On May 3, 2021, Better Markets filed comment letters regarding the SEC’s proposal to grant substituted compliance for certain aspects of security-based swap regulatory requirements for entities in the UK and France. If the SEC grants substituted compliance, it will mean that security-based swap entities in the UK and France will be deemed in compliance with certain U.S. security-based swap requirements if they are in compliance with similar UK or French requirements, as applicable. Substituted compliance should only be granted if, after careful review, the SEC determines that a foreign jurisdiction’s regulatory framework is sufficiently comparable to the SEC’s to ensure that the U.S. financial system is adequately protected. Otherwise, the SEC will simply be facilitating evasion of U.S. laws and allowing foreign companies to import risk to the United States financial system.
Our letters raised a number of concerns with the SEC’s proposals, including the SEC’s proposal to allow non-binding EU guidance to form the basis of substituted compliance with binding U.S. regulations, which if finalized would undermine the ability of the SEC to protect the American financial system. We also addressed the SEC’s proposal with regard to capital requirements for security-based swap entities, which would grant substituted compliance with multiple conditions designed to address the gap between capital requirements in the UK and France and U.S. capital requirements. As we explained in the letter, in order to protect the American financial system, the proposed capital conditions must not be weakened; however, the necessity of the capital conditions raises the question of whether substituted compliance should be granted for capital requirements at all.
Ultimately, a firm that wants to operate in the U.S. financial system should be expected to comply with the rules put in place by Congress and the SEC to protect the American financial system. Exceptions to those rules, including through use of substituted compliance, should only be granted after a careful consideration that doing so does not present undue risks to the American financial system.