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.
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.
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)
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.
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