On March 21, 2013, the SEC’s Division of Trading and Markets issued guidance regarding Rule 15a-6 under the Securities Exchange Act of 1934, which provides exemptions from broker-dealer registration for foreign broker-dealers that engage in certain activities involving U.S. investors, so long as the foreign broker-dealers abide by certain conditions. The new guidance is in the form of answers to frequently asked questions received from participants in the international securities markets.
In adopting Rule 15a-6, the SEC sought to facilitate access to foreign markets by U.S. institutional investors through foreign broker-dealers and provide clear guidance to foreign broker-dealers seeking to operate without triggering a requirement to register as a U.S. broker-dealer.
Exempted activities under Rule 15a-6 include: (i) effecting unsolicited securities transactions; (ii) providing research reports to major U.S. institutional investors and effecting transactions in the subject securities with or for those investors, subject to certain conditions; (iii) soliciting and effecting transactions with or for certain U.S. institutional investors with the assistance of a registered “chaperone” broker-dealer; and (iv) soliciting and effecting transactions with or for registered broker-dealers, banks acting in a brokerdealer capacity, certain international organizations, foreign persons temporarily in the U.S., U.S. citizens resident abroad and foreign branches and agencies of U.S. persons.
The principal interpretive guidance under Rule 15a-6 has been two no-action letters issued in 1996 and 1997, respectively. The first, known as the “Seven Firms Letter,” was issued in response to a no-action request from a law firm representing seven broker-dealers, and delineated the circumstances under which a foreign broker-dealer affiliated with a U.S. registered broker-dealer could effect transactions in foreign securities with a U.S. resident fiduciary without registering with the SEC or complying with Rule 15a-6. The second, the so-called “Nine Firms Letter,” was issued in response to a subsequent no-action request by the same seven broker-dealers plus two new ones, established an expanded definition of “major U.S. institutional investor” for purposes of foreign broker-dealers satisfying certain of the Rule 15a-6 exemptions. Additionally, the Nine Firms Letter permitted a foreign broker-dealer or its agent, in reliance on Rule 15a-6(a)(3), to transfer funds or securities directly to a U.S. institutional investor or its agent so long as certain requirements are met, and permitted foreign associated persons of a foreign broker-dealer to engage in direct contact with certain U.S. institutional investors, subject to certain timing and frequency requirements.
In order to provide more formal guidance in response to issues arising under Rule 15a-6, the staff of the SEC’s Division of Trading and Markets issued answers to frequently asked questions ("FAQs"). The following is a summary of the SEC guidance:
Permitted contacts with investors in the U.S.
- A foreign broker-dealer is entitled to effect transactions with a foreign person located in the U.S. (a person “temporarily resident in the United States” under Rule 15a-6(a)(4)(iii)) with whom it has had a pre-existing relationship before the foreign person entered the U.S., so long as such person is not a U.S. citizen or a permanent resident of the U.S.
- A foreign broker-dealer that administers a global employee stock option plan or other employee benefit plan established and administered under foreign law on behalf of a foreign issuer is entitled to the registration exemption provided by Rule 15a-6 in transmitting communications to, and effecting transactions in the foreign issuer’s securities for, U.S. employees of the foreign issuer so long as the foreign broker-dealer (i) deals exclusively with the issuer’s management and employee benefits representative and (ii) limits its activities with respect to U.S. persons to (a) facilitating the transfer of the issuer’s securities to the issuer’s U.S. employees, (b) sending plan notices and other legally required documents to such employees and (c) selling, transferring or otherwise disposing of the issuer’s securities in connection with its administration of the employee benefit plan.
- A foreign broker-dealer may send confirmations and account statements after effecting an unsolicited transaction on behalf of a U.S. investor without precluding its ability to rely on Rule 15a-6.
- The SEC staff confirmed that its expanded definition of “major U.S. institutional investor” in the Nine Firms Letter applied to all applicable provisions of Rule 15a-6.
Issues related to the use of U.S. registered “chaperone”
- While Rule 15a-6(a)(3)(iii)(A)(2) generally requires a “chaperone” U.S. registered broker-dealer working with a foreign broker-dealer to send all required confirmations and statements to the U.S. counterparty, a foreign broker-dealer may do so itself if required by the law of its jurisdiction, although it remains the chaperone’s responsibility to assure that the communications received by U.S. persons comply with all applicable U.S. requirements.
- A foreign broker-dealer may distribute research directly to major U.S. institutional investors and effect transactions in the securities discussed in the reports with or for those major U.S. institutional investors without the review, approval or provision of other administrative functions by a U.S. registered broker-dealer. However, if the foreign broker-dealer has a chaperoning arrangement with a U.S. registered broker-dealer, any transactions with the foreign broker-dealer in securities discussed in the research reports must be effected only through the chaperoning broker-dealer in compliance with the requirements of Rule 15a-6(a)(3).
- The SEC staff confirmed that its position in the Nine Firms Letter applied generally to a foreign broker-dealer that has a chaperoning arrangement with an unaffiliated registered broker-dealer.
- The SEC staff confirmed that its position in the Seven Firms Letter applies to foreign broker-dealers whether or not the chaperoning broker-dealer is an affiliate.
- A foreign broker-dealer may rely on Rule 15a-6(a)(1) to effect more than one unsolicited securities transaction on behalf of a single U.S. investor without automatically being deemed to have “solicited” that investor (and thereby precluding it from relying on Rule 15a-6(a)(1)), although the staff stated it would view a series of frequent transactions or a significant number of transactions between a foreign broker-dealer and a U.S. investor as being indicative of solicitation through the establishment of an “ongoing securities business relationship.” Thus, foreign broker-dealers must carefully document their efforts and activities with respect to U.S. investors in order to continue to rely on the Rule 15a-6 exemptions.
- A U.S. registered broker-dealer that enters into a chaperoning arrangement with a foreign broker-dealer is subject to a minimum net capital requirement of at least $250,000 unless it has entered into a fully disclosed carrying agreement with another registered broker-dealer that has expressly agreed to comply with certain SEC financial responsibility rules with respect to the chaperoning arrangement. This minimum net capital requirement applies (i) to introducing broker-dealers and (ii) even if the purpose of the registered broker-dealer’s chaperoning arrangement is to act as chaperone for DVP/RVP transactions with institutional investors.
- If a foreign broker-dealer’s business is limited to giving advice to a U.S. institutional investor or a major U.S. institutional investor contemplating an acquisition of a company, the registered broker-dealer with whom the foreign broker-dealer enters into a chaperoning agreement would be subject to a minimum net capital requirement of $5,000 or a greater amount required under Rule 15c3-1.
- A registered introducing broker-dealer acting as a chaperone for a foreign broker-dealer can rely on all the terms of the Nine Firms Letter if the registered broker-dealer meets the minimum net capital requirement of at least $250,000 unless it has in effect a fully disclosed carrying agreement with another registered broker-dealer that has agreed to comply with the SEC’s financial responsibility rules with respect to the chaperoning arrangement.
- A registered broker-dealer acting as a chaperone in connection with securities transactions with a U.S. institutional investor or a major U.S. institutional investor is required to take a net capital charge for failed transactions, even if the foreign broker-dealer is required to take a failed transaction charge under foreign law, unless the registered broker-dealer has entered into a fully disclosed carrying agreement with another registered broker-dealer that has expressly agreed to comply with the SEC’s financial responsibility rules with respect to the chaperoning arrangement, in which case the carrying broker-dealer would be required to take the net capital charge. In any case, it remains the chaperoning broker-dealer’s responsibility to maintain books and records that identify open trades and failed transactions. Additionally, the chaperoning broker-dealer must maintain its records in accordance with Rules 17a-3 and 17a-4 under the Exchange Act. It is allowed to obtain information regarding transactions and failed transactions from the foreign broker-dealer, but remains solely responsible for the accuracy of its books and records.
The FAQs are available on the SEC's website at https://www.sec.gov/divisions/marketreg/faq-15a-6-foreign-bd.htm