The cross-border application of Title VII of the Dodd-Frank Act has been a vexing question for regulators.  A major factor determining the ultimate reach of such swap regulation is the definition of “U.S. person” for purposes of the regulators’ guidance and other pronouncements regarding cross-border regulation.

On January 7, 2013, the CFTC published in the Federal Register a final order ^[1] (the “January Order”), which set forth a temporary “U.S. person” definition and provided temporary relief from certain provisions of the Dodd-Frank Act relating to swaps.  The January Order expired on July 12, 2013, but on that same day the CFTC approved a new exemptive order ^[2] (the “July Order”) providing “temporary conditional relief effective upon the expiration of the January Order in order to facilitate transition to the Dodd-Frank Swaps regime.” ^[3] Although the July Order states that, “the Commission does not believe that an extension of the January Order is necessary or appropriate,” ^[4] the July Order in effect simply extends many provisions of the January Order until 75 days after the publication in the Federal Register of the related final guidance ^[5] (the “Final Guidance”), which the CFTC also approved on July 12, 2013.  The Final Guidance was published in the Federal Register on July 26, 2013, making the extension date October 9, 2013.

Significantly, the July Order extends until October 9, 2013 the “U.S. person” definition exactly as it was set forth in the January Order. ^[6]  Upon the expiration of this definition on October 9, 2013, the “U.S. person” definition set forth in the Final Guidance will apply.  The Final Guidance provides that the CFTC will interpret the term “U.S. person” generally to include, but not be limited to:

(i)        any natural person who is a resident of the United States;

(ii)       any estate of a decedent who was a resident of the United States at the time of death;

(iii)      any corporation, partnership, limited liability company, business or other trust, association, joint-stock company, fund or any form of enterprise similar to any of the foregoing (other than an entity described in prongs (iv) or (v), below) (a “legal entity”), in each case that is organized or incorporated under the laws of a state or other jurisdiction in the United States or having its principal place of business in the United States;

(iv)     any pension plan for the employees, officers or principals of a legal entity described in prong (iii), unless the pension plan is primarily for foreign employees of such entity;

(v)      any trust governed by the laws of a state or other jurisdiction in the United States, if a court within the United States is able to exercise primary supervision over the administration of the trust;

(vi)     any commodity pool, pooled account, investment fund, or other collective investment vehicle that is not described in prong (iii) and that is majority-owned by one or more persons described in prong (i), (ii), (iii), (iv), or (v), except any commodity pool, pooled account, investment fund, or other collective investment vehicle that is publicly offered only to non-U.S. persons and not offered to U.S. persons;

(vii)    any legal entity (other than a limited liability company, limited liability partnership or similar entity where all of the owners of the entity have limited liability) that is directly or indirectly majority-owned by one or more persons described in prong (i), (ii), (iii), (iv), or (v) and in which such person(s) bears unlimited responsibility for the obligations and liabilities of the legal entity; and

(viii)   any individual account or joint account (discretionary or not) where the beneficial owner (or one of the beneficial owners in the case of a joint account) is a person described in prong (i), (ii), (iii), (iv), (v), (vi), or (vii). ^[7]

The Final Guidance definition is similar to the temporary definition, but broader.  For example, the temporary definition does not include an equivalent of prong (vi) above relating to legal entities that are majority-owned by persons that constitute U.S. Persons and which bear unlimited responsibility for the obligations and liabilities of the legal entity.  Moreover, the Final Guidance provides explanation on each prong of the foregoing definition and makes some important clarifications.

Once such clarification is that a foreign branch of a U.S. bank registered with the CFTC as a “swap dealer” (an “SD Foreign Branch”) is a “U.S. person” for purposes of the CFTC’s Dodd-Frank regulations.  However, generally speaking, the Final Guidance permits “substituted compliance” by an SD Foreign Branch that enters into a swap with a non-U.S. counterparty for one of more Dodd-Frank requirements if the CFTC has made a determination of comparability with respect to those regulatory requirements (a “Substituted Compliance Determination”).  Specifically: (i) with respect to “Category A Transaction-Level Requirements,” ^[8] an SD Foreign Branch may comply with the requirements of the local law and regulations in the foreign location of the branch in lieu of compliance with Dodd-Frank where a Substituted Compliance Determination has been made and (ii) with respect to “Category B Transaction-Level Requirements,” ^[9] an SD Foreign Branch need not comply with such requirements unless its swap counterparty is a U.S. person (other than another SD Foreign Branch).  The CFTC has not yet issued any Substituted Compliance Determinations, although it is currently considering substituted compliance applications submitted by six jurisdictions:  Australia, Canada, the European Union, Hong Kong, Japan and Switzerland.

Another important clarification is the application of a “principal place of business” test for purposes of determining whether a collective investment vehicle constitutes a U.S. person (under prong (iii) of the definition).  In particular, the Final Guidance states that the determination of the principal place of business for a collective investment vehicle generally should depend on the location of the “actual center of direction, control and coordination,” that is the “nerve center” ^[10] of the vehicle.  The Final Guidance further highlights that “[t]he key personnel relevant to this aspect of the analysis are those senior personnel responsible for implementing the vehicle’s investment strategy and its risk management.  Depending on the vehicle’s investment strategy, these senior personnel could be those responsible for investment selections, risk management decisions, portfolio management, or trade execution.” ^[11]  In sum, the Final Guidance provides that a collective investment vehicle’s principal place of business will be the United States “if the senior personnel responsible for either (1) the formation and promotion of the collective investment vehicle or (2) the implementation of the vehicle’s investment strategy are located in the United States, depending on the facts and circumstances that are relevant to determining the center of direction, control and coordination of the vehicle.” ^[12]

The CFTC has encouraged requests to provide written advice and guidance as to the application of the definition of “U.S. person,” ^[13] apparently recognizing that ambiguities may remain despite publication of the Final Guidance.