DGL REVISED 2019 Supporting Statement 3a71-6

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for Exchange Act
Rule 3a71-6: Substituted Compliance for Foreign Security-Based Swap Entities
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

Various requirements contained in Title VII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (“Title VII”) apply to cross-border security based swap transactions.
There accordingly is a potential that, in a market as global as the security-based swap market,
market participants who engage in cross-border security-based swap activity could be subject to
conflicting or duplicative compliance obligations across multiple jurisdictions, including
obligations in connection with the business conduct requirements that the Commission has
adopted in Exchange Act rules 15Fh-1 to 15Fh-6, and 15Fk-1. The Commission accordingly has
developed a policy and procedural framework under which the Commission will consider
permitting compliance with comparable regulatory requirements in a foreign jurisdiction to
substitute for compliance with certain Title VII requirements relating to security-based swaps
(i.e., “substituted compliance”).
On April 13, 2016, the Commission adopted new rules under the Securities Exchange Act
of 1934 (“Exchange Act”) that are intended to implement provisions of Title VII relating to
business conduct standards and the designation of a chief compliance officer for security-based
swap dealers and major security-based swap participants and also address the cross-border
application of the rules and the availability of substituted compliance. 1 Rule 3a71-6, as adopted,
provides that the Commission may, conditionally or unconditionally, by order, make a
determination with respect to a foreign financial regulatory system that compliance with
specified requirements under such foreign financial regulatory system by a registered non-U.S.
security-based swap dealer or non-U.S. major security-based swap participant (collectively “SBS
Entities), or class thereof, may satisfy certain business conduct requirements by complying with
the comparable foreign requirements. The availability of substituted compliance would be
predicated on a determination by the Commission that the relevant foreign requirements are
comparable to the requirements that otherwise would be applicable, taking into account the scope
See Business Conduct Standards for Security-Based Swap Dealers and Major SecurityBased Swap Participants, Exchange Act Release No. 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).

1

The Commission subsequently amended Rule 3a71-6 to also provide for the possibility of
substituted compliance in connection with trade acknowledgement and verification requirements.
See Exchange Act Release No. 78011 (Jun. 8, 2016), 81 FR 39808 (Jun. 17, 2016).

and objectives of the relevant foreign requirements, and the effectiveness of supervision and
enforcement under the foreign regulatory regime. The availability of substituted compliance
further would be predicated on there being a supervisory and enforcement MOU or other
arrangement between the Commission and the relevant foreign authority addressing supervisory
and enforcement cooperation and other matters arising under the substituted compliance
determination.
Requests for substituted compliance may come from parties or groups of parties that may
rely on substituted compliance, or from foreign financial authorities supervising such parties or
their security-based swap activities. Under the final rule, the Commission would make any
determinations with regard to the applicable business conduct requirements, rather than on a
firm-by-firm basis. Once the Commission has made a substituted compliance determination,
other similarly situated market participants would be able to rely on that determination to the
extent applicable and subject to any corresponding conditions. Accordingly, the Commission
expects that requests for a substituted compliance determination would be made only where an
entity seeks to rely on particular requirements of a foreign jurisdiction that has not previously
been the subject of a substituted compliance request. The Commission believes that this
approach would substantially reduce the burden associated with requesting substituted
compliance determinations for an entity that relies on a previously issued determination, and,
therefore, complying with the Commission’s rules and regulations more generally.
As provided by Exchange Act Rule 0-13, which the Commission adopted in 2014,
applications for substituted compliance determinations in connection with these requirements
must be accompanied by supporting documentation necessary for the Commission to make the
determination, including information regarding applicable requirements established by the
foreign financial regulatory authority or authorities, as well as the methods used by the foreign
financial regulatory authority or authorities to monitor and enforce compliance with such rules,
and to cite to and discuss applicable precedent. Rule 0-13 also specifies other prerequisites for
the filing of substituted compliance applications (e.g., requirements regarding the use of English,
the use of electronic or paper requests, contact information, and public notice and comment in
connection with complete applications).
2.

Purpose and Use of the Information Collection

The Commission would use the information collected pursuant to Exchange Act Rule
3a71–6, as adopted, to evaluate requests for substituted compliance with respect to the business
conduct requirements applicable to security-based swap entities. The requests for substituted
compliance determinations are required when a person seeks a substituted compliance
determination. Consistent with Exchange Act Rule 0-13(h), the Commission will publish in the
Federal Register a notice that a complete application has been submitted, and provide the public
the opportunity to submit to the Commission any information that relates to the Commission
action requested in the application, subject to requests for confidential treatment being submitted
pursuant to any applicable provisions governing confidentiality under the Exchange Act.

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3.

Consideration Given to Information Technology

Exchange Act rule 0-13 provides that applications for a substituted compliance
determination may be submitted in paper format or electronically. Applications submitted
electronically must be submitted to the electronic mailbox described on the Commission’s Web
site. The rule permits electronic submission of applications in order to reduce the burden on
applicants and streamline the submission process, while also permitting submission of paper
applications to give applicants flexibility in their form of submission.
4.

Duplication

Rule 3a71-6 does not duplicate any existing regulatory requirements. There are no other
rules governing substituted compliance for foreign security-based swap dealers.
5.

Effect on Small Entities

Not applicable. None of the respondents subject to the information collection will be a
small entity.
6.

Consequences of Not Conducting Collection

The information collection under Rule 3a71-6 is designed to enable the Commission to
permit compliance with comparable regulatory requirements in a foreign jurisdiction to substitute
for compliance with certain Title VII requirements relating to security-based swaps, and thereby
mitigate the threat that a market participant who engages in cross-border security-based swap
transactions could be subject to conflicting or duplicative compliance obligations across multiple
jurisdictions. If the information collection under Rule 3a71-6 is not completed with respect to a
given foreign jurisdiction, the Commission may be unable to make a substituted compliance
determination with respect such foreign jurisdiction.
7.

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

There are no special circumstances. This 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.

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9.

Payment or Gift

Not applicable.
10.

Confidentiality

The Commission intends to make public the information submitted to it pursuant to any
request for a substituted compliance determination under Rule 3a71-6, including supporting
documentation provided by the requesting party, though requestors may seek confidential
treatment of their applications to the extent permitted under Commission rules. If confidential
treatment is granted, such information would be kept confidential, subject to the provisions of
applicable law (e.g., Exchange Act sections 24(d) and 24(f)(2)).
11.

Sensitive Questions

The collection of information contained in Rule 3a71-6 may include Personally
Identifiable Information (“PII”) 2 in that applicants submitting substituted compliance requests to
the Commission pursuant to 3a71-6 are required to follow the procedures set forth in Rule 0-13.
Specifically, Rule 0-13(e) states that “[e]very application (electronic or paper) must contain the
name, address, telephone number, and email address of each applicant and the name, address,
telephone number, and email address of a person to whom any questions regarding the
application should be directed.” This information collection does not include social security
numbers.
Further, Commission staff does not expect to be able to search and retrieve a substituted
compliance request using PII. As such, we believe that the treatment of any PII provided with
the collection of information associated with this rule is not likely to implicate the Federal
Information Security Management Act of 2002 or the Privacy Act of 1974.
12.

Burden of Information Collection

A request for a substituted compliance determination under Rule 3a71-6 may come from
a registered foreign SBS Entity (or a group of such entities), or from foreign regulatory
authorities. The Commission will make any determinations with respect to particular
requirements on a class or jurisdiction basis, depending on the specific characteristics of the
foreign regulatory regime, rather than on a firm-by-firm basis. Once the Commission has made
an affirmative substituted compliance determination with respect to a particular jurisdiction,
other similarly situated foreign SBS Entities within such jurisdiction would be able to rely on
that determination to the extent applicable and subject to any corresponding conditions.
Similarly, if the Commission makes a determination to reject a request for a substituted
2

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.
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compliance determination with respect to a particular jurisdiction, such determination would
apply to other similarly situated entities within such jurisdiction. Therefore, a registered foreign
entity would not be required to make a request with respect to rules and regulations of a foreign
jurisdiction that have previously been the subject of a substituted compliance determination.
Based on the analysis of recent data, the Commission staff expects that there may be
approximately 22 non-U.S. entities that potentially may register as security-based swap dealers,
out of approximately 50 total entities that may register as security-based swap dealers.
Potentially, all such non-U.S. security-based swap dealers, or some subset thereof, may seek to
rely on substituted compliance in connection with the applicable requirements. 3 It is likely that
the majority of such requests will be made in the two years preceding the compliance date for
security-based swap dealer registration.
In practice, the Commission expects that the greater portion of any such substituted
compliance requests will be submitted by foreign financial authorities, given their expertise in
connection with the relevant substantive requirements, and in connection with their supervisory
and enforcement oversight with regard to security-based swap dealers and their activities. For
purposes of this assessment, the Commission estimates that three such SBS Entities will submit
substituted compliance applications.
The Commission staff estimates that the one-time reporting burden associated with
making each substituted compliance request by SBS Entities pursuant to Rule 3a71-6 would
occur in the first year and be approximately 80 hours of in-house counsel time. Thus, the
Commission staff estimates that the aggregate burden associated with preparing and submitting
requests for a substituted compliance determination pursuant to Rule 3a71-6 would be
approximately 240 4 hours across all applicable respondents. Based on these calculations, the
annualized three year estimate is 26.67 5 hours per respondent on an annual basis and the threeyear estimate of the hourly burden across all respondents is 80 hours. 6
These total burdens include all collection burdens associated with Rule 3a71-6, including
burdens associated with analyzing and comparing the regulatory requirements of the foreign
jurisdiction with the business conduct requirements in Section 15F of the Exchange Act and the
3

Consistent with prior estimates, the Commission staff further believes that there may be
zero to five major security-based swap participants. It is possible that some subset of those
entities will be non-U.S. major security-based swap participants that will seek to rely on
substituted compliance in connection with the business conduct requirements.
4

3 (estimated number of requests for substituted compliance determinations by SBS
Entities pursuant to Rule 3a71-6) * 80 hours = 240 hours.
5

(First year: 80 hours; second year: 0 hours; third year: 0 hours) ÷ 3 years = 26.67 hours
per respondent.
6

26.67 hours per respondent * 3 respondents = 80 hours.
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rules and regulations thereunder.
Collection of
Information

Type of
Burden

Total
Number of
Respondents

Substituted
compliance
requests by
SBS Entities

Reporting

3

13.

Total
Number of
Responses
Per Year

1

Type of
Burden

Initial
Burden Per
Response Per
Year Per
Respondent

Ongoing
Burden Per
Response Per
Year Per
Respondent

Total
Annualized
Burden Per
Year Per
Year Per
Respondent

Total
Reporting
Burden For
All
Respondents

Small
Business
Entities
Affected

Initial

26.67

0.00

26.67

80

0

Costs to Respondents

The Commission believes that a registered SBS Entity (or a group of such entities)
requesting a substituted compliance determination will seek outside legal services in the
preparation of such requests. For PRA purposes, the Commission assumes that three such
entities would seek outside legal services for the first year only and would, on average, consult
with outside counsel for 200 hours, which would cost $252,000 across all applicable
respondents. 7 The Commission also assumes that none of the three respondents would seek
outside legal services for year two or year three. The total labor cost per respondent would be
approximately $84,000, 8 or approximately $28,000 9 when annualized over three years. Thus, the
cost over the three-year period would be $252,000 10 or $84,000 11 per year when annualized over
three years.

7

In initially adopting Rule 3a71-6 in 2016, the Commission used the following burden
estimate: 3 (estimated number of entities that would seek outside counsel to help request a
substituted compliance determination) × 200 hours (average estimated time spent by outside
counsel to help request a substituted compliance determination) × $400 (hourly rate for an
outside attorney) = $240,000. The hourly cost estimate of $400 was based on Commission staff
conversations with law firms that regularly assist regulated financial firms with compliance
matters.
The present estimate increases those prior estimates by five percent to account for
inflation, resulting in a total of $252,000 in the aggregate and $84,000 per firm.
8

$252,000 (total labor cost to seek outside counsel, over three years) ÷ 3 (estimated
number of entities that would seek outside counsel to help request a substituted compliance
determination) = $84,000.
9

$84,000 (cost per respondent, over three years) ÷ 3 years = $28,000.

10

$84,000 per respondent * 3 respondents = $252,000.

11

$252,000 (cost over three years) ÷ 3 years = $84,000.
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Collection of
Information

Type of
Burden

Total
Number of
Respondents

Substituted
compliance
requests by
SBS Entities

Reporting

3

14.

Total
Number of
Responses
Per Year

1

Type of
Burden

Initial
Burden Per
Response Per
Year Per
Respondent

Ongoing
Burden Per
Response Per
Year Per
Respondent

Total
Annualized
Burden Per
Year Per
Year Per
Respondent

Total
Reporting
Burden For
All
Respondents

Small
Business
Entities
Affected

Initial

$28,000

0.00

$28,000

$84,000

0

Cost to Federal Government

Not applicable. The Commission does not anticipate any contracting, IT, or development
costs, and does not anticipate hiring new employees in connection with the information collection.
15.

Changes in Burden

As discussed above, the estimates of costs have increased from $80,000 to $84,000 per firm,
and from $240,000 to $252,000 in the aggregate – to account for inflation, based on a five percent
increase over that time.
16.

Information Collection Planned for Statistical Purposes

Not applicable. The information collection is not used for statistical purposes.
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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