(a) Definitions. For purposes of this section:

(1) The term “principal relationship” means where a swap entity is a principal of the representative of a Special Entity or the representative of a Special Entity is a principal of the swap entity. The term “principal” means any person listed in § 3.1(a)(1) through (3) of this chapter.

(2) The term “statutory disqualification” means, with respect to a person that is not a registrant with the Commission, grounds for refusal to register or to revoke, condition, or restrict the registration of any registrant or applicant for registration as set forth in sections 8a(2) and 8a(3) of the Act, or, with respect to a person that is a registrant with the Commission, the Commission has refused registration or revoked, conditioned, or restricted the registration of such registrant or applicant for registration pursuant to sections 8a(2) or 8a(3) of the Act.

(b) Reasonable basis. (1) Any swap entity that offers to enter or enters into a swap with a Special Entity, other than a Special Entity defined in § 23.401(h)(3), shall have a reasonable basis to believe that the Special Entity has a representative that:

(i) Has sufficient knowledge to evaluate the transaction and risks;

(ii) Is not subject to a statutory disqualification;

(iii) Is independent of the swap entity;

(iv) Undertakes a duty to act in the best interests of the Special Entity it represents;

(v) Makes appropriate and timely disclosures to the Special Entity;

(vi) Evaluates, consistent with any guidelines provided by the Special Entity, fair pricing and the appropriateness of the swap; and

(vii) In the case of a Special Entity, as defined in § 23.401(h)(2) or (4), is subject to restrictions on certain political contributions imposed by the Commission, the Securities and Exchange Commission, or a self-regulatory organization subject to the jurisdiction of the Commission or the Securities and Exchange Commission; provided however, that this paragraph (b)(1)(vii) shall not apply if the representative is an employee of the Special Entity.

(2) Any swap entity that offers to enter or enters into a swap with a Special Entity as defined in § 23.401(h)(3) shall have a reasonable basis to believe that the Special Entity has a representative that is a fiduciary as defined in section 3 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002).

(c) Independent. For purposes of paragraph (b)(1)(iii) of this section, a representative of a Special Entity will be deemed to be independent of the swap entity if:

(1) The representative is not and, within one year of representing the Special Entity in connection with the swap, was not an associated person of the swap entity within the meaning of section 1a(4) of the Act;

(2) There is no principal relationship between the representative of the Special Entity and the swap entity;

(3) The representative:

(i) Provides timely and effective disclosures to the Special Entity of all material conflicts of interest that could reasonably affect the judgment or decision making of the representative with respect to its obligations to the Special Entity; and

(ii) Complies with policies and procedures reasonably designed to manage and mitigate such material conflicts of interest;

(4) The representative is not directly or indirectly, through one or more persons, controlled by, in control of, or under common control with the swap entity; and

(5) The swap entity did not refer, recommend, or introduce the representative to the Special Entity within one year of the representative's representation of the Special Entity in connection with the swap.

(d) Safe harbor. (1) A swap entity shall be deemed to have a reasonable basis to believe that the Special Entity, other than a Special Entity defined in § 23.401(h)(3), has a representative that satisfies the applicable requirements of paragraph (b)(1) of this section, provided that:

(i) The Special Entity represents in writing to the swap entity that it has complied in good faith with written policies and procedures reasonably designed to ensure that it has selected a representative that satisfies the applicable requirements of paragraph (b) of this section, and that such policies and procedures provide for ongoing monitoring of the performance of such representative consistent with the requirements of paragraph (b) of this section; and

(ii) The representative represents in writing to the Special Entity and swap entity that the representative:

(A) Has policies and procedures reasonably designed to ensure that it satisfies the applicable requirements of paragraph (b) of this section;

(B) Meets the independence test in paragraph (c) of this section; and

(C) Is legally obligated to comply with the applicable requirements of paragraph (b) of this section by agreement, condition of employment, law, rule, regulation, or other enforceable duty.

(2) A swap entity shall be deemed to have a reasonable basis to believe that a Special Entity defined in § 23.401(h)(3) has a representative that satisfies the applicable requirements in paragraph (b)(2) of this section, provided that the Special Entity provides in writing to the swap entity the representative's name and contact information, and represents in writing that the representative is a fiduciary as defined in section 3 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002).

(e) Reasonable reliance on representations of the Special Entity. A swap entity may rely on written representations of a Special Entity and, as applicable under this section, the Special Entity's representative to satisfy any requirement of this section as provided in § 23.402(d).

(f) Chief compliance officer review. If a swap entity initially determines that it does not have a reasonable basis to believe that the representative of a Special Entity meets the criteria established in this Section, the swap entity shall make a written record of the basis for such determination and submit such determination to its chief compliance officer for review to ensure that the swap entity has a substantial, unbiased basis for the determination.

(g) Disclosures. Before the initiation of a swap, a swap entity shall disclose to the Special Entity in writing:

(1) The capacity in which it is acting in connection with the swap; and

(2) If the swap entity engages in business with the Special Entity in more than one capacity, the swap entity shall disclose the material differences between such capacities.

(h) Exceptions. This section shall not apply with respect to a transaction that is:

(1) Initiated with a counterparty whose identity is not known to the swap entity prior to execution on a designated contract market, a swap execution facility, or a trading facility currently exempted from registration as a swap execution facility by the Commission pursuant to section 5h(g) of the Act;

(2) An A-ITBC Swap; or

(3) An ITBC Swap initiated on a designated contract market, a swap execution facility, or a trading facility currently exempted from registration as a swap execution facility by the Commission pursuant to section 5h(g) of the Act.