[Federal Register: July 8, 2008 (Volume 73, Number 131)]
[Proposed Rules]
[Page 39181-39212]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08jy08-33]
[[Page 39181]]
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Part IV
Securities and Exchange Commission
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17 CFR Part 240
Exemption of Certain Foreign Brokers or Dealers; Proposed Rule
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-58047; File No. S7-16-08]
RIN 3235-AK15
Exemption of Certain Foreign Brokers or Dealers
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'' or
``SEC'') is proposing to amend a rule under the Securities Exchange Act
of 1934 (``Exchange Act''), which provides conditional exemptions from
broker-dealer registration for foreign entities engaged in certain
activities involving certain U.S. investors. To reflect increasing
internationalization in securities markets and advancements in
technology and communication services, the proposed amendments would
update and expand the scope of certain exemptions for foreign entities,
consistent with the Commission's mission to protect investors, maintain
fair, orderly and efficient markets and facilitate capital formation.
DATES: Comments should be received on or before September 8, 2008.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://
www.sec.gov/rules/proposed.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number S7-16-08 on the subject line; or
Use the Federal eRulemaking Portal (http://
www.regulations.gov/). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number S7-16-08. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. We will post all comments on the Commission's Internet Web site
(http://www.sec.gov/rules/proposed.shtml). Comments are also available
for public inspection and copying in the Commission's Public Reference
Room, 100 F Street, NE., Washington, DC 20549, on official business
days between the hours of 10 a.m. and 3 p.m. All comments received will
be posted without change; we do not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: Erik R. Sirri, Director, Marlon
Quintanilla Paz, Senior Counsel to the Director, Brian A. Bussey,
Assistant Chief Counsel, Matthew A. Daigler, Special Counsel, or Max
Welsh, Attorney, Office of the Chief Counsel, Division of Trading and
Markets, at (202) 551-5500, at the Securities and Exchange Commission,
100 F Street, NE., Washington, DC 20549-6628.
SUPPLEMENTARY INFORMATION: The Commission is requesting public comment
on the proposed amendments to Rule 15a-6 [17 CFR 240.15a-6] under the
Exchange Act.
Table of Contents
I. Introduction and Background
II. The Regulatory Framework Under Rule 15a-6
A. Unsolicited Trades
B. Provision of Research Reports
C. Solicited Trades
D. Counterparties and Specific Customers
III. Proposed Amendments to Rule 15a-6
A. Extension of Rule 15a-6 to Qualified Investors
B. Unsolicited Trades
C. Provision of Research Reports
D. Solicited Trades
E. Counterparties and Specific Customers
F. Familiarization With Foreign Options Exchanges
G. Scope of the Proposed Exemption
IV. Preliminary Findings
V. General Request for Comment
VI. Administrative Law Matters
VII. Statutory Basis
VIII. Text of Proposed Amendments
I. Introduction and Background
Section 15(a) of the Exchange Act generally provides that, absent
an exception or exemption, a broker or dealer that uses the mails or
any means of interstate commerce to effect transactions in, or to
induce or attempt to induce the purchase or sale of, any security must
register with the Commission.\1\ The Commission uses a territorial
approach in applying the broker-dealer registration requirements to the
international operations of broker-dealers.\2\ Under this approach,
broker-dealers located outside the United States that induce or attempt
to induce securities transactions with persons in the United States are
required to register with the Commission, unless an exemption
applies.\3\ Entities that conduct such activities entirely outside the
United States do not have to register. Because this territorial
approach applies on an entity level, not a branch level, if a foreign
broker-dealer establishes a branch in the United States, broker-dealer
registration requirements would extend to the entire foreign broker-
dealer entity.\4\ The registration requirements do not apply, however,
to a foreign broker-dealer with an affiliate, such as a subsidiary,
operating in the United States.\5\ Only the U.S. affiliate must
register and only the U.S. affiliate may engage in securities
transactions and perform related functions on behalf of U.S.
investors.\6\ The territorial approach also requires registration of
foreign broker-dealers operating outside the United States that effect,
induce or attempt to induce securities transactions for any person
inside the United States, other than a foreign person temporarily
within the United States.\7\
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\1\ See 15 U.S.C. 78o(a)(1). Section 3(a)(4) of the Exchange Act
generally defines a ``broker'' as ``any person engaged in the
business of effecting transactions in securities for the account of
others,'' but provides 11 exceptions for certain bank securities
activities. Section 3(a)(5) of the Exchange Act generally defines a
``dealer'' as ``any person engaged in the business of buying and
selling securities for his own account,'' but includes exceptions
for certain bank activities. 15 U.S.C. 78c(a)(4). Exchange Act
Section 3(a)(6) defines a ``bank'' as a bank or savings association
that is directly supervised and examined by state or federal banking
authorities (with certain additional requirements for banks and
savings associations that are not chartered by a federal authority
or a member of the Federal Reserve System). 15 U.S.C. 78c(a)(6).
Accordingly, foreign banks that act as brokers or dealers within the
jurisdiction of the United States are subject to U.S. broker-dealer
registration requirements. See Exchange Act Release No. 27017 (Jul.
11, 1989), 54 FR 30013, 30015 n.16 (Jul. 18, 1989) (``1989 Adopting
Release''); and Exchange Act Release No. 25801 (Jun. 14, 1988), 53
FR 23645 at n.1 (Jun. 23, 1988) (``1988 Proposing Release''). To the
extent, however, that a foreign bank establishes a branch or agency
in the United States that is supervised and examined by a federal or
state banking authority and otherwise meets the requirements of
Section 3(a)(6), the Commission considers that branch or agency to
be a ``bank'' for purposes of the exceptions from the ``broker'' and
``dealer'' definitions. See 1989 Adopting Release, 54 FR at 30015
n.16.
\2\ See 1989 Adopting Release, 54 FR at 30016.
\3\ See id.
\4\ See id. at 30017.
\5\ See id.
\6\ See id.
\7\ See id. For contacts by foreign broker-dealers with U.S.
citizens domiciled abroad, the Commission generally does not require
registration. Paragraph (a)(4)(v) of Rule 15a-6 specifically
addresses this situation.
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In response to numerous inquiries seeking no-action relief and
interpretive advice regarding whether certain international securities
activities required U.S. broker-dealer registration, the Commission
issued a release on June 14, 1988, to clarify the registration
[[Page 39183]]
requirements for foreign-based broker-dealers, foreign affiliates of
U.S. broker-dealers, and other foreign financial institutions.\8\ The
release also proposed Rule 15a-6, which provided conditional exemptions
from registration under Section 15(b) of the Exchange Act for foreign
broker-dealers that induce or attempt to induce the purchase or sale of
any security by certain U.S. institutional investors, if the foreign
broker-dealer satisfied certain conditions. The Commission adopted Rule
15a-6 on July 11, 1989, and it became effective August 15, 1989.\9\
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\8\ See 1988 Proposing Release.
\9\ 17 CFR 240.15a-6. See 1989 Adopting Release.
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While the rule has provided a useful framework for certain U.S.
investors to access foreign broker-dealers for almost two decades, ever
increasing market globalization suggests that it is time to revisit
that framework to consider whether it could be made more workable,
consistent with the Commission's mission to protect investors, maintain
fair, orderly and efficient markets and facilitate capital formation.
As discussed below, the amendments we propose today would generally
expand the category of U.S. investors that foreign broker-dealers may
contact for the purpose of providing research reports and soliciting
securities transactions. The proposed amendments would also reduce the
role U.S. registered broker-dealers must play in intermediating
transactions effected by foreign broker-dealers on behalf of certain
U.S. investors. Proposed new safeguards are intended to ensure that the
expanded exemptions would remain consistent with the Commission's
statutory mandate.
II. The Regulatory Framework Under Rule 15a-6
As discussed below, Rule 15a-6 provides conditional exemptions from
broker-dealer registration for foreign broker-dealers that engage in
certain activities involving certain U.S. investors. Paragraph (b)(3)
of the rule defines a ``foreign broker-dealer'' as ``any non-U.S.
resident person * * * that is not an office or branch of, or a natural
person associated with, a registered broker-dealer, whose securities
activities, if conducted in the United States, would be described by
the definition of `broker' or `dealer' in Section 3(a)(4) or 3(a)(5) of
the Act.'' \10\ Among the activities that foreign broker-dealers may
engage in under the rule are: (i) ``Nondirect'' contacts by foreign
broker-dealers with U.S. investors through execution of unsolicited
securities transactions and the provision of research reports to
certain U.S. institutional investors and (ii) ``direct'' contacts,
involving the execution of transactions through a registered broker-
dealer intermediary with or for certain U.S. institutional investors,
and without this intermediary with or for certain entities such as
registered broker-dealers and banks acting in a broker or dealer
capacity.\11\
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\10\ 17 CFR 240.15a-6(b)(3).
\11\ See 1989 Adopting Release, 54 FR at 30013.
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A. Unsolicited Trades
As we explained in adopting Rule 15a-6, a broker-dealer that
solicits a transaction with a U.S. investor must be registered with the
Commission.\12\ Because the Commission determined that, as a policy
matter, registration is not necessary if a U.S. investor initiated a
transaction with a foreign broker-dealer entirely by his or her own
accord, paragraph (a)(1) of Rule 15a-6 \13\ provides an exemption for a
foreign-broker dealer that effects unsolicited securities transactions
with U.S. persons.\14\ As the Commission expressed in adopting Rule
15a-6, solicitation is construed broadly as ``any affirmative effort by
a broker or dealer intended to induce transactional business for the
broker-dealer or its affiliates.'' \15\ For example, the Commission
views telephone calls to U.S. investors, advertising circulated or
broadcast in the United States and holding investment seminars in the
United States, regardless of whether the seminars were hosted by a
registered broker-dealer, as forms of solicitation.\16\ Solicitation
also includes recommending the purchase or sale of securities to
customers or prospective customers for the purpose of generating
transactions.\17\
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\12\ See id. at 30017.
\13\ 17 CFR 240.15a-6(a)(1).
\14\ See 1989 Adopting Release, 54 FR at 30017.
\15\ See id.
\16\ See id. at 30017-18.
\17\ See id.
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The exemption in paragraph (a)(1) is intended to allow a foreign
broker-dealer to effect transactions with U.S. investors when the
foreign broker-dealer does not make any affirmative effort to induce
transactional activity with the U.S. investor. Because of the breadth
of the meaning of solicitation in the broker-dealer registration
context, this exemption typically would not be a viable basis for a
foreign broker-dealer to conduct an ongoing business, which would
likely involve some form of solicitation, in the United States.\18\
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\18\ See id.; see also Exchange Act Release No. 39779,
``Interpretation Re: Use of Internet Web Sites To Offer Securities,
Solicit Securities Transactions, or Advertise Investment Services
Offshore'' (Mar. 23, 1998), 63 FR 14806, 14813 (Mar. 27, 1998)
(stating that ``[f]oreign broker-dealers that have Internet Web
sites and that intend to rely on Rule 15a-6's `unsolicited'
exemption should ensure that the `unsolicited' customer's
transactions are not in fact solicited, either directly or
indirectly, through customers accessing their Web sites.'').
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B. Provision of Research Reports
The provision of research to investors also may constitute
solicitation by a broker or dealer that would require broker-dealer
registration.\19\ Broker-dealers often provide research to customers
with the expectation that the customer eventually will trade through
the broker-dealer.\20\ Paragraph (a)(2) of Rule 15a-6 \21\ provides an
exemption from U.S. broker-dealer registration for foreign broker-
dealers that provide research reports to certain institutional
investors under conditions that are designed to permit the flow of
research without allowing foreign broker-dealers to do more to solicit
transactions with U.S. investors.\22\
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\19\ See 1989 Adopting Release, 54 FR at 30021-22.
\20\ See id. (``Broker-dealers often provide research to
customers on a non-fee basis, with the expectation that the customer
eventually will trade through the broker-dealer. They may provide
research to acquaint potential customers with their existence, to
maintain customer goodwill, or to inform customers of their
knowledge of specific companies or markets, so that these customers
will be encouraged to use their execution services for that company
or those markets. In each instance, the basic purpose of providing
the non-fee research is to generate transactional business for the
broker-dealer. In the Commission's view, the deliberate transmission
of information, opinions, or recommendations to investors in the
United States, whether directed at individuals or groups, could
result in the conclusion that the foreign broker-dealer has
solicited those investors.'').
\21\ 17 CFR 240.15a-6(a)(2).
\22\ See 17 CFR 240.15a-6(a)(2).
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In particular, the rule exempts from U.S. broker-dealer
registration a foreign broker-dealer that provides research to certain
U.S. institutional investors if (i) the research reports do not
recommend that the investor use the foreign broker-dealer to effect
trades in any security, (ii) the foreign broker-dealer does not
initiate follow up contacts or otherwise induce or attempt to induce
investors to effect transactions in any security, (iii) transactions
with the foreign broker-dealer in securities covered by the research
reports are effected through a registered broker-dealer according to
the provisions of paragraph (a)(3) of the rule, described below, and
(iv) the provision of research is not pursuant to an understanding that
the foreign broker-dealer will receive commission income from
transactions effected by U.S. investors.\23\
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\23\ See id.
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The exemption in paragraph (a)(2) of Rule 15a-6 is available only
with
[[Page 39184]]
respect to research reports that are furnished to ``major U.S.
institutional investors.'' Paragraph (b)(4) of the rule defines a
``major U.S. institutional investor'' as (i) a U.S. institutional
investor \24\ that has, or has under management, total assets in excess
of $100 million (which may include the assets of any family of
investment companies of which it is a part); or (ii) an investment
adviser registered with the Commission under Section 203 of the
Investment Advisers Act of 1940 that has total assets under management
in excess of $100 million.\25\
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\24\ See Part II.C., infra, for discussion of the definition of
``U.S. institutional investor.''
\25\ See 17 CFR 240.15a-6(b)(4); cf. Letter from Richard R.
Lindsey, Director, Division of Market Regulation, to Mr. Giovanni P.
Prezioso, Cleary Gottlieb, Steen & Hamilton (Apr. 9, 1997) (``1997
Staff Letter'').
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C. Solicited Trades
As we discussed in adopting Rule 15a-6, although many foreign
broker-dealers have established registered broker-dealer affiliates to
deal with U.S. investors and trade in U.S. securities, they may prefer
to deal with institutional investors in the United States from their
overseas trading desks, where their dealer operations and principal
sources of current information on foreign market conditions and foreign
securities are based.\26\ For similar reasons, many U.S. institutions
want direct contact with overseas traders. Except for limited instances
of unsolicited transactions, such contact would require the foreign
broker-dealer to register with the Commission.
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\26\ See 1989 Adopting Release, 54 FR at 30024.
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Paragraph (a)(3) of Rule 15a-6 \27\ provides an exemption for
foreign broker-dealers that induce or attempt to induce securities
transactions by certain institutional investors, if a U.S. registered
broker-dealer intermediates certain aspects of the transactions by
carrying out specified functions. In particular, the U.S. registered
broker-dealer is required to effect all aspects of the transaction
(other than negotiation of the terms).\28\ It must issue all required
confirmations \29\ and account statements to the U.S. institutional
investor or major U.S. institutional investor. As the Commission
explained, these documents are significant points of contact between
the investor and the broker-dealer, and they provide important
information for investors.\30\ Also, as between the foreign broker-
dealer and the U.S. registered broker-dealer, the latter is required to
extend or arrange for the extension of any credit to these investors in
connection with the purchase of securities.\31\ In addition, the U.S.
registered broker-dealer is responsible for maintaining required books
and records relating to the transactions conducted under paragraph
(a)(3) of the rule, including those required by Rules 17a-3 and 17a-
4,\32\ which facilitates Commission supervision and investigation of
these transactions.\33\ Of course, the U.S. registered broker-dealer
also must maintain sufficient net capital in compliance with Exchange
Act Rule 15c3-1,\34\ and receive, deliver and safeguard funds and
securities in connection with the transactions in compliance with
Exchange Act Rule 15c3-3.\35\ Furthermore, the U.S. registered broker-
dealer must take responsibility for certain key sales activities,
including ``chaperoning'' the contacts of foreign associated persons
with certain U.S. institutional investors.\36\
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\27\ 17 CFR 240.15a-6(a)(3).
\28\ 17 CFR 240.15a-6(a)(3)(iii)(A). In adopting Rule 15a-6, the
Commission recognized that rules of foreign securities exchanges and
over-the-counter markets may require the foreign broker-dealer, as a
member or market maker, to perform the actual physical execution of
transactions in foreign securities listed on those exchanges or
traded in those markets. See 1989 Adopting Release, 54 FR at 30029
n.185. For this reason, the Commission stated that, while it does
not believe that it is appropriate to allow the U.S. registered
broker-dealer to delegate the performance of its duties under the
rule to the foreign broker-dealer, it would permit such delegation
in the case of physically executing foreign securities trades in
foreign markets or on foreign exchanges. See 1989 Adopting Release,
54 FR at 30025; cf. 1997 Staff Letter. As a result, the treatment of
U.S. securities and foreign securities under paragraph (a)(3) of the
rule differs. Specifically, with foreign securities the foreign
broker-dealer may not only negotiate the terms, but also execute the
transactions in the circumstances specified in the Adopting Release.
See 1989 Adopting Release, 54 FR at 30029 n.185; cf. NASD Rule
6620(g)(2) (trade reporting of transactions in foreign equity
securities not required when the transaction is executed on and
reported to a foreign securities exchange or over the counter in a
foreign country and reported to the foreign regulator). With respect
to U.S. securities, however, the U.S. broker-dealer is required to
execute the transactions and to comply with the provisions of the
federal securities laws, the rules thereunder and SRO rules
applicable to the execution of transactions.
\29\ See Rule 10b-10, 17 CFR 240.10b-10. See 17 CFR 240.15a-
6(a)(3)(iii)(A)(2).
\30\ See 1989 Adopting Release, 54 FR at 30029.
\31\ 17 CFR 240.15a-6(a)(3)(iii)(A)(3).
\32\ 17 CFR 240.17a-3 and 17a-4. See 17 CFR 240.15a-
6(a)(3)(iii)(A)(4).
\33\ See 1989 Adopting Release, 54 FR at 30029.
\34\ 17 CFR 240.15c3-1. See 17 CFR 240.15a-6(a)(3)(iii)(A)(5).
\35\ 17 CFR 240.15c3-3. See 17 CFR 240.15a-6(a)(3)(iii)(A)(6);
cf. 1997 Staff Letter.
\36\ See 17 CFR 240.15a-6(a)(3)(ii)(A) and (a)(3)(iii)(B); cf.
1997 Staff Letter.
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In adopting Rule 15a-6, the Commission pointed out that the U.S.
registered broker-dealer's intermediation is intended to help protect
U.S. investors and securities markets.\37\ For example, the U.S.
registered broker-dealer has an obligation, as it has for all customer
accounts, to review any Rule 15a-6(a)(3) account for indications of
potential problems.\38\
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\37\ See 1989 Adopting Release, 54 FR at 30025.
\38\ See id. While the rule does not require the U.S. registered
broker-dealer to implement procedures to obtain positive assurance
that the foreign broker-dealer is operating in accordance with U.S.
requirements, the U.S. registered broker-dealer, in effecting trades
arranged by the foreign broker-dealer, has a responsibility to
review these trades for indications of possible violations of the
federal securities laws. Id.
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This exemption in Rule 15a-6(a)(3) applies to transactions with
major U.S. institutional investors, described above, as well as ``U.S.
institutional investors.'' The rule defines a ``U.S. institutional
investor'' as (i) an investment company registered with the Commission
under Section 8 of the Investment Company Act of 1940; or (ii) a bank,
savings and loan association, insurance company, business development
company, small business investment company, or employee benefit plan
defined in Rule 501(a)(1) of Regulation D under the Securities Act of
1933 (``Securities Act''); a private business development company
defined in Rule 501(a)(2); an organization described in Section
501(c)(3) of the Internal Revenue Code, as defined in Rule 501(a)(3);
or a trust defined in Rule 501(a)(7).\39\
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\39\ See 17 CFR 240.15a-6(b)(7).
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D. Counterparties and Specific Customers
Paragraph (a)(4) of Rule 15a-6 \40\ provides an exemption for
foreign broker-dealers that effect transactions in securities with or
for, or induce or attempt to induce the purchase or sale of securities
by, five categories of persons: (1) Registered broker-dealers (acting
either as principal or for the account of others) or banks acting
pursuant to an exception or exemption from the definition of ``broker''
or ``dealer'' in Sections 3(a)(4)(B), 3(a)(4)(E), or 3(a)(5)(C) of the
Exchange Act or the rules thereunder; \41\ (2) certain international
organizations and their agencies, affiliates and pension funds; \42\
[[Page 39185]]
(3) foreign persons temporarily present in the United States with whom
the foreign broker-dealer had a pre-existing relationship; (4) any
agency or branch of a U.S. person permanently abroad; and (5) U.S.
citizens resident outside the United States, as long as the
transactions occur outside the United States and the foreign broker-
dealer does not target solicitations at identifiable groups of U.S.
citizens resident abroad.
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\40\ 17 CFR 240.15a-6(a)(4).
\41\ While the exemption allows foreign broker-dealers to effect
transactions with or for certain banks or registered broker-dealers,
it does not allow direct contact by foreign broker-dealers with the
U.S. customers of the registered broker-dealers or banks. See 1989
Adopting Release, 54 FR at 30013 n.202.
\42\ The organizations are the African Development Bank, the
Asian Development Bank, the Inter-American Development Bank, the
International Bank for Reconstruction and Development, the
International Monetary Fund, the United Nations. See 17 CFR 240.15a-
6(a)(4)(ii).
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III. Proposed Amendments to Rule 15a-6
The pace of internationalization in securities markets around the
world has continued to accelerate since we adopted Rule 15a-6 in 1989.
Advancements in technology and communication services have provided
greater access to global securities markets for all types of
investors.\43\ U.S. investors are seeking to take advantage of this
increased access by seeking more direct contact with those expert in
foreign markets and foreign securities. In addition, discussions over
the years with industry representatives regarding Rule 15a-6 have
suggested areas where the rule could be revised to achieve its
objectives more effectively without jeopardizing investor
protections.\44\
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\43\ See, e.g., Spotlight On: Roundtable Discussions Regarding
Mutual Recognition (Jun. 12, 2007) (available at: http://
www.sec.gov/spotlight/mutualrecognition.htm).
\44\ See, e.g., id.
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In response to these developments and suggestions, the Commission
is proposing to amend Rule 15a-6 to remove barriers to access while
maintaining key investor protections. In general, and as discussed more
fully in Part III.G. below, the proposed amendments would expand and
streamline the conditions under which a foreign broker-dealer could
operate without triggering the registration requirements of Section
15(a)(1) or 15B(a)(1) of the Exchange Act and the reporting and other
requirements of the Exchange Act (other than Sections 15(b)(4) and
15(b)(6)), and the rules and regulations thereunder, that apply
specifically to a broker-dealer that is not registered with the
Commission solely by virtue of its status as a broker or dealer, while
maintaining a regulatory structure designed to protect investors and
the public interest.\45\
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\45\ See Part III.G., infra, regarding the scope of the
exemption.
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A. Extension of Rule 15a-6 to Qualified Investors
The proposed rule would expand the category of U.S. investors with
which a foreign broker-dealer \46\ could interact under Rule 15a-
6(a)(2) and would expand, with a few exceptions, the category of U.S.
investors with which a foreign broker-dealer could interact under Rule
15a-6(a)(3) by replacing the categories of ``major U.S. institutional
investor'' and ``U.S. institutional investor'' with the category of
``qualified investor,'' as defined in Section 3(a)(54) of the Exchange
Act.\47\ In adopting the definitions of ``U.S. institutional investor''
and ``major U.S. institutional investor,'' the Commission expressed the
view that institutions with the major U.S. institutional investor
``level of assets are more likely to have the skills and experience to
assess independently the integrity and competence of the foreign
broker-dealers providing [foreign market] access.'' \48\ As discussed
below, we believe that advancements in communications and other
technology have made it increasingly likely that a broader range of
persons would have these skills and experience at a lower asset level.
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\46\ The definition of ``foreign broker or dealer ''in the
proposed rule would be the same as in the current rule, except as
described below. See proposed Rule 15a-6(b)(2).
\47\ The proposed rule would also eliminate the definition of
``family of investment companies,'' which is currently used in the
definition of ``major U.S institutional investor, ''because it would
no longer be needed. See 17 CFR 240.15a-6(b)(1), (4) and (7).
\48\ 1989 Adopting Release, 54 FR at 30027. In proposing the
definition of ``U.S. institutional investor,'' the Commission stated
that ``[t]he proposed asset limitation in the rule is based on the
assumption that direct U.S. oversight of the competence and conduct
of foreign sales personnel may be of less significance where they
are soliciting only U.S. institutional investors with high levels of
assets. The $100 million asset level * * * is designed to increase
the likelihood that the institution or its investment advisers have
prior experience in foreign markets that provides insight into the
reliability and reputation of various foreign broker-dealers.'' 1988
Proposing Release, 53 FR 23654.
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The proposed rule would give the term ``qualified investor'' the
same meaning as set forth in Section 3(a)(54) of the Exchange Act.\49\
The qualified investor standard is well known to the financial
community. Section 3(a)(54)(A) defines a ``qualified investor'' as:
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\49\ 15 U.S.C. 78c(54). The definition of ``qualified investor''
was added to the Exchange Act by the Gramm-Leach-Bliley-Act of 1999
(Pub. L. 106-102, 113 Stat. 1338 (1999)) and has application to
several of the bank exceptions from broker-dealer registration,
including: (1) the broker exception for identified banking products
when the product is an equity swap agreement (Section 206(a)(6) of
Pub. L. 106-102, 15 U.S.C. 78c note, as incorporated into Exchange
Act Section 3(a)(4)(B)(ix), 15 U.S.C. 78c(a)(4)(B)(ix)); (2) the
dealer exception for identified banking products when the product is
an equity swap agreement (Section 206(a)(6) of Pub. L. 106-102, 15
U.S.C. 78c note, as incorporated into Exchange Act Section
3(a)(5)(C)(iv), 15 U.S.C. 78c(a)(5)(C)(iv)); and (3) the dealer
exception for asset-backed securities (Exchange Act Section
3(a)(5)(C)(iii), 15 U.S.C. 78c(a)(5)(C)(iii)). These exceptions
permit banks to sell certain securities to qualified investors
without registering as broker-dealers with the Commission.
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(i) Any investment company registered with the Commission under
Section 8 of the Investment Company Act of 1940 (``Investment Company
Act'');
(ii) Any issuer eligible for an exclusion from the definition of
investment company pursuant to Section 3(c)(7) of the Investment
Company Act;
(iii) Any bank (as defined in Section 3(a)(6) of the Exchange Act),
savings association (as defined in Section 3(b) of the Federal Deposit
Insurance Act), broker, dealer, insurance company (as defined in
Section 2(a)(13) of the Securities Act), or business development
company (as defined in Section 2(a)(48) of the Investment Company Act);
(iv) Any small business investment company licensed by the United
States Small Business Administration under Section 301(c) or (d) of the
Small Business Investment Act of 1958;
(v) Any State sponsored employee benefit plan, or any other
employee benefit plan, within the meaning of the Employee Retirement
Income Security Act of 1974, other than an individual retirement
account, if the investment decisions are made by a plan fiduciary, as
defined in Section 3(21) of that Act, which is either a bank, savings
and loan association, insurance company, or registered investment
adviser;
(vi) Any trust whose purchases of securities are directed by a
person described in clauses (i) through (v) above;
(vii) Any market intermediary exempt under Section 3(c)(2) of the
Investment Company Act;
(viii) Any associated person of a broker or dealer other than a
natural person;
(ix) Any foreign bank (as defined in Section 1(b)(7) of the
International Banking Act of 1978); \50\
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\50\ The definition of qualified investor includes any foreign
bank. Unlike foreign governments (see note 51, infra), foreign banks
may establish a permanent presence in the United States, such as a
branch, that would not qualify under Exchange Act Section 3(a)(6) as
a bank. See note 1, supra. Foreign broker-dealers need to rely on
Rule 15a-6 to effect transactions with such entities.
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(x) The government of any foreign country; \51\
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\51\ Of course, foreign broker-dealers currently do not need to
rely on Rule 15a-6 to effect transactions with foreign governments
because foreign governments are neither located in the United States
nor U.S. persons resident abroad.
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(xi) Any corporation, company, or partnership that owns and invests
on a
[[Page 39186]]
discretionary basis not less than $25,000,000 in investments;
(xii) Any natural person who owns and invests on a discretionary
basis not less than $25,000,000 in investments;
(xiii) Any government or political subdivision, agency, or
instrumentality of a government that owns and invests on a
discretionary basis not less than $50,000,000 in investments; or
(xiv) Any multinational or supranational entity or any agency or
instrumentality thereof.
The Commission proposes to use the definition of ``qualified
investor'' in section 3(a)(54) of the Exchange Act for several reasons
primarily related to the sophistication and likely experience with
foreign securities and foreign markets of the investors included in the
definition. For example, the entities described in paragraphs (i)
through (ix) of Section 3(a)(54)(A) of the Exchange Act, without
limitation based on ownership or investment, are all engaged primarily
in financial activities, including the business of investing. The
persons in paragraphs (xi), (xii) and (xiii) of Section 3(a)(54)(A) are
not primarily engaged in investing and may have limited investment
experience. Thus, Congress established ownership and investment
thresholds for those latter persons as indicators of investment
experience and sophistication.\52\ The Commission believes that
Congress' standard for investors with significant investment experience
and sophistication to deal with banks that are not registered as
broker-dealers should ensure that these investors would possess
sufficient experience with financial matters to be able to enter into
securities transactions with foreign broker-dealers under the proposed
exemption. Thus, the Commission believes that it would be appropriate
and consistent with the protection of investors to extend the relief in
proposed Rules 15a-6(a)(2) and (a)(3) to a corporation, company,
partnership that, or a natural person who, owns and invests on a
discretionary basis not less than $25,000,000 in investments, and to a
government or political subdivision, agency or instrumentality of a
government that owns and invests on a discretionary basis not less than
$50,000,000 in investments.
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\52\ See 15 U.S.C. 6801 et seq., Pub. L. 106-102, 113 Stat. 1338
(1999). Congress did not include an ownership or investment
threshold for multinational or supranational entities, or any
agencies or instrumentalities thereof, presumably regarding such
entities as possessing sufficient financial sophistication, net
worth and knowledge and experience in financial matters to be
considered a qualified investor. Exchange Act Release No. 47364
(Feb. 13, 2003), 68 FR 8686, 8693 (Feb. 24, 2003).
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The primary distinction between a major U.S. institutional investor
and a qualified investor is the threshold value of assets or
investments owned or invested and the inclusion of natural persons. As
a result, under the proposed rule, the threshold would decline from
institutional investors that own or control greater than $100 million
in total assets to, among others, all investment companies registered
with the Commission under Section 8 of the Investment Company Act and
corporations, companies, or partnerships that own or invest on a
discretionary basis $25 million or more in investments. In addition,
under the proposed rule, natural persons who own or invest on a
discretionary basis not less than $25,000,000 in investments would be
included. In adopting Rule 15a-6, we explained that the $100 million
asset level was designed ``to increase the likelihood that [the
investor has] prior experience in foreign markets that provides insight
into the reliability and reputation of various foreign broker-
dealers.'' \53\ While we believe this is still the right focus,
increased access to information about foreign securities markets due to
advancements in communication technology suggest that a broader
spectrum of investors are likely to have this type of sophistication.
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\53\ See 1989 Adopting Release, 54 FR at 30027.
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We believe that the proposed use of the definition of qualified
investor would more accurately encompass persons that have prior
experience in foreign markets and an appropriate level of investment
experience and sophistication overall. In certain instances, it would
exclude persons that are currently included in the definition of U.S.
institutional investor or major U.S. institutional investor. In each
such instance, the proposed use of the definition of qualified investor
would require greater investment experience of the entity than the
current definition.
For example, with respect to employee benefit plans, the definition
of qualified investor includes plans in which investment decisions are
made by certain plan fiduciaries. The definition of U.S. institutional
investor does not require a fiduciary to make investment decisions and
encompasses plans with $5 million or more in assets. While there is no
asset requirement in the employee benefit plan section in the
definition of qualified investor, the Commission believes that
proposing to require investment decisions to be made by plan
fiduciaries as a qualification for the definition would help ensure a
higher level of investing experience and sophistication than a $5
million asset threshold. Similarly, while a qualified investor applies
to trusts whose purchases are directed by certain entities, the
definition of ``U.S. institutional investor'' does not impose that
limitation, but instead applies to certain trusts with $5 million or
more in assets. Also, while the proposed definition (like the existing
definition) would encompass business development companies as defined
in Section 2(a)(48) of the Investment Company Act, the definition of
``U.S. institutional investor'' extends to private business development
companies defined in Section 202(a)(22) of the Investment Advisers Act
of 1940. The definition of ``U.S. institutional investor,'' unlike the
definition of ``qualified investor,'' further applies to certain
organizations described in Section 503(c) of the Internal Revenue Code
with assets of $5 million or more. Proposing to require the higher
level of investing experience and sophistication would be appropriate
in light of the expanded activities in which foreign broker-dealers
would be permitted to engage under the proposed rule, as well as the
reduced role that would be played by the U.S. registered broker-dealer.
The Commission requests comment on the proposed use of the
definition of ``qualified investor'' generally and, more specifically,
whether allowing foreign broker-dealers to induce or attempt to induce
transactions with the persons included in the proposed definition is
appropriate. Are the ownership and investment thresholds applicable to
certain persons included in the proposed use of the definition of
``qualified investor'' appropriate? Does the definition encompass
investors that likely would have an appropriate level of investing or
business experience in foreign markets? If not, why not? Should the
definition be tailored to include only investors that have a
demonstrated pattern of appropriate transactional activity with U.S.
registered or foreign broker-dealers in foreign securities? If so, how?
The Commission also requests comment on whether the proposed use of
the definition of ``qualified investor'' should include additional
minimum asset levels for any of the persons included in Exchange Act
Section 3(a)(54). For example, should the proposed rule use a new
definition that includes a requirement that a small business investment
company own and invest a certain amount of investments? Should it
include any of the omitted
[[Page 39187]]
categories of persons from the definition of ``U.S. institutional
investor''? Are there any categories of investors included in the
proposed use of the definition of qualified investor that should be
excluded, such as market intermediaries exempt under Section 3(c)(2) of
the Investment Company Act?
In addition, the Commission requests comment on whether the
proposed use of the definition of ``qualified investor'' should include
natural persons who own or invest on a discretionary basis at least
$25,000,000 in investments. If not, should the Commission adopt a
different threshold level of investments or ownership? What criteria,
if any, should apply to help ensure that a natural person would have
sufficient investment experience and sophistication specifically in
foreign securities? Are there additional safeguards for natural persons
that would be appropriate to include in the rule, such as increasing
the involvement of U.S. registered broker-dealers in transactions
solicited by foreign broker-dealers? For example, foreign broker-
dealers could be required to make suitability determinations before
sales to natural persons under the exemption. If additional safeguards
applied to transactions with natural persons who own or invest on a
discretionary basis at least $25,000,000 in investments, would foreign
broker-dealers choose to comply with those safeguards or choose not to
do business directly with natural persons under such a rule? Finally,
should any of the dollar thresholds in the proposed use of the
definition of qualified investor be adjusted for inflation? If so, what
mechanism should be used to make such adjustments?
B. Unsolicited Trades
As we noted in adopting Rule 15a-6, although the requirements of
Section 15(a) under the Exchange Act do not distinguish between
solicited and unsolicited transactions, the Commission does not
believe, as a policy matter, that registration is necessary if U.S.
investors have sought out foreign broker-dealers outside the United
States and initiated transactions in foreign securities markets
entirely of their own accord.\54\ In that event, U.S. investors would
have taken the initiative to trade outside the United States with
foreign broker-dealers that are not conducting activities within this
country and the U.S. investors would have little reason to expect these
foreign broker-dealers to be subject to U.S. broker-dealer
requirements.\55\ Therefore, the Commission is not proposing to amend
paragraph (a)(1) of the current rule, other than to add the title
``Unsolicited Trades.'' Notably, in order to rely on this exemption,
foreign broker-dealers need to determine whether each transaction
effected in reliance on it has been solicited under the proposed rule.
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\54\ See 1989 Adopting Release, 54 FR at 30017.
\55\ See id.
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Because the Commission construes solicitation broadly and
relatively few transactions qualify for the unsolicited exemption,\56\
the Commission is proposing to provide further interpretive guidance
related to solicitation under the proposed rule with respect to
quotation systems. In adopting the current rule, we noted that access
to foreign market makers' quotations is of considerable interest to
registered broker-dealers and institutional investors that seek timely
information on foreign market conditions.\57\ The Commission also
stated that it generally would not consider a solicitation to have
occurred for purposes of Rule 15a-6 if there were a U.S. distribution
of foreign broker-dealers' quotations by third-party systems, such as
systems operated by foreign marketplaces or by private vendors, that
distributed these quotations primarily in foreign countries.\58\ The
Commission's position applies only to third-party systems that do not
allow securities transactions to be executed between the foreign
broker-dealer and persons in the United States through the systems.\59\
The Commission noted that it would have reservations about certain
specialized quotation systems, which might constitute a more powerful
inducement to effect trades because of the nature of the proposed
transactions.\60\ With respect to direct dissemination of a foreign
market maker's quotations to U.S. investors, such as through a private
quote system controlled by a foreign broker-dealer (as distinct from a
third-party system), the Commission noted in adopting the current rule
that such conduct would not be appropriate without registration,
because the dissemination of these quotations would be a direct,
exclusive inducement to trade with that foreign broker-dealer.\61\
---------------------------------------------------------------------------
\56\ See id. at 30021.
\57\ See id. at 30017.
\58\ See id.
\59\ See id.
\60\ See id. at n.66. For example, the Commission stated that a
foreign broker-dealer whose quotations were displayed in a system
that disseminated quotes only for large block trades might well be
deemed to have engaged in solicitation requiring broker-dealer
registration, as opposed to a foreign broker-dealer whose quotes
were displayed in a system that disseminated the quotes of numerous
foreign dealers or market makers in the same security. See id.
\61\ See id. at 30019. In making the statement that the conduct
would not be appropriate ``without registration, ''the Commission
did not intend to preclude a foreign broker-dealer from directly
inducing U.S. investors to trade with the foreign broker-dealer via
such a quotation system where the U.S. investor subscribes to the
quotation system through a U.S. broker-dealer, the U.S. broker-
dealer has continuing access to the quotation system, the foreign
broker-dealer's other contacts with the U.S. investor are
permissible under the current rule and any resulting transactions
are intermediated in accordance with the requirements of Rule 15a-
6(a)(3).
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Since the time the current rule was adopted, third-party quotation
systems have become increasingly global in scope such that the
distinction between systems that distribute quotations primarily in the
United States and those that distribute quotations primarily in foreign
countries is no longer a meaningful or workable distinction because
most third-party quotation systems no longer serve a primary
location.\62\ As a result, under the Commission's proposed
interpretation, the Commission's previous guidance on U.S. distribution
of foreign broker-dealers' quotations by third-party systems no longer
would be limited to third-party systems that distributed their
quotations primarily in foreign countries under the proposed rule. In
other words, under the proposed interpretation, U.S. distribution of
foreign broker-dealers' quotations by a third-party system (which did
not allow securities transaction 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.
---------------------------------------------------------------------------
\62\ Cf. 1997 Staff Letter.
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The Commission seeks comment regarding whether retaining the
proposed Unsolicited Trades exemption in paragraph (a)(1) is
appropriate. Are any modifications to this exemption necessary to
reflect increasing internationalization in securities markets and
advancements in technology and communication services since the
exemption was adopted in 1989? Commenters are invited to provide
information on the specific circumstances in which foreign broker-
dealers use the exemption in paragraph (a)(1) of the current rule and
particularly on the frequency of its use. The Commission also seeks
comment on its proposed interpretation with respect to third-party
quotation systems under the proposed rule. Are there other interpretive
issues relating to third-party
[[Page 39188]]
quotation systems, or proprietary quotation systems, that the
Commission should address? Is guidance needed under the Commission's
interpretation of solicitation for other entities, such as third-party
or proprietary systems that provide indications of interest, for
purposes of the proposed amendments of Rule 15a-6?
Because one of the requirements for being an alternative trading
system under Regulation ATS \63\ is to be registered as a broker-dealer
under Section 15(b) of the Exchange Act, a foreign broker-dealer
relying on an exemption in proposed Rule 15a-6 would not be eligible to
rely on the exemption in Regulation ATS. The Commission solicits
comment on whether it should consider amending Regulation ATS to allow
a foreign broker-dealer relying on an exemption in proposed Rule 15a-6
to operate an alternative trading system in the United States so long
as it otherwise complies with the terms of Regulation ATS.
---------------------------------------------------------------------------
\63\ See 17 CFR 242.300 et seq.
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C. Provision of Research Reports
The provision of research to investors also may constitute
solicitation by a broker-dealer, in part because broker-dealers often
provide research to customers on a non-fee basis, with the expectation
that the customers eventually will trade through the broker-dealer.\64\
As we noted in adopting Rule 15a-6, the Commission does not wish to
restrict the ability of U.S. investors to obtain foreign research
reports in the United States if adequate regulatory safeguards are
present.\65\ Therefore, the Commission would retain the current
exemption for the provision of research reports in paragraph (a)(2) of
the current rule. However, for the reasons discussed above,\66\ the
Commission is proposing to expand the class of investors to which the
foreign broker-dealer could provide research reports directly from
major U.S. institutional investors to qualified investors. As proposed,
paragraph (a)(2) would permit a foreign broker-dealer, subject to the
conditions discussed below, to furnish research reports to qualified
investors and effect transactions in the securities discussed in the
research reports with or for those qualified investors.
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\64\ See 1989 Adopting Release, 54 FR at 30021.
\65\ See id.
\66\ See Part III.A., supra.
---------------------------------------------------------------------------
Paragraph (a)(2) of the proposed rule would retain the conditions
in current Rule 15a-6(a)(2), modified solely to reflect the proposed
expansion of the class of investors to qualified investors.
Specifically, proposed paragraph (a)(2) would be available, provided
that: (1) The research reports do not recommend the use of the foreign
broker-dealer to effect trades in any security; (2) the foreign broker-
dealer does not initiate contact with the qualified investors to follow
up on the research reports and does not otherwise induce or attempt to
induce the purchase or sale of any security by the qualified investors;
(3) if the foreign broker-dealer has a relationship with a registered
broker-dealer that satisfies the requirements of paragraph (a)(3) of
the proposed rule, any transactions with the foreign broker-dealer in
securities discussed in the research reports are effected pursuant to
the provisions of paragraph (a)(3); and (4) the foreign broker-dealer
does not provide research to U.S. persons pursuant to any express or
implied understanding that those U.S. persons will direct commission
income to the foreign broker-dealer. We understand from discussions
with industry representatives that these conditions have been workable
for both foreign broker-dealers and U.S. registered broker-dealers and
we have no knowledge of investor protection concerns having been raised
with regard to foreign broker-dealers that operate in compliance with
the current exemption. Accordingly, we do not propose to amend them.
If these conditions are met, the Commission proposes to allow the
foreign broker-dealer to effect transactions in the securities
discussed in a research report at the request of a qualified investor.
The Commission believes that, under the proposed conditions, the direct
distribution of research to qualified investors would be consistent
with the free flow of information across national boundaries without
raising substantial investor protection concerns.\67\
---------------------------------------------------------------------------
\67\ See 1989 Adopting Release, 54 FR at 30021.
---------------------------------------------------------------------------
The Commission seeks comment on the proposed ``Research Reports''
exemption in paragraph (a)(2). Should any of the conditions of the
current exemption be changed to address the proposed expansion of the
class of institutional investors to which research reports may be
distributed directly, or to reflect increasing internationalization in
securities markets and advancements in technology and communication
services since the exemption was adopted in 1989? If so, how?
Similarly, should any of the conditions of the current exemption be
changed to more closely align with the proposed modifications to the
requirements of paragraph (a)(3) discussed below in Part III.D.? If so,
how? Commenters are invited to provide information on the specific
circumstances in which foreign broker-dealers use the exemption in
paragraph (a)(2) of the current rule and on the frequency of its use.
D. Solicited Trades
The proposed rule would significantly revise the conditions under
which a foreign broker-dealer could induce or attempt to induce the
purchase or sale of a security by certain U.S. investors under
paragraph (a)(3) of Rule 15a-6. Overall, and as discussed more fully
below, the proposed rule would reduce and streamline the obligations of
the U.S. registered broker-dealer in connection with these transactions
and, in certain situations, permit a foreign broker-dealer to provide
full-service brokerage by effecting securities transactions on behalf
of qualified investors and maintaining custody of qualified investor
funds and securities relating to any resulting transactions.
1. Customer Relationship
The proposed rule would require a foreign broker-dealer that
induces or attempts to induce the purchase or sale of any security by a
qualified investor to engage a U.S. registered broker-dealer under one
of two exemptive approaches, to which we will refer as Exemption (A)(1)
and Exemption (A)(2), corresponding to paragraphs (a)(3)(iii)(A)(1) and
(A)(2) of the proposed rule.\68\ As explained below, under both
proposed exemptions, the U.S. registered broker-dealer would have fewer
obligations than under paragraph (a)(3) of the current rule and the
foreign broker-dealer would correspondingly be permitted to play a
greater role in effecting any resulting transactions. Both proposed
exemptions would allow qualified investors the more direct contact they
seek with those expert in foreign markets and foreign securities,
without certain barriers such as the chaperoning requirements that may
be unnecessary in light of other protections and investor
sophistication. Nevertheless, as explained below, both proposed
exemptions would retain important measures of investor protection that
the Commission believes would, among other things, address the
potential risks to qualified investors related to contacts with foreign
associated persons with a disciplinary history and ensure that the
books and records related to transactions for U.S. investors are
available to the Commission.
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\68\ See proposed Rule 15a-6(a)(3)(iii)(A).
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[[Page 39189]]
There are two primary differences between the two proposed
exemptive approaches. First, Exemption (A)(1) could only be used by
foreign broker-dealers that conduct a ``foreign business,'' \69\ while
Exemption (A)(2) could be used by all foreign broker-dealers. Second,
the foreign broker-dealer would be permitted to custody funds and
securities of qualified investors in connection with resulting
transactions under Exemption (A)(1), but not under Exemption (A)(2).
These distinctions are discussed in the following paragraphs.
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\69\ See Part III.D.1.a.ii., infra, for discussion of ``foreign
business.''
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a. Exemption (A)(1)
i. Role of the U.S. Registered Broker-Dealer
For transactions effected by a foreign broker-dealer pursuant to
proposed Exemption (A)(1),\70\ a U.S. registered broker-dealer would be
required to maintain copies of all books and records, including
confirmations and statements issued by the foreign broker-dealer to the
qualified investor, relating to any such transactions.\71\ As discussed
below, the proposed rule would allow such books and records to be
maintained by the U.S. registered broker-dealer in the form, manner and
for the periods prescribed by the foreign securities authority (as
defined in Section 3(a)(50) of the Exchange Act) \72\ regulating the
foreign broker-dealer.\73\ The proposed rule would give the term
``foreign securities authority'' the same meaning as set forth in
Section 3(a)(50) of the Exchange Act,\74\ which defines ``foreign
securities authority'' to mean ``any foreign government, or any
governmental body or regulatory organization empowered by a foreign
government to administer or enforce its laws as they relate to
securities matters.''
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\70\ As mentioned above and discussed more fully below, only
foreign broker-dealers that conduct a ``foreign business ''would be
eligible to effect transactions on behalf of qualified investors
pursuant to Exemption (A)(1).
\71\ See proposed Rule 15a-6(a)(3)(iii)(A)(1). Of course, this
would not prevent the U.S. registered broker-dealer from performing
other aspects of the transaction.
\72\ 15 U.S.C. 78c(a)(50).
\73\ See proposed Rule 15a-6(a)(3)(iii)(A)(1). Of course, this
would not change any books and recordkeeping obligations a U.S.
registered broker-dealer may have under Exchange Act Rules 17a-3 and
17a-4 (17 CFR 240.17a-3 and 17a-4).
\74\ 15 U.S.C. 78c(a)(50).
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Because proposed Exemption (A)(1) would allow a foreign broker-
dealer to effect transactions for qualified investors and custody their
funds and assets, the foreign broker-dealer would generate books and
records relating to the transactions. Proposed Exemption (A)(1) would
allow the U.S. registered broker-dealer to maintain such books and
records with the foreign broker-dealer, provided that the U.S.
registered broker-dealer makes a reasonable determination that copies
of any or all of such books and records could be furnished promptly to
the Commission and promptly provides any such books and records to the
Commission, upon request.\75\ In making such a determination, the U.S.
registered broker-dealer would need to consider, among other things,
the existence of any legal limitations in the foreign jurisdiction that
might limit the ability of the foreign broker-dealer to disclose
information relating to transactions conducted pursuant to proposed
Exemption (A)(1) to the U.S. registered broker-dealer. Proposing to
require U.S. registered broker-dealers to make a reasonable
determination that the books and records could be furnished promptly to
the Commission is designed to ensure that the ability of the Commission
to obtain copies of the books and records would not be diminished. It
should also significantly reduce the U.S. registered broker-dealer's
cost of recordkeeping with respect to transactions effected pursuant to
this exemption. Thus, the Commission believes that allowing U.S.
registered broker-dealers to maintain books and records with a foreign
broker-dealer would appropriately support the Commission's interest in
the protection of investors--by being designed to ensure that the books
and records related to transactions for U.S. investors are available to
the Commission--while avoiding the burden that might be placed on U.S.
registered broker-dealers under the exemption by requiring the books
and records to be maintained in the form, manner and for the periods
prescribed by Rules 17a-3 and 17a-4 under the Exchange Act,\76\ as if
the U.S. registered broker-dealer had effected the transactions under
proposed Exemption (A)(1).
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\75\ See Exchange Act Release No. 44992 (Oct. 26, 2001), 66 FR
55818, 55825 & n.72 (Nov. 2, 2001) (``Generally, requests for
records which are readily available at the office (either on-site or
electronically) should be filled on the day the request is made. If
a request is unusually large or complex, then the firm should
discuss with the regulator a mutually agreeable time-frame for
production. * * * Valid reasons for delays in producing the
requested records do not include the need to send the records to the
firm's compliance office for review prior to providing the
records.'').
\76\ See 17 CFR 240.17a-3 and 17a-4.
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Unlike under the current rule, under Exemption (A)(1), the
intermediating U.S. registered broker-dealer would not be required to
effect all aspects of the transaction.\77\ Thus, with respect to
transactions effected pursuant to Exemption (A)(1), the intermediating
U.S. registered broker-dealer would no longer be required to comply
with the provisions of the federal securities laws, the rules
thereunder and SRO rules applicable to a broker-dealer effecting a
transaction in securities, unless it were otherwise involved in
effecting the transaction.\78\ However, if a foreign broker-dealer
effects a transaction pursuant to Exemption (A)(1) on a U.S. national
securities exchange, through a U.S. alternative trading system, or with
a market maker or an over-the-counter dealer in the United States, as
is common with respect to U.S. securities, a U.S. registered broker-
dealer would be involved in effecting the transaction and would be
required to comply with the provisions of the federal securities laws,
the rules thereunder and SRO rules applicable to such activity. In
other words, such provisions would apply with respect to all
transactions in U.S. securities under Exemption (A)(1) other than
certain over-the-counter transactions that a foreign broker-dealer does
not effect by or through a U.S. registered broker-dealer.
---------------------------------------------------------------------------
\77\ See 17 CFR 240.15a-6(a)(3)(iii)(A) (requiring the U.S.
registered broker-dealer to effect all aspects of a transaction
other than negotiation of its terms) and proposed Rule 15a-
6(a)(3)(iii)(A)(1); see also note 28, supra, for a discussion of the
differing treatment of U.S. and foreign securities under current
Rule 15a-6(a)(3)(iii)(A)(1).
\78\ See note 28, supra, for a discussion of the differing
treatment of U.S. and foreign securities under current Rule 15a-
6(a)(3)(iii)(A)(1).
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The intermediating U.S. registered broker-dealer also would no
longer be required to extend or arrange for the extension of credit,
issue confirmations and account statements, comply with Rule 15c3-1
with respect to the transactions, or receive, deliver and safeguard
funds and securities in connection with the transactions in compliance
with Rule 15c3-3.\79\ In addition, the intermediating U.S. registered
broker-dealer would no longer be required to maintain accounts for the
customers of foreign broker-dealers relying on Exemption (A)(1),\80\ or
comply with the requirements applicable to broker-dealers that maintain
such accounts. As a result, among other requirements, the U.S.
registered broker-dealer may not have obligations under Exchange Act
Rule 17a-8 \81\ with respect to customers of foreign broker-dealers
relying on Exemption (A)(1). Rule 17a-8 requires a
[[Page 39190]]
U.S. registered broker-dealer to comply with the reporting,
recordkeeping and record retention requirements in regulations
implemented under the Bank Secrecy Act.\82\ As discussed above, current
Rule 15a-6 permits an unregistered foreign broker-dealer to effect
transactions directly with U.S. persons on an unsolicited basis,\83\
and to solicit certain U.S. institutional investors by means of
research reports and effect transactions in securities discussed in
such reports, subject to certain conditions,\84\ in either case without
intermediation by a U.S. registered broker-dealer subject to Rule 17a-
8. Would permitting a foreign broker-dealer to effect securities
transactions on a solicited basis with certain U.S. persons under
proposed Exemption (A)(1) present any concerns with respect to Rule
17a-8 or anti-money laundering obligations under the Bank Secrecy Act?
How should these concerns, if any, be addressed? For example, are there
specific circumstances in which the Commission should consider imposing
additional obligations on the U.S. registered broker-dealer or the
foreign broker-dealer under proposed Exemption (A)(1) or alternatively
prohibiting the use of Exemption (A)(1)?
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\79\ See 17 CFR 240.15a-6(a)(3)(iii)(A)(1), (2), (3), (4) and
(5) and the discussion in Part II.C., supra.
\80\ See text accompanying note 38, supra.
\81\ 17 CFR 240.17a-8.
\82\ Currency and Foreign Transactions Reporting Act of 1970
(commonly referred to as the Bank Secrecy Act). See 31 U.S.C. 5311
et seq., 12 U.S.C. 1829b and 12 U.S.C. 1951-1959. The Secretary of
the U.S. Department of Treasury has delegated responsibility for the
administration of the Bank Secrecy Act to the Director of the
Financial Crimes Enforcement Network (``FinCEN''), a bureau of the
U.S. Department of Treasury. See Treasury Order 180-01 (Sep. 26,
2002).
\83\ See Part II.A., supra.
\84\ See Part II.B., supra.
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The Commission requests comment generally on the proposed
requirements in Exemption (A)(1) of the proposed rule. In particular,
the Commission requests comment on whether the Commission should
require the U.S. registered broker-dealer to comply with any
requirements with respect to transactions under Exemption (A)(1) other
than the proposed requirement to maintain books and records relating to
the transactions. Should the requirements differ based on whether the
securities are U.S. securities or foreign securities? If so, why and
how? The Commission also requests comment on whether the Commission
should require the U.S. registered broker-dealer to maintain books and
records relating to the transactions in the form, manner and for the
periods prescribed by Rules 17a-3 and 17a-4 under the Exchange Act as
if the U.S. registered broker-dealer had effected the transactions
under Exemption (A)(1). In addition, the Commission requests comment on
whether the Commission should permit the U.S. registered broker-dealers
to maintain copies of books and records resulting from transactions
under paragraph Exemption (A)(1) with the foreign broker-dealer. Should
it depend on the adequacy of the books and recordkeeping requirements
to which the foreign broker-dealer is subject? Should the Commission
provide more guidance on or should the proposed rule provide parameters
for what would constitute a reasonable determination? In lieu of the
proposed requirement of a reasonable determination by the U.S.
registered broker-dealer under Exemption (A)(1), should the Commission
condition the exemption on the foreign broker-dealer filing a written
undertaking with the Commission to furnish the books and records to the
U.S. registered broker-dealer or the Commission upon request?
Furthermore, the Commission requests comment on whether the
requirement under Exemption (A)(1) that the U.S. registered broker-
dealer make a reasonable determination that books and records relating
to any resulting transactions could be furnished promptly to the
Commission upon request, and promptly provide such books and records to
the Commission upon request, is the appropriate standard given the
potential time-zone differences and the fact that such records may be
maintained in paper form. If not, what is the appropriate standard and
why?
ii. Role of the Foreign Broker-Dealer
The proposed rule would limit the availability of Exemption (A)(1)
to foreign broker-dealers that are regulated for conducting securities
activities (such as effecting transactions in securities), including
the specific activities in which the foreign broker-dealer engages with
the qualified investor, in a foreign country by a foreign securities
authority.\85\ This requirement is designed to ensure that only foreign
entities that are legitimately in the business of conducting securities
activities (such as effecting transactions in securities), and that are
regulated in the conduct of those activities, could rely on Exemption
(A)(1).
---------------------------------------------------------------------------
\85\ See proposed Rule 15a-6(b)(2)(i).
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Both Exemption (A)(1) and Exemption (A)(2) would require the
foreign broker-dealer to disclose to the qualified investor that it is
regulated by a foreign securities authority and not by the Commission.
Unlike under Exemption (A)(2), for the reasons discussed below,\86\ the
foreign broker-dealer operating under proposed Exemption (A)(1) would
also be required to disclose that U.S. segregation requirements (e.g.,
the requirement that customer funds and assets be segregated from the
broker-dealer's own proprietary funds and assets), U.S. bankruptcy
protections (e.g., preference to creditors in bankruptcy) and
protections under the Securities Investor Protection Act (``SIPA'')
\87\ will not apply to any funds and securities of the qualified
investor held by the foreign broker-dealer.\88\
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\86\ See Part III.D.b.ii., infra.
\87\ 15 U.S.C. 78aaa et seq. The SIPA created the Securities
Investor Protection Corporation (``SIPC''), a nonprofit, private
membership corporation to which most registered brokers and dealers
are required to belong, and established a fund administered by SIPC
designed to protect the customers of brokers or dealers subject to
the Act from loss in case of financial failure of the member.
\88\ See proposed Rule 15a-6(a)(3)(i)(D)(1) and (2).
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These disclosure requirements are intended to help to put qualified
investors on notice that foreign broker-dealers operating pursuant to
Exemption (A)(1) of the proposed rule would not be subject to the same
regulatory requirements as U.S. registered broker-dealers. This notice
would be important because the proposed rule would eliminate the
current chaperoning requirements, as described below, and allow a
foreign broker-dealer to effect transactions on behalf of qualified
investors and custody qualified investor funds and securities relating
to any resulting transactions with more limited participation in the
transactions by a U.S. registered broker-dealer. This should be
sufficient notice given the level of sophistication of the investors
with which the foreign broker-dealer would be engaging in transactions
under Exemption (A)(1). Specifically, proposing to require disclosure
that the foreign broker-dealer is regulated by a foreign securities
authority and not the Commission should alert qualified investors that
the foreign broker-dealer would not be subject to the full scope of the
Commission's broker-dealer regulatory framework. Proposing to require
disclosure that U.S. segregation requirements, U.S. bankruptcy
protection and protections under the SIPA would not apply to the funds
and securities of the qualified investor held by the foreign broker-
dealer should alert the qualified investor that its funds and assets
would not receive the same protections that they would under U.S. law.
Exemption (A)(1) would only be available to foreign broker-dealers
that
[[Page 39191]]
conduct a ``foreign business.'' \89\ As explained below, the proposed
rule would define ``foreign business'' to mean the business of a
foreign broker-dealer with qualified investors and foreign resident
clients \90\ where at least 85% of the aggregate value of the
securities purchased or sold in transactions conducted pursuant to both
paragraphs (a)(3) and (a)(4)(vi) of the proposed rule by the foreign
broker-dealer, calculated on a rolling two-year basis, is derived from
transactions in foreign securities, as defined below.\91\ In general,
the Commission believes that making Exemption (A)(1) available only to
a foreign broker-dealer conducting a foreign business would provide
U.S. investors increased access to foreign securities and markets
without creating opportunities for regulatory arbitrage vis-[aacute]-
vis U.S. securities markets because the foreign broker-dealer's
business in U.S. securities would be limited.
---------------------------------------------------------------------------
\89\ See proposed Rule 15a-6(b)(2)(ii).
\90\ See Part III.E., infra.
\91\ See proposed Rule 15a-6(b)(3).
---------------------------------------------------------------------------
The proposed definition of foreign securities would include both
debt and equity securities of foreign private issuers and debt
securities of issuers organized or incorporated in the United States
but where the distribution is wholly outside the United States in
compliance with Regulation S, as well as certain securities issued by
foreign governments. The proposed definition is not restricted to
certain types of securities, rather, to the extent that qualified
investors are interested in purchasing foreign securities, the
Commission believes that they should be able to access a broad range of
foreign securities. The proposed rule would define ``foreign
securities'' to mean:
(i) An equity security (as defined in 17 CFR 230.405) of a foreign
private issuer (as defined in 17 CFR 230.405); \92\
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\92\ 17 CFR 230.405 defines ``foreign private issuer'' to mean
any foreign issuer other than a foreign government, except issuers
that meet the following conditions: (1) More than 50 percent of the
outstanding voting securities of such issuer directly or indirectly
owned of record by residents of the United States; and (2) any of
the following: (i) the majority of the executive officers or
directors are U.S. citizens or residents; (ii) more than 50 percent
of the assets of the issuer are located in the United States; or
(iii) the business of the issuer is administered principally in the
United States. The rule sets forth guidelines for determining the
percentage of outstanding voting securities owned of record by
residents of the United States.
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(ii) A debt security (as defined in 17 CFR 230.902) of a foreign
private issuer (as defined in 17 CFR 230.405);
(iii) A debt security (as defined in 17 CFR 230.902) issued by an
issuer organized or incorporated in the United States in connection
with a distribution conducted solely outside the United States pursuant
to Regulation S (17 CFR 230.903 et seq.); \93\
---------------------------------------------------------------------------
\93\ Thus, debt securities of an issuer organized or
incorporated under the laws of the United States would not qualify
as ``foreign securities'' if they were offered and sold as part of a
global offering involving both an offer and sale of the securities
in the United States and a contemporaneous distribution outside the
United States. This would be consistent with the purpose of the
foreign business test, as discussed below.
---------------------------------------------------------------------------
(iv) A security that is a note, bond, debenture or evidence of
indebtedness issued or guaranteed by a foreign government (as defined
in 17 CFR 230.405) that is eligible to be registered with the
Commission under Schedule B of the Securities Act; and
(v) A derivative instrument on a security described in subparagraph
(i), (ii), (iii), or (iv) of this paragraph.\94\
---------------------------------------------------------------------------
\94\ See proposed Rule 15a-6(b)(5).
---------------------------------------------------------------------------
The proposed rule would require the foreign broker-dealer to
compute the absolute value of all transactions pursuant to both
paragraphs (a)(3) and (a)(4)(vi) of the proposed rule (i.e., without
netting the transactions) each year to determine the aggregate amount
for the previous two years. For example, a foreign broker-dealer that
sold 100 shares of Security A at $10.00 per share and bought 100 shares
of Security A at $10.00 per share pursuant to paragraphs (a)(3) and
(a)(4)(vi) of the proposed rule would have an aggregate value of
securities bought and sold of $2000.00 (or (100 x $10.00) + (100 x
$10.00)).
We note that the definition of foreign security would include,
among other things, derivative instruments on debt and equity
securities of foreign private issuers. Given that the proposed rule
would provide an exemption for foreign broker-dealers that effect
transactions in securities, the proposed definition of ``foreign
securities'' would not include derivative instruments that are not
themselves securities. Thus, foreign broker-dealers would not need to
include the value of swap agreements that meet the definition of ``swap
agreement'' in Section 206A of the Gramm-Leach-Bliley Act (``GLBA'') in
the foreign business test calculation because they are excluded from
the definition of security.\95\ In the case of other derivative
instruments that are securities, the valuation would depend on the
product. For example, the value of options on a security or group or
index of securities bought or sold would be the premium paid by the
buyer, not the value of the underlying security or securities.
Similarly, the value of a security future would be the price times the
number of securities to be delivered at the time the transaction is
entered into.
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\95\ The GLBA defines ``swap agreement,'' in part, as an
agreement between eligible contract participants (as defined in
Section 1a(12) of the Commodity Exchange Act), the material terms of
which (other than price and quantity) are subject to individual
negotiation. Swap agreements may be based on a wide range of
financial and economic interests. Section 206B of the GLBA defines
``security-based swap agreement'' as a swap agreement of which ``a
material term is based on the price, yield, value, or volatility of
any security or any group or index of securities, or any interest
therein.'' Section 3A of the Exchange Act excludes from the
definition of security both security-based swap agreements and
``non-security-based swap agreements.'' The Commission retains,
however, antifraud authority (including authority over insider
trading) over security-based swap agreements. See, e.g., Section
10(b) of the Exchange Act.
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Foreign broker-dealers should be able to use this valuation
information to calculate the total, combined value of the securities
purchased or sold in transactions conducted pursuant to both paragraphs
(a)(3) and (a)(4)(vi) of the proposed rule to determine the percentage
of foreign securities bought from, or sold to, U.S. investors.
The calculation of the composition of the foreign broker-dealer's
business on a rolling, two-year basis would mean that, after the first
year the foreign broker-dealer relies on the exemption, the foreign
broker-dealer would calculate the aggregate value of securities
purchased and sold for the prior two years to determine whether it has
complied with the foreign business test to be eligible for proposed
Exemption (A)(1). This proposed requirement would allow for short-term
fluctuations that otherwise could cause a foreign broker-dealer to be
out of compliance with the exemption on isolated occasions. A foreign
broker-dealer would have the flexibility to elect to use a calendar
year or the firm's fiscal year for purposes of complying with the
foreign business test. In addition, to provide foreign broker-dealers
sufficient time to obtain and verify the relevant aggregate value data,
the proposed rule would allow foreign broker-dealers to rely on the
calculation made for the prior year for the first 60 days of a new
year.\96\ Hence, a foreign broker-dealer that had a foreign business
over years 1 and 2 would be deemed to have a foreign business for the
first 60 days of year 4, regardless of the result of the calculation
for year 3. We believe that 60 days would be an appropriate ``grace
period'' because it would give a foreign broker-dealer time to make the
necessary calculation and to cease relying on Exemption (A)(1) if the
calculation revealed that it was no longer conducting a foreign
business.
---------------------------------------------------------------------------
\96\ See proposed Rule 15a-6(b)(3).
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Making Exemption (A)(1) available only to a foreign broker-dealer
[[Page 39192]]
conducting a foreign business would provide U.S. investors increased
access to foreign securities and foreign markets without creating
opportunities for regulatory arbitrage vis-[aacute]-vis U.S. securities
markets because the foreign broker-dealer's business in U.S. securities
would be limited. We believe this is particularly important because,
under Exemption (A)(1), for the first time, a foreign broker-dealer
would be able to provide full-service brokerage services (including
maintaining custody of funds and securities from resulting
transactions) to certain U.S. investors.
We are proposing an 85% percent threshold for determining whether a
foreign broker-dealer conducts a foreign business because we understand
from industry representatives that foreign broker-dealers currently
effect transactions pursuant to paragraph (a)(3) of Rule 15a-6
primarily in foreign securities and only do a small percentage of
business in U.S. securities (less than 10%, by most estimates). The
Commission has not been given any indication that foreign broker-
dealers would seek to use an expanded exemption to increase their
business in U.S. securities. The 85% threshold should accommodate
existing business models and allow foreign broker-dealers to continue
to do a limited amount of business in U.S. securities, whether as an
accommodation to their clients or as part of program trading (i.e., any
trading strategy involving the related purchase or sale of a group of
stocks as part of a coordinated trading strategy, which could include
U.S. securities), without causing those foreign broker-dealers to lose
the benefit of the exemption. Any lower threshold could allow a foreign
broker-dealer to conduct significant business in U.S. securities with
certain U.S. investors without being subject to the full scope of the
Commission's broker-dealer regulatory framework. This, in turn, could
hinder the ability of the Commission to protect investors, maintain
fair, orderly and efficient markets and facilitate capital
formation,\97\ as well as affect the competitive positions of U.S.
registered broker-dealers and foreign broker-dealers.\98\
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\97\ See Exchange Act Section 2, 15 U.S.C. 78b.
\98\ See Exchange Act Section 3(f); see also Part VI.C., infra.
---------------------------------------------------------------------------
The Commission seeks comment on proposed Exemption (A)(1)
generally. We invite comment on the proposed limitation of foreign
broker-dealers to those that are regulated for conducting securities
activities by a foreign securities authority and that conduct a foreign
business. The Commission also seeks comment on whether the proposed
disclosures provide appropriate notice to qualified investors that
foreign broker-dealers would not be subject to the same regulatory
requirements as U.S. registered broker-dealers. Would notice be
sufficient? Are there other disclosures that should be required, in
particular if the foreign jurisdiction does not require the segregation
of qualified investor funds and assets or provide for bankruptcy
protection for those funds and assets? Should the foreign broker-dealer
be required to identify the foreign securities authority or authorities
regulating the foreign broker-dealer? Should disclosure of the
applicable dispute resolution system be required? In addition, the
Commission requests comment regarding the proposed required form of
these disclosures. Should the proposed disclosures be eliminated or
modified in any way? If so, how and why?
The Commission solicits comment on the proposed definition of
foreign broker-dealer. Should the proposed rule require a foreign
broker-dealer to be regulated for conducting securities activities,
including the specific activities in which the foreign broker or dealer
engages with the qualified investor, in a foreign country by a foreign
securities authority? What if foreign securities authorities do not
apply their regulations to the activities of their broker-dealers
outside their country or with non-residents? The Commission also seeks
comment on the proposed definition of foreign securities.\99\ Are there
any other types of securities that should be included within the
definition? Should any types of securities be excluded? Will reference
to the equity and debt securities of a ``foreign private issuer,'' as
that term is defined in 17 CFR 230.405, affect the interest of foreign
issuers to cross-list on both foreign and U.S. exchanges? If so, how?
Furthermore, will reference to the equity and debt securities of a
``foreign private issuer,'' as that term is defined in 17 CFR 230.405,
affect listings of American Depositary Receipts issued by depositaries
against the deposit of the securities of foreign issuers on U.S.
exchanges? If so, how?
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\99\ See proposed Rule 15a-6(b)(5).
---------------------------------------------------------------------------
The Commission seeks comment on the proposed definition of
``foreign business.'' \100\ Would the proposed test be workable? Would
it be relatively easy for foreign broker-dealers to make the foreign
business test calculation? Should the proposed test apply separately to
debt and equity securities? Should the proposed test exclude U.S.
government securities from the percentage of business in U.S.
securities for purposes of computing the threshold? Is the proposed
method of valuing options and security futures appropriate? Should we
provide examples of how to value other types of derivative instruments?
---------------------------------------------------------------------------
\100\ See proposed Rule 15a-6(b)(3).
---------------------------------------------------------------------------
The Commission requests comment on whether the proposed 85%
threshold would be sufficient to enable foreign broker-dealers to
effect transactions in U.S. securities as an accommodation and engage
in program trading with qualified investors. Would compliance with the
threshold be easily determinable? Should it be raised or lowered to
better protect against regulatory arbitrage or to achieve its stated
purposes? Commenters suggesting a different threshold or a different
method for determining compliance with the threshold should explain why
the Commission should choose that threshold or method. Instead of
requiring foreign broker-dealers to conduct a ``foreign business,''
should Exemption (A)(1) of the proposed rule instead permit foreign
broker-dealers to effect transactions in foreign securities and U.S.
government securities, with a limited exemption for the purchase of
U.S. securities by qualified persons as part of a program trade,
provided that the purchase or sale of foreign securities predominates?
b. Exemption (A)(2)
Proposed Exemption (A)(2) is designed to be used by foreign broker-
dealers that would like to solicit transactions from qualified
investors that have accounts, and custody their funds and securities,
with U.S. registered broker-dealers. Because we expect that qualified
investors would likely select a foreign broker-dealer for its knowledge
of local markets and/or its ability to execute trades in particular
markets, as they would under Exemption (A)(1), but the foreign broker-
dealer would not be acting as custodian of the funds and securities of
the qualified investor (i.e., not acting as a full-service broker), we
do not believe it would be necessary for Exemption (A)(2) to include
certain of the requirements proposed to be included in Exemption
(A)(1), particularly the proposed requirement that the foreign broker-
dealer conduct a foreign business, as described above.
i. Role of the U.S. Registered Broker-Dealer
Under Exemption (A)(2), the U.S. registered broker-dealer would be
responsible for maintaining books and
[[Page 39193]]
records, including copies of all confirmations issued by the foreign
broker-dealer to the qualified investor, relating to any transactions
effected under this exemption.\101\ This requirement is designed to
ensure that the Commission would have access to books and records
relating to resulting transactions, as well as copies of confirmations
issued by the foreign broker-dealer to the qualified investor. Because
the U.S. registered broker-dealer would carry the account of the
qualified investor under Exemption (A)(2), we understand from
discussions with industry representatives that it would be consistent
with current business practices for the U.S. registered broker-dealer
to maintain the books and records for transactions effected under this
exemption.
---------------------------------------------------------------------------
\101\ See proposed Rule 15a-6(a)(3)(iii)(A)(2)(i).
---------------------------------------------------------------------------
Proposed Exemption (A)(2) would also require the U.S. registered
broker-dealer to receive, deliver and safeguard funds and securities in
connection with the transactions on behalf of the qualified investor in
compliance with Rule 15c3-3 under the Exchange Act.\102\ As explained
below, Exemption (A)(2) is designed to permit qualified investors that
have an account with a U.S. registered broker-dealer to have access to
foreign broker-dealers regardless of the types of securities that are
involved.\103\
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\102\ 17 CFR 240.15c3-3. See proposed Rule 15a-
6(a)(3)(iii)(A)(2)(ii). Securities received and safeguarded under
Exemption (A)(2) would be securities carried for the account of a
customer under Rule 15c3-3(a)(2). 17 CFR 240.15c3-3(a)(2).
\103\ Under Exemption (A)(2), the foreign broker-dealer would be
permitted to clear and settle the transactions on behalf of the U.S.
registered broker-dealer. The Commission believes that this is
appropriate for transactions effected under Exemption (A)(2) for
investors that possess the sophistication of qualified investors,
particularly given that the exemption would require a U.S.
registered broker-dealer to maintain books and records and receive,
deliver and safeguard funds and securities in connection with the
transactions.
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Unlike under the current rule, under Exemption (A)(2), the
intermediating U.S. registered broker-dealer would not be required to
effect the transaction.\104\ Thus, with respect to transactions
effected pursuant to Exemption (A)(2), the intermediating U.S.
registered broker-dealer would no longer be required to comply with the
provisions of the federal securities laws, the rules thereunder and SRO
rules applicable to a broker-dealer effecting a transaction in
securities, unless it were otherwise involved in effecting the
transaction.\105\ However, if a foreign broker-dealer effects a
transaction pursuant to Exemption (A)(2) on a U.S. national securities
exchange, through a U.S. alternative trading system, or with a market
maker or an over-the-counter dealer in the United States, as is common
with respect to U.S. securities, a U.S. registered broker-dealer would
be involved in effecting the transaction and would be required to
comply with the provisions of the federal securities laws, the rules
thereunder and SRO rules applicable to such activity. In other words,
such provisions would apply with respect to all transactions in U.S.
securities under Exemption (A)(2) other than certain over-the-counter
transactions that a foreign broker-dealer does not effect by or through
a U.S. registered broker-dealer.
---------------------------------------------------------------------------
\104\ See 17 CFR 240.15a-6(a)(3)(iii)(A) (requiring the U.S.
registered broker-dealer to effect all aspects of a transaction
other than negotiation of its terms) and proposed Rule 15a-
6(a)(3)(iii)(A)(2); see also note 28, supra, for a discussion of the
differing treatment of U.S. and foreign securities under current
Rule 15a-6(a)(3)(iii)(A)(1).
\105\ See note 28, supra, for a discussion of the differing
treatment of U.S. and foreign securities under current Rule 15a-
6(a)(3)(iii)(A)(1).
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ii. Role of the Foreign Broker-Dealer
A foreign broker-dealer relying on Exemption (A)(2) would not be
permitted to maintain custody of qualified investor funds and
securities relating to any resulting transactions. Because of this
limitation, Exemption (A)(2) would be available to all foreign broker-
dealers and not just those that conduct a foreign business. Because
entities that meet the definition of foreign broker-dealer under the
proposed rule could not operate full-service brokerage under this
exception, we believe that there is less risk of regulatory arbitrage.
Like Exemption (A)(1), Exemption (A)(2) would only be available to
foreign broker-dealers that are regulated for conducting securities
activities, including the specific activities in which the foreign
broker-dealer engages with the qualified investor, in a foreign country
by a foreign securities authority.\106\ This requirement is designed to
ensure that only foreign entities that are legitimately in the business
of conducting securities activities (such as effecting transactions in
securities), and that are regulated in the conduct of those activities,
could rely on Exemption (A)(2). In addition, the foreign broker-dealer
relying on Exemption (A)(2) would be required to disclose to the
qualified investor that the foreign broker-dealer is regulated by a
foreign securities authority and not by the Commission. Unlike under
Exemption (A)(1), however, the foreign broker-dealer relying on
Exemption (A)(2) would not be required to provide disclosures to the
qualified investor regarding segregation requirements, bankruptcy
protections and protections under SIPA. The Commission does not believe
these disclosures would be necessary given that, under proposed
Exemption (A)(2), the U.S. registered broker-dealer would be
maintaining custody of funds and securities of qualified investors in
connection with the resulting transactions.
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\106\ See proposed Rule 15a-6(b)(2)(i).
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As noted above, we expect that Exemption (A)(2) would be used by
qualified investors that would like to access foreign broker-dealers
but nonetheless would like to have an account, and maintain custody of
their funds and securities, with a U.S. registered broker-dealer.
Because a foreign broker-dealer would be selected for its knowledge of
local markets and/or its ability to execute trades in particular
markets, but would not be acting as custodian of the funds and
securities of the qualified investor (i.e., not acting as a full-
service broker), we do not believe it would be necessary for proposed
Exemption (A)(2) to include certain of the requirements contained in
proposed Exemption (A)(1), particularly the requirement that the
foreign broker-dealer conduct a foreign business, as described above.
The Commission requests comment on proposed Exemption (A)(2)
generally. How would this exemption likely be used and by whom? Should
proposed Exemption (A)(2) be available when the U.S. registered broker-
dealer does not maintain custody of the qualified investor's funds and
securities (e.g., when a U.S. or foreign affiliate of the U.S.
registered broker-dealer custodies the funds and securities otherwise
than pursuant to Rule 15c3-3 under the Exchange Act)? \107\
---------------------------------------------------------------------------
\107\ 17 CFR 240.15c3-3.
---------------------------------------------------------------------------
The Commission also seeks comment on whether the proposed rule
should require the U.S. registered broker-dealer to comply with any
requirements with respect to transactions under Exemption (A)(2) other
than the proposed requirement to maintain books and records and
maintain custody of qualified investors' funds and securities relating
to the transactions. Should the requirements differ based on whether
the securities are U.S. securities or foreign securities? If so, why?
In addition, the Commission seeks comment on whether the proposed
disclosures would provide appropriate notice to qualified investors
that foreign broker-dealers would not be subject to the same regulatory
requirements as U.S. registered broker-dealers. Would notice be
sufficient? Are there are other
[[Page 39194]]
disclosures that should be required? In particular, should the foreign
broker-dealer be required to identify the foreign securities authority
or authorities regulating the foreign broker-dealer? Should disclosure
of the applicable dispute resolution system be required? In addition,
the Commission requests comment regarding the proposed required form of
these disclosures. Should the proposed disclosures be eliminated or
modified in any way? If so, how and why?
In general, the Commission seeks comment on whether proposed
Exemption (A)(1) and Exemption (A)(2) alternatives would provide a
meaningful choice for qualified investors wishing to access foreign
broker-dealers. What would be the advantages and disadvantages of using
each alternative?
2. Sales Activities
Both proposed Exemption (A)(1) and proposed Exemption (A)(2) would
eliminate the requirements in current Rule 15a-6(a)(3) for foreign
associated persons \108\ to be accompanied by an associated person of a
U.S. registered broker-dealer during in-person visits with U.S.
investors. The proposed rule also would eliminate the current
requirement for an associated person of a U.S. registered broker-dealer
to participate in communications between foreign associated persons and
U.S. investors, whether oral or electronic.
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\108\ The proposed rule would retain the definition of ``foreign
associated person'' that is in paragraph (b)(2) of the current Rule
15a-6, but would substitute ``qualified investor'' for ``U.S.
institutional investor or major U.S. institutional investor'' in the
definition. See proposed Rule 15a-6(b)(1).
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From discussions with industry representatives, the staff
understands that the current chaperoning requirements have been
criticized as impractical and that they have been viewed as imposing
unnecessary operational and compliance burdens particularly for
communications with broker-dealers in time zones outside those of the
United States. The current rule allows some unchaperoned contacts, in
part due to the existence of other provisions of the rule that require
review of ``the background of, foreign personnel who will contact U.S.
institutional investors.'' \109\ The proposed amendments would retain
the requirement that the background of foreign personnel be reviewed,
albeit by the foreign broker-dealer,\110\ but would expand the ability
of foreign broker-dealers to have unchaperoned contacts. Specifically,
the proposed rule would not limit a foreign broker-dealer's ability to
have unchaperoned communications, both oral and electronic, with
qualified investors, as part of a transaction pursuant to either
exemption in paragraph (a)(3) of the proposed rule. In addition, the
proposed rule would provide that a foreign associated person may
conduct unchaperoned visits to qualified investors within the United
States, provided that transactions in any securities discussed during
visits by the foreign associated person with qualified investors are
effected pursuant to either exemption in paragraph (a)(3) of the
proposed rule because these transactions would be viewed as being
solicited.\111\ The Commission believes that increasing the ability of
foreign broker-dealers to have unchaperoned contacts should provide
greater flexibility for both investors and industry participants in
conducting communications and that eliminating the requirement to have
a U.S. registered broker-dealer present for such communications should
not result in any significant loss of safeguards for qualified
investors because of the sophistication and experience standards in the
definition of qualified investor and the proposed disclosure
requirements in Exemption (A)(1) and Exemption (A)(2).
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\109\ See 1988 Proposing Release, 53 FR at 23653.
\110\ See Proposed Rule 15a-6(a)(3)(i)(B) and (C).
\111\ See proposed Rule 15a-6(a)(3)(ii).
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As noted above, the proposed rule would allow a foreign broker-
dealer to have unchaperoned visits within the United States. Whether a
foreign associated person's stay in the United States would qualify as
a ``visit'' for purposes of the proposed rule would be a facts and
circumstances determination based on factors including, but not limited
to, the purpose, length and frequency of any stays. The Commission
proposes to interpret a ``visit'' as one or more trips to the United
States over a calendar year that do not last more than 180 days in the
aggregate. The purpose of this proposed limitation regarding visits is
to prevent foreign broker-dealers from essentially having a permanent
sales force in the United States, which may result in foreign broker-
dealers essentially conducting a U.S. based business, similar to U.S.
registered broker-dealers, without appropriate regulatory oversight of
these foreign broker-dealers. We preliminarily believe that 180 days
strikes the proper balance between facilitating legitimate foreign
broker-dealer activity in the United States, such as investment
banking, and the potential competitive issues with U.S. registered
broker-dealers and investor protection concerns.
The Commission requests comment on its proposed interpretation of
what would constitute a visit. Should the Commission provide a bright-
line definition of what constitutes a ``visit'' or is a more flexible
approach appropriate? Is it appropriate to interpret ``visit'' as a
specific number of days in a calendar year that a foreign broker-dealer
could be in the United States? If so, is 180 days a calendar year
appropriate? Or would a lower number such as 120, 90, 60, or 30 days a
calendar year be more appropriate? We also solicit comment on the
factors for determining what qualifies as a ``visit,'' described above.
In addition, the Commission requests comment on eliminating the
chaperoning requirements of the current rule. Are unchaperoned contacts
between foreign broker-dealers and their associated persons and
qualified investors appropriate?
3. Establishment of Qualification Standards
Foreign broker-dealers intending to rely on proposed Rule 15a-
6(a)(3) would need to meet certain qualification requirements.\112\ As
under the current rule, the foreign broker-dealer would be required to
provide the Commission, upon request or pursuant to agreement between
the Commission or the United States and any foreign securities
authority, information or documents related to the foreign broker-
dealer's activities in inducing or attempting to induce securities
transactions by qualified investors.\113\ This information would permit
the Commission to monitor and follow up on transactional activity
conducted under Rule 15a-6, as necessary and appropriate.
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\112\ See proposed Rule 15a-6(a)(3)(i).
\113\ See proposed Rule 15a-6(a)(3)(i)(A) and 17 CFR 240.15a-
6(a)(3)(i)(B).
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The proposed rule also would require the foreign broker-dealer to
determine that its associated persons that effect transactions with
qualified investors are not subject to a statutory disqualification
under Section 3(a)(39) of the Exchange Act.\114\ This would be a change
from the current rule, which requires the U.S. registered broker-dealer
intermediating the transaction to make this determination.\115\
Specifically, current Rule 15a-6(a)(3)(ii)(B) requires a U.S.
registered broker-dealer to determine that the foreign associated
persons of a foreign broker-dealer effecting transactions with U.S.
institutional investors or major U.S. institutional investors are not
subject to
[[Page 39195]]
a statutory disqualification specified in Section 3(a)(39) of the
Exchange Act, or certain substantially equivalent foreign disciplinary
actions. Because of subsequent legislation, the proposed rule would no
longer separately describe the foreign equivalents of statutory
disqualification.\116\ The Commission believes shifting the
responsibility for making the statutory disqualification determination
would be appropriate because the foreign broker-dealer is in possession
of the relevant information regarding its foreign associated persons.
Thus, we believe, as a practical matter, foreign broker-dealers are
already making this determination so that U.S. registered broker-
dealers can comply with their obligations under the existing rule. As
discussed below, the proposed rule would require the U.S. registered
broker-dealer to obtain a representation from the foreign broker-dealer
that it has made this determination.
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\114\ See proposed Rule 15a-6(a)(3)(i)(B).
\115\ See 17 CFR 240.15a-6(a)(3)(ii)(B).
\116\ At the time the Commission adopted Rule 15a-6, the
definition of ``statutory disqualification'' in Section 3(a)(39) did
not include expulsions, suspensions or other orders under foreign
statutes or foreign equivalents of U.S. regulatory authorities. The
International Securities Enforcement Cooperation Act of 1990 amended
Section 3(a)(39) to include certain foreign conduct and disciplinary
action in the definition of ``statutory disqualification'',
including each type of conduct or disciplinary action described in
paragraphs (a)(3)(ii)(B)(1)(i)-(v), (a)(3)(ii)(B)(2) and
(a)(3)(ii)(B)(3) of Rule 15a-6. See Pub. L. 101-550, 104 Stat. 2714
(1990).
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Under the current rule, a U.S. registered broker-dealer must
obtain, with respect to each foreign associated person, information
specified in Rule 17a-3(a)(12) under the Exchange Act \117\ that
relates to activities under paragraph (a)(3).\118\ The proposed rule
would require the foreign broker-dealer to maintain this information in
its files and make it available upon request by the U.S. registered
broker-dealer or the Commission.\119\ This information would include
the foreign associated person's name; address; social security number
or foreign equivalent; the starting date of employment or other
association with the foreign broker-dealer; date of birth; a complete,
consecutive statement of all the foreign associated person's business
connections for at least the preceding ten years, including whether the
employment was part-time or full-time; a record of any denial of
membership or registration, and of any disciplinary action taken, or
sanction imposed, upon the foreign associated person by any agency, or
by any securities exchange or securities association, including any
finding that the foreign associated person was a cause of any
disciplinary action or had violated any law; a record of any denial,
suspension, expulsion or revocation of membership or registration of
any foreign broker-dealer with which the foreign associated person was
associated in any capacity when such action was taken; a record of any
permanent or temporary injunction entered against the foreign
associated person or any foreign broker-dealer with which the foreign
associated person was associated in any capacity at the time such
injunction was entered; a record of any arrest or indictment for any
felony or foreign equivalent, or any misdemeanor or foreign equivalent
pertaining to securities, commodities, banking, insurance or real
estate (including, but not limited to, acting or being associated with
a foreign broker-dealer), fraud, false statements or omissions,
wrongful taking of property or bribery, forgery, counterfeiting or
extortion, and the disposition of the foregoing; and a record of any
other name or names by which the foreign associated person has been
known or which the foreign associated person has used.\120\
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\117\ 17 CFR 240.17a-3(a)(12).
\118\ See 17 CFR 240.15a-6(a)(3)(iii)(C).
\119\ See Proposed Rule 15a-6(a)(3)(i)(C).
\120\ 17 CFR 240.17a-3(a)(12).
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The proposed rule would provide that the information kept by the
foreign broker-dealer as specified in Rule 17a-3(a)(12)(i)(D) \121\
must include documentation of sanctions imposed by foreign securities
authorities, foreign exchanges, or foreign associations, including
without limitation those described in Section 3(a)(39) of the Exchange
Act.\122\ The Commission believes shifting the responsibility would be
appropriate because the foreign broker-dealer is in possession of the
relevant information regarding its foreign associated persons. Thus, we
believe, as a practical matter, foreign broker-dealers are already
making this determination so that U.S. registered broker-dealers can
comply with their obligations under the existing rule. As discussed
below, the proposed rule would require the U.S. registered broker-
dealer to obtain a representation from the foreign broker-dealer that
it is maintaining the required information.
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\121\ 17 CFR 240.17a-3(a)(12)(i)(D) (requiring a broker-dealer
to make and keep current a record of any denial of membership or
registration, and of any disciplinary action taken, or sanction
imposed, upon the associated person by any federal or state agency,
or by any national securities exchange or national securities
association, including any finding that the associated person was a
cause of any disciplinary action or had violated any law).
\122\ See proposed Rule 15a-6(a)(3)(i)(C).
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Consistent with the current rule, proposed Rule 15a-6(a)(3) would
require the U.S. registered broker-dealer to obtain from the foreign
broker-dealer and each foreign associated person written consent to
service of process for any civil action brought by or proceeding before
the Commission or a self-regulatory organization (as defined in Section
3(a)(26) of the Exchange Act).\123\ The U.S. registered broker-dealer
would also be responsible for obtaining from the foreign broker-dealer
a representation that the foreign broker-dealer has determined that any
foreign associated person of the foreign broker-dealer effecting
transactions with the qualified investor is not subject to a statutory
disqualification specified in Section 3(a)(39) of the Act, as required
by paragraph (a)(3)(i)(B) of the proposed rule and discussed
above.\124\
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\123\ See proposed Rule 15a-6(a)(3)(iii)(B) and 17 CFR 240.15a-
6(a)(3)(iii)(C). As in the current rule, the consent would be
required to provide that process may be served on them by service on
the registered broker-dealer in the manner set forth on the
registered broker's or dealer's current Form BD. This would put
individuals on notice of the manner in which process would be
served.
\124\ See proposed Rule 15a-6(a)(3)(iii)(C).
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In addition, the U.S. registered broker-dealer would be responsible
for obtaining from the foreign broker-dealer a representation that it
has in its files, and the foreign broker-dealer would make available
upon request by the U.S. registered broker-dealer or the Commission,
the types of information specified in Rule 17a-3(a)(12) under the Act,
as required by paragraph (a)(3)(i)(C) of the proposed rule and
discussed above.\125\ Finally, the proposed rule would require the U.S.
registered broker-dealer to maintain records of these written consents
and representations and, as in the current rule, make these records
available to the Commission upon request.\126\ These proposed
requirements are important because they are designed to ensure that the
Commission would be able to obtain information regarding foreign
associated persons if it were necessary in the context of an
investigation into alleged misconduct by a foreign broker-dealer or
persons associated with the foreign broker-dealer. The Commission
believes that allowing U.S. registered broker-dealers to rely upon the
determinations and representations of foreign broker-dealers discussed
above is a balanced approach that should address the risks
[[Page 39196]]
to qualified investors related to, among other things, contacts with
foreign associated persons with a disciplinary history.
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\125\ See id.
\126\ See proposed Rule 15a-6(a)(3)(i)(D). The provisions of
proposed Rules 15a-6(a)(3)(iii)(B) and (D) are similar to paragraphs
(a)(3)(iii)(D) and (E) of the current rule, although the proposed
rule would eliminate the requirement under current Rule 15a-
6(a)(3)(iii)(E) that the registered broker-dealer maintain a written
record of all records in connection with trading activities of the
qualified investor involving the foreign broker-dealer. This
requirement is subsumed in other sections of the proposed rule. See
proposed Rule 15a-6(a)(3)(iii)(A)-(D).
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The Commission seeks comment on the qualification standards that
would apply to foreign broker-dealers and U.S. registered broker-
dealers under the proposed rule. Commenters are invited to discuss
whether reliance by a U.S. registered broker-dealer upon the
determinations and representations of a foreign broker-dealer
appropriately addresses the potential risks to qualified investors
related to, among other things, contacts with foreign associated
persons with a disciplinary history. Should any of the responsibilities
for making the statutory disqualification determinations or obtaining
consents be shifted? Should the proposed rule require that the foreign
broker-dealer (or the U.S. registered broker-dealer) determine whether
the foreign associated persons are subject to statutory
disqualifications?
E. Counterparties and Specific Customers
As in the current rule, proposed Rule 15a-6(a)(4) would provide
exemptions for foreign broker-dealers that effect transactions in
securities with or for, or induce or attempt to induce the purchase or
sale of any security, by certain persons, including registered broker-
dealers, certain international banks and bank organizations, certain
foreign persons temporarily present in the United States and certain
U.S. persons or groups of U.S. persons abroad. We understand from
discussions with industry that these exemptions have been workable for
both foreign broker-dealers and the U.S. entities and we have no
knowledge of investor protection concerns being raised. Accordingly, we
do not propose to amend them.
We do, however, propose to provide an additional exemption for
transactions with U.S. resident fiduciaries of accounts for ``foreign
resident clients'' because it is our understanding that foreign
resident clients would not assume that the broker-dealer through which
a U.S. resident fiduciary is effecting transactions is regulated by the
Commission.\127\ The proposed rule would define ``foreign resident
client'' to mean ``(i) any entity not organized or incorporated under
the laws of the United States and not engaged in a trade or business in
the United States for federal income tax purposes; (ii) any natural
person not a resident for federal income tax purposes; and (iii) any
entity not organized or incorporated under the laws of the United
States, 85 percent or more of whose outstanding voting securities are
beneficially owned by persons in subparagraphs (i) and (ii) of this
paragraph.'' \128\ Discussions with industry have indicated that these
are the types of entities that would likely use the proposed exemption.
We selected the 85 percent threshold to capture foreign entities that
are predominantly foreign-owned, while accommodating a small amount of
U.S. ownership.\129\
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\127\ Cf. Letter from Catherine McGuire, Chief Counsel, Division
of Market Regulation, to Giovanni P. Prezioso, Cleary Gottlieb,
Steen & Hamilton (Jan. 30, 1996).
\128\ See proposed Rule 15a-6(b)(4).
\129\ The Commission considers a person to be a control person
if he or she directly or indirectly has the power to vote 25 percent
or more of the voting securities or interests of an entity. See,
e.g., 17 CFR 240.12b-2. The concept of control, which is found in
all the statutes administered by the Commission, varies to some
degree between statutes. Although the Exchange Act does not define
``control,'' Rule 12b-2 under the Exchange Act defines ``control''
as ``the possession, direct or indirect, of the power to direct or
cause the direction of the management and policies of a person,
whether through the ownership of voting securities, by contract, or
otherwise.'' This definition has been found to apply to all Exchange
Act control determinations. In re Commonwealth Oil / Tesoro
Petroleum Securities Litigation, 484 F. Supp. 253, 268 (W.D. Tex.
1979) (the right to vote 25 percent or more of the voting securities
or is entitled to 25 percent or more of the profits is presumed to
control that company). The 85 percent threshold in proposed
paragraph (b)(4)(iii) is designed to ensure that entities with U.S.
control persons would not meet the proposed definition of ``foreign
resident client.''
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For purposes of both the broker-dealer registration provisions of
the Exchange Act and the proposed exemption provided by Rule 15a-
6(a)(4)(vi), a U.S. resident fiduciary is considered to be a U.S.
person, regardless of the residence of the owners of the underlying
accounts. Accordingly, absent an exemption, a foreign broker-dealer
that induces or attempts to induce a securities transaction with a U.S.
resident fiduciary would be required either to register with the
Commission or effect transactions in accordance with Rule 15a-6(a)(3).
We understand, however, that foreign resident clients of a U.S.
resident fiduciary reasonably may not expect the U.S. broker-dealer
regulatory requirements to apply to their transactions in foreign
securities, in large part simply because the transactions are in
foreign securities.
Accordingly, the proposed rule would permit a foreign broker-dealer
to effect transactions in, or induce or attempt to induce the purchase
or sale of, securities, with or for any U.S. person, other than a
registered broker-dealer or a bank acting pursuant to an exception or
exemption from the definition of ``broker'' or ``dealer,'' \130\ that
acts in a fiduciary capacity for an account of a foreign resident
client. Consistent with our understanding of the expectations of
foreign resident clients of a U.S. resident fiduciary, this proposed
exemption would be available only to a foreign broker-dealer that
conducts a foreign business.\131\ As indicated above, this exemption
would recognize that foreign resident clients would not expect that the
broker-dealer through which a U.S. resident fiduciary is effecting
transactions is regulated by the Commission. Moreover, under the
proposed rule, the foreign broker-dealer would be required to obtain a
written representation from the U.S. fiduciary that the account is
managed in a fiduciary capacity for a foreign resident client.\132\
This requirement is designed to ensure that the U.S. fiduciary is
actually managing accounts for foreign resident clients.
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\130\ See Sections 3(a)(4)(B), 3(a)(4)(E) and 3(a)(5)(C) of the
Exchange Act. Foreign broker-dealers that want to effect
transactions for registered broker-dealers or banks acting pursuant
to certain exceptions or exemptions from the definition of
``broker'' or ``dealer'' can do so under the exemption in paragraph
(a)(4)(i) of Rule 15a-6. See 17 CFR 240.15a-6(a)(4)(i).
\131\ See proposed Rule 15a-6(b)(2)(ii).
\132\ See proposed Rule 15a-6(a)(4)(vi)(B).
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The Commission seeks comment generally on the exemptions in
paragraph (a)(4) of the proposed rule for transactions with certain
U.S. entities. Are there entities or other categories of entities that
should be included? The Commission particularly seeks comment on the
proposed exemption for transactions with U.S. fiduciaries of accounts
for foreign resident clients. Is the requirement that a foreign broker-
dealer conduct a foreign business necessary or appropriate? Should the
rule apply to U.S. fiduciaries for accounts other than those of foreign
resident clients? The Commission requests comment on the definition of
``foreign resident client,'' in general, and the 85 percent foreign
ownership threshold for entities not organized or incorporated under
the laws of the United States, in particular. Should it be raised or
lowered to better protect against regulatory arbitrage or to achieve
its stated purposes? Commenters suggesting a different threshold or a
different method for determining compliance with the threshold should
explain why they would choose that threshold or method.
F. Familiarization With Foreign Options Exchanges
Over the years, foreign options exchanges have inquired regarding
the
[[Page 39197]]
permissibility of limited activities designed to familiarize U.S.
entities that have had prior actual experience with traded options in
U.S. options markets, such as U.S. registered broker-dealers and
certain U.S. institutional investors, with the existence and operations
of, and options on foreign securities traded on, such foreign options
exchanges. These exchanges have limited the activities conducted by
their representatives, who may be located in a foreign office or in a
representative office in the United States, and by their foreign
broker-dealer members.
1. Exchange Act Section 15(a)
Because the activities by a representative of a foreign options
exchange may constitute solicitation,\133\ they raise potential
registration concerns for foreign broker-dealer participants on the
exchanges under Section 15(a).\134\ This is in part because the
activities are undertaken with the expectation that one or more U.S.
registered broker-dealers or U.S. institutional investors will engage
in foreign options transactions executed through the exchange, and thus
trade through one or more foreign broker-dealer members of the
exchange. Similarly, the activities of a foreign broker-dealer member
of a foreign options exchange may constitute solicitation under the
Commission's broad interpretation of solicitation.
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\133\ For a discussion of the Commission's broad interpretation
of solicitation, see Parts II.A. and III.B., supra.
\134\ The fact that the activities are conducted by the
exchanges through their representatives does not necessarily
eliminate the registration concerns of the participants on those
exchanges. See Exchange Act Section 20(b), 17 U.S.C. 78t(b) (``It
shall be unlawful for any person, directly or indirectly, to do any
act or thing which it would be unlawful for such person to do under
the provisions of this title or any rule or regulation thereunder
through or by means of any other person'').
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The Commission recognizes the role of these activities in making
certain U.S. investors aware of foreign options markets and the options
on foreign securities traded on those markets. Accordingly, the
Commission is proposing a new exemption to provide legal certainty for
the foreign broker-dealer members and these foreign options exchanges.
Paragraph (a)(5) of proposed Rule 15a-6 would allow a foreign broker-
dealer that is a member of a foreign options exchange to effect
transactions in options on foreign securities listed on that exchange
for a qualified investor that has not otherwise been solicited by the
foreign broker-dealer.\135\ Under this exemption, a foreign broker-
dealer, a foreign options exchange and representatives of the foreign
options exchange could conduct certain activities or communicate with a
qualified investor in a manner that might otherwise be considered a
form of solicitation, as described below.\136\ Transactions effected by
or through the foreign broker-dealer with or for qualified investors
that result from these activities or communications would not require
registration or compliance with proposed Rule 15a-6(a)(3). However,
while these activities would not necessarily constitute a form of
solicitation, the Commission anticipates that given the broad
interpretation of solicitation, 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, the
Commission anticipates that most transactions with qualified investors
resulting from these activities or communications would need to be
completed pursuant to proposed Rules 15a-6(a)(3).
---------------------------------------------------------------------------
\135\ See proposed Rule 15a-6(a)(5).
\136\ See proposed Rules 15a-6(a)(5)(i)-(iii).
---------------------------------------------------------------------------
Paragraph (a)(5)(i) of proposed Rule 15a-6 would set forth the
limited activities in which a representative of a foreign options
exchange located in a foreign office or a representative office in the
United States may engage vis-[agrave]-vis qualified investors. The
proposed rule would allow the representative of a foreign options
exchange to communicate with persons that he or she reasonably believes
are qualified investors regarding the foreign options exchange, the
options on foreign securities traded on the foreign options exchange,
and, if applicable, the foreign options exchange's ``OTC options
processing service,'' as defined below.\137\ Such communications could
include programs and seminars in the United States.
---------------------------------------------------------------------------
\137\ See proposed Rule 15a-6(a)(5)(i)(A).
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Proposed Rule 15a-6(b)(6) would define an ``OTC options processing
service'' as ``a mechanism for submitting an options contract on a
foreign security that has been negotiated and completed in an over-the-
counter transaction to a foreign options exchange so that the foreign
options exchange may replace that contract with an equivalent
standardized options contract that is listed on the foreign options
exchange and that has the same terms and conditions as the over-the-
counter options.'' By utilizing an OTC options processing service,
qualified investors would be able to take advantage of the flexible
nature of the OTC options market, while realizing certain efficiencies
and benefits available in an exchange-traded market. In particular,
qualified investors would have greater opportunities to close out
options positions. In a typical OTC options transaction, a party must
either negotiate with its counterparty to close out the trade or enter
into an offsetting transaction to reduce its risk. In addition, OTC
options processing services would provide a means for qualified
investors to reduce other risks that arise in trading in the OTC
options market, including credit risks, liquidity risks, legal risks
and operational risks. By using an OTC options processing service,
qualified investors would be able to access the benefits available in
the OTC options market while taking advantage of the benefits and
decreased risks available in the exchange-traded market.
The proposed rule would also permit a representative of a foreign
options exchange to provide persons that the representative of the
foreign options exchange reasonably believes are qualified investors
with a disclosure document that provides an overview of the foreign
options exchange and the options on foreign securities traded on that
exchange, including the differences from standardized options in the
U.S. options market and special factors relevant to transactions by
U.S. entities in options on the foreign options exchange.\138\ In
addition, a representative of a foreign options exchange could make
available to persons that the representative of the foreign options
exchange reasonably believes are qualified investors, solely upon the
request of the investor, a list of participants on the foreign options
exchange permitted to take orders from the public and any U.S.
registered broker-dealer affiliates of such participants.\139\
Moreover, paragraph (5)(iii) would allow the foreign exchange to make
available to qualified investors, through the foreign broker-dealer,
the exchange's OTC options processing service.\140\
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\138\ See proposed Rule 15a-6(a)(5)(i)(B).
\139\ See proposed Rule 15a-6(a)(5)(i)(C).
\140\ See proposed Rule 15a-6(a)(5)(iii).
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In proposing to limit these activities, the proposed rule is
designed to ensure that a foreign options exchange and its
representatives do not engage in solicitation on behalf of a particular
foreign broker-dealer or limited group of particular foreign broker-
dealers.
Paragraph (a)(5)(ii) of the proposed rule would set forth the
activities in which a foreign broker-dealer could engage in connection
with transactions effected on a foreign options exchange
[[Page 39198]]
of which it is a member. A foreign broker-dealer would be permitted to
make available to qualified investors the foreign options exchange's
OTC options processing service.\141\ A foreign broker-dealer would also
be permitted to provide qualified investors, in response to an
otherwise unsolicited inquiry concerning foreign options traded on the
foreign options exchange, with a disclosure document that provides an
overview of the foreign options exchange and the options on foreign
securities traded on that exchange, including the differences from
standardized options in the U.S. domestic options market and special
factors relevant to transactions by U.S. entities in options on that
exchange.\142\
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\141\ See proposed Rule 15a-6(a)(5)(ii)(A).
\142\ See proposed Rule 15a-6(a)(5)(ii)(B). Exchange Act Rule
9b-1 requires an options market to file with the Commission an
options disclosure document containing the information specified in
Rule 19b-1(c). ``Options markets'' are defined in Rule 19b-1 to
include foreign securities exchanges. See Exchange Act Rule 19b-
1(a)(1), 17 CFR 240.19b-1(a)(1). The Commission would not view the
provision of the options disclosure document, which contains, among
other things, a summary of the instruments traded and the mechanics
of trading on that market, as a ``research report'' under proposed
Rule 15a-6(a)(2). See Parts II.B. and III.C., supra.
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2. Exchange Act Sections 5 and 6
Section 5 of the Exchange Act makes it ``unlawful for any broker,
dealer, or exchange, directly or indirectly, to make use of the mails
or any means or instrumentality of interstate commerce for the purpose
of using any facility of an exchange with or subject to the
jurisdiction of the United States to effect any transaction in a
security, or to report any such transaction,'' unless such exchange is
registered under Section 6 of the Exchange Act or exempt from such
registration.\143\ As described above, paragraph (a)(5) of proposed
Rule 15a-6 would establish the limited activities and communications in
which a representative of a foreign options exchange located in a
foreign office or a representative office in the United States may
engage vis-[agrave]-vis qualified investors,\144\ and in which a
foreign broker-dealer may engage in connection with transactions
effected on a foreign options exchange in which it is a member.\145\ In
addition, a foreign exchange could make available to qualified
investors, through a foreign broker-dealer, the exchange's OTC options
processing service.\146\
---------------------------------------------------------------------------
\143\ 15 U.S.C. 78e.
\144\ See proposed Rule 15a-6(a)(5)(i).
\145\ See proposed Rule 15a-6(a)(5)(ii).
\146\ See proposed Rule 15a-6(a)(5)(iii).
---------------------------------------------------------------------------
The Commission is proposing to provide interpretive guidance that a
foreign exchange would not be required to register as a national
securities exchange under Section 6 of the Exchange Act or be exempt
from such registration if the foreign exchange, its representatives, or
its foreign broker-dealer members engaged in the limited activities and
communications described in proposed paragraph (a)(5) of Rule 15a-6.
The Commission's proposed interpretation is based on its preliminary
view that, although a foreign exchange's OTC options processing service
may be a facility of an exchange,\147\ the OTC options processing
service would not effect any transaction in a security or report any
such transaction.\148\ Accordingly, such activity would not trigger the
registration requirements of Section 6 of the Exchange Act.\149\
---------------------------------------------------------------------------
\147\ See Section 3(a)(2) of the Exchange Act, 15 U.S.C.
78c(a)(2) (defining ``facility'' of an exchange).
\148\ See note 143 and accompanying text, supra (discussing
Section 5 of the Exchange Act, which prohibits a broker, dealer, or
exchange from using a facility of an exchange to effect a
transaction in a security, or to report any such transaction, unless
such exchange is registered under Section 6 of the Exchange Act).
\149\ See Section 3(a)(1) of the Exchange Act, 15 U.S.C. 78c
(defining ``exchange'') and Rule 3b-16 under the Exchange Act, 17
CFR 240-3b-16 (further elaborating on the definition of ``exchange''
contained in the Exchange Act).
---------------------------------------------------------------------------
The Commission seeks comment on its proposed interpretation that a
foreign exchange would not be required to register as a national
securities exchange under Section 6 of the Exchange Act if the foreign
exchange, its representatives, or its foreign broker-dealer members
engage in the limited activities and communications described in
paragraph (a)(5) of proposed Rule 15a-6. Are any additional conditions
necessary or are there other interpretive issues relating to the
circumstances under which a foreign exchange would be required to
register under Section 6 of the Exchange Act, or otherwise obtain an
exemption from such registration requirements, that the Commission
should address?
3. Exchange Act Section 17A
Under proposed Rule 15a-6(a)(5), qualified investors would not
become direct members of, or participants in, the foreign options
exchange or any associated foreign clearing organization. Further, the
foreign options exchange would not trade nor would the foreign clearing
organization clear and settle options on U.S. securities for a foreign
broker-dealer member or participant relying on proposed paragraph
(a)(5) for the transaction. The foreign broker-dealer member or
participant would execute transactions in options on foreign
securities, or submit an options contract on foreign securities, and
the foreign clearing organization would clear and settle these
transactions for its foreign broker-dealer participants in the same
manner as any other transaction executed on the foreign options
exchange.
Section 17A(b)(1) of the Exchange Act prohibits any clearing agency
from directly or indirectly making ``use of the mails or any means or
instrumentality of interstate commerce to perform the functions of a
clearing agency with respect to any security (other than an exempted
security),'' unless it is registered with the Commission.\150\ The
Commission may conditionally or unconditionally exempt any clearing
agency if the Commission finds that such exemption is consistent with
the public interest, the protection of investors and the purposes of
Section 17A.\151\
---------------------------------------------------------------------------
\150\ 15 U.S.C. 78q-1(b)(1).
\151\ Id.
---------------------------------------------------------------------------
Previously, the Commission has required foreign clearing
organizations to obtain an exemption from clearing agency registration
only when the foreign clearing organization provides clearance and
settlement services for U.S. securities directly to U.S. entities. For
example, the Commission granted Euroclear and Clearstream (formerly
Cedel Bank) exemptions from clearing agency registration in order that
they could provide clearance and settlement services for U.S.
government securities to their U.S. participants.\152\ Because only the
foreign broker-dealer would have direct access to the foreign clearing
organization to clear and settle foreign securities transactions under
proposed Rule 15a-6(a)(5), the Commission does not believe that relief
under Section 17A of the Exchange Act would be necessary. The
Commission solicits comment on whether any interpretive guidance is
needed under Section 17A with respect to activities under proposed Rule
15a-6(a)(5). If so, what?
---------------------------------------------------------------------------
\152\ See Exchange Act Release Nos. 43775 (Dec. 28, 2000), 66 FR
819 (order exempting Euroclear Bank from clearing agency
registration) and 39643 (Feb. 18, 1998), 63 FR 8232 (order exempting
Euroclear Bank's predecessor, Morgan Guaranty Trust Company, as
operator of the Euroclear system, from clearing agency registration)
and Exchange Act Release No. 38328 (Feb. 24, 1997), 62 FR 9225
(order exempting Clearstream Bank, formerly Cedel Bank, from
clearing agency registration).
---------------------------------------------------------------------------
4. Securities Act
Foreign option transactions that are effected through the
facilities of a foreign exchange will generally involve the offer and
sale of a security by an issuer of the security.\153\ As a result,
[[Page 39199]]
unless the foreign options were registered under the Securities Act,
foreign option transactions involving U.S. persons would be required to
come within an exemption from registration. To the extent that the
activities undertaken by foreign options exchange in the United States
can be deemed to constitute offers of foreign options under the
Securities Act, such activities must also be undertaken in a fashion
that is consistent with the requirements of the applicable
exemption.\154\
---------------------------------------------------------------------------
\153\ With exchange traded options, the clearing house is the
issuer of the option security. See Securities Act Release No. 8171
(Dec. 23, 2002), 68 FR 188, 188 (Jan. 2, 2003).
\154\ For example, to the extent that reliance is based on
Securities Act Section 4(2), the activities of the foreign options
exchange must not constitute a public offering of the securities.
---------------------------------------------------------------------------
5. Request for Comment
The Commission seeks comment on the proposed exemption in paragraph
(a)(5) for transactions effected by a foreign broker-dealer on a
foreign options exchange of which it is a member. Should the Commission
require a foreign broker-dealer or a representative of a foreign
options exchange to determine that the persons with whom the
representative communicates or otherwise provides information under
proposed paragraphs (a)(5)(i)(A)-(C) are, in fact, qualified investors?
Should the exemption be limited to unsolicited transactions? As a
practical matter, because of the broad interpretation of solicitation,
would foreign broker-dealers effecting transactions with qualified
investors that have been approached by the representatives of a foreign
options exchange effect these transactions in reliance on proposed
paragraph (a)(3) of Rule 15(a)(6)? If not, should the proposed
exemption permit foreign broker-dealers to engage in additional limited
solicitation activities, such as the types of contacts that would be
expected in an ongoing customer relationship? In general, should
foreign representatives of foreign options exchanges or foreign options
exchanges be permitted to engage in any other activities under the
proposed rule? If so, what? Given the purpose of the exemption to allow
familiarization activities for foreign options exchanges, are there
other types of markets for which it would be appropriate to permit
familiarization activities? If so, which markets and what should the
permissible range of activities be? Should they be broader or narrower
than the permissible range of activities for foreign options exchanges?
If so, why? Commenters are requested to explain their views.
G. Scope of the Proposed Exemption
When we adopted Rule 15a-6 in 1989, the Commission had authority,
under Section 15(a)(2) of the Exchange Act, only to conditionally or
unconditionally exempt from the broker-dealer registration requirements
of Section 15(a)(1) any broker-dealer or class of broker-dealers, by
rule or order, as it deems consistent with the public interest and the
protection of investors.\155\ However, many of the statutory and
regulatory provisions under the Exchange Act actually are applicable by
their terms to broker-dealers regardless of their registration
status.\156\ To provide foreign broker-dealers relying on the
exemptions in Rule 15a-6 with relief from these provisions, the
Commission stated in the 1989 Adopting Release, ``Nevertheless, the
staff would not recommend that the Commission take enforcement action
against foreign broker-dealers for want of compliance with those
provisions, with the exception of sections 15(b)(4) and 15(b)(6), if
the foreign broker-dealers were exempt from broker-dealer registration
under the Rule.'' \157\
---------------------------------------------------------------------------
\155\ See 15 U.S.C. 78o(a)(2); see also Section 15B(a)(4) of the
Exchange Act, 15 U.S.C. 78o-4(a)(4) (giving the Commission similar
authority with respect to municipal securities dealers).
\156\ See 1989 Adopting Release, 54 FR at 30015 n.22 (``E.g.,
sections 15(b)(4) and 15(b)(6) of the Exchange Act, 15 U.S.C.
78o(b)(4) and 78o(b)(6); Rules 15c3-1, 15c3-3, 17a-3, 17a-4, and
17a-5, 17 CFR 240.15c3-1, 15c3-3, 17a-3, 17a-4, and 17a-5'').
\157\ See 1989 Adopting Release, 54 FR at 30015 n.22.
---------------------------------------------------------------------------
Since 1996, the Commission has had general exemptive authority
under Section 36 of the Exchange Act to conditionally or
unconditionally exempt any person, security, or transaction, or any
class or classes of persons, securities, or transactions, from any
provision or provisions of the Exchange Act or any rule or regulation
thereunder, by rule, regulation or order, to the extent that such
exemption is necessary or appropriate in the public interest and is
consistent with the protection of investors.\158\
---------------------------------------------------------------------------
\158\ See 15 U.S.C. 78mm; see also Capital Markets Efficiency
Act of 1996, Sec. 105(b), Pub. Law 104-290, 110 Stat. 3416 (1996)
(adding Section 36 to the Exchange Act).
---------------------------------------------------------------------------
The Commission proposes to amend Rule 15a-6 to exempt foreign
broker-dealers from not only the registration requirements of Section
15(a)(1) or 15B(a)(1) of the Exchange Act, but also from the reporting
and other requirements of the Exchange Act (other than Sections
15(b)(4) and 15(b)(6)), and the rules and regulations thereunder, that
apply specifically to a broker-dealer solely by virtue of its status as
a broker or dealer rather than because of its registration with the
Commission.
Under the proposed rule, as under the current rule, however,
foreign broker-dealers would not be exempt from provisions of the
Exchange Act, and the rules and regulations thereunder, that are not
specific to broker-dealers, such as Section 10(b) of the Exchange Act,
or Rule 10b-5 thereunder.\159\ Such rules apply to ``persons''
regardless of their registration status, and thus apply equally to
registered broker-dealers, unregistered broker-dealers and non-broker-
dealers. We also do not propose to exempt foreign broker-dealers from
Exchange Act Sections 15(b)(4) and 15(b)(6), which give the Commission
the authority to sanction broker-dealers and persons associated with
broker-dealers, because these sections provide the Commission with
flexibility to impose a bar against or place other limitations on
associated persons or place limitations on broker-dealers in the
circumstances specified in these sections.
---------------------------------------------------------------------------
\159\ The proposed rule also would not affect any obligations a
foreign broker-dealer may have under any other law, including the
Securities Act.
---------------------------------------------------------------------------
As discussed more fully below with respect to each of the
exemptions in the proposed rule, the Commission preliminarily believes
that exempting foreign broker-dealers from the registration
requirements of Sections 15(a)(1) and 15B(a)(1) of the Exchange Act and
the reporting and other requirements of the Exchange Act (other than
Sections 15(b)(4) and 15(b)(6)), and the rules and regulations
thereunder, that apply specifically to a broker-dealer that is not
registered with the Commission solely by virtue of its status as a
broker or dealer would be necessary or appropriate in the public
interest, and would be consistent with the protection of investors.
1. Proposed Rule 15a-6(a)(2)
As discussed above, proposed rule 15a-6(a)(2) would permit a
foreign broker-dealer to provide research reports to qualified
investors, but not otherwise induce or attempt to induce the purchase
or sale of any security by qualified investors.\160\ Based on
conversations with industry participants, we understand that foreign
broker-dealers rarely rely on current Rule 15a-6(a)(2). This is in part
because of the limitations on solicitation, as well as the requirement
that if a foreign broker-dealer has a relationship with a U.S.
registered broker-dealer that satisfies the requirement of paragraph
(a)(3) of the current rule, any
[[Page 39200]]
transactions with the foreign broker-dealer in securities discussed in
the research reports must be effected pursuant to the provisions of
paragraph (a)(3).\161\
---------------------------------------------------------------------------
\160\ See Part III.C., supra.
\161\ See 17 CFR 240.15a-6(a)(2)(iii).
---------------------------------------------------------------------------
Given the de minimis volume of transactions that likely would be
conducted,\162\ and the level of financial sophistication of the
investors that could receive the research reports under this proposed
exemption, as well as the fact that the foreign broker-dealer would not
otherwise be permitted to induce or attempt to induce the purchase or
sale of any security by those investors under the proposed exemption,
the Commission preliminarily believes that it would be necessary or
appropriate in the public interest, and would be consistent with the
protection of investors, to exempt foreign broker-dealers relying on
paragraph (a)(2) of the proposed rule from the registration
requirements of Sections 15(a)(1) and 15B(a)(1) of the Exchange Act and
the reporting and other requirements of the Exchange Act (other than
Sections 15(b)(4) and 15(b)(6)), and the rules and regulations
thereunder, that apply specifically to a broker-dealer that is not
registered with the Commission solely by virtue of its status as a
broker or dealer.
---------------------------------------------------------------------------
\162\ This estimate is based on information the staff obtained
in discussions with industry representatives.
---------------------------------------------------------------------------
The Commission solicits comment on whether it would be necessary or
appropriate in the public interest, and consistent with the protection
of investors, to exempt foreign broker-dealers relying on paragraph
(a)(2) of the proposed rule from such rules and requirements. If not,
which provisions or rules should apply and why?
2. Proposed Rule 15a-6(a)(3)
a. Exemption (A)(1)
As discussed above, foreign broker-dealers relying on proposed
Exemption (A)(1) under Rule 15a-6(a)(3) would be required to conduct a
foreign business.\163\ The proposed rule would define ``foreign
business'' to mean the business of a foreign broker-dealer with
qualified investors and foreign resident clients \164\ where at least
85% of the aggregate value of the securities purchased or sold in
transactions conducted pursuant to both paragraphs (a)(3) and
(a)(4)(vi) of the proposed rule by the foreign broker-dealer,
calculated on a rolling two-year basis, is derived from transactions in
foreign securities, as defined above.\165\ As explained above, the
Commission believes that making Exemption (A)(1) available only to a
foreign broker-dealer conducting a foreign business would provide U.S.
investors increased access to foreign securities and markets without
creating opportunities for regulatory arbitrage vis-[agrave]-vis U.S.
securities markets because the foreign broker-dealer's business in U.S.
securities would be limited.
---------------------------------------------------------------------------
\163\ See Part III.D.1.a., supra.
\164\ See Part III.E., supra.
\165\ See proposed Rule 15a-6(b)(3).
---------------------------------------------------------------------------
Given the requirement that foreign broker-dealers conduct a foreign
business and the sophistication of qualified investors, as well as the
other investor protections in the proposed rule, the Commission
preliminarily believes that it would be necessary or appropriate in the
public interest, and would be consistent with the protection of
investors to exempt foreign broker-dealers relying on Exemption (A)(1)
of the proposed rule from the registration requirements of Sections
15(a)(1) and 15B(a)(1) of the Exchange Act and the reporting and other
requirements of the Exchange Act (other than Sections 15(b)(4) and
15(b)(6)), and the rules and regulations thereunder, that apply
specifically to a broker-dealer that is not registered with the
Commission solely by virtue of its status as a broker or dealer.
The Commission solicits comment on whether it would be necessary or
appropriate in the public interest, and consistent with the protection
of investors, to exempt foreign broker-dealers relying on Exemption
(A)(1) from such rules and requirements. If not, which rules should
apply and why? Alternatively, and as under current Rule 15a-6(a)(3),
should the intermediating U.S. registered broker-dealer be required to
comply with certain rules in lieu of the foreign broker-dealer? If so,
which rules and why? Should the requirements differ based on whether
the securities are U.S. securities or foreign securities and where the
transactions are executed? Would exempting foreign broker-dealers from
such rules and regulations place U.S. registered broker-dealers at a
competitive disadvantage?
b. Exemption (A)(2)
Under proposed Exemption (A)(2), qualified investors that have an
account with a U.S. registered broker-dealer would have access to
foreign broker-dealers regardless of the types of securities that are
involved. Foreign broker-dealers relying on proposed Exemption (A)(2)
would be permitted to effect transactions in securities, provided,
among other things, that a U.S. registered broker-dealer acts as
custodian for any resulting transactions.\166\ As a result, a U.S.
registered broker-dealer would hold the funds and securities of the
qualified investor and be subject to the Commission's rules relating to
the safeguarding of customer assets, such as Exchange Act Rule 15c3-3.
As with proposed Exemption (A)(1), proposed Exemption (A)(2) would be
limited to transactions with qualified investors, which we believe are
sophisticated investors that can be expected to understand the risk of
dealing with foreign broker-dealers that are not regulated by the
Commission.
---------------------------------------------------------------------------
\166\ See Part III.D.1.b., supra.
---------------------------------------------------------------------------
Given the requirement that a U.S. registered broker-dealer maintain
custody of qualified investors' funds and securities from any resulting
transactions and the sophistication of qualified investors, as well as
the other investor protections in the proposed rule, the Commission
preliminarily believes that it would be necessary or appropriate in the
public interest, and would be consistent with the protection of
investors, to exempt foreign broker-dealers relying on Exemption (A)(2)
of the proposed rule from the registration requirements of Sections
15(a)(1) and 15B(a)(1) of the Exchange Act and the reporting and other
requirements of the Exchange Act (other than Sections 15(b)(4) and
15(b)(6)), and the rules and regulations thereunder, that apply
specifically to a broker-dealer that is not registered with the
Commission solely by virtue of its status as a broker or dealer.
The Commission solicits comment on whether it would be necessary or
appropriate in the public interest, and consistent with the protection
of investors, to exempt foreign broker-dealers relying on Exemption
(A)(2) from such rules and requirements. If not, which rules should
apply and why? Alternatively, as under current Rule 15a-6(a)(3), should
the intermediating U.S. registered broker-dealer be required to comply
with certain rules in lieu of the foreign broker-dealer? If so, which
rules and why? Should the requirements differ based on whether the
securities are U.S. securities or foreign securities and where the
transactions are executed? Would exempting foreign broker-dealers from
such rules and regulations place U.S. registered broker-dealers at a
competitive disadvantage?
3. Proposed Rule 15a-6(a)(4)
As explained above, paragraph (a)(4) of proposed Rule 15a-6 would
provide an additional exemption for foreign broker-dealers that effect
transactions
[[Page 39201]]
for certain classes of investors, namely, U.S. persons that act in a
fiduciary capacity for an account of a foreign resident client.\167\
---------------------------------------------------------------------------
\167\ See Part III.E., supra.
---------------------------------------------------------------------------
Because of the nature and/or location of these persons, the
Commission preliminarily believes that it would be necessary or
appropriate in the public interest, and would be consistent with the
protection of investors, to exempt foreign broker-dealers relying on
paragraph (a)(4)(vi) of the proposed rule from the registration
requirements of Sections 15(a)(1) and 15B(a)(1) of the Exchange Act and
the reporting and other requirements of the Exchange Act (other than
Sections 15(b)(4) and 15(b)(6)), and the rules and regulations
thereunder, that apply specifically to a broker-dealer that is not
registered with the Commission solely by virtue of its status as a
broker or dealer.
The Commission solicits comment on whether it would be necessary or
appropriate in the public interest, and be consistent with the
protection of investors, to exempt foreign broker-dealers relying on
paragraph (a)(4)(vi) of the proposed rule from such rules and
requirements. If not, which rules should apply and why?
4. Proposed Rule 15a-6(a)(5)
As explained above, paragraph (a)(5) of proposed Rule 15a-6 would
allow a foreign broker-dealer that is a member of a foreign options
exchange to effect transactions in options on foreign securities listed
on that exchange for a qualified investor that has not otherwise been
solicited by the foreign broker-dealer.\168\ Under this exemption, a
foreign broker-dealer, a foreign options exchange and representatives
of the foreign options exchange could conduct certain activities or
communicate with a qualified investor in a manner that might otherwise
be considered a form of solicitation, as described above.\169\
Transactions effected by or through the foreign broker-dealer with or
for qualified investors that result from these activities or
communications would not require registration or, in some situations,
compliance with proposed Rule 15a-6(a)(3). However, while these
activities would not necessarily constitute a form of solicitation, the
Commission anticipates that given the broad interpretation of
solicitation, it would be difficult, if not impractical, to conduct
repeated transactions with the same qualified investor without a
foreign broker-dealer engaging in some form of communication that would
constitute solicitation. Therefore, the Commission anticipates that
most transactions with qualified investors resulting from these
activities or communications would need to be completed pursuant to
proposed Rules 15a-6(a)(3).
---------------------------------------------------------------------------
\168\ See Part III.F., supra.
\169\ See proposed Rules 15a-6(a)(5)(i)-(iii).
---------------------------------------------------------------------------
Hence, for the reasons given above in the discussion of paragraphs
(a)(2) and (a)(3) of the proposed rule, the Commission preliminarily
believes that it would be necessary or appropriate in the public
interest, and would be consistent with the protection of investors to
exempt foreign broker-dealers relying on paragraph (a)(5) of the
proposed rule from the registration requirements of Sections 15(a)(1)
and 15B(a)(1) of the Exchange Act and the reporting and other
requirements of the Exchange Act (other than Sections 15(b)(4) and
15(b)(6)), and the rules and regulations thereunder, that apply
specifically to a broker-dealer that is not registered with the
Commission solely by virtue of its status as a broker or dealer.
The Commission solicits comment on whether it would be necessary or
appropriate in the public interest, and be consistent with the
protection of investors, to exempt foreign broker-dealers relying on
paragraph (a)(5) of the proposed rule from such rules and requirements.
If not, which rules should apply and why?
IV. Preliminary Findings
Section 15(a)(2) of the Exchange Act provides that the Commission,
by rule or order, as it deems consistent with the public interest and
the protection of investors, may conditionally or unconditionally
exempt from Section 15(a)(1) any broker or dealer or class of brokers
or dealers. Section 36 of the Exchange Act provides general exemptive
authority to the Commission to exempt any person or class of persons or
transactions from any provision of the Exchange Act, to the extent that
such exemption is necessary or appropriate in the public interest and
is consistent with the protection of investors. As described in Part
III.G., above, the Commission preliminarily believes that the proposed
exemptions would be necessary or appropriate in the public interest and
would be consistent with the protection of investors.
V. General Request for Comment
In addition to the specific requests for comment above, the
Commission seeks comment generally on all aspects of the proposed
amendments to Rule 15a-6 under the Exchange Act. The Commission
anticipates that all prior staff no-action relief under Rule 15a-6
would be superseded if the Commission were to adopt this proposed rule
and interpretive guidance. Are there additional issues stemming from
the 1989 Adopting Release or related staff guidance that are not
addressed in the proposal and that should be addressed by this rule or
interpretive guidance? Commenters are invited to provide empirical data
to support their views. Comments are of the greatest assistance to our
rulemaking initiatives if accompanied by supporting data and analysis
of the issues addressed, and if accompanied by alternative suggestions
to our proposals when appropriate. Commenters are also welcome to offer
their views on any other issues raised by the proposed amendments to
Rule 15a-6.
VI. Administrative Law Matters
A. Paperwork Reduction Act Analysis
Certain provisions of current Rule 15a-6 contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995.\170\ The Commission has previously submitted
these information collections to the Office of Management and Budget
(``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 CFR
1320.11. The revised collections of information in the proposed
amendments would impose certain burdens on U.S. registered broker-
dealers, foreign broker-dealers and U.S. persons acting as fiduciaries
as described in proposed Rule 15a-6(a)(4)(vi). The Commission has
submitted the revised collections of information, entitled ``Rule 15a-6
under the Securities Exchange Act of 1934--Exemption of Certain Foreign
Brokers or Dealers'' (OMB control No. 3235-0371), to the OMB for
review. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid OMB control number.\171\
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\170\ 44 U.S.C. 3501 et seq.
\171\ See 44 U.S.C. 3512.
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1. Related Collections of Information Under Proposed Paragraphs
(a)(3)(i)(B) and (C) and (a)(3)(iii)(C) and (D)
Current paragraph (a)(3)(ii)(B) of Rule 15a-6 requires a U.S.
registered broker-dealer to determine that the foreign associated
persons of a foreign broker-dealer effecting transactions with U.S.
institutional investors or major U.S. institutional investors are not
subject to a statutory disqualification as defined in Section 3(a)(39)
of the Exchange Act, or certain substantially equivalent foreign
[[Page 39202]]
disciplinary actions. As described above, because the foreign
equivalents of statutory disqualification are now included in Section
3(a)(39), the proposed rule would no longer separately describe
them.\172\ In addition, the proposed rule would place the burden on the
foreign broker-dealer to determine that its foreign associated persons
effecting transactions with a qualified investor are not subject to a
statutory disqualification as defined in Section 3(a)(39) of the
Exchange Act.\173\
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\172\ See Part III.D.3., supra; see also proposed Rule 15a-
6(a)(3)(i)(B).
\173\ See proposed Rule 15a-6(a)(3)(i)(B).
---------------------------------------------------------------------------
Current paragraph (a)(3)(iii)(C) of Rule 15a-6 requires a U.S.
registered broker-dealer to obtain from the foreign broker-dealer, with
respect to each foreign associated person, the types of information
specified in Rule 17a-3(a)(12) under the Exchange Act,\174\ provided
that the information required by paragraph (a)(12)(i)(D) of that rule
includes sanctions imposed by foreign securities authorities,
exchanges, or associations, including statutory disqualification.\175\
Proposed paragraph (a)(3)(i)(C) of Rule 15a-6 would require that the
foreign broker-dealer have such information regarding its foreign
associated persons in its files.
---------------------------------------------------------------------------
\174\ See Part III.D.3., supra.
\175\ See 17 CFR 240.15a-6(a)(3)(iii)(C).
---------------------------------------------------------------------------
Proposed paragraphs (a)(3)(iii)(C) and (D) of Rule 15a-6 would
require that a registered broker-dealer obtain and record a
representation from the foreign broker-dealer that the foreign broker-
dealer has determined that its foreign associated persons effecting
transactions with a qualified investor are not subject to a statutory
disqualification as defined in Section 3(a)(39) of the Exchange Act and
has the information required by proposed paragraph (a)(3)(i)(C) of Rule
15a-6 in its files.
a. Collection of Information
Proposed paragraphs (a)(3)(i)(B) and (C) and (a)(3)(iii)(C) and (D)
of Rule 15a-6 all would require ``collections of information,'' as that
term is defined in 44 U.S.C. 3502(3). Proposed paragraph (a)(3)(i)(B)
would require a foreign broker-dealer to make a determination that its
foreign associated persons effecting transactions with a qualified
investor are not subject to a statutory disqualification as defined in
Section 3(a)(39) of the Exchange Act.\176\ Proposed paragraph
(a)(3)(i)(C) would require that the foreign broker-dealer have in its
files information specified in Rule 17a-3(a)(12) under the Exchange
Act, including information related to sanctions imposed by foreign
securities authorities, foreign exchanges, or foreign
associations.\177\ Thus, each requires a collection of information by
the foreign broker-dealer.
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\176\ See proposed Rule 15a-6(a)(i)(B).
\177\ See proposed Rule 15a-6(a)(i)(C).
---------------------------------------------------------------------------
Proposed paragraph (a)(3)(iii)(C) would require that a U.S.
registered broker-dealer obtain a representation from the foreign
broker-dealer that the foreign broker-dealer has made the
determinations that would be required by proposed paragraph
(a)(3)(i)(B) and has in its files the information that would be
required by proposed paragraph (a)(3)(i)(C). Proposed paragraph
(a)(3)(iii)(C) therefore would require a collection of information by
both the foreign broker-dealer and the U.S. registered broker-dealer in
that the foreign broker-dealer must provide the representation and the
U.S. registered broker-dealer must obtain that representation.
Proposed paragraph (a)(3)(iii)(D) would require a U.S. registered
broker-dealer to maintain a record of the representations it obtains
pursuant to proposed paragraph (a)(3)(iii)(C). This proposed paragraph
would require a collection of information by the U.S. registered
broker-dealer.
b. Proposed Use of Information
The collections of information under proposed paragraphs
(a)(3)(i)(B) and (C) and proposed paragraphs (a)(3)(iii)(C) and (D) are
intended to protect U.S. investors from contacts with foreign
associated persons with a disciplinary history.
c. Respondents
As discussed above, proposed paragraphs (a)(3)(i)(B) and (C) and
proposed paragraphs (a)(3)(iii)(C) and (D) of Rule 15a-6 would require
collections of information by both foreign broker-dealers and U.S.
registered broker-dealers. All foreign broker-dealers that take
advantage of the exemption from registration under the proposed rule
would be required to comply with proposed paragraphs (a)(3)(i)(B) and
(C) and proposed paragraph (a)(3)(iii)(C). The Commission estimates
that approximately 700 foreign broker-dealers would take advantage of
the exemption from registration under the proposed rule and therefore
be subject to the collection of information requirements in proposed
paragraphs (a)(3)(i)(B) and (C) and proposed paragraph
(a)(3)(iii)(C).\178\
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\178\ Based on information the staff obtained in discussions
with industry representatives, the Commission estimates that
approximately 40 U.S. registered broker-dealers would serve as U.S.
registered broker-dealers under Exemption (A)(1) under the proposed
rule. The Commission estimates that each of these 40 U.S. registered
broker-dealers would do so for an average of 10 foreign broker-
dealers, so that an estimated total of 400 foreign broker-dealers
would utilize Exemption (A)(1) under the proposed rule. The
Commission also estimates based on information the staff obtained in
discussions with industry that approximately 18 U.S. registered
broker-dealers would be engaged under Exemption (A)(2) by foreign
broker-dealers relying on the exemption provided by paragraph
(a)(3)(iii)(A)(2) of the proposed rule. The Commission believes that
Exemption (A)(2) under the proposed rule would be utilized by
approximately 300 foreign broker-dealers (an average of 16.67 per
each of the 18 U.S. registered broker-dealers acting under Exemption
(A)(2)--assuming an even distribution of foreign broker-dealers per
U.S. registered broker-dealer operating under the exemption, some
U.S. registered broker-dealers would do so for 16 foreign broker-
dealers and some would do so for 17 foreign broker-dealers).
Therefore, the Commission estimates that a total of 700 foreign
broker-dealers would take advantage of one or both exemptions from
registration under the proposed rule.
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Similarly, all U.S. registered broker-dealers engaged by foreign
broker-dealers to assume the responsibilities of a U.S. registered
broker-dealer under the proposed rule, under either exemption, would be
required to comply with proposed paragraphs (a)(3)(iii)(C) and (D). The
Commission estimates that approximately 40 U.S. registered broker-
dealers would be engaged by foreign broker-dealers to assume the
responsibilities under Exemption (A)(1) and approximately 18 U.S.
registered broker-dealers would be engaged by foreign broker-dealers to
assume the responsibilities under Exemption (A)(2) under the proposed
rule, for a total of approximately 58 U.S. registered broker-dealers
assuming the responsibilities under paragraph (a)(3)(iii) and therefore
be subject to the collection of information requirements in proposed
paragraphs (a)(3)(iii)(C) and (D).
d. Reporting and Recordkeeping Burden
The Commission estimates for the purposes of proposed paragraph
(a)(3)(i)(B) that each of the approximately 700 foreign broker-dealer
respondents would employ approximately 5 foreign associated persons
that would effect transactions with qualified investors and would spend
approximately 10 hours per year determining that these foreign
associated persons are not subject to a statutory disqualification as
defined in Section 3(a)(39) of the Exchange Act.\179\ The Commission
also estimates for the purposes of proposed paragraph (a)(3)(i)(C) that
each of the
[[Page 39203]]
approximately 700 foreign broker-dealer respondents would spend
approximately 10 hours per year complying with the terms of that
proposed paragraph. Thus, the Commission estimates for the purposes of
proposed paragraph (a)(3)(iii)(C) that each of the approximately 700
foreign broker-dealer respondents would spend approximately 5 hours per
year providing representations to U.S. registered broker-dealers that
they have complied with proposed paragraphs (a)(3)(i)(B) and (C).
Therefore, the annual burden imposed by proposed paragraphs
(a)(3)(i)(B) and (C) and proposed paragraph (a)(3)(iii)(C) on each of
the 700 foreign broker-dealers would be approximately 25 hours for an
aggregate annual burden on all foreign broker-dealers of 17,650 hours
(700 foreign broker-dealers x 25 hours per foreign broker-dealer).
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\179\ As noted above, the bases for these estimates come from
information the staff obtained in discussions with industry
representatives. Unless otherwise indicated, each of the
Commission's estimates used for the purposes of calculating the
number of respondents or the burden imposed upon those respondents
is based on such discussions.
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The Commission estimates for the purposes of proposed paragraphs
(a)(3)(iii)(C) and (D) that each U.S. registered broker-dealer acting
under Exemption (A)(1) would spend approximately 5 hours each year
obtaining and recording representations required by proposed paragraphs
(a)(3)(iii)(C) and (D). Similarly, the Commission estimates that each
U.S. registered broker-dealer acting under Exemption (A)(2) would spend
approximately 8 hours each year obtaining and recording representations
required by proposed paragraphs (a)(3)(iii)(C) and (D). Thus, the
aggregate annual burden imposed by proposed paragraphs (a)(3)(i)(C) and
(D) on all U.S. registered broker-dealers would be approximately 344
hours (40 U.S. registered broker-dealers acting under Exemption (A)(1)
multiplied by 5 hours per broker-dealer plus 18 U.S. registered broker-
dealers acting under Exemption (A)(2) multiplied by 8 hours per broker-
dealer).
e. Collection of Information Is Mandatory
These collections of information would be mandatory for foreign
broker-dealers that choose to rely on the exemptions in paragraph
(a)(3) of the proposed rule and U.S. registered broker-dealers that
intermediate transactions for foreign broker-dealers that choose to
rely on the exemptions in paragraph (a)(3) of the proposed rule.
f. Confidentiality
Proposed paragraph (a)(3)(i)(C) would require foreign broker-
dealers to have in their files the type of information specified in
Rule 17a-3(a)(12) under the Exchange Act, provided that the information
required by paragraph (a)(12)(i)(D) of Rule 17a-3 shall include
information relating to sanctions imposed by foreign securities
authorities, foreign exchanges or foreign associations, including
without limitation those described in Section 3(a)(39) of the Exchange
Act. Proposed paragraph (a)(3)(iii)(D) would require U.S. registered
broker-dealers to maintain a written record of the representations
obtained from foreign broker-dealers, as required by proposed paragraph
(a)(3)(iii)(C).
All information related to transactions with qualified investors,
whether kept by U.S. registered broker-dealers or foreign broker-
dealers, would be subject to review and inspection by the Commission
and its representatives as required in connection with examinations,
investigations and enforcement proceedings. Such information is not
required to be disclosed to the public and will be kept confidential by
the Commission.
g. Record Retention Period
Proposed paragraphs (a)(3)(i)(B) and (C) and proposed paragraphs
(a)(3)(iii)(C) and (D) would not include record retention periods.
However, the U.S. registered broker-dealers would have to retain the
representations for the period specified under 17 CFR 240.17a-4(b)(7),
which requires broker-dealers to preserve all written agreements they
enter into relating to their business for a period of not less than
three years, the first two years in an easily accessible place.
2. Collection of Information Under Proposed Paragraph (a)(3)(i)(D)
a. Collection of Information
Proposed paragraph (a)(3)(i)(D) would require ``collections of
information,'' as that term is defined in 44 U.S.C. 3502(3), by foreign
broker-dealers. Proposed paragraph (a)(3)(i)(D) would require that a
foreign broker-dealer relying on either Exemption (A)(1) or Exemption
(A)(2) disclose to qualified investors that the foreign broker dealer
is regulated by a foreign securities authority and not by the
Commission. Foreign broker-dealers relying on Exemption (A)(1) would
also have to disclose to qualified investors whether U.S. segregation
requirements, U.S. bankruptcy protections and protections under the
SIPA would apply to any funds and securities held by the foreign
broker-dealer.
b. Proposed Use of Information
The collections of information required by proposed paragraph
(a)(3)(i)(D) are designed to put U.S. investors on notice that foreign
broker-dealers operating pursuant to the exemption in Rule 15a-
6(a)(3)(iii)(A)(1) are not subject to the same regulatory requirements
as U.S. registered broker-dealers. This notice is important because the
proposed rule would eliminate the current chaperoning requirements, as
described below, and allow a foreign broker-dealer to effect
transactions on behalf of qualified investors and custody qualified
investor funds and securities relating to any resulting transactions
with more limited participation in the transaction by a U.S. registered
broker-dealer.\180\
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\180\ Similarly, because of the limited participation of the
U.S. registered broker-dealer and the lack of chaperoning
requirements, the proposed rule would require that the foreign
broker-dealer be regulated for conducting securities activities in a
foreign country by a foreign securities authority.
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c. Respondents
As discussed above, the Commission estimates that approximately 400
foreign broker-dealers would rely on Exemption (A)(1) of the proposed
rule. All 400 foreign broker-dealers would be required to comply with
proposed paragraph (a)(3)(i)(D). The Commission also estimates that
approximately 300 foreign broker-dealers would rely on Exemption (A)(2)
of the proposed rule. These 300 foreign broker-dealers would only be
required to comply with proposed paragraph (a)(3)(i)(D)(1).
d. Reporting and Recordkeeping Burden
Each of the 700 foreign broker-dealers that would rely on either
Exemption (A)(1) or Exemption (A)(2) of the proposed rule would have to
make certain disclosures required by proposed paragraph (a)(3)(i)(D) to
each qualified investor from which the foreign broker-dealer induces or
attempts to induce the purchase or sale of any security. The Commission
believes that such disclosures would be conveyed in the course of other
communications between the foreign broker-dealer and the qualified
investor, such as the foreign broker-dealer's standard account-opening
documentation. Thus, we expect that the only collection of information
burden that proposed paragraph (a)(3)(i)(D) would impose on a foreign
broker-dealer would be the hour burden incurred in developing and
updating as necessary the standard documentation it will provide to
qualified investors. In addition, the Commission does not believe that
there would be a significant difference in the burden placed foreign
broker-dealers relying on either Exemption (A)(1) or Exemption (A)(2)
of the proposed rule by proposed paragraph (a)(3)(i)(D). The Commission
[[Page 39204]]
estimates that each of the 700 foreign broker-dealers that would rely
on either Exemption (A)(1) or Exemption (A)(2) of the proposed rule
would spend approximately 2 hours per year in drafting, reviewing or
updating as necessary their standard documentation for compliance with
proposed paragraph (a)(3)(i)(D). Therefore, the aggregate annual
collection of information burden imposed by proposed paragraph
(a)(3)(i)(D) on foreign broker-dealers would be approximately 1,400
hours (700 foreign broker-dealers multiplied by 2 hours per foreign
broker-dealer).
e. Collection of Information Is Mandatory
This collection of information would be mandatory for foreign
broker-dealers that rely on either Exemption (A)(1) or Exemption (A)(2)
of the proposed rule.
f. Confidentiality
The disclosures required by proposed paragraph (a)(3)(i)(D) would
be conveyed to a qualified investor in the course of communications
between the foreign broker-dealer and the qualified investor, such as
the foreign broker-dealer's standard account-opening documentation, and
therefore would not be confidential.
g. Record Retention Period
Proposed paragraph (a)(3)(i)(D) would not include a record
retention period.
3. Related Collections of Information Under Proposed Paragraphs
(a)(3)(iii)(B) and (D)
a. Collection of Information
Proposed paragraphs (a)(3)(iii)(B) and (D) would require
``collections of information,'' as that term is defined in 44 U.S.C.
3502(3), by U.S. registered broker-dealers. Proposed paragraph
(a)(3)(iii)(B) would require that a U.S. registered broker-dealer
obtain from a foreign broker-dealer and each of the foreign broker-
dealer's foreign associated persons written consents to service of
process for any civil action brought by or proceeding before the
Commission or a self-regulatory organization (as defined in Section
3(a)(26) of the Exchange Act).\181\ Proposed paragraph (a)(3)(iii)(D)
would require that the U.S. registered broker-dealer maintain a written
record of the consents to service of process obtained pursuant to
proposed paragraph (a)(3)(iii)(B).
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\181\ The consent would indicate that process may be served on
the foreign broker-dealer or foreign associated person by service on
the U.S. registered broker-dealer in the manner set forth on the
U.S. registered broker-dealer's current Form BD. See proposed Rule
15a-6(a)(3)(iii)(B).
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b. Proposed Use of Information
The collections of information under proposed paragraphs
(a)(3)(iii)(B) and (D) are designed to assist the Commission in its
regulatory function by ensuring that foreign broker-dealers and their
foreign associated persons effecting transactions with qualified
investors have consented to service of process.
c. Respondents
All U.S. registered broker-dealers engaged by foreign broker-
dealers to assume the responsibilities of a U.S. registered broker-
dealer under the proposed exemption would be subject to the collections
of information. As discussed above, the Commission estimates that
approximately 40 U.S. registered broker-dealers would act under
Exemption (A)(1) for foreign broker-dealers relying on the exemption
provided by paragraph (a)(3)(iii)(A)(1) of the proposed rule and that
approximately 18 U.S. registered broker-dealers would act under
Exemption (A)(2). Therefore, the Commission estimates that a total of
approximately 58 U.S. registered broker-dealers would have to comply
with the collection of information requirements in proposed paragraphs
(a)(3)(iii)(B) and (D).\182\
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\182\ The Commission understands that U.S. registered broker-
dealers acting under Exemption (A)(2) are likely to also act under
Exemption (A)(1) under the proposed rule. The Commission requests
comment regarding how frequently this would occur.
---------------------------------------------------------------------------
d. Reporting and Recordkeeping Burden
As discussed above, the Commission estimates that each of the 40
U.S. registered broker-dealers that would serve under Exemption (A)(1)
for affiliated foreign broker-dealers under the proposed rule would do
so for an average of 10 foreign broker-dealers. The Commission also
estimates that each such foreign broker-dealer would have an average of
5 foreign associated persons engaged in business under the proposed
rule. Therefore, proposed paragraphs (a)(3)(iii)(B) and (D) would
require each U.S. registered broker-dealer acting under Exemption
(A)(1) to obtain and record a total of 50 consents to service of
process from foreign associated persons and 10 consents to service of
process from foreign broker-dealers.
As discussed above, the Commission estimates that each of the 18
U.S. registered broker-dealers that would serve under Exemption (A)(2)
for qualified investors would do so for approximately 16.67 foreign
broker-dealers. Also as discussed above, the Commission estimates that
each such foreign broker-dealer would have an average of 5 foreign
associated persons engaged in business under the proposed rule.
Therefore, proposed paragraphs (a)(3)(iii)(B) and (D) would require a
U.S. registered broker-dealer acting under Exemption (A)(2) to obtain a
total of 83.35 consents to service of process from foreign associated
persons and 16.67 consents to service of process from foreign broker-
dealers.\183\
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\183\ Assuming a relatively even distribution of the estimated
300 foreign broker-dealers across the 18 U.S. registered broker-
dealers acting under Exemption (A)(2), proposed paragraphs
(a)(3)(iii)(B) and (D) would require some U.S. registered broker-
dealers acting under Exemption (A)(2) to obtain and record 83
consents to service of process from foreign associated persons and
some to obtain and record 84 consents to service of process from
foreign associated persons.
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The Commission further estimates that each affected U.S. registered
broker-dealer, acting under either exemption, would spend an average of
0.5 hours in obtaining and recording one consent under proposed
paragraphs (a)(3)(iii)(B) and (D). Each U.S. registered broker-dealer
acting under Exemption (A)(1) would therefore spend an average of 35
hours per year in its efforts at compliance with proposed paragraphs
(a)(3)(iii)(B) and (D) (0.5 hours per consent per representation
multiplied by the sum of 50 consents from foreign associated persons
plus 10 consents to service of process from foreign broker-dealers plus
10 representations). Similarly, each U.S. registered broker-dealer
acting under Exemption (A)(2) would spend an average of 50.01 hours per
year in its efforts at compliance with proposed paragraphs
(a)(3)(iii)(B) and (D) (0.5 hours per consent per representation
multiplied by the sum of 83.35 consents from foreign associated persons
plus 16.67 consents to service of process from foreign broker-dealers).
Therefore, the Commission estimates an annual aggregate reporting and
recordkeeping burden of 2,300.18 hours for compliance with proposed
paragraphs (a)(3)(iii)(B) and (D) (35 hours per 40 registered broker-
dealers acting under Exemption (A)(1) for a total of 1,400 hours, plus
50.01 hours per 18 registered broker-dealers acting under Exemption
(A)(2) for a total of 900.18 hours).
e. Collection of Information Is Mandatory
This collection of information would be mandatory for U.S.
registered broker-dealers that intermediate transactions for foreign
broker-dealers that choose to
[[Page 39205]]
rely on the exemption in paragraph (a)(3) of the proposed rule.
f. Confidentiality
The proposed rule would require that U.S. registered broker-dealers
maintain a written record of the information and consents and make such
records available to the Commission upon request. All information
related to transactions with qualified investors, whether kept by U.S.
registered broker-dealers or foreign broker-dealers, would be subject
to review and inspection by the Commission and its representatives as
required in connection with examinations, investigations and
enforcement proceedings. Such information is not required to be
disclosed to the public and will be kept confidential by the
Commission.
g. Record Retention Period
Proposed paragraphs (a)(3)(iii)(B) and (D) would not include
separate record retention periods. However, the U.S. registered broker-
dealers would have to retain the consents for the period specified
under 17 CFR 240.17a-4(b)(7), which requires broker-dealers to preserve
all written agreements they enter into relating to their business for a
period of not less than three years, the first two years in an easily
accessible place.
4. Related Collections of Information Under Proposed Paragraph
(a)(4)(vi)(B)
Under the proposed rule, a foreign broker-dealer would be exempt
from the registration, reporting and other requirements of the Exchange
Act to the extent that it effects transactions in securities with or
for, or induces or attempts to induce the purchase or sale of any
security by any U.S. person, other than a registered broker-dealer or
bank acting pursuant to an exception or exemption from the definition
of ``broker'' or ``dealer'' in Section 3(a)(4)(B), 3(a)(4)(E), or
3(a)(5)(C) of the Exchange Act or the rules thereunder, that acts in a
fiduciary capacity for an account of a foreign resident client.\184\ As
a condition of this exemption, the foreign broker-dealer would be
required, among other things, to obtain and maintain a representation
from the U.S. person that the account is managed in a fiduciary
capacity for a foreign resident client.\185\
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\184\ See proposed paragraph (a)(4)(vi).
\185\ See proposed paragraph (a)(4)(vi)(B).
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a. Collection of Information
Proposed paragraph (a)(4)(vi)(B) would require ``collections of
information'' as that term is defined in 44 U.S.C. 3502(3) in that it
would require foreign broker-dealers to obtain and maintain a
representation for each account managed by a U.S. fiduciary that the
account is managed in a fiduciary capacity for a foreign resident
client. This would require foreign broker-dealers to obtain and record
each representation. The proposed paragraph would also require a
collection of information by the U.S. fiduciary, which would be
required to provide the representation to the foreign broker-dealer.
b. Proposed Use of Information
The collection of information in proposed paragraph (a)(4)(vi)(B)
would assist foreign broker-dealers seeking to rely on the exemption
under proposed paragraph (a)(4)(vi) in complying with the terms of that
exemption and would provide the Commission with access to such
information.
c. Respondents
As discussed above, the Commission estimates that approximately 700
foreign broker-dealers that would take advantage of either exemption
under proposed paragraphs (a)(3)(iii)(A)(1) and (2).\186\ The
Commission believes that these estimated 700 foreign broker-dealers
represent the number of foreign broker-dealers that engage in
international broker-dealer business and would take advantage of the
exemption in proposed paragraph (a)(4)(vi). Even though not all of
these 700 foreign broker-dealers may actually utilize the exemption in
proposed paragraph (a)(4)(vi), for the purposes of determining the
number of foreign broker-dealer respondents for the collection of
information in proposed paragraph (a)(4)(vi)(B), the Commission
estimates that all 700 foreign broker-dealers that engage in
international business and that would otherwise take advantage of
either exemption under proposed paragraph (a)(3)(iii)(A)(1) or (2)
would also utilize the exemption in proposed paragraph (a)(4)(vi) and
be respondents for the purposes of the collection of information in
proposed paragraph (a)(4)(vi)(B).
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\186\ See note 178, supra.
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The Commission estimates that there are 349 U.S. fiduciaries that
would be respondents for the purposes of the collection of information
in proposed paragraph (a)(4)(vi)(B).
d. Reporting and Recordkeeping Burden
The Commission estimates that each U.S. fiduciary would spend
approximately 5 hours per year providing representations in accordance
with proposed paragraph (a)(4)(vi)(B). Therefore, the Commission
estimates that the aggregate burden imposed by proposed paragraph
(a)(4)(vi)(B) on all of the approximately 349 U.S. fiduciaries would be
approximately 1,745 hours per year (5 hours multiplied by 349 U.S.
fiduciaries).
The Commission also estimates that each foreign broker-dealer would
spend approximately 5 hours per year obtaining and recording the
representations required by proposed paragraph (a)(4)(vi)(B) from U.S.
fiduciaries. Therefore, the Commission estimates that the aggregate
burden imposed by proposed paragraph (a)(4)(vi)(B) on all the
approximately 700 foreign broker-dealers would be approximately 3,500
hours per year (5 hours multiplied by 700 foreign broker-dealers).
e. Collection of Information Is Mandatory
These collections of information would be mandatory for U.S.
fiduciaries and foreign broker-dealers that effect transactions
according to the proposed exemption in proposed paragraph (a)(4)(vi) of
the proposed rule.
f. Confidentiality
The proposed rule would require that a foreign broker-dealer
maintain the representations it would obtain from a U.S. fiduciary
regarding the U.S. fiduciary's accounts. All information related to
transactions with qualified investors, whether kept by U.S. registered
broker-dealers or foreign broker-dealers, would be subject to review
and inspection by the Commission and its representatives as required in
connection with examinations, investigations and enforcement
proceedings. Such information is not required to be disclosed to the
public and will be kept confidential by the Commission.
g. Record Retention Period
Proposed paragraph (a)(4)(vi)(B) would not include a record
retention period.
5. Request for Comment
The Commission requests comment on the proposed collections of
information in order to: (1) Evaluate whether the proposed collection
of information is necessary for the proper performance of the functions
of the Commission, including whether the information would have
practical utility; (2) evaluate the accuracy of the Commission's
estimates of the burden of the proposed collections of information; (3)
determine whether there are ways to
[[Page 39206]]
enhance the quality, utility and clarity of the information to be
collected; (4) evaluate whether there are ways to minimize the burden
of the collection of information on those who respond, including
through the use of automated collection techniques or other forms of
information technology; and (5) evaluate whether the proposed rules
would have any effects on any other collection of information not
previously identified in this section.
Persons who desire to submit comments on the collection of
information requirements should direct their comments to OMB,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Washington, DC 20503, and
should also send a copy of their comments to Secretary, Securities and
Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090, and
refer to File No. S7-16-08. OMB is required to make a decision
concerning the collections of information between 30 and 60 days after
publication of this document in the Federal Register; therefore,
comments to OMB are best assured of having full effect if OMB receives
them within 30 days of this publication. Requests for the materials
submitted to OMB by the Commission with regard to these collections of
information should be in writing, refer to File No. S7-16-08, and be
submitted to the Securities and Exchange Commission, Records Management
Office, 100 F Street, NE, Washington, DC 20549-1110.
B. Consideration of Benefits and Costs
1. Expected Benefits
The proposed rule would have several important benefits. First, the
proposed rule would allow a broader category of U.S. investors \187\
greater access to foreign broker-dealers and foreign markets by
expanding and streamlining the conditions under which a foreign broker-
dealer could operate without triggering the registration requirements
of Section 15(a)(1) or 15B(a)(1) of the Exchange Act. Among the
benefits to U.S. investors would be expanded investment and
diversification opportunities and lower cost of accessing such
opportunities. Because the proposed rule would broaden the category of
U.S. investors that may interact with foreign broker-dealers, the
expanded investment and diversification opportunities would be
available to a greater number of U.S. investors that the Commission
believes possess the investment experience to effect transactions with
or through unregistered broker-dealers under the safeguards imposed by
the proposed rule. This also would be a benefit to foreign broker-
dealers, which would have access to an expanded potential client base
without being required to register with the Commission as broker-
dealers.
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\187\ As noted above, the proposed rule would expand the
category of U.S. investors with which a foreign broker-dealer may
interact under Rule 15a-6(a)(2) from major U.S. institutional
investors to qualified investors and generally expand the category
of U.S. investors with which a foreign broker-dealer may interact
under Rule 15a-6(a)(3) from major U.S. institutional investors and
U.S. institutional investors to qualified investors. This would
allow foreign broker-dealers, for the first time, to interact with a
corporation, company, or partnership that owns and invests on a
discretionary basis $25 million or more in investments under
paragraph (a)(3). In addition, under the proposed rule, natural
persons who own or invest on a discretionary basis not less than
$25,000,000 in investments would be included. See Part III.A.,
supra.
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In addition, the Commission understands that the current
chaperoning requirements have been criticized as impractical and
imposing unnecessary operational and compliance burdens, particularly
for communications with broker-dealers in time zones outside those of
the United States. In this regard, the Commission believes that the
investor protections intended to be provided by the presence of
associated persons of U.S. registered broker-dealers during in-person
or telephonic communications between foreign associated persons of
foreign broker-dealers and U.S. investors, as under the current rule,
could be achieved by less operationally challenging methods.
Specifically, foreign associated persons that are subject to statutory
disqualification specified in Section 3(a)(39) of the Exchange Act
would be precluded from contacting qualified investors and foreign
broker dealers would be required to make disclosures to those
investors, placing them on notice that the foreign broker-dealer is
regulated by a foreign securities authority and not by the Commission
and, in the case of Exemption (A)(1), informing them that U.S.
segregation requirements, U.S. bankruptcy protections and protections
under the SIPA would apply to any funds and securities held by the
foreign broker-dealer.\188\ Accordingly, the proposed rule would allow
a foreign broker-dealer to have unchaperoned visits within the United
States and communications, both oral and electronic, with qualified
investors, as long as a U.S. registered broker-dealer assumes certain
limited responsibilities in connection with the foreign broker-dealer's
activities, as described above. As a result, the proposed rule should
facilitate communications between foreign broker-dealers and qualified
investors to communicate, while utilizing more efficient methods
designed to protect qualified investors.
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\188\ See proposed Rule 15a-6(a)(3)(i)(B) and (D).
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Second, the proposed rule would provide U.S. registered broker-
dealers and foreign broker-dealers with greater flexibility in how they
conduct business under paragraph (a)(3) of Rule 15a-6. For instance,
U.S. registered broker-dealers acting under Exemption (A)(1) would be
allowed to maintain copies of books and records in the form prescribed
by the foreign securities authority and with the foreign broker-dealer.
In general, the proposed rule would allow a foreign broker-dealer to
effect transactions on behalf of qualified investors and custody
qualified investor funds and securities relating to any resulting
transactions with more limited participation in the transaction by a
U.S. registered broker-dealer. Among other things, this would have the
benefit of eliminating the need for the U.S. registered broker-dealer
to ``double book'' transactions under current Rule 15a-6(a)(3). It
would also allow the foreign broker-dealer more flexibility in how it
communicates with qualified investors, as described above.
Third, while proposed Rule 15a-6 would impose certain costs on U.S.
registered broker-dealers acting under either exemption, as discussed
below, these costs would be markedly less than under current Rule 15a-
6. Most importantly, the proposed rule would significantly reduce the
cost for a U.S. registered broker-dealer to intermediate transactions
under paragraph (a)(3) of Rule 15a-6.
Under Exemption (A)(1), the U.S. registered broker-dealer would not
be required to effect transactions--and perform all of the functions
associated with effecting transactions, including, for example,
compliance with recording and recordkeeping rules, issuing
confirmations and maintaining custody of customer funds and
securities--on behalf of the qualified investor. Instead, under the
proposed rule, the U.S. registered broker-dealer would only be required
to collect and make available to the Commission certain limited
information. Specifically, the proposed rule would require a U.S.
registered broker-dealer acting under Exemption (A)(1) to maintain
certain books and records, including confirmations and statements
issued by the foreign broker-dealer to the qualified investor, but
would permit the U.S. registered broker-dealer to maintain those books
and records in the form, manner and for the
[[Page 39207]]
periods prescribed by the foreign securities authority regulating the
foreign broker-dealer and with the foreign broker-dealer.\189\ The
Commission believes that all U.S. registered broker-dealers acting
under Exemption (A)(1) in Rule 15a-6(a)(3) relationships would take
advantage of this option, thereby significantly lowering costs
associated with collecting and maintaining books and records, including
collection of information burdens under the Paperwork Reduction Act and
associated costs. There would also be significant cost savings for U.S.
registered broker-dealers acting under Exemption (A)(1) because they
would not have to clear and settle transactions, safeguard customer
funds and securities, or issue confirmations.
---------------------------------------------------------------------------
\189\ See proposed Rule 15a-6(a)(3)(iii)(A)(1) and (2).
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In addition, regardless of whether the U.S. registered broker-
dealer acts under Exemption (A)(1) or Exemption (A)(2), the proposed
rule would eliminate the current rule's requirement that the U.S.
registered broker-dealer make certain determinations regarding the
foreign broker-dealer and its associated persons. Under the proposed
rule, the U.S. registered broker-dealer would only be required to
obtain representations from the foreign broker-dealer regarding that
information.\190\ This would be a significant cost savings with respect
to the current rule because the U.S. registered broker-dealer would not
have to make the determination itself for each foreign broker-dealer
and its associated persons as under the current rule.
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\190\ See proposed Rule 15a-6(a)(3)(iii)(C).
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Finally, the proposed rule would reduce a foreign broker-dealer's
costs of meeting the conditions of the exemption in two principal ways.
First, the proposed amendments would make it less burdensome for
foreign broker-dealers to communicate directly with qualified
investors. Currently, Rule 15a-6 requires an associated person of a
U.S. registered broker-dealer to chaperone certain in-person visits and
oral communications between foreign associated persons and U.S.
institutional investors, with certain exceptions, and chaperone in-
person visits between foreign associated persons and major U.S.
institutional investors under certain conditions.\191\ The proposed
rule would allow a foreign broker-dealer to hold in-person meetings and
have oral and electronic communications with qualified investors
without the intermediation of an U.S. registered broker-dealer. This
would result in significant cost savings.
---------------------------------------------------------------------------
\191\ See 17 CFR 240.15a-6(a)(3)(ii)(A)(1) and (iii)(B). This
would be a cost savings for U.S. registered broker-dealers as well,
as they would no longer need to chaperone the in-person visits and
oral communications of foreign associated persons with U.S.
investors.
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Second, the proposed rule would provide a foreign broker-dealer
with the alternative of having a U.S. registered broker-dealer act
under Exemption (A)(1) or under Exemption (A)(2). These alternatives
would allow the foreign broker-dealer and the U.S. registered broker-
dealer, as well as the qualified investors, to determine the most cost
effective method for complying with the rule.
2. Expected Costs
Of course, reducing the cost of complying with paragraph (a)(3) of
Rule 15a-6 may encourage more U.S. registered broker-dealers and
foreign broker-dealers to rely on the rule, which would increase the
overall costs associated with complying with the requirements of Rule
15a-6. As noted above, the increased flexibility of the proposed rule
would provide U.S. investors with increased access to foreign broker-
dealers and foreign markets, which would presumably lead to increased
transactional activity under Rule 15a-6(a)(3). As a result, foreign
broker-dealers may experience some incremental cost increase. In
addition, because some of the responsibilities under paragraph (a)(3)
of the proposed rule would be shifted to the foreign broker-dealer,
foreign broker-dealers may incur some greater costs, some of which are
described below. We believe these increased costs would be
insignificant. For example, because foreign broker-dealers, as members
of foreign exchanges, typically are required to clear and settle
transactions in foreign securities, regardless of the requirements of
Rule 15a-6(a)(3), shifting the responsibility for clearing and settling
from the U.S. registered broker-dealer to foreign broker-dealers would
not increase their cost of complying with Rule 15a-6. Similarly, other
foreign governments or securities regulators may have laws or rules
comparable to the provisions in Section 3(a)(39) of the Exchange Act
related to statutory disqualification. Requiring foreign broker-dealers
to review the fitness of their associated persons under the provisions
of Section 3(a)(39), in addition to meeting the requirements of
equivalent foreign laws or rules, would impose an incremental cost on
those foreign broker-dealers.
Shifting some of the responsibilities under paragraph (a)(3) of the
proposed rule to foreign broker-dealers would have an effect on the
business activities of U.S. registered broker-dealers. For example,
shifting the responsibility for clearing and settling from the U.S.
registered broker-dealer to foreign broker-dealers would reduce the
compensation received by U.S. registered broker-dealers for these and
other services. The elimination of the chaperoning requirements of the
current rule may also reduce income to U.S. registered broker-dealers
that perform such services for foreign broker-dealers.
In addition, as described above, certain provisions of the proposed
rule would impose ``collection of information'' requirements within the
meaning of the Paperwork Reduction Act on foreign broker-dealers, U.S.
registered broker-dealers and U.S. fiduciaries.\192\ For each of the
collections of information that would be imposed by the proposed rule,
the relevant respondent or respondents would incur an hour burden in
complying with the collection of information requirements. For example,
as described above, proposed paragraph (a)(3)(i)(B) would require that
a foreign broker-dealer make a determination that its foreign
associated persons effecting transactions with a qualified investor are
not subject to a statutory disqualification. As explained, we estimate
each foreign broker-dealer that takes advantage of the exemption under
the proposed rule would spend approximately 10 hours per year in making
the determination required by proposed paragraph (a)(3)(i)(B). While
not a burden for the purposes of the PRA, the foreign broker-dealer
would also incur certain costs related to the 10 hours per year spent
making the determination required by proposed paragraph (a)(3)(i)(B).
Specifically, the determination likely would be made by an employee of
the foreign broker-dealer to whom the broker-dealer must pay a salary
or hourly wage. Therefore, the salaries and wages foreign broker-
dealers, U.S. registered broker-dealers and U.S. fiduciaries must pay
to the employees who would perform the work required by the collections
of information imposed by the proposed rule would be additional costs
of meeting the exemption in the proposed rule. These costs are
described in the following paragraphs.
---------------------------------------------------------------------------
\192\ See Part VI.A., supra.
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a. Collection of Information Costs to Foreign Broker-Dealers
As described above in the Paperwork Reduction Act Analysis,
proposed paragraphs (a)(3)(i)(B), (a)(3)(i)(C), (a)(3)(i)(D),
(a)(3)(iii)(C) and (a)(4)(vi)(B) each would impose collection of
[[Page 39208]]
information requirements on foreign broker-dealers. Other than proposed
paragraph (a)(3)(i)(C), these collections of information would require
the foreign broker-dealer to make certain legal determinations, provide
or obtain legal representations or draft disclosures. Therefore, the
Commission believes that the type of work required by each requirement
would be performed by a compliance attorney at each foreign broker-
dealer. Proposed paragraph (a)(3)(i)(C), however, is a record-keeping
requirement and the Commission believes that this type of work would be
performed by a compliance clerk at each foreign broker-dealer.
The Commission estimates that foreign broker-dealers pay compliance
attorneys at an hourly rate of (U.S.) $270.00 and compliance clerks at
an hourly rate of (U.S.) $62.00.\193\ Based on the estimates of the
hourly burden imposed by proposed paragraphs (a)(3)(i)(B),
(a)(3)(i)(B), (a)(3)(i)(D), (a)(3)(iii)(C) and (a)(4)(vi)(B) on foreign
broker-dealers, the Commission further estimates that foreign broker-
dealers would incur a total cost of (U.S.) $6,560.00 per year complying
with the collection of information requirements that would be imposed
by those paragraphs.\194\
---------------------------------------------------------------------------
\193\ See Securities Industry and Financial Markets
Association's ``Management & Professional Earnings in the Securities
Industry--2007'' (available at: http://www.sifma.org/research/
surveys/ professional-earning.shtml). The SIFMA study reflects a
survey of U.S. earnings. We estimate that the earnings of comparable
employees at foreign broker-dealers are similar, but solicit comment
on whether foreign salaries vary and, if so, how.
\194\ 10 hours per year at $270.00 per hour complying with
proposed paragraph (a)(3)(i)(B), 10 hours per year at $62.00 per
hour complying with proposed paragraph (a)(3)(i)(C), 2 hours per
year at $270.00 per hour complying with proposed paragraph
(a)(3)(i)(D), 5 hours per year at $270.00 per hour complying with
proposed paragraph (a)(3)(iii)(C) and 5 hours per year at $270.00
per hour complying with proposed paragraph (a)(4)(vi)(B). See Part
VI.A., supra.
---------------------------------------------------------------------------
b. Collection of Information Costs to U.S. Registered Broker-Dealers
As described above in the Paperwork Reduction Act Analysis,
proposed paragraphs (a)(3)(iii)(B), (C) and (D) each would impose
collection of information requirements on U.S. registered broker-
dealers. These collections of information would require the U.S.
registered broker-dealer to obtain and record certain legal
representations made by foreign broker-dealers. The Commission believes
that this type of work would be performed by a compliance attorney at
each U.S. registered broker-dealer. The Commission estimates that U.S.
registered broker-dealers pay compliance attorneys at an hourly rate of
(U.S.) $270.00. Based on the estimates of the hourly burden imposed by
proposed paragraphs (a)(3)(iii)(B), (C) and (D) on U.S. registered
broker-dealers, the Commission further estimates that U.S. registered
broker-dealers intermediating transactions for foreign broker-dealers
relying on Exemption (A)(1) would incur a total cost of (U.S.)
$10,800.00 per year complying with the collection of information
requirements that would be imposed by those paragraphs.\195\ The
Commission estimates that U.S. registered broker-dealers intermediating
transactions for foreign broker-dealers relying on Exemption (A)(2)
would incur a total cost of (U.S.) $13,527.00 per year complying with
the collection of information requirements that would be imposed by
those paragraphs.\196\
---------------------------------------------------------------------------
\195\ 5 hours per year at $270.00 per hour and 35 hours per year
at $270.00 per hour. See id.
\196\ 8 hours per year at $270.00 per hour and 50.1 hours per
year at $270.00 per hour. See id. As discussed above in the PRA
analysis, U.S. registered broker-dealers intermediating transactions
for foreign broker-dealers relying on Exemption (A)(1) would spend
different amounts of time complying with the collection of
information requirements of proposed paragraphs (a)(3)(iii)(B), (C)
and (D) than U.S. registered broker-dealers intermediating
transactions for foreign broker-dealers relying on Exemption (A)(2).
See Part VI.A., supra. Therefore, the monetary costs incurred in
complying with these paragraphs would also be different for
intermediating U.S. registered broker-dealers, depending on the
exemption relied upon by the foreign broker-dealer. See id.
---------------------------------------------------------------------------
c. Collection of Information Costs to U.S. Fiduciaries
As described above in the Paperwork Reduction Act Analysis,
proposed paragraph (a)(4)(vi)(B) would impose collection of information
requirements on U.S. fiduciaries in the form of a legal representation
provided to foreign broker-dealers that, for each account managed by a
U.S. fiduciary, the account is managed in a fiduciary capacity for a
foreign resident client. The Commission believes that these legal
representations would be made by a compliance attorney at each U.S.
fiduciary.
The Commission estimates that U.S. fiduciaries pay compliance
attorneys at an hourly rate of (U.S.) $270.00. Based on the estimates
of the hourly burden imposed by proposed paragraphs (a)(4)(vi)(B) on
U.S. fiduciaries, the Commission further estimates that U.S.
fiduciaries would incur a total cost of (U.S.) $1,350.00 per year
complying with the collection of information requirements that would be
imposed by that paragraph (5 hours per year at $270.00 per hour =
$1,350.00 per year).\197\
---------------------------------------------------------------------------
\197\ See id.
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3. Comment Solicited
We solicit comment on the costs and benefits to U.S. investors,
foreign broker-dealers, U.S. registered broker-dealers and others who
may be affected by the proposed amendments to Rule 15a-6. We request
views on the costs and benefits described above as well as on any other
costs and benefits that could result from adoption of the proposed rule
amendments. The Commission renews its request for comment on the
Commission's estimates of the hour burdens that would be imposed by the
collections of information in the proposed rule and also solicits
comment on its calculation of the monetary cost of those burdens. In
particular, the Commission requests comment on whether the work
required by the collections of information would be performed by the
individuals identified. For the cost of work that would be performed by
employees of foreign broker-dealers, is it reasonable to assume that
such employees generally earn salaries and wages similar to comparable
employees of U.S. registered broker-dealers, after conversion to U.S.
dollars? Commenters are requested to provide empirical data and other
factual support for their views, if possible.
C. Consideration of Burden on Competition, and on Promotion of
Efficiency, Competition and Capital Formation
Section 3(f) of the Exchange Act requires the Commission, whenever
it engages in rulemaking and is required to consider or determine
whether an action is necessary or appropriate in the public interest,
to consider whether the action would promote efficiency, competition
and capital formation.\198\ Exchange Act Section 23(a)(2) requires the
Commission, in making rules under the Exchange Act, to consider the
impact that any such rule would have on competition. This section also
prohibits the Commission from adopting any rule that would impose a
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act.\199\
---------------------------------------------------------------------------
\198\ 15 U.S.C. 78c(f).
\199\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------
The Commission believes the proposed amendments would not impose
any burden on competition not necessary or appropriate in furtherance
of the Exchange Act. By streamlining the conditions under which a
foreign broker-dealer may operate without
[[Page 39209]]
triggering the registration requirements of Section 15(a)(1) or
15B(a)(1) of the Exchange Act and the reporting and other requirements
of the Exchange Act (other than Sections 15(b)(4) and 15(b)(6)), the
proposed amendments to Rule 15a-6 should promote competition by
enhancing the ability of foreign broker-dealers to compete with U.S.
registered broker-dealers in the U.S. market, particularly with respect
to transactions in foreign securities.\200\
---------------------------------------------------------------------------
\200\ See generally, Part III.D.1., supra.
---------------------------------------------------------------------------
We note, in particular, that making Exemption (A)(1) available only
to a foreign broker-dealer conducting a predominantly foreign business
would provide U.S. investors increased access to foreign expertise and
foreign securities and markets without creating opportunities for
regulatory arbitrage vis-[agrave]-vis U.S. securities markets.\201\ As
discussed above, this is particularly important because, under
Exemption (A)(1), for the first time, a foreign broker-dealer would be
able to provide full-service brokerage services (including maintaining
custody of funds and securities from resulting transactions) to U.S.
investors.\202\ We are proposing an 85 percent threshold for
determining whether a foreign broker-dealer conducts a predominantly
foreign business because a lower threshold may allow a foreign broker-
dealer to conduct significant business in U.S. securities with U.S.
investors without being regulated by the Commission. While we believe
that the 85% threshold would be effective in eliminating the
opportunities for regulatory arbitrage, allowing foreign broker-dealers
to conduct any business in U.S. securities could affect the competitive
positions of U.S. registered broker-dealers and foreign broker-
dealers.\203\
---------------------------------------------------------------------------
\201\ See Part III.D.1.a., supra.
\202\ See id.
\203\ See Part III.D.1.a.ii., supra.
---------------------------------------------------------------------------
Exemption (A)(2), which would not require a foreign broker-dealer
to conduct a predominantly foreign business, would allow foreign
broker-dealers to compete more directly with U.S. registered broker-
dealers without limitation on the type of security, U.S. or foreign. In
order to preserve measures of investor protection, however, the
proposed rule would require a U.S. registered broker-dealer to keep
books and records and act as custodian of funds and securities.\204\
---------------------------------------------------------------------------
\204\ See Part III.D.1.b.i., supra.
---------------------------------------------------------------------------
We solicit comment on whether the proposed amendments would promote
competition, including whether investors would be more or less likely
to choose to invest in foreign markets under the proposed rule.
The Commission also believes the proposed amendments would promote
efficiency. As U.S. investors increasingly invest in securities whose
primary market is outside the United States, the ability of these
investors to obtain ready access to foreign markets has grown in
importance.\205\ In some cases, foreign broker-dealers may offer such
access to these U.S. investors by more efficient means than a U.S.
registered broker-dealer could. For example, a foreign broker-dealer
may more efficiently provide a U.S. investor with the means to execute
trades quickly in a wide range of foreign securities markets. A foreign
broker-dealer may also offer expertise and access to research reports
concerning foreign companies, industries and market environments.\206\
Allowing foreign broker-dealers to provide these services to certain
classes of U.S. investors without registering, but subject to the
conditions of proposed Rule 15a-6, would further stimulate the
competition and efficiencies promoted by the current rule.
---------------------------------------------------------------------------
\205\ See Part III.A., supra.
\206\ See generally, Part III.D.1., supra.
---------------------------------------------------------------------------
The proposed amendments to Rule 15a-6 are intended to promote
efficiency by reducing the costs of compliance for both U.S. registered
broker-dealers and foreign broker-dealers conducting transactions
pursuant to paragraph (a)(3). As discussed above, the proposed rule
should decrease the burden on U.S. registered broker-dealers acting
under both Exemption (A)(1) and Exemption (A)(2) for foreign broker-
dealers. While some of this burden would be shifted to foreign broker-
dealers, overall the burden of complying with the proposed rule would
be lessened. As a result, we believe that the proposed rule would
enable U.S. investors to more efficiently gain access to foreign
broker-dealers.
Although the proposed amendments may facilitate capital formation
and capital raising by foreign broker-dealers by increasing the
available pool of U.S. investors foreign broker-dealers can contact
directly, the Commission does not believe that they would have any
significant effect on capital formation. We note that U.S. investors
can currently obtain access to foreign securities through U.S. broker-
dealers.
We solicit comment on whether the proposed amendments would impose
a burden on competition or whether they would promote efficiency,
competition and capital formation. Commenters are requested to provide
empirical data and other factual support for their views if possible.
D. Consideration of the Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, or ``SBREFA,'' \207\ the Commission must advise the Office
of Management and Budget as to whether the proposed amendments to Rule
15a-6 constitute a ``major'' rule. Under SBREFA, a rule is considered
``major'' where, if adopted, it would result or is likely to result in:
An annual effect on the economy of $100 million or more (either in the
form of an increase or a decrease); a major increase in costs or prices
for consumers or individual industries; or a significant adverse effect
on competition, investment, or innovation.
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\207\ Pub. L. 104-121, Title II, 110 Stat. 857 (1996) (codified
in various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C.
601).
---------------------------------------------------------------------------
If a rule is ``major,'' its effectiveness would generally be
delayed for 60 days pending Congressional review. We request comment on
the potential impact of the proposed amendments on the economy on an
annual basis. Commenters are requested to provide empirical data and
other factual support for their views to the extent possible.
E. Regulatory Flexibility Certification
Section 3(a) of the Regulatory Flexibility Act (``RFA'') requires
the Commission to undertake an initial regulatory flexibility analysis
of the impact of a proposed rule on small entities, unless the
Commission certifies that the rule, if adopted, would not have a
significant economic impact on a substantial number of small entities.
The application of the RFA to proposed Rule 15a-6 is limited, because
its exemptive provisions would be restricted to foreign broker-dealers,
which need not be considered under the RFA. In addition, to the extent
that the proposed rule, if adopted, would impose any costs on U.S.
registered broker-dealer affiliates of such foreign broker-dealers or
on other domestic broker-dealers, those costs are not significant and
would not impact a substantial number of small domestic broker-dealers.
Staff discussions with industry have indicated that small domestic
broker-dealers generally are not engaged in Rule 15a-6(a)(3)
arrangements with foreign broker-dealers, and have not indicated that
this would change in the event the conditions of the rule were amended.
Accordingly, the Commission certifies that the proposed rule, if
adopted, would not have a significant economic
[[Page 39210]]
impact on a substantial number of small entities.
VII. Statutory Basis
Pursuant to the Exchange Act and particularly sections 3, 10, 15,
17, 23, 30 and 36 thereof, 15 U.S.C. 78c, 78j, 78o, 78q, 78w, 78dd and
78mm, the Commission proposes to amend Sec. 240.15a-6 of Title 17 of
the Code of Federal Regulations in the manner set forth below.
VIII. Text of Proposed Amendments
Lists of Subjects in 17 CFR Part 240
Broker-dealers, Reporting and recordkeeping requirements,
Securities.
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is proposed to be amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5,
78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4,
80b-11 and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise noted.
* * * * *
2. Revise Sec. 240.15a-6 to read as follows:
Sec. 240.15a-6 Exemption of certain foreign brokers or dealers.
(a) A foreign broker or dealer shall be exempt from the
registration requirements of sections 15(a)(1) and 15B(a)(1) of the Act
and the reporting and other requirements of the Act (other than
sections 15(b)(4) and 15(b)(6)), and the rules and regulations
thereunder, that apply specifically to a broker or dealer that is not
registered with the Commission solely by virtue of its status as a
broker or dealer, with respect to a particular transaction or
solicitation, to the extent that the foreign broker or dealer operates
in compliance with paragraph (a)(1), (a)(2), (a)(3), (a)(4) or (a)(5)
of this section with respect to such transaction or solicitation.
(1) Unsolicited trades. The foreign broker or dealer effects
transactions in securities with or for persons that have not been
solicited by the foreign broker or dealer.
(2) Research reports. The foreign broker or dealer furnishes
research reports to qualified investors, and effects transactions in
the securities discussed in the research reports with or for those
qualified investors, provided that the following conditions are
satisfied:
(i) The research reports do not recommend the use of the foreign
broker or dealer to effect trades in any security;
(ii) The foreign broker or dealer does not initiate contact with
those qualified investors to follow up on the research reports, and
does not otherwise induce or attempt to induce the purchase or sale of
any security by those qualified investors;
(iii) If the foreign broker or dealer has a relationship with a
registered broker or dealer that satisfies the requirements of
paragraph (a)(3) of this section, any transactions with the foreign
broker or dealer in securities discussed in the research reports are
effected pursuant to the provisions of paragraph (a)(3) of this
section; and
(iv) The foreign broker or dealer does not provide research to U.S.
persons pursuant to any express or implied understanding that those
U.S. persons will direct commission income to the foreign broker or
dealer.
(3) Solicited trades. The foreign broker or dealer induces or
attempts to induce the purchase or sale of any security by a qualified
investor, provided that the following conditions are satisfied:
(i) The foreign broker or dealer:
(A) Provides the Commission (upon request or pursuant to agreements
reached between any foreign securities authority and the Commission or
the U.S. government) with any information or documents within the
possession, custody, or control of the foreign broker or dealer, any
testimony of foreign associated persons, and any assistance in taking
the evidence of other persons, wherever located, that the Commission
requests and that relates to transactions under paragraph (a)(3) of
this section, except that if, after the foreign broker or dealer has
exercised its best efforts to provide the information, documents,
testimony, or assistance, including requesting the appropriate
governmental body and, if legally necessary, its customers (with
respect to customer information) to permit the foreign broker or dealer
to provide the information, documents, testimony, or assistance to the
Commission, the foreign broker or dealer is prohibited from providing
this information, documents, testimony, or assistance by applicable
foreign law or regulations, then this paragraph (a)(3)(i)(A) shall not
apply and the foreign broker or dealer will be subject to paragraph (c)
of this section;
(B) Determines that the foreign associated person of the foreign
broker or dealer effecting transactions with the qualified investor is
not subject to a statutory disqualification specified in section
3(a)(39) of the Act;
(C) Has in its files, and will make available upon request by a
registered broker or dealer satisfying the requirements described in
paragraph (a)(3)(iii) of this section or the Commission, the types of
information specified in Sec. 240.17a-3(a)(12), provided that the
information required by paragraph (a)(12)(i)(D) of Sec. 240.17a-3
shall include sanctions imposed by foreign securities authorities,
foreign exchanges, or foreign associations, including without
limitation those described in section 3(a)(39) of the Act; and
(D) Discloses to the qualified investor:
(1) That the foreign broker or dealer is regulated by a foreign
securities authority and not by the Commission; and
(2) Solely when the foreign broker or dealer is relying on
paragraph (a)(3)(iii)(A)(1) of this section, that U.S. segregation
requirements, U.S. bankruptcy protections and protections under the
Securities Investor Protection Act will not apply to any funds or
securities held by the foreign broker or dealer;
(ii) The foreign associated person of the foreign broker or dealer
effecting transactions with the qualified investor conducts all
securities activities from outside the United States, except that the
foreign associated person may conduct visits to qualified investors
within the United States, provided that transactions in any securities
discussed during visits by the foreign associated person with qualified
investors are effected pursuant to paragraph (a)(3) of this section;
and
(iii) A registered broker or dealer:
(A) Is responsible for either:
(1) Maintaining copies of all books and records, including
confirmations and statements issued by the foreign broker or dealer to
the qualified investor, relating to any resulting transactions, except
that such books and records may be maintained:
(i) In the form, manner and for the periods prescribed by the
foreign securities authority regulating the foreign broker or dealer;
and
(ii) With the foreign broker or dealer, provided that the
registered broker or dealer makes a reasonable determination that
copies of any or all of such books and records can be furnished
promptly to the Commission, and promptly provides to the Commission any
such books and records, upon request; or
[[Page 39211]]
(2) (i) Maintaining books and records, including copies of all
confirmations issued by the foreign broker or dealer to the qualified
investor, relating to any resulting transactions; and
(ii) Receiving, delivering and safeguarding funds and securities in
connection with the transactions on behalf of the qualified investor in
compliance with Sec. 240.15c3-3;
(B) Obtains from the foreign broker or dealer and each foreign
associated person written consent to service of process for any civil
action brought by or proceeding before the Commission or a self-
regulatory organization (as defined in section 3(a)(26) of the Act),
providing that process may be served on them by service on the
registered broker or dealer in the manner set forth on the registered
broker's or dealer's current Form BD (17 CFR 249.501);
(C) Obtains from the foreign broker or dealer a representation that
the foreign broker or dealer has complied with the requirements of
paragraphs (a)(3)(i)(B) and (C) of this section; and
(D) Maintains records of the written consents required by paragraph
(a)(3)(iii)(B) and the representations required by paragraph
(a)(3)(iii)(C) of this section, and makes these records available to
the Commission upon request.
(4) Counterparties and specific customers. The foreign broker or
dealer effects transactions in securities with or for, or induces or
attempts to induce the purchase or sale of any security by:
(i) A registered broker or dealer, whether the registered broker or
dealer is acting as principal for its own account or as agent for
others, or a bank acting pursuant to an exception or exemption from the
definition of ``broker'' or ``dealer'' in section 3(a)(4)(B),
3(a)(4)(E), or 3(a)(5)(C) of the Act or the rules thereunder;
(ii) The African Development Bank, the Asian Development Bank, the
Inter-American Development Bank, the International Bank for
Reconstruction and Development, the International Monetary Fund, the
United Nations and their agencies, affiliates and pension funds;
(iii) A foreign person temporarily present in the United States,
with whom the foreign broker or dealer had a bona fide, pre-existing
relationship before the foreign person entered the United States;
(iv) Any agency or branch of a U.S. person permanently located
outside the United States, provided that the transactions occur outside
the United States;
(v) U.S. citizens resident outside the United States, provided that
the transactions occur outside the United States, and that the foreign
broker or dealer does not direct its selling efforts toward
identifiable groups of U.S. citizens resident abroad; or
(vi) Any U.S. person, other than a registered broker or dealer or a
bank acting pursuant to an exception or exemption from the definition
of ``broker'' or ``dealer'' in section 3(a)(4)(B), 3(a)(4)(E), or
3(a)(5)(C) of the Act or the rules thereunder, that acts in a fiduciary
capacity for an account of a foreign resident client, provided the
foreign broker or dealer:
(A) Only effects transactions in securities with or for, or induces
or attempts to induce the purchase or sale of securities by, the U.S.
person in the U.S. person's capacity as a fiduciary to an account of a
foreign resident client; and
(B) Obtains and maintains a representation from the U.S. person
that the account is managed in a fiduciary capacity for a foreign
resident client.
(5) Familiarization with foreign options exchanges. The foreign
broker or dealer effects transactions in options on foreign securities
listed on a foreign options exchange of which it is a member for a
qualified investor that has not been solicited by the foreign broker or
dealer, except that:
(i) A representative of the foreign options exchange located in a
foreign office or a representative office in the United States may:
(A) Communicate with persons that the representative of the foreign
options exchange reasonably believes are qualified investors, including
through participation in programs and seminars in the United States,
regarding the foreign options exchange, the options on foreign
securities traded on the foreign options exchange and, if applicable,
the foreign options exchange's OTC options processing service;
(B) Provide persons that the representative of the foreign options
exchange reasonably believes are qualified investors with a disclosure
document that provides an overview of the foreign options exchange and
the options on foreign securities traded on that exchange, including
the differences from standardized options in the U.S. options market
and special factors relevant to transactions by U.S. persons in options
on the foreign options exchange; and
(C) Make available to persons that the representative of the
foreign options exchange reasonably believes are qualified investors,
solely upon request of the investor, a list of participants on the
foreign options exchange permitted to take orders from the public and
any registered broker or dealer affiliates of such participants;
(ii) The foreign broker or dealer may:
(A) Make available to qualified investors the foreign options
exchange's OTC options processing service; and
(B) Provide qualified investors, in response to an unsolicited
inquiry concerning options on foreign securities traded on the foreign
options exchange, with a disclosure document that provides an overview
of the foreign options exchange and the options on foreign securities
traded on that exchange, including the differences from standardized
options in the U.S. domestic options market and special factors
relevant to transactions by U.S. persons in options on that exchange;
and
(iii) The foreign exchange may make available to qualified
investors through the foreign broker or dealer the foreign options
exchange's OTC options processing service.
(b) Definitions. When used in this section:
(1) The term foreign associated person shall mean any natural
person domiciled outside the United States who is an associated person,
as defined in section 3(a)(18) of the Act, of the foreign broker or
dealer and who participates in the solicitation of a qualified investor
under paragraph (a)(3) of this section.
(2) The term foreign broker or dealer shall mean any non-U.S.
resident person (including any U.S. person engaged in business as a
broker or dealer entirely outside the United States, except as
otherwise permitted by this section) that is not an office or branch
of, or a natural person associated with, a registered broker or dealer,
whose securities activities, if conducted in the United States, would
be those of a ``broker'' or ``dealer,'' as defined in section 3(a)(4)
or 3(a)(5) of the Act, and that:
(i) Solely for purposes of paragraph (a)(3) of this section, is
regulated for conducting securities activities, including the specific
activities in which the foreign broker or dealer engages with the
qualified investor, in a foreign country by a foreign securities
authority; and
(ii) Solely for purposes of paragraphs (a)(3)(iii)(A)(1) and
(a)(4)(vi) of this section, conducts a foreign business.
(3) The term foreign business shall mean the business of a foreign
broker or dealer with qualified investors and foreign resident clients
where at least 85% of the aggregate value of the securities purchased
or sold in transactions conducted pursuant to both paragraphs (a)(3)
and (a)(4)(vi) of this section by the foreign broker or dealer
[[Page 39212]]
calculated on a rolling two-year basis is derived from transactions in
foreign securities, except that the foreign broker or dealer may rely
on the calculation made for the prior year for the first 60 days of a
new year.
(4) The term foreign resident client shall mean:
(i) Any entity not organized or incorporated under the laws of the
United States and not engaged in a trade or business in the United
States for federal income tax purposes;
(ii) Any natural person not a U.S. resident for federal income tax
purposes; and
(iii) Any entity not organized or incorporated under the laws of
the United States 85 percent or more of whose outstanding voting
securities are beneficially owned by persons in paragraphs (b)(4)(i)
and (b)(4)(ii) of this section.
(5) The term foreign security shall mean:
(i) An equity security (as defined in 17 CFR 230.405) of a foreign
private issuer (as defined in 17 CFR 230.405);
(ii) A debt security (as defined in 17 CFR 230.902) of a foreign
private issuer (as defined in 17 CFR 230.405);
(iii) A debt security (as defined in 17 CFR 230.902) issued by an
issuer organized or incorporated in the United States in connection
with a distribution conducted solely outside the United States pursuant
to Regulation S (17 CFR 230.903);
(iv) A security that is a note, bond, debenture or evidence of
indebtedness issued or guaranteed by a foreign government (as defined
in 17 CFR 230.405) that is eligible to be registered with the
Commission under Schedule B of the Securities Act of 1933; and
(v) A derivative instrument on a security described in paragraph
(b)(5)(i), (b)(5)(ii), (b)(5)(iii), or (b)(5)(iv) of this section.
(6) The term OTC options processing service shall mean a mechanism
for submitting an options contract on a foreign security that has been
negotiated and completed in an over-the-counter transaction to a
foreign options exchange so that the foreign options exchange may
replace that contract with an equivalent standardized options contract
that is listed on the foreign options exchange and that has the same
terms and conditions as the over-the-counter options.
(7) The term registered broker or dealer shall mean a person that
is registered with the Commission under section 15(b), 15B(a)(2), or
15C(a)(2) of the Act.
(8) The term United States shall mean the United States of America,
including the States and any territories and other areas subject to its
jurisdiction.
(c) Withdrawal of exemption. The Commission, by order after notice
and opportunity for hearing, may withdraw the exemption provided in
paragraph (a)(3) of this section with respect to the subsequent
activities of a foreign broker or dealer or class of foreign brokers or
dealers conducted from a foreign country, if the Commission finds that
the laws or regulations of that foreign country have prohibited the
foreign broker or dealer, or one of a class of foreign brokers or
dealers, from providing, in response to a request from the Commission,
information or documents within its possession, custody, or control,
testimony of foreign associated persons, or assistance in taking the
evidence of other persons, wherever located, related to activities
exempted by paragraph (a)(3) of this section.
Dated: June 27, 2008.
By the Commission.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-15000 Filed 7-7-08; 8:45 am]
BILLING CODE 8010-01-P