The U.S. Securities and Exchange Commission (SEC) has, at long last, made good on its promise to propose extensive revisions updating and expanding Rule 15a-6 under the Securities Exchange Act of 1934 (Exchange Act), which permits foreign broker-dealers to do limited business in the United States without registering as a broker-dealer. The proposing release was issued by the SEC on June 27, 2008 (Securities Exchange Act Release No. 58047, referred to hereinafter as the "Proposing Release") and comments are due 60 days following publication of the Proposing Release in the Federal Register, which is expected to occur this week.
The SEC and its staff discussed the proposed amendments at an open meeting on June 25, 2008. The director of the Division of Trading and Markets, Erik Sirri, stated that the proposed amendments to Rule 15a-6 (Proposed Rule) are intended to address those parts of Rule 15a-6 that impose burdens on foreign broker-dealers without conferring concomitant benefits. Mr. Sirri highlighted as particularly burdensome the current recordkeeping and chaperoning requirements, and also the current limits on interaction with institutional investors with less than $100 million in assets invested or under management. Therefore, the proposal includes substantial changes in these areas from existing Rule 15a-6. Recordkeeping requirements are truncated and revised to track the realities of cross-border transactions; the chaperoning requirement is eliminated entirely; and the Proposed Rule would allow foreign broker-dealers to interact directly with "qualified investors," as defined in the Exchange Act.
The significant aspects of the Proposed Rule and related discussion from the SEC's open meeting and the Proposing Release are described below.
Expansion Of The Category Of U.S. Investors
The SEC proposes expanding the category of U.S. investors with which a foreign broker-dealer can interact with under Rule 15-6 by replacing the defined categories of "Major U.S. Institutional Investor" and "U.S. Institutional Investor" with "qualified investor" as defined in Section 3(a)(54) of the Exchange Act.
- Definition of "Qualified
Investor." The definition of qualified investor
covers a broad range of investors, including
individuals "who own and invest on a discretionary basis
not less than $25,000,000 in investments." The
definition does not include a small number of entities that
have been included in the definition of "U.S.
institutional investor" such as private business
development companies. However, other types of entities such
as investment companies and pension plans, have lower
requisite assets under management.
-
Research. Foreign broker-dealers could
distribute their research directly to all qualified
investors if the changes to Rule 15a-6(a)(2) in the
Proposed Rule were adopted.
- The SEC notes in the Proposing Release that the
Proposed Rule would permit a foreign broker-dealer to
effect transactions directly with qualified investors
resulting from the provision of research, provided that,
if the foreign broker-dealer has a relationship with a
U.S. broker-dealer that satisfies the requirements of
Rule 15a-6(a)(3), the transactions would have to be
effected pursuant to the provisions of that
paragraph.
- The SEC proposes to retain the existing requirement
that follow-up calls to investors in the United States by
foreign associated persons, including foreign research
analysts, must comply with Rule 15a-6(a)(3).
- The SEC does not discuss in the Proposing Release the
"alternative" method used by some foreign
broker-dealers to distribute research into the United
States to persons other than "major U.S.
institutional investors" that is described in text
and footnotes 113-117 of the 1989 Release publishing Rule
15a-6 as originally adopted by the SEC (54 Fed. Reg.
30013, 30023, July 18, 1989). Many foreign broker-dealers
have relied on this alternative method, channeling their
research through U.S. affiliates that assume
responsibility for the foreign research product, in order
to allow broader research distribution.
- The SEC does not discuss in the Proposing Release the
interplay of Rule 15a-6 and NASD and NYSE Rules that
apply to the activities of research analysts and the
distribution of research reports by broker-dealers in the
United States (together the "SRO Research
Rules"). Foreign and U.S. broker-dealers will have
to consider both the SRO Research Rules and Rule 15a-6
when contemplating distribution of foreign research in
the United States; therefore, the SEC should be
encouraged to provide clear guidance with regard to the
interplay of Rule 15a-6 and the SRO Research Rules.
- The SEC notes in the Proposing Release that the
Proposed Rule would permit a foreign broker-dealer to
effect transactions directly with qualified investors
resulting from the provision of research, provided that,
if the foreign broker-dealer has a relationship with a
U.S. broker-dealer that satisfies the requirements of
Rule 15a-6(a)(3), the transactions would have to be
effected pursuant to the provisions of that
paragraph.
-
Elimination of Chaperoning. The SEC
proposes to eliminate all chaperoning requirements for
foreign broker-dealers. Foreign associated persons of
foreign broker-dealers could communicate directly with
qualified investors from outside the United States without
a chaperon and without any limitations on the time of day
of the contacts. Foreign associated persons of foreign
broker-dealers also could visit qualified investors in the
United States without a chaperon. Transactions resulting
from these visits would have to be effected in compliance
with Rule 15a-6(a)(3) as proposed.
- In the Proposing Release, the SEC proposes to
interpret "visit" as in aggregate up to 180
days each calendar year.
- Mr. Sirri, in discussing this proposed interpretation
during the SEC's open meeting, acknowledged that
180 days was an arbitrary number, but that the intent was
to ensure that a foreign broker-dealer did not in effect
"set up shop" in the United States. The SEC
therefore requests comment on an appropriate threshold
for visits under the Proposed Rule.
- In the Proposing Release, the SEC proposes to
interpret "visit" as in aggregate up to 180
days each calendar year.
Simplification And Streamlining Of Recordkeeping Requirements
The recordkeeping and related requirements would be simplified for all foreign broker-dealers, but especially for those that conduct a "foreign business." The SEC proposes to define "foreign business" to mean the business of a foreign broker-dealer with qualified investors and foreign resident clients (in the United States) where at least 85 percent of the aggregate value of the securities purchased or sold in transactions under Rule 15a-6(a)(3) or (a)(4)(iv), calculated on a rolling two-year basis, is derived from transactions in "foreign securities," as the SEC proposes to define that term. Proposed Rule 15a-6(b)(3), Proposed Rule 15a-6(b)(5).
A U.S. broker-dealer would continue to have a role in transactions effected by a foreign broker-dealer for a qualified investor, but that role would be more limited than currently is required in Rule 15a-6(a)(3).
The Proposed Rule would require disclosure by a foreign broker-dealer that it is not licensed in the United States.
-
A foreign broker-dealer that conducts a
"foreign business" could effect transactions
directly for qualified investors, maintain custody of the
clients' funds and assets, and generate the books
and records related to the transactions. Proposed
Rule 15a-6(a)(3)(iii)(A)(1). The Proposed Rule is
formulated to require a U.S. broker-dealer to assume
responsibility for books and records; however, the proposal
reflects an understanding of the burdens that Rule 15a-6
presently imposes by requiring in effect duplicative
records.
- The Proposed Rule would require a foreign
broker-dealer relying on this exemption to disclose that
U.S. segregation requirements, U.S. bankruptcy
protections, and protections under the Securities
Investor Protection Act would not apply to any funds or
securities held by the foreign broker-dealer.
- The Proposed Rule would allow maintenance of books
and records by the foreign broker-dealer and in the form,
manner, and for the periods proscribed by the foreign
securities authority regulating the foreign broker-dealer
effecting the transactions.
- The U.S. broker-dealer would have to make a
reasonable determination that copies of the books and
records could be furnished "promptly" to the
SEC and would have to comply promptly with any request
for such books and records.
- Commissioner Atkins, during discussion at the open
meeting raised two concerns about the "promptly
provide" requirement: (1) whether there is a
likelihood that the "promptly provide"
language, if adopted, would be difficult to satisfy; and
(2) whether foreign blocking statutes could have the
effect of preventing foreign broker-dealers from
providing to the SEC records requested by the SEC and its
staff pursuant to this requirement. The SEC requests
comments on these two concerns.
- The Proposed Rule would require a foreign
broker-dealer relying on this exemption to disclose that
U.S. segregation requirements, U.S. bankruptcy
protections, and protections under the Securities
Investor Protection Act would not apply to any funds or
securities held by the foreign broker-dealer.
- A foreign broker-dealer that does not conduct a
"foreign business" could effect transactions
directly for qualified investors; however, books and records
would have to be maintained by a U.S. broker-dealer, and the
U.S. broker-dealer, on behalf of the qualified investors,
would have to receive, deliver, and safeguard funds and
securities in connection with the transactions effected by
the foreign broker-dealer. Proposed Rule
15a-6(a)(3)(iii)(A)(2)
Unsolicited Trades
The SEC proposes to retain the exemption in Rule 15a-6(a)(1) for unsolicited trades. The Proposing Release includes extensive discussion of what the SEC would consider to be an "unsolicited trade." Two SEC statements are of particular interest:
- "[I]n order to rely on this exemption, foreign
broker-dealers need to determine whether each
transaction effected in reliance on [the exemption] has been
solicited under the proposed rule." (italics
added)
- "[U]nder the proposed interpretation, U.S.
distribution of foreign broker-dealers' quotations by
a third party system (which did not allow securities
transactions to be executed between the foreign broker-dealer
and persons in the U.S. through the system) would not be
viewed as a form of solicitation, in the absence of other
contacts with U.S. investors initiated by the third-party
system or the foreign broker-dealer." Previous
interpretative guidance limited relief to third-party systems
that distributed quotations primarily in foreign
markets.
Proposed New Exemption For Foreign Options Exchanges
Various foreign options exchanges have sought an exemption, and the Proposed Rule includes proposed Rule 15a-6(a)(5), to allow their representatives to communicate with persons reasonably thought to be qualified investors regarding the foreign options exchanges and the products the exchanges trade.
- The SEC also proposes to allow foreign broker-dealers to
effect unsolicited transactions in options on foreign
securities on a foreign options exchange for qualified
investors and to allow qualified investors to access the
foreign options exchange's OTC options processing
service. The SEC explains in the Proposing Release that while
this exemption would not require trades to be effected in
compliance with Rule 15a-6(a)(3), it anticipates that
"it would be difficult, if not impractical, to conduct
repeated transactions with the same qualified investor
without the foreign broker-dealer engaging in some form of
communication that would constitute solicitation.
Therefore...most transactions ...would need to be completed
pursuant to proposed Rule 15a-6(a)(3)."
Finally, in the Proposing Release, the SEC discusses the anticipated costs of the Proposed Rule to both foreign broker-dealers and U.S. broker-dealers, the potential burden of the Proposed Rule on interested parties, and the balance of costs and benefits of specific parts of the Proposed Rule.
The SEC requests comments on every aspect of the Proposed Rule and also on the general concepts discussed in the Proposing Release.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.