0Goodwin Procter Alert: Massachusetts High Court Rules that ZIP Codes Are Personal Identification Information

Goodwin Procter’s Consumer Financial Services Practice issued a Client Alert concerning a recent decision by Massachusetts’ highest court in which the Court ruled that, under Massachusetts’ consumer privacy statute, a consumer’s ZIP code is “personal identification information” and if a retailer collects such information during credit card transactions the retailer may be violating Massachusetts law.

0Goodwin Procter Alert: Aiding and Abetting Liability of Fund Manager for Use of Unregistered Broker – Recent SEC Enforcement Action

Goodwin Procter Alert analyzes recent settled administrative proceedings in which the SEC found that a finder engaged by a fund manager had not complied with the broker registration requirements of the federal securities laws and that the fund manager and one of its senior executive officers had aided and abetted the finder’s violation.  The Alert discusses the implications of the settlements for fund managers and principals and lists steps fund managers and other issuers conducting private placements can take to avoid similar SEC enforcement activity.

0SEC Staff Provides FAQ on Rule 15a-6 and Foreign Broker-Dealers

On March 21, 2013, the staff of the SEC’s Division of Trading and Markets (the “Staff”) posted on the SEC’s website “Frequently Asked Questions Regarding Rule 15a-6 and Foreign Broker-Dealers” (the “FAQ”) to address some of the questions the Staff has received regarding the application of Rule 15a-6 under the Securities Exchange Act of 1934 (the “Exchange Act”).  Rule 15a-6 provides conditional exemptions from broker-dealer registration for foreign broker-dealers that engage in certain specified activities involving U.S. investors.  Since its adoption, the Staff has provided guidance on the operation of Rule 15a-6 in various no-action letters.  The FAQ provides additional guidance with respect to the operation of Rule 15a-6. The Staff’s answers are summarized below.

Chaperoning Arrangements - Affiliation

In 1996, the Staff issued a no-action letter (the “Seven Firms Letter”) with respect to foreign broker-dealers effecting transactions in foreign securities with a U.S. resident fiduciary for offshore clients without the foreign broker-dealers, each of which was affiliated with one of the seven registered broker-dealers named in the letter, either registering with the SEC or effecting the transactions in accordance with Rule 15a-6.  SEC No-Action Letter re: Transactions in Foreign Securities by Foreign Brokers or Dealers with Accounts of Certain Foreign Persons Managed or Advised by U.S. Resident Fiduciaries from Catherine McGuire, Chief Counsel, Division of Market Regulation to Giovanni P. Prezioso, Cleary, Gottlieb, Steen & Hamilton, dated January 30, 1996.  The following year, the Staff took a no-action position with respect to foreign broker-dealers engaging in certain activities, including the transfer of funds and certain communications with U.S. institutional investors, without the foreign broker-dealers, each of which was affiliated with one of the nine registered broker-dealers named in the letter, either registering with the SEC or effecting the transactions in accordance with Rule 15a-6 (the “Nine Firms Letter”).  SEC No-Action Letter re: Securities Activities of U.S.-Affiliated Foreign Dealers from Richard R. Lindsey, Director, Division of Market Regulation to Giovanni P. Prezioso, Cleary, Gottlieb, Steen & Hamilton, dated April 9, 1997.  The Nine Firms Letter also established an expanded interpretation of the term “major U.S. institutional investor” as defined in Rule 15a‑6.  Since the two no-action letters were issued, FINRA has taken the position, when reviewing Rule 15a‑6 chaperoning arrangements, that because each of the foreign broker-dealers in the two letters were affiliates of the U.S. chaperoning broker-dealers, such affiliation is a condition of the no-action position stated in the letters.

The Staff used the FAQs to clarify that the no-action positions taken in the Seven Firms Letter and the Nine Firms Letter, although based on representations regarding particular facts and conditions that included affiliation between the registered broker-dealers and the foreign broker-dealers, apply also to a chaperoning arrangement in which the U.S. and foreign broker-dealers are not affiliates. (Question 6 and Question 8)

Chaperoning Arrangements - Minimum Net Capital

FINRA, in examining U.S. broker-dealers that are parties to chaperoning arrangements, has raised questions about the appropriate level of minimum net capital under SEC Rule 15c3‑1.  The Staff provided the following guidance:

  • A registered broker-dealer that enters into a chaperoning arrangement with a foreign broker-dealer under Rule 15a-6(a)(3) is subject to a minimum net capital requirement of at least $250,000, unless the chaperoning broker-dealer has entered into a fully disclosed carrying agreement with another registered broker-dealer that has agreed, in writing, to comply with the SEC’s broker-dealer financial responsibility rules with respect to the arrangement.  (Question 10)
  • The $250,000 minimum net capital requirement applies even where the U.S. broker-dealer is acting as chaperone for a foreign broker-dealer effecting in connection with delivery versus payment (“DVP”) and receive versus payment (“RVP”) transactions with institutional investors. (Question 14)
  • However, if a foreign broker-dealer’s business under Rule 15a-6 is limited to M&A advisory services to a U.S. institutional investor or a major U.S. institutional investor, for example, in connection with an acquisition of a company, the chaperone’s minimum net capital requirement would be $5,000.  (Question 11)
  • A registered broker-dealer may act as a chaperone for a foreign broker-dealer under Rule 15a-6(a)(3) and rely on the Nine Firms Letter if it has in effect a fully disclosed carrying agreement with another registered broker-dealer that has agreed, in writing, to comply with the SEC’s broker-dealer financial responsibility rules with respect to the chaperoning arrangement.  (Question 12)  In such an arrangement, the registered broker-dealer would be subject to a minimum net capital requirement of $5,000, or such greater amount as would be required under Rule 15c3-1 based on the broker-dealer’s activities.  (Question 10 and Question 12)
  • A registered introducing broker-dealer may not act as chaperone for a foreign broker-dealer under Rule 15a-6(a)(3) and the Nine Firms Letter if the registered broker-dealer maintains a minimum net capital of $100,000 in accordance with the exception in Rule 15c3-3(k)(2)(i).  Such a registered broker-dealer would be subject to a minimum net capital of at least $250,000 notwithstanding its reliance on Rule 15c3‑3(k)(2)(i).  (Question 13)

Chaperoning Arrangements - Capital Charge

A registered broker-dealer acting as a chaperone in connection with securities transactions with a U.S. institutional investor or a major U.S. institutional investor is required to take a net capital charge for failed transactions, even if the foreign broker-dealer is required to take a fails charge under foreign law, unless the chaperoning broker-dealer has entered into a fully disclosed carrying agreement with another registered broker-dealer, in which case the carrying broker-dealer would be required to take the net capital charge for failed transactions. The existence of a carrying agreement does not relieve the chaperoning broker-dealer from recordkeeping requirements with respect to open trades and failed transactions.  (Question 15)

Chaperoning Arrangements - Recordkeeping

With respect to U.S. institutional investors or major U.S. institutional investors for transactions effected under Rule 15a-6, a foreign broker-dealer may send required confirmations and account statements directly to U.S. counterparties to the extent required by foreign law or as required by a firm’s internal policies and procedures applicable to its global business operations.  However, the chaperoning broker-dealer maintains an obligation to be sure that confirmations and account statements are sent to the investor that comply with all applicable U.S. requirements and, in certain cases, clearly identify the U.S. broker-dealer on whose behalf the document is sent. (Question 4)

The Staff clarified that it considers a registered broker-dealer acting as a chaperone for a foreign broker-dealer subject to recordkeeping requirements under Rules 17a-3 and 17a-4 of the Exchange Act.  A chaperoning broker-dealer is required to make and keep current books and records that reflect trades between the U.S. customer and the foreign broker-dealer, including, but not limited to, transaction records and failed transaction records.  The chaperoning broker-dealer may obtain this information from the foreign broker-dealer or another source; however, the chaperoning broker-dealer is responsible for the accuracy of its books and records.  (Question 16)

“Major U.S. Institutional Investor”

The Staff considers the expanded view of the term “major U.S. institutional investor,” as set forth in the Nine Firms Letter, as applicable to all provisions of Rule 15a-6.  (Question 7)


Provided certain conditions are met, the Staff believes that a foreign broker-dealer may distribute research directly to major U.S. institutional investors pursuant to Rule 15a-6(a)(2) without any intermediation or other involvement of a registered broker-dealer in connection with the distribution of the reports, even if the foreign broker-dealer has a chaperoning arrangement with a registered broker-dealer.  However, if the foreign broker-dealer has a chaperoning arrangement with a registered broker-dealer that satisfies the requirements of Rule 15a-6(a)(3), including applicable recordkeeping requirements, any transactions with the foreign broker-dealer in securities discussed in the research reports must be effected only through the chaperoning broker-dealer in compliance with the requirements of paragraph (a)(3).  Accordingly, to the extent that a chaperoning broker-dealer obtains a copy of a research report distributed directly to major U.S. institutional investors by a foreign broker-dealer pursuant to Rule 15a-6(a)(2), such research report should be retained by the chaperoning broker-dealer.  (Question 5)

Unsolicited Transactions

The Staff would not consider a foreign broker-dealer to have solicited a U.S. investor solely because the foreign broker-dealer, in connection with effecting an unsolicited transaction for the U.S. investor, sends confirmations, account statements, and other required documents related to the transaction, to the U.S. investor.  However, such foreign broker-dealer is not permitted to provide a U.S. investor with any document that includes advertising or other material intended to induce either a securities transaction or transactional business for the foreign broker-dealer or its affiliates.  (Question 3)

The Staff explained that it would not ordinarily view a single securities transaction effected by a foreign broker-dealer on behalf of a U.S. investor in accordance with Rule 15a-6(a)(1) as precluding such foreign broker-dealer from relying on that same authority to effect additional unsolicited securities transactions on behalf of the same U.S. investor, absent any other indicia of solicitation, such as efforts to develop an ongoing securities business relationship.  The Staff explained that analysis of a foreign broker-dealer’s efforts and activities to determine whether solicitation has occurred must be made on a case-by-case basis.  The Staff noted that the SEC takes a broad view of what constitutes solicitation.  (Question 9)

Temporarily Present

The determination of whether a foreign person is temporarily present in the U.S. will ultimately depend on the specific facts and circumstances of each particular situation.  The Staff believes that the SEC, in adopting Rule 15a-6(a)(4)(iii), intended to permit a foreign broker-dealer, without registering with the SEC, to effect transactions with a foreign person located in the U.S. with whom the foreign broker-dealer had a bona fide, pre-existing relationship before the foreign person entered the U.S., so long as such person: (1) is not a U.S. citizen and (2) is not a lawful permanent resident of the U.S.  (Question 1)

Employee Stock Option or Benefit Plan

The Staff believes that a foreign broker-dealer chosen by a foreign issuer to administer a global employee stock option or “employee benefit plan,” as defined in 17 C.F.R. § 230.405, may rely on Rule 15a-6(a) to transmit communications regarding the plan to U.S. employees of the foreign issuer or its U.S. subsidiary and effect transactions in the foreign issuer’s securities for such employees.  Such a foreign-broker dealer would not, solely because of that activity, be considered to have solicited the U.S. employees or U.S. subsidiary provided that the foreign broker-dealer (i) deals exclusively with management and employee benefit representatives from the foreign issuer (so long as such persons are not located within the U.S.) in administering the plan and (ii) limits its activities with respect to U.S. persons to certain activities, including facilitating the transfer of the foreign issuer’s securities to a U.S. person employed by the foreign issuer or its U.S. subsidiary and sending required plan documents to the employee.  (Question 2)

In addition, the Staff stated that it generally considers a foreign broker-dealer administering an employee benefit plan for a foreign issuer or a U.S. subsidiary of a foreign issuer to have an ongoing securities business relationship primarily with the foreign issuer.  Thus, any solicitation by the foreign broker-dealer in ordinary circumstances would be directed to the foreign issuer, rather than to employees who happen to be present in the U.S.  Such conduct does not involve the solicitation of a U.S. person, so long as the foreign broker-dealer’s active solicitation of the foreign issuer as part of its efforts to become a plan administrator is performed entirely outside the U.S. and does not involve employees who are located within the U.S. By contrast, the staff likely would consider a foreign broker-dealer that went beyond the circumstances described in this FAQ as having solicited a U.S. person, such as the deliberate transmission of information, opinions, or recommendations to investors in the U.S. (Question 2)

*  *  *

The Staff stated that it intends to amend or supplement the Rule 15a‑6 FAQs from time to time.

0FinCEN Issues Guidance on the Application of its Money Services Businesses Regulations to Users, Administrators and Exchangers of Virtual Currencies

On March 18, 2013, the Financial Crimes Enforcement Network (“FinCEN”) issued guidance (the “Guidance”) on whether “persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies,” categorized in the Guidance as either “users,” “administrators,” or “exchangers,” constitute money transmitters, and therefore money services businesses (each an “MSB”), under FinCEN’s regulations.  The Guidance specifically addresses “convertible” virtual currency, and stated that while a “user” is not an MSB, an “administrator” or “exchanger” is a money transmitter, and therefore an MSB, unless an exception applies to such administrator or exchanger. 

FinCEN’s regulations define a money transmitter as: (1) “A person that provides money transmission services (i.e., the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means;” or (2) “Any other person engaged in the transfer of funds.”  31 CFR 1010.100(ff)(5).  FinCEN’s regulations clarify that [w]hether a person is a money transmitter … is a matter of facts and circumstances,” and exclude certain categories of persons, including a person who “[a]ccepts and transmits funds only integral to the sale of goods or the provision of services, other than money transmission services, by the person who is accepting and transmitting the funds.”  Id.

The Guidance defines “convertible virtual currency” as a type of virtual currency (itself defined as “a medium of exchange that operates like a currency in some environments,” but which lacks some “attributes of real currency,” including having “legal tender status in any jurisdiction”) that “has an equivalent value in real currency, or acts as a substitute for real currency.”  The Guidance notes that FinCEN’s definition of money transmitter does not distinguish between real and convertible virtual currency.  The Guidance defines a “user” as “a person that obtains virtual currency to purchase goods or services,”  an “exchanger” as “a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency,” and an “administrator” as “a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency.”

The Guidance clarifies that a user is by definition not a money transmitter.  On the other hand, the Guidance states: “An administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN's regulations, unless a limitation to or exemption from the definition applies to the person.”  The Guidance addresses administrators and exchangers under three scenarios: (1) brokers and dealers of e-currencies and e-precious metals; (2) centralized convertible virtual currencies; (3) and de-centralized convertible virtual currencies.

As is the case with brokers or dealers in real currencies or commodities, brokers and dealers of e-currencies or e-precious metals are not money transmitters as long as such brokers or dealers transfer funds for the purpose of effecting a bona fide purchase or sale of e-currency or e-precious metals for or with a customer.

To the extent that the administrator of a centralized repository of virtual currency allows transfers of value between persons or from one location to another, such administrator is a money transmitter.  An exchanger that uses its access to the convertible virtual currency services provided by an administrator to accept and transmit the convertible virtual currency on behalf of others is also a money transmitter.  The Guidance contemplates that the exchanger’s activities will be of two types.  In the first, the exchanger acts as a seller of the virtual currency to the user-purchaser by accepting real currency or its equivalent from such user and transmitting the value of the real currency to fund the user’s convertible virtual currency account with the administrator.  The Guidance deems such activity the transmission of currency to another location, and therefore money transmission.  In the second, a de facto sale of convertible virtual currency occurs, in which the exchanger accepts currency from a user, credits the user with a commensurate portion of the exchanger’s own convertible currency held with the administrator or repository, and then transmits the credit value to third parties at the user’s discretion.  Such activity constitutes transmission to another person, and is therefore money transmission.

De-centralized virtual currency activity refers to virtual currency without a central repository and single administrator, which persons may obtain through their own computing or manufacturing efforts.  A person that so creates convertible virtual currency and uses such currency to purchase goods or services is a user and not a money transmitter.  However, a person that creates such currency and sells it to another person for real currency or its equivalent, or who accepts such currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds or other value substituting for currency, is a money transmitter.

The Guidance notes that an exchanger or administrator of convertible virtual currency is neither a provider or seller of prepaid access nor a dealer in foreign exchange, two other categories of MSBs.

0FDIC, FRB and OCC Jointly Propose Revisions to Interagency Q&As Regarding Community Reinvestment; Comptroller Curry Presents Remarks Concerning Revisions to Q&As

The OCC, FDIC, and FRB jointly proposed certain updates to the Interagency Questions and Answers Regarding Community Reinvestment.  The proposed changes (the “Proposal”) focus primarily on issues concerning community development and seek to revise five questions and answers that address (1) community development activities outside institutions’ assessment areas, (2) additional ways to determine whether recipients of community services are low- or moderate-income and (3) providing a community development service by serving on the board of directors of a community development organization.  For example, the Proposal would clarify that community development activities in the broader statewide or regional area will be considered in the evaluation of an institution’s Community Reinvestment Act (“CRA”) performance.  The Proposal also seeks to add two new questions and answers.  The first new question and answer relates to consideration of community development performance in determining a financial institution’s lending test rating.  The second new question and answer concerns quantitative consideration given to a certain type of community development investment.  Comments must be received by May 17, 2013.

Separately, Comptroller of the Currency Thomas J. Curry presented remarks to a meeting of the National Community Reinvestment Coalition in which he stated that implementation of the CRA “makes a measurable difference” to low- and moderate-income communities and was not a contributor to the nation’s recent financial crisis.  Comptroller Curry commented on the Proposal and stated that the Proposal is intended “to provide more clarity so that banks will look into more opportunities to lend and make investments in rural and under-served areas in their broader statewide and regional areas…”  while still meeting community needs in [the respective bank’s] assessment area.  Comptroller Curry also noted that the federal bank regulatory agencies continue to work to improve CRA guidance and will, in the future, issue additional questions and answers regarding CRA issues.

0CFTC Issues No-Action Relief from Clearing Requirement for Multilateral Portfolio Compression Exercises and for Stub Swaps

The CFTC’s Division of Clearing and Risk (the “Division”) issued two no-action letters providing relief from the clearing requirements for swaps under the Commodity Exchange Act and CFTC regulations.  The first letter pertains to swaps resulting from a multilateral portfolio compression exercise, while the second applies to “stub swaps” resulting from a partial termination or partial novation of an existing swap.

Multilateral portfolio compression exercises.  The first no-action letter pertains to the clearing of amended swaps and replacement swaps that are generated as part of a multilateral portfolio compression exercise.  As described in the no-action letter, a “multilateral portfolio compression exercise” is a process by which a service provider analyzes the swap portfolios of multiple swap market participants and then determines the “optimal solution” to net down the size and/or number of outstanding swaps among the participating swap market participants.  The result is a decrease in either the number of outstanding swaps or the aggregate notional value of the swaps.  The intention is to reduce operational risk and, in some cases, counterparty credit risk.  As part of the process, pre-existing swaps may be amended to lower the outstanding notional value, or pre-existing swaps may be terminated and replaced with new swaps reflecting the reduced notional exposure between the counterparties.

The no-action letter states that the Division will not recommend that the CFTC take an enforcement action against any person for failure to clear an amended or replacement swap generated as part of a multilateral portfolio compression exercise, provided that certain conditions are met.  The conditions include, among others, the following requirements: (1) no original swap subject to the multilateral portfolio compression exercise had been cleared by a derivatives clearing organization or required to have been cleared; (2) the multilateral portfolio compression exercise must involve more than two market participants; and (3) the resulting swaps must have the same material terms as the original swaps with the exception of reducing the notional amount.

Stub swaps.  The Division’s second no-action letter addresses so-called “stub swaps,” the portion of an original swap that remains after the partial termination or partial novation of an uncleared “original swap” that would have been required to be cleared had it been executed after the applicable mandatory clearing compliance date.  The letter uses the term “partial termination” to refer to the extinguishing of all rights and obligations for a stated portion of the notional amount of an original swap (other than a single termination payment) and uses the term “partial novation” to refer to the transfer of ownership of a stated portion of the notional amount of an original swap from one of the original counterparties to a third party.  In the letter, the Division states that it will not recommend that the CFTC take an enforcement action against any person for failure to clear a stub swap under certain conditions.  Such conditions include the following requirements: (a) the original swap was not cleared by a derivatives clearing organization and was executed prior to the applicable clearing compliance date; (b) the records of the original swap counterparties be amended solely to reflect the reduced notional amount of the original swap; and (c) all other terms of the stub swap remain the same as the terms of the original swap.  In the case of a partially novated swap, the novated portion must be cleared in accordance with CFTC regulations.  The letter also notes that ISDA, the entity that requested the relief, explicitly stated that it was not requesting relief from clearing where the original counterparties enter into a new swap that fully or partially offsets the risk of an existing uncleared swap.