SEC Issues Order on Filing Requirements Under Rule 18a-7 by Non-US SBSDs and MSBSPs Relying on Substituted Compliance and Issues Related No-Action Letters | Practical Law

SEC Issues Order on Filing Requirements Under Rule 18a-7 by Non-US SBSDs and MSBSPs Relying on Substituted Compliance and Issues Related No-Action Letters | Practical Law

The SEC issued an order providing guidance for non-US security-based swap dealers (SBSDs) and major security-based swap participants (MSBSPs) relying on substituted compliance determinations regarding the filing of unaudited financial and operational information under Rule 18a-7 under the Exchange Act. The SEC also issued a series of no-action letters on reporting requirements under Rule18a-7 for registered non-US SBSDs with a prudential regulator that are not covered under existing SEC conditional substituted compliance orders.

SEC Issues Order on Filing Requirements Under Rule 18a-7 by Non-US SBSDs and MSBSPs Relying on Substituted Compliance and Issues Related No-Action Letters

by Practical Law Finance
Published on 03 Nov 2021 • USA (National/Federal)
The SEC issued an order providing guidance for non-US security-based swap dealers (SBSDs) and major security-based swap participants (MSBSPs) relying on substituted compliance determinations regarding the filing of unaudited financial and operational information under Rule 18a-7 under the Exchange Act. The SEC also issued a series of no-action letters on reporting requirements under Rule18a-7 for registered non-US SBSDs with a prudential regulator that are not covered under existing SEC conditional substituted compliance orders.
On October 14, 2021, the SEC issued order No. 34-93335 (SEC FOCUS order) specifying the manner and format for filing unaudited financial and operational information under Rule 18a-7 (17 C.F.R § 240.18a–7) (Rule 18a-7) under the Securities Exchange Act of 1934 (Exchange Act) by certain security-based swap dealers (SBSDs) and major security-based swap participants (MSBSPs) (collectively, SBS entities) that are non-US persons relying on SEC conditional substituted compliance orders.
The SEC also issued a series of no-action letters on reporting requirements under Rule18a-7 for registered non-US SBSDs with a prudential regulator (see SEC No-Action Letters on Reporting Requirements Under Rule 18a-7 for Registered Non-US SBSDs with a Prudential Regulator).
The SEC FOCUS order also extends the existing Rule 18a-7 filing periods for 35 days after the applicable month or quarter end dates for non-US persons seeking to comply with the monthly or quarterly filing requirements on SEC Form X-17A-5, the Financial and Operational Combined Uniform Single Report (FOCUS Report). The SEC FOCUS order also includes a copy of FOCUS Report Part II as Appendix A, and Part IIC as Appendix B with certain provisions yellow highlighted to help direct covered entity compliance. The SEC FOCUS order notes that Rule 18a-7:
The SEC FOCUS order requires that non-US SBS entities for which the SEC has granted conditional substituted compliance under Rule 3a71-6 for certain SEC security-based swap (SBS) requirements (covered entities) comply with Exchange Act rule 18a-7 by making FOCUS report filings through the SEC's eFOCUS system (or under instructions on the SEC’s website if the SEC eFOCUS system is not ready to receive the required reports) that include:
  • If it is not prudentially regulated, a FOCUS Report Part II filed within 35 calendar days after the end of each month with the required information (as applicable).
  • If it is prudentially regulated, a FOCUS Report Part IIC filed within 35 calendar days after the end of each quarter with the required information (as applicable) and completing the regulatory capital section of Part IIC in accordance with the reporting requirements of the covered entity’s home jurisdiction.
  • The information in the FOCUS Report Part II or Part IIC (as applicable) presented at its entity level on the same consolidated or unconsolidated basis that it reports in its home jurisdiction.
  • The identification of the use of generally accepted accounting principles (GAAP) by the entity to present the information in the FOCUS Report Part II or Part IIC (as applicable).
  • The information in the FOCUS Report Part II or Part IIC (as applicable) reported in accordance with the instructions except that the entity can report the information in a manner consistent with:
    • the manner and format of the applicable SEC substituted compliance order, if the instructions in the Part II or Part IIC FOCUS reports conflicts with the condition of the SEC substituted compliance order; or
    • the requirements of its home jurisdiction, if the instruction on the FOCUS Report Part IIC requires information submitted on the form FFIEC 031 (call report) and it does not report the required information on a call report.

SEC No-Action Letters on Reporting Requirements Under Rule 18a-7 for Registered Non-US SBSDs with a Prudential Regulator

The SEC Division of Trading and Markets issued no-action letters to the following three entities related to the SEC FOCUS order specifying the manner and format for filing unaudited financial and operational information under Rule 18a-7 under the Exchange Act:
  • A November 1, 2021 no-action letter issued to Skandinaviska Enskilda Banken AB (publ) (SEB), an international bank headquartered in Sweden and prudentially regulated by the Finansinspektionen that uses GAAP consistent with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) (Swedish GAAP) to prepare its publicly available financial statements.
  • A November 1, 2021 no-action letter issued to Bank of Montreal, the Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and the Toronto-Dominion Bank (collectively, the Canadian banks), each headquartered in Canada and prudentially regulated by the Office of the Superintendent of Financial Institutions and that use GAAP consistent with IFRS as issued by the IASB (Canadian GAAP). to prepare their publicly available financial statements.
  • A November 19, 2021 no-action letter issued to Macquarie Bank Limited (MBL), a corporation organized under the laws of Australia and prudentially regulated in Australia by the Australian Prudential Regulation Authority as an authorized deposit-taking institution and by the Australian Securities and Investments Commission (ASIC) as a holder of an Australian financial services license that uses GAAP consistent with the IFRS as issued by the IASB (Australian GAAP) to prepare its publicly available financial statements.
In seeking no-action relief the specified banks each note that they each would be required to comply with Rule 18a-7(a)(2), while European Bank SBSDs could comply with Rule 18a-7(a)(2) pursuant to either the German, French, or UK Orders (as applicable) and the manner and format condition in the SEC FOCUS order.
The division states in the letters that it will not recommend enforcement action under section 15F(f) of the Exchange Act and Rule 18a-7(a)(2) against the above-listed parties, provided each of the parties:
  • Registers with the SEC as an SBSD.
  • Files periodic unaudited financial and operational information with the SEC or its designee under Rule 18a-7(a)(2) in accordance with the manner and format condition set forth in the SEC FOCUS order.
  • Presents its financial information under Rule 18a-7(a)(2) in filings made with the SEC in accordance with:
    • Swedish GAAP, in the case of SEB;
    • Canadian GAAP, in the case of the Canadian banks, provided that each of the Canadian banks files the financial and operational information under Rule 18a-7(a)(2) within 35 days of the end of each Canadian reporting quarter; and
    • Australian GAAP in the case of MBL.
  • Immediately notifies the SEC staff if it fails to maintain the minimum amount of regulatory capital required under the laws of its respective home jurisdiction and includes the contact information of an individual at such non-US SBSD who can provide further information to SEC staff.
For more information on conditional substituted compliance orders issued by the SEC in Europe see Legal Update, SEC Issues New and Amended Security-Based Swap (SBS) Substituted Compliance Orders.