SEC Proposes Recordkeeping, Reporting, and Notification Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants


The SEC issued a release proposing recordkeeping, reporting, and notification requirements for security-based swap dealers (“SBSDs”) and major security-based swap participants (“MSBSPs”).  Although described as seeking to establish consistent requirements to avoid “potential competitive disparities” between different categories of SBSDs, the proposals, which are modeled on rules applicable to broker-dealers, generally apply somewhat differently to the following three categories of SBSDs and MSBSPs:  (1) “broker-dealer SBSDs” or “broker-dealer MSBSPs,” which are registered broker-dealers that also act as SBSDs or MSBSPs; (2) “bank SBSDs” or “bank MSBSPs,” which are regulated by a prudential regulator; and (3) “stand-alone SBSDs” or “stand-alone MSBSPs,” which are neither broker-dealers nor regulated by a prudential regulator.

The proposals would generally govern broker-dealer SBSDs and broker-dealer MSBSPs by amending existing regulations applicable to broker-dealers to address issues relating to security-based swaps.  New rules have been proposed for stand-alone SBSDs and stand-alone MSBSPs, which are generally based on, but narrower in scope than, those applicable to their broker-dealer counterparts in an effort to reflect the fact that the stand-alone entities will engage in a narrower range of activities than broker-dealers.  The rules governing bank SBSDs and bank MSBSPs would be narrowest in scope, in acknowledgement of the fact that banking entities are subject to existing recordkeeping and reporting requirements imposed by the prudential regulators and because those regulators, rather than the SEC, would administer some of the requirements that the proposed SEC rules applicable to broker-dealer and stand-alone entities are designed to advance.  Some of the proposed rules applicable to bank SBSDs and bank MSBSPs are designed to conform to existing banking regulations.  The proposing release solicits comment on “whether alternative approaches would be appropriate” for each of the various types of SBSDs and MSBSPs.

The proposals would amend Rule 17a-3 under the Securities Exchange Act of 1934 (the “Exchange Act”), which imposes record-keeping requirements on broker-dealers, to apply to broker-dealer SBSDs and broker-dealer MSBSPs and to make certain technical amendments.  Proposed new Rule 18a-5 under the Exchange Act, which is modeled on Rule 17a-3, would impose record-keeping requirements on stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs.  The records required to be maintained would include daily trading records (“trade blotters”), ledger accounts, a securities record, memoranda of brokerage orders, and memoranda of proprietary trades with respect to security-based swaps activity.  The proposals would also amend Rule 17a-4 under the Exchange Act, which applies to broker-dealers, to specify requirements for how long the records must be preserved and the manner in which they must be preserved; proposed new Rule 18a-6 would impose similar requirements on stand-alone and bank SBSDs and MSBSPs.  Generally, records would be required to be preserved for either three years or six years, depending on the specific type of record, and must be stored in an easily accessible place for at least the first two years.

Exchange Act Rule 17a-5, which codifies a reporting program for broker-dealers, would be amended under the proposals to apply to the security-based swap activities of broker-dealer SBSDs and broker-dealer MSBSPs.  Proposed new Exchange Act Rule 18a-7, which is modeled on Rule 17a-5 as proposed to be amended, would apply to stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs.  All SBSDs and MSBSPs would report on proposed Form SBS, a new form modeled on the Financial and Operational Combined Uniform Single Report, or “FOCUS Report.”  In the case of broker-dealer SBSDs and broker-dealer MSBSPs, reporting on the Form SBS would replace their use of certain parts of the FOCUS Report.  Broker-dealer SBSDs, broker-dealer MSBSPs, stand-alone SBSDs, and stand-alone MSBSPs would be required to file proposed Form SBS on a monthly basis, while banking SBSDs and banking MSBSPs would be required to do so on a quarterly basis to conform with the existing requirement that banking entities file call reports on a quarterly basis.

The proposals also include a “notification program” in which SBSDs and MSBSPs would be required to notify the SEC upon the occurrence of certain events pertaining to their financial or operational condition, such as a failure to meet minimum capital requirements, early warnings of potential capital problems, failure to make and keep current books and records, and insufficient liquidity reserves.  Rule 17a-11 under the Exchange Act, an existing notification rule applicable to broker-dealers, would be amended to account for a broker-dealer that is also an SBSD or MSBSP.  A new rule, proposed Rule 18a-8 under the Exchange Act, would be based on Rule 17a-11 and would apply to stand-alone SBSDs, stand-alone MSBSPs, banking SBSDs, and banking MSBSPs.

Comments on the proposal are due on July 1, 2014.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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