure for any material changes to the data sources,
methodologies and assumptions.
We continue to believe that SBS Entities will use internal staff to revise existing
disclosures to comply with Rules 15Fh-3(b) and (c), and to prepare language which Rule
15Fh-3(d) requires SBS Entities to disclose regarding the clearing options available for a
particular security-based swap. In addition, the requirements of Rule 15Fh-3(d) are not
the same as the CFTC requirements to disclose clearing options, so SBS Entities will
need to develop new disclosures.
We estimate that in 2018 there were approximately 593,364 security-based swap
transactions between an SBS Dealer and a counterparty that is not an SBS Dealer. Of
these, we estimate that approximately 233,595 were new or amended trades requiring
these disclosures.8 We recognize that the time required to develop an infrastructure to
provide these disclosures will vary significantly depending on, among other factors, the
complexity and nature of the SBS Entity’s security-based swap business, its market risk
management activities, its existing disclosure practices, whether the security-based swap
is cleared or uncleared and other applicable regulatory requirements. Under the rule, as
adopted, SBS Entities could make the required disclosures to their counterparties through
standardized documentation, such as a master agreement or other written agreement, if
the parties so agree. We recognize that it will likely be necessary to prepare some
disclosures that are particular to a transaction to meet all of an SBS Entity’s disclosure
obligations under Rules 15Fh-3(b), (c) and (d). We also believe that, because the
reporting burden will generally require refining or revising an SBS Entity’s existing
disclosure processes, the disclosures will be prepared internally.
Disclosure – SBS Entities [226,600 hours]
At adoption, we conservatively estimated the initial one-time only burden of SBS Entities
for initial analysis and development of specifications, on average, would require three
persons from trading and structuring, three persons from legal, two persons from
operations, and four persons from compliance, for a total of 12 persons spending 100
hours each, to comply with the rules.9 These initial burdens (a total of 66,000 hours
8

Available DTCC-TIW data as of February 2019 indicated approximately 593,364 transactions between
SBS Entities and non-SBS Entities during that time period. Of these, approximately 233,595 were new
trades, and 15,931 were amendments. Of the approximately 233,595 new trades between likely SBS
Dealers and non-dealers, 96,532 trades or approximately 41% were voluntarily cleared bilateral trades in
2018.

9

In the Proposing Release, we used this estimate and it recognizes the development of market practice to
comply with very similar CFTC rules. It also recognizes that given the current model used for clearing
security-based swaps, daily mark disclosures in that context are unlikely to be required. Furthermore, no
comments were received on these estimates. As a result, we conservatively continue to use these estimates.
We note that some SBS Entities may choose to utilize in-house counsel to review, revise and prepare these
disclosures.

19
annualized at 22,000 hours per year over three years) have already been incurred.
Following the initial analysis and development of specifications, we continue to estimate
that half of these persons, approximately 6, will still be required to spend approximately
20 hours per year (120 hours annually per SBS Entity), to re-evaluate and modify the
disclosures and system requirements as necessary, amounting to an ongoing aggregate
annual total reporting burden of 6,600 hours per year.10
We also previously estimated that SBS Entities would incur initial, one-time only
burdens totaling 440,000 hours (annualized at 146,666.67 over three years) for the
creation of necessary information technology infrastructure. These initial burdens have
already been incurred. We continue to estimate that once an information technology
infrastructure is created, maintenance of this system will require each SBS Entity to use
two full-time persons per year for a total ongoing reporting burden of 220,000 hours
annually.11 The total combined annual ongoing reporting burden is thus 226,600 hours
(6,600 hours + 220,000 hours). The annual burden per respondent is 4,120 hours
(226,600 ÷ 55).
Disclosure - Security-Based Swap Transactions between an SBS Dealer and a
Non-SBS Dealer Counterparty [233,595 hours]
In addition, we estimate that, on average, the SBS Entities will require one burden hour
per security-based swap to evaluate whether more particularized disclosures are
necessary for the transaction and to develop the additional disclosures for the
contemplated transaction. As stated above, we estimate that in 2018 there were
approximately 593,364 security-based swap transactions between an SBS Dealer and a
counterparty that is not an SBS Dealer. Of these, we estimate that approximately
233,595 were new or amended trades requiring these disclosures. This amounts to an
ongoing reporting burden of 233,595 hours.12
15Fh-3(e) and (f) – Know Your Counterparty and Recommendations: As noted in
the Proposing Release, the estimates in this paragraph reflect our experience with and
burden estimates for similar collections of information, as well as our discussions with
market participants.13

10

The annual estimate is based on the following calculation: (55 SBS Entities) x (6 persons) x (20 hours) =
6,600 hours.

11

The estimate is based on the following calculation: (55 SBS Entities) x (2 persons) x (2,000 hours per year)
= 220,000 hours.

12

The estimate is based on the following calculation: (233,595 security-based swaps that require these
disclosures) x (1 hour) = 233,595 hours. We realize that some assessments may take less time and some
may take more. In addition, to the extent that additional disclosures are required, drafting the disclosure is
likely to take more than an hour, but we expect the vast majority of transactions will not require additional
disclosures so that an average of one hour per transaction is a reasonable estimate.

13

See Proposing Release 76 FR at 42398, n. 14.

20

SBS Dealers [6,853 hours]
We believe that most SBS Dealers already have policies and procedures in place for
knowing their counterparties that comply with existing CFTC and FINRA standards, and
that they have already incurred any initial one-time burdens associated with reviewing
and revising the policies and procedures to comply with the “know your counterparty”
obligations under this rule. Going forward, we estimate that an SBS Dealer will spend an
average of approximately 30 minutes each year per unique non-SBS Dealer
counterparty14 to assess whether the SBS Dealer is in compliance with the rules’
“suitability” requirements under Rule 15Fh-3(f)(1) – a total ongoing reporting burden of
approximately 6,853 hours annually,15 or an average of approximately 137 hours
annually per SBS Dealer.16
Counterparties [0 hours]
Counterparties have already previously incurred initial one-time burdens associated with
the counterparty or its agent collecting and providing essential facts to SBS Dealers.
Once counterparties provide SBS Dealers with essential facts, we do not anticipate there
are any ongoing burdens.
Special Entities [0 hours]
We expect that, given the institutional nature of the participants involved in securitybased swaps, most SBS Dealers will obtain the representations in Rule 15Fh-3(f)(2) or
Rule 15Fh-3(f)(3)(ii) to comply with Rule 15Fh-3(f).17 For the estimated 1,141 special
entities, we expect they will choose compliance with the safe harbor Rule 15Fh-5(b) and
accordingly, the burden estimates for the SBS Entities and special entities are included in
the context of the discussion for that rule, infra.
Dual Market Participants [0 hours]
For the 8,802 security-based swap market participants that are also swap market
participants, including the 46 firms that we expect to be dually registered as Swap
Entities and SBS Entities, the requisite representations have already been prepared in the
14

Based on 2018 TIW data, there were approximately 13,706 unique transacting SBS Dealer - non-SBS
dealer pairs.

15

The estimate is based on the following calculation: (13,706 unique transacting SBS Dealer - non-SBS
dealer pairs) x (30 minutes) ÷ (60 minutes) = 6,853 hours.

16

The estimate is based on the following calculation: (6,853 hours) ÷ (50 SBS Dealers) = 137 hours per SBS
Dealer. To the extent that the SBS Dealer is unfamiliar with the counterparty, we would expect a greater
time burden and as an SBS Dealer becomes more familiar with the particular counterparty, we would
expect a lesser time burden. As a result, we use 30 minutes as an average estimate.

17

We base the expectation on observation and experience in the context of transactions by broker-dealers
with institutional clients and the use of FINRA’s institutional suitability exception in that context.

21
swaps context. 18 We understand that swap market participants are currently utilizing
standardized representations that are currently in Schedule 3 of the ISDA August 2012
DF Protocol. Any initial one time burdens associated with adapting these standard
representations to the SBS context have already been previously incurred by respondents.
After respondents have made the necessary initial modifications to adapt these standard
representations to the SBS context, we do not anticipate any ongoing burden with respect
to the requisite representations because the representations in the swaps context are
deemed repeated “as of the occurrence of each Swap Communication Event” and we
would anticipate a similar construction in the security-based swap context.
SBS only Market Participants [0 hours]
The remaining 4,335 market participants not dually registered have already incurred an
initial one-time burden to draft the requisite representations to comply with the
institutional suitability analysis in Rule 15Fh-3(f)(2). We believe that these 4,335 market
participants are likely to have modelled their representations on the representations
included in the ISDA August 2012 DF Protocol because the SBS Entity is already
familiar with those particular representations. Given that there are various industry
practices in master documentation for renewing representations or addressing material
changes to representations made for future actions, as discussed above, we do not believe
that there will be an ongoing burden pertaining to these representations.
15Fh-3(g) – Fair and Balanced Communications [110 hours]
Rule 15Fh-3(g) requires SBS Entities to communicate with counterparties “in a fair and
balanced manner, based on principles of fair dealing and good faith.” The three specific
standards of Rule 15Fh-3(g) require that: (1) communications must provide a sound basis
for evaluating the facts with respect to any security-based swap or trading strategy
involving a security-based swap; (2) communications may not imply that past
performance will recur, or make any exaggerated or unwarranted claim, opinion, or
forecast; and (3) any statement referring to the potential opportunities or advantages
presented by a security-based swap or trading strategy involving a security-based swap
shall be balanced by an equally detailed statement of the corresponding risks.19 Rule
18

Of the 8,802 market participants that engage in both swaps and security-based swaps, a proportion of them
will also be special entities. This calculation assumes all of the special entities are engaged in transactions
in both markets, leaving 7,661 market participants (8,802 market participants – 1,141 special entities) to
adapt the representations in the ISDA August 2012 DF Protocol to the security-based swap context, as
necessary.

19

We expect 16 registered broker-dealers that are FINRA members to register as SBS Entities. These 16
FINRA members are already subject to these similar FINRA requirements in the non-security based swap
context. Cf. FINRA Rule 2210(d)(1)(D) (“Members must ensure that statements are clear and not
misleading within the context in which they are made, and that they provide balanced treatment of risks
and potential benefits. Communications must be consistent with the risks of fluctuating prices and the
uncertainty of dividends, rates of return and yield inherent to investments.”) We believe that this
requirement addresses concerns raised by a commenter that to be fair and balanced, communications must
inform investors of both the potential rewards and risks of their investments. See letter from Carl Levin,
U.S. Senate, dated Aug. 29, 2011.

22
15Fh-3(g) applies to communications made before the parties enter into a security-based
swap, and continues to apply over the term of a security-based swap. We expect that a
discussion of material risks of the transaction will be included in the documentation for
the security-based swap.
We believe that all 55 SBS Entities are required to comply with Rule 15Fh-3(g), and that
they have already incurred a one-time initial burden associated with sending their
existing marketing materials to outside counsel for review and comment (see discussion
of outside counsel costs in Item 13 below). After initial changes to marketing materials
have been made to comply with Rule 15Fh-3(g), we believe that the ongoing hour burden
associated with the rule will likely be limited to two hours pertaining to the review of
SBS Entities’ e-mail communications and Bloomberg messages sent to counterparties,
which we believe will likely be done by in-house counsel or an SBS Entity’s CCO. We
estimate that the ongoing hour burden of the rule will be approximately two hours per
year per SBS Entity, for an aggregate total of 110 hours per year (55 SBS Entities x 2
burden hours).


15Fh-3(h) – Supervision [29,700 hours]
As outlined above, Rule 15Fh-3(h) requires an SBS Entity to establish and maintain a
system to supervise, and to diligently supervise, its business and the activities of its
associated persons. Such a system shall be reasonably designed to prevent violations of
the provisions of applicable federal securities laws and the rules and regulations
thereunder relating to its business as an SBS Entity. The written policies and procedures
required by Rule 15Fh-3(h) must include, at a minimum, procedures for nine specific
areas of supervision.
We continue to expect that 55 SBS Entities (of which approximately 46 will be dually
registered with the CFTC as Swap Entities) will be required to comply with analogous
supervision rules like those required by Rule 15Fh-3(h). The supervision requirements in
Rule 15Fh-3(h) are largely the same under the business conduct standards and related
rules adopted by the CFTC.20
The estimates in this paragraph reflect the foregoing information, as well as our general
experience with and understanding of the burden estimates in similar contexts, including,
but not limited to, FINRA’s analogous supervision rules. All 55 SBS Entities have
already incurred initial one-time burdens to initially prepare policies and procedures. We
continue to expect that many SBS Entities will rely primarily on outside counsel for the
ongoing collection of information required under this rule and to review each policy and
procedure on an ongoing basis as discussed above. We continue to estimate that, on
average, each SBS Entity will spend approximately 540 hours (approximately 60 hours
per policy and procedure) each year to maintain these policies and procedures, yielding a

20

See CFTC Rule 23.602. See also CFTC Rule 23.402(a) (policies and procedures to ensure compliance);
CFTC Rule 3.3(d)(1) (administration of compliance policies and procedures). Accordingly, the SBS
Entities that would also be registered as a swap dealer or major swap participant with the CFTC would
have supervision policies and procedures for engaging in swaps.

23
total ongoing annual burden of approximately 29,700 burden hours annually.21 We
believe that the maintenance of these policies and procedures will be conducted
internally.


15Fh-4 and 15Fh-2(a) – SBS Dealers Acting as Advisors to Special Entities
As discussed above, Rule 15Fh-4 imposes on SBS Dealers that act as advisors to special
entities a duty to make a reasonable determination that any security-based swap or related
trading strategy that the SBS Dealer recommends is in the “best interests” of the special
entity. Rule 15Fh-2(a) states that an SBS Dealer “acts as an advisor” to a special entity
when it recommends a security-based swap or related trading strategy to the special
entity. However, the rule provides a safe harbor whereby an SBS Entity will not be
deemed an “advisor” if an ERISA special entity counterparty relies on advice from an
ERISA fiduciary, or where any special entity counterparty relies on advice from a
qualified independent representative that acts in its best interests.22
Among swap dealers operating under the CFTC’s parallel safe harbor,23 parties have
generally included representations in standard swap documentation that both
counterparties are acting as principals, and that the counterparty is not relying on any
communication from the swap dealer as investment advice. We believe that SBS Dealers
and their special entity counterparties will similarly include the requisite representations
in standard security-based swap documentation. These representations will need to be
reviewed and revised to ensure that they comply with the business conduct standards.
SBS Dealers Acting as Advisors to Special Entities [0 hours]
We believe that the 50 SBS Dealers will primarily rely on in-house counsel for
compliance with these rules. The 50 SBS Dealers have already previously incurred an
initial one time burden associated with reviewing and revising the representations in their
standard security based swap documentation to comply with Rule 15Fh-2(a)(1)-(2). We
believe that once an SBS Dealer initially has revised the language of the representations
to meet the requirements of Rule 15Fh-2(a)(1)-(2), such language will become part of the
SBS Dealer’s standard security-based swap documentation and, accordingly, there will
be no further ongoing burden associated with this rule.
SBS Dealers Acting as Advisors to Special Entities (Unique Pairs)
[0 hours]
For transactions in which an SBS Dealer is not a counterparty and chooses to act as an
advisor, the SBS Dealer will have already previously incurred an initial one time burden
associated with collecting the information from each special entity required under the

21

The estimate is based on the following calculation: (60 hours) x (9 policies and procedures) x (55 SBS
Entities) = 29,700 hours annually.

22

Rule 15Fh-2(a)(1)-(2).

23

See CFTC Regulation § 23.440(b)(1)-(2).

24
rule.24 We estimate that once an SBS Dealer has initially collected the requisite
information from each special entity, there is no ongoing reporting burden associated
with these rules.


15Fh-5 – SBS Entities Acting as Counterparties to Special Entities
Where a special entity is a counterparty to a security-based swap, Rule 15Fh-5(a)(1)
requires an SBS Entity to have a reasonable basis for believing that the special entity has
a qualified independent representative that meets specified requirements. Where the
special entity counterparty is an ERISA plan, under Rule 15Fh-5(a)(2), the SBS Entity
must have a reasonable basis to believe that the ERISA plan is represented by an ERISA
fiduciary. We believe that written representations will likely provide the basis for
establishing an SBS Entity’s reasonable belief regarding the qualifications of the
independent representative. Rule 15Fh-5(b) grants a safe harbor to the SBS entities if
they obtain certain representations and information from the special entity. Rule 15Fh5(c) requires the SBS Dealer to make certain disclosures about the capacity in which they
are acting with respect to the SBS swap.
As stated in the Proposing Release, we believe that the burden for determining whether
an independent representative is independent of the SBS Entity will depend on the size of
the independent representative, the size of the SBS Entity, and the volume of transactions
with which each is engaged. We further believe that each SBS Entity would initially
require written representations regarding the qualifications of a special entity’s
independent representative, but would only require updates to the independent
representative’s qualifications in subsequent dealings with the same independent
representative throughout the duration of the swap term, provided the volume and nature
of the security-based swap transaction remain the same. The remaining representations
and disclosures are easily incorporated into standardized documentation.
SBS Entities Acting as Counterparties to Special Entities (Reporting)
[21,450 hours]
Regarding the burden estimates for SBS Entities, our estimates reflect that each SBS
Entity will interact with and be required to form a reasonable basis regarding the
qualifications of approximately 370 independent, third-party representatives and 20 inhouse independent representatives, for a total of 390 independent representatives. Each
of the SBS Entities has already previously incurred a one-time initial burden associated
with forming a reasonable basis concerning and obtaining written representations
regarding the qualifications of each special entity’s independent representative.
With regard to SBS Entities’ ongoing burden, we believe that such burden would be
minimal (1 hour for each SBS Entity per independent representative), since, once an SBS
Entity forms a reasonable basis to believe that a given independent representative meets
the qualifications of Rule 15Fh-5, the SBS Entity would not likely need to reaffirm that

24

We have estimated approximately 85 unique pairs of SBS Dealers and US special entities without a third-party
adviser based on market data provided by DTCC.

25
independent representative’s qualifications anew, but could instead rely on past
representations regarding the representative’s qualifications. Also, as discussed above,
we consider this part of the SBS Entity’s overall recordkeeping requirement. We
estimate that SBS Entities will incur an ongoing, aggregate reporting burden of 21,450
hours per year as a result of this rule.25
SBS Entities Acting as Counterparties to Special Entities (Third-Party
Disclosure) [21,450 hours]
In addition to the burdens imposed on SBS Entities, Rule 15Fh-5(a)(1) will also impose
an ongoing burden on special entities’ independent representatives to collect the
necessary information regarding their relevant qualifications, and provide that
information to the SBS Entity and/or the special entity. We continue to believe that the
reporting burden for the independent representative will consist of providing written
representations to the SBS Entity and/or the special entity it represents. We believe that
the burden associated with an independent representative’s obligation to assess its
independence from the SBS Entity will likely depend on the size of the independent
representative, the size of the SBS Entity, the interactions between the independent
representative and the SBS Entity, the policies and procedures of the independent
representative and depend less on the number of transactions in which the independent
representative is engaged. The policies and procedures of the independent representative
will facilitate its ability to quickly assess, disclose, manage and mitigate any potential
material conflicts of interest. We believe the number of transactions in which the
independent representative engages is less likely to impact this assessment.
We anticipate that independent representatives will rely on in-house counsel to collect
and submit the relevant documentation and information regarding its qualifications. Each
independent representative has already previously incurred a one-time initial burden
associated with collecting and submitting the relevant documentation and information
regarding its qualifications.
As with SBS Entities’ ongoing burden associated with this rule, we believe that the
ongoing burden imposed on independent representatives would be minimal (1 hour
annually for each SBS Entity per independent representative), since, once the
independent representative has provided information regarding its qualifications to the
SBS Entity, the independent representative will not likely need to collect or provide that
information again, but as discussed above, could instead rely on a bring down of
representations as is industry practice that reflects past representations regarding its
qualifications. We estimate that independent representatives will incur an ongoing,
aggregate burden of 21,450 hours per year as a result of this rule.26

25

The estimate is based on the following calculation: (1 hour) x (390 independent representatives) = 390
hours per SBS Entity. (55 SBS Entities x 390 hours) = 21,450 hours.

26

The estimate is based on the following calculation: (1 hour) x (390 independent representatives) = 390
hours per SBS Entity. (55 SBS Entities) x (390 hours) = 21,450 hours. We note that, in the Proposing
Release, we based our burden estimates for evaluating an independent representative’s qualifications on the

26


15Fh-6 – Political Contributions [50 hours]
As noted above, we believe that there will be approximately 50 SBS Dealers subject to
these rules, and estimate that all of them will provide, or will seek to provide, securitybased swap services to municipal entities. SBS Dealers, in order to supervise and assess
internal compliance with Rule 15Fh-6, will need to collect information regarding the
political contributions of SBS Dealers and their covered associates. In addition, SBS
Dealers’ covered associates will also need to collect and provide the information required
by Rule 15Fh-6 to SBS Dealers.
Our estimates in this paragraph take into account the burden of the covered associates
and the SBS Dealers. These estimates also reflect our experience with and burden
estimates for similar requirements, as well as our discussions with market participants.
We believe that all SBS Dealers will primarily rely on in-house counsel for the collection
of information required under this rule and that all SBS Dealers and covered associates
will already have incurred one-time initial burdens to comply with the rule. Thereafter,
we estimate the rule would require one burden hour per SBS Dealer per year on an
ongoing basis for an aggregate burden of 50 hours per year.



15Fk-1 – Chief Compliance Officer [15,015 hours]
Under Rule 15Fk-1, an SBS Entity’s CCO is responsible for, among other things, taking
reasonable steps to ensure that the SBS Entity establishes and maintains policies and
procedures reasonably designed to ensure compliance by the SBS Entity with the
Exchange Act and the rules and regulations thereunder relating to its business as an SBS
Entity. Each SBS Entity has already previously incurred a one-time initial burden
associated with establishing the policies and procedures. We continue to estimate that,
on average, ongoing administration of the policies and procedures required under Rule
15Fk-1 (e.g., the SBS Entity’s annual assessment of its written policies and procedures
reasonably designed to achieve compliance with Section 15F and the rules and
regulations thereunder) will require 180 hours to administer per year per respondent, for a
total average reporting burden of 9,900 hours per year,27 on an ongoing basis.28
A CCO will also be required to prepare and submit annual compliance reports to the
Commission and the SBS Entity’s board of directors. We continue to estimate that these

underlying assumption that representations regarding an independent representative’s qualifications must
be provided prior to every transaction, and therefore the associated burden calculations were transactionspecific. See Proposing Release, 76 FR 42446-7. However, based on the observed practices of swap
market participants, we now believe that representations regarding an independent representative’s
qualifications need only be provided in the context of each relationship with an SBS Entity. Our revised
calculations, which are now relationship-specific, reflect this shift in our underlying assumption.
27

The estimate is based on the following calculation: (55 SBS Entities) x (180 hours) = 9,900 hours.

28

See Proposing Release, 76 FR at 42448.

27
reports will require on average 93 hours per respondent per year, for an ongoing annual
reporting burden of 5,115.29
The total aggregate CCO related burden is thus 15,015 hours per year (9,900 hours +
5,115 hours) and the annual related burden per SBS Entity is 273 hours.
13.

Costs to Respondents

The Commission estimates that the aggregate cost burden of the ongoing
reporting and disclosures required by the BCS Rules, as described above, is
approximately $2,138,000, calculated as follows:


15Fh-3(a) – Verification of Status: As discussed in Item 12, SBS Entities have already
undertaken to comply with the verification of status requirements. In addition, the
Commission acknowledges that the parties may utilize industry practice and protocols in
the initial master agreement documentation, to bring down or refresh representations and
address material changes. Thus, once the initial compliance is completed, we consider
ongoing events part of the overall SBS Entities’ books and recordkeeping requirements
and we do not anticipate any ongoing cost burdens.
SBS Entities – Adherence Letter [$0]
As indicated above, any initial one-time costs associated with this rule have already been
previously incurred and we do not anticipate any ongoing cost burdens with respect to
this rule.
SBS Market Participants – Adherence Letter [$0]
As noted above, we believe that approximately 8,802 of the 13,137 security-based swap
market participants (which include SBS Entities and counterparties) are also swap market
participants and likely already adhere to the relevant protocol and the remaining SBS
market participants will already have come into compliance. Thereafter, for both
categories of market participants, we do not anticipate any ongoing cost burdens with
respect to this rule.
SBS Entities – Notice, etc. [$0]
The 55 SBS Entities would have previously incurred one time initial cost burdens in
connection with preparing the required notice under Rule 15Fh-3(a)(3) for counterparties
defined in Rule 15Fh-2(d)(4) and we anticipate would not have any ongoing cost burdens
with respect to this rule.
Counterparties – Representations [$0]

29

The estimate is based on the following calculation: (93 hours) x (55 SBS Dealers) = 5,115 hours.

28
As discussed in Item 12 above, the Adopting Release states SBS Entities and
counterparties may follow industry practice and agree in master agreement
documentation as to the required representations, how to address material changes and or
refresh such representations by “bring down” or renewing for subsequent actions. Once
the initial diligence is conducted and counterparty representations are made, we consider
this part of the overall SBS Entity books and recordkeeping requirements. Therefore, for
counterparties, we do not anticipate any ongoing cost burdens with respect to this rule.


15Fh-3(g) – Fair and Balanced Communications [$198,000]
We believe that all 55 SBS Entities are required to comply with Rule 15Fh-3(g) and that
they have already incurred an initial one-time cost associated with sending their existing
marketing materials to outside counsel for review and comment. After these initial costs
have been incurred, we believe that each SBS Entity will likely incur $1200 per year in
legal costs thereafter ($66,000 per year in the aggregate for all SBS Entities) for outside
counsel to draft or review statements of potential opportunities and corresponding risks in
the marketing materials for single name and narrow based index credit default swaps,
total return swaps and other security-based swaps.30
For more bespoke transactions, however, the cost for outside counsel to review the
marketing materials will depend on the complexity, novelty and nature of the product, but
we expect a higher cost associated with the review for more novel products. We
accordingly estimate an ongoing, annual cost for the outside review of marketing
materials relating to bespoke single name and narrow based index credit default swaps,
total return swaps and other security-based swaps of $2,400 per SBS Entity ($132,000
per year in the aggregate for all SBS Entities).31
Thus, we estimate that each of the 55 SBS Entities will incur $3,600 per year in total
outside legal costs for an annual aggregate cost of $198,000 for all respondents.
We additionally believe that compliance with Rule 15Fh-3(g) would require a review of
SBS Entities’ other communications to their counterparties, such as e-mails and
Bloomberg messages. However, as discussed in Section 12 above, we believe that such
additional communications would likely be reviewed internally by in-house legal counsel
or an SBS Entity’s CCO.



15Fh-3(h) – Supervision [$264,000]

30

We estimate that the review of marketing materials for these three categories of security-based swaps
would require 1 hour of outside counsel time, at an average cost of $400 per hour. This estimate also
assumes that each SBS Entity engages in all three categories of security-based swaps. The estimate is based
on the following calculation: (1 hour) x ($400 per hour) x (3 categories) = $1,200 per SBS Entity. (55 SBS
Entities) x ($1,200) = $66,000.

31

We estimate the review of the marketing materials for each of these categories would require two hours of
outside counsel time at a cost of $400 per hour. This estimate also assumes that each SBS Entity engages
in all three categories of transactions. The estimate is based on the following calculation: 2 hours x $400
per hour x 3 = $2,400 per SBS Entity. (55 SBS Entities) x ($2,400) = $132,000.

29
As discussed in Item 12 above, Rule 15Fh-3(h) requires an SBS Entity to establish and
maintain a system to supervise, and to diligently supervise, its business and the activities
of its associated persons. All 55 SBS Entities have already incurred initial one-time costs
to prepare policies and procedures. Once these policies and procedures have been
established, we expect that many SBS Entities will primarily rely on outside counsel for
the collection and review of information required under this rule at a rate of $400 per
hour, for an average of 12 hours per respondent per year, resulting in an outside ongoing
cost burden of $4,800 per respondent – or an aggregate ongoing cost of $264,000.32


15Fh-6 – Political Contributions [$1,280,000]
We believe that there will be approximately 50 SBS Dealers subject to these rules, and
estimate that all of them will provide, or will seek to provide, security-based swap
services to municipal entities. SBS Dealers, in order to supervise and assess internal
compliance with the pay to play rules, will need to collect information regarding the
political contributions of SBS Dealers and their covered associates. In addition, SBS
Dealers’ covered associates will also need to collect and provide the information required
by these rules to SBS Dealers. All SBS Dealers and covered associates have already
incurred one-time initial costs to comply with these rules. Once the initial supervision
and information collection process has been established and managed by in-house
counsel, we estimate there will be no ongoing cost burdens.
The rules also allow SBS Dealers to file applications for exemptive relief, and outline a
list of items to be addressed, including, whether the SBS Dealer has developed policies
and procedures to monitor political contributions; the steps taken after discovery of the
contribution; and the apparent intent in making the contribution based on the facts and
circumstances of each case. The incidence of exemptive relief related to MSRB Rule G37 and the number of applications we have received under the Advisers Act Rule 206(4)5 may be indicative of the possible applications for exemptive relief under these rules.
We also estimate that a firm that applies for an exemption will hire outside counsel to
prepare an exemptive request, and estimate that the number of hours counsel will spend
preparing and submitting an application will be from 16 to 32 hours, at a rate of $400 per
hour. Recognizing that this is an estimate, we conservatively estimate that we may
receive up to two applications for exemptive relief per year with respect to pay to play
rules,33 at a total ongoing cost of $25,600 per year per SBS Dealer and $1,280,000 per

32

Some SBS Entities may choose to utilize in-house counsel to prepare these policy and procedure, which
would mitigate the aggregate cost, but the estimate of $264,000 reflects a conservative assumption of SBS
Entities primarily relying on outside counsel to review these materials on an ongoing basis. The estimate is
based on the following calculation: (12 hours) x ($400 per hour) = $4,800 per SBS Entity. (55 SBS
Entities) x ($4,800) = $264,000.

33

FINRA has granted 21 exemptive letters related to Rule G-37 between 1/05 and 12/18 (14 years)
http://www.finra.org/industry/exemptive-letters. In addition, the Commission has received 15 applications
under the Adviser’s Act (since the compliance date, approximately 7 years).

30
year for all 50 SBS Dealers, assuming conservatively 32 hours for outside counsel to
prepare an exemptive request.34 This is an ongoing cost for all SBS Dealers.35


15Fk-1 – Chief Compliance Officer [$396,000]
Under Rule 15Fk-1, an SBS Entity’s CCO is responsible for, among other things, taking
reasonable steps to ensure that the SBS Entity establishes and maintains policies and
procedures reasonably designed to ensure compliance by the SBS Entity with the
Exchange Act and the rules and regulations thereunder relating to its business as an SBS
Entity. Each SBS Entity has already incurred a one-time initial cost burden associated
with establishing the policies and procedures. We estimate that an annual total of $7,200
per SBS Entity in outside legal costs will be incurred to, among other things, assist in the
preparation of the annual compliance report and the SBS Entity’s annual assessment of
its written policies and procedures, for an aggregate ongoing outside cost burden of
$396,000.36

34

Ongoing: (Outside counsel at $400 per hour) x (32 hours per application) x (2 applications) = $25,600. See
Advisers Act Pay-to-Play Release, 75 FR at 41065 (making similar estimates in connection with Advisers
Act Rule 206(4)-5).

35

The estimate is based on the following calculation: (50 SBS Dealers) x ($25,600) = $1,280,000.

36

See id. This figure is the result of an estimated $400 per hour cost for outside legal services times 6 hours
for 3 policies and procedures for 55 respondents. The estimate is based on the following calculation: (6
hours) x ($400 per hour) x (3 policies) = $7,200 per SBS Entity. (55 SBS Entities) x ($7,200) = $396,000.

31

SUMMARY OF HOUR AND COST BURDENS

Section

Type of
Burden

15Fh-3(b), (c),
(d)

Disclosures - SBS
Entities

15Fh-3(b), (c),
(d)

Disclosures - SBS
Transactions Between
SBS Dealer and NonSBSD Counterparty

15Fh-3(e), (f)

Know Your
Counterparty and
Recommendations
(SBS Dealers)

15Fh-3(g)

Fair and Balanced
Communications

15Fh-3(h)

Supervision

15Fh-5

SBS Entities Acting
as Counterparties to
Special Entities

15Fh-5

SBS Entities Acting
as Counterparties to
Special Entities

Respondents

Ongoing Annual
Burden

Ongoing Annual
Burden

Industry-wide
Annual Burden

Industry-wide
Annual Burden

Hours

Cost

Hours

Cost

Reporting

55

4,120

$0

226,600

$0

Reporting

233,595

1

$0

233,595

$0

Reporting

50

137

$0

6,853

$0

Reporting

55

2

$3,600

110

$198,000

Reporting

55

540

$4,800

29,700

$264,000

Reporting

55

390

$0

21,450

$0

Third-Party
Disclosure

55

390

$0

21,450

$0

15Fh-6

Political
Contributions

Reporting

50

1

$25,600

50

$1,280,000

15Fk-1

Chief Compliance
Officer

Reporting

55

273

$7,200

15,015

$396,000.00

554,823

$2,138,000

Total

14.

Cost to Federal Government

Commission staff estimates that there is no annual cost associated with information
submitted to the Commission under the new rules, other than the cost of full-time employee
labor costs.
15.

Explanation of Changes in Burden

The estimated annual hour burden has decreased from 1,260,260 hours to 554,823 hours
and the estimated annual cost burden has decreased from $10,973,333 to $2,138,000, a decrease
of approximately 705,437 hours and $8,835,333 respectively. The primary reason for the
reduction in burdens is the elimination of one-time initial hour and cost burdens. As discussed
above, all one-time initial burdens have already been incurred and all current burden estimates
reflect only ongoing hour and cost burdens. As indicated in the chart below, a decrease in the
estimate of the number of certain entities and transactions and the amount of certain costs has
also contributed to the reduction in burdens.

32

Summary of Annual Burden Reductions (rounded to nearest dollar):
Rule
Rule 15Fh-3(a) (SBS
Entities)
Rule 15Fh-3(a) (SBS
Participants)
Rule 15Fh-3(a)
(Notice, SBS Entities)
Rule 15Fh-3(a)
(Counterparties)
Rule 15Fh-3(b),(c),(d)
(SBS Entities)
Rule 15Fh-3(b),(c),(d)
(SBS Dealer/Non SBS
Counterparty)
Rule 15Fh-3(e)-(f)
(SBS Dealers)

Reduction Reduction in
Reason for Change
in Hours
Cost
7.00 $ 3,333
Elimination of one-time initial burdens
1,163.00 $ 581,333
9.00 $ 0
1,156.00 $578,000

Elimination of one-time initial burdens
Elimination of one-time initial burdens
Elimination of one-time initial burdens

168,667.00 $ 0

Elimination of one-time initial burdens

194,405.00 $ 0

Reduction in estimate of number of
trades requiring disclosures

Rule 15Fh-3(e)-(f)
(Counterparties)
Rule 15Fh-3(e)-(f)
(Dual Participants)
Rule 15Fh-3(e)-(f)
(SBS only
Participants)
Rule 15Fh-3(g) (Fair
and Balanced
Communications)

36,333.00 $ 0

Elimination of one-time initial burdens
and reduction in estimate of number of
transactions between SBS Dealers and
non-SBS Dealer counterparties
Elimination of one-time initial burdens

4,181.00 $ 0

Elimination of one-time initial burdens

5,814.00 $ 0

Elimination of one-time initial burdens

Rule 15Fh-3(h)
(Supervision)

34,650.00 $ 3,036,000

Rule 15Fh-2(a) and
15Fh-4
Rule 15Fh-2(a) and
15Fh-4 (Unique Pairs)
Rule 15Fh-5
(Reporting)

4731.00 $ 0

110.00 $ 66,000

84.00 $ 0

Elimination of one-time initial burdens
and reduction in estimate of the number
of hours of outside counsel time per SBS
Entity
Elimination of one-time initial burdens
and addition of ongoing outside counsel
costs
Elimination of one-time initial burdens

567.00 $ 0

Elimination of one-time initial burdens

117,609.00 $ 0

Elimination of one-time initial burdens
and reduction in estimate of number of
independent representatives

33
Rule 15Fh-5 (ThirdParty Disclosure)
Rule 15Fh-6 (Political
Contributions)
Rule 15Fk-1(CCO)

16.

121,367.00 $ 0
3,034.00 $ 1,666,667
11,550.00 $ 2,904,000

Elimination of one-time initial burdens
and reduction in estimate of number of
independent representatives
Elimination of one-time initial burdens
and addition of ongoing hour burdens
Elimination of one-time initial burdens
and addition of ongoing cost burdens

Information Collection Planned for Statistical Purposes

Not applicable. The Commission does not publish information collected pursuant to the
Rules.
17.

Approval to Omit OMB Expiration Date

The Commission is not seeking approval to omit the expiration date.
18.

Exceptions to Certification for Paperwork Reduction Act Submissions

This collection complies with the requirements in 5 CFR 1320.9.
B.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS
This collection does not involve statistical methods.


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