Rule 15a-6 under the Exchange Act sets forth the (limited) activities that foreign broker-dealers may undertake in the United States, and still remain outside the scope of the Act’s broker-dealer registration requirements.
The rule mainly addresses four areas of activity:
- Effecting unsolicited transactions.
- Soliciting transactions with certain institutional investors (which are then coordinated with U.S. broker-dealers).
- Conducting business with U.S. broker-dealers and banks acting as broker-dealers, and expatriates that are temporarily in the United States.
- Distributing research reports to certain institutional investors.
The first three types of activities at times involve sales of structured notes, and we describe them in this article. Non-U.S. broker-dealers carefully structure these activities around Rule 15a-6, in order to avoid becoming subject to U.S. broker-dealer regulation.2
Transactions with Retail Customers
Rule 15a-6 permits non-U.S. broker-dealers to transact with retail customers in the United States only on a very limited basis. The rule permits these broker-dealers to engage in (a) unsolicited transactions with retail (or institutional) customers in the United States and (b) under certain circumstances, transactions with expatriates who reside in the United States.
Unsolicited Transactions. The exception for unsolicited transactions applies only to a U.S. investor who has sought out the foreign broker-dealer entirely of the investor’s own accord, without any solicitation by the non-U.S. broker-dealer. For example, a U.S. investor may somehow be informed about a type of structured product that is traded outside of the United States, and contact the non-U.S. broker dealer to offer to purchase a quantity of that product. As is the case for a variety of items under the federal securities laws, the SEC interprets the term “solicitation” very broadly. As a result, if the non U.S. broker agrees to such a transaction, or if it establishes an account with that U.S. investor to facilitate the sale of the investment, the broker must be very careful not to take any action that could be deemed to be a solicitation of any additional transactions. Accordingly, many non-U.S. broker-dealers generally refrain from establishing these types of accounts, in the absence of special circumstances.
A note of caution as to the exemption for unsolicited purchases: Rule 15a-6 itself is only an exemption from registration as a broker-dealer. For any sale to a person in the United States, an exemption from registration under the 1933 Act will still be needed.
Expatriates. In addition to unsolicited transactions, a non-U.S. broker-dealer may transact with certain expatriates who are in the United States. This part of the exception is designed to ensure that non-U.S. broker-dealers do not have to terminate a pre-existing existing business relationship with their non-U.S. customers who happen to travel to the United States, or work in the United States on a temporary basis. These considerations shaped the provisions of Rule 15a-6: to qualify for the exemption, the non-U.S. person must be in the United States on a “temporary basis,” and there must be a “pre-existing relationship” between the broker and that person before the move to the United States took place.
If a relationship between a non-U.S. broker-dealer and an expatriate qualifies for the exemption, there are no significant limitations on the nature of the business that the broker-dealer can conduct with that person. For example, there is no need to retain a “U.S. chaperone” to act in connection with these transactions, as discussed below in the case of certain institutional sales.
Transactions with Institutional Investors
Rule 15a-6 enables non-U.S. broker-dealers to solicit transactions with “U.S. institutional investors” and “major U.S. institutional investors.” (These terms are defined in the rule.) Visits and telephone conversations with U.S. institutional investors” that are not “major U.S. institutional investors” must be “chaperoned” by a representative of a U.S. broker-dealer.
The key limitation for the use of this exemption is that any transactions that result from the solicitation must be effected through a U.S. broker-dealer.
As in the case above for retail investors, this exemption for institutional investors only relates to the broker-dealer registration requirements, and a separate exemption from Securities Act registration must be obtained for any resulting sale. In the case of structured notes, this will often be the Rule 144A functionality that is built into many EMTN and “Global MTN” programs.
Obligations of the U.S. Broker-Dealer. A U.S. broker-dealer that facilitates a trade with a U.S. institutional investor has a variety of obligations, including the information required for “know your customer” purposes, and obtaining the information or documentation needed for the broker-dealer to satisfy its suitability obligations. The U.S. broker-dealer must ensure that the confirmations and statements that the U.S. institutional investor receives for the relevant offerings comply with applicable legal requirements.
A U.S. broker that engages in this type of trade must satisfy a variety of additional obligations, including:
- determining that the non-U.S. broker-dealer and its associated persons involved in the trade are not subject to a statutory disqualification under Section 3(a)(39) of the Exchange Act or any substantially equivalent non-U.S. provisions;
- obtaining from the non-U.S. broker-dealer the basic background information required under Rule 17a-3(a)(12) under the Exchange Act with respect to each associated person of the non-U.S. broker-dealer who is involved in the trade;
- obtaining from the non-U.S. broker-dealer and each involved non-US. associated person a written consent to service of process by the SEC or other securities regulators; and
- making the information obtained in the second and third bullets above available to the SEC.
- In short, the U.S. broker-dealer will essentially take full responsibility for the executed trade, treating the referred account in the same manner it would treat any of its other accounts.
These requirements are sufficiently cumbersome that a U.S. broker-dealer will not typically enter into such an arrangement with a non-affiliated non-U.S. broker-dealer in the absence of a plan for multiple transactions and repeat business. However, in the case of affiliated entities that operate as part of a multinational financial institution, there is typically greater openness to an arrangement of this kind.
Transactions with U.S. Broker Dealers
The rule also permits a non-U.S. broker-dealer to engage in transactions with U.S. broker-dealers or with U.S. banks acting in a broker-dealer capacity. These transactions may be actively solicited by the foreign broker-dealer, and also provide a basis in which non-U.S. broker-dealers may purchase and sell structured notes with U.S. market participants.