On November 27, 2012, the SEC announced the settlement of administrative proceedings pursuant to Section 15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) against four India-based financial services firms (the “Respondents”) for soliciting and providing brokerage services to U.S. institutional investors without being registered as broker-dealers as required by Section 15(a) of the Exchange Act. The SEC announcement, and links to the four orders settling the aforementioned proceedings, are available here. This article describes the SEC’s findings in the settlement orders, which the Respondents neither admitted nor denied.
Absent an applicable exception or exemption, Section 15(a) of the Exchange Act generally prohibits a broker or dealer from making use of the mails or any means or instrumentality of interstate commerce to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security without being registered with the SEC as a broker-dealer.
In the settlement orders, the SEC found that Respondents used U.S. jurisdictional means to engage in one or more various brokerage activities such as:
- buying and selling securities of Indian issuers on behalf of U.S. investors in exchange for transaction-based compensation;
- distributing research reports to U.S. investors and following up with U.S. investors with respect to such reports;
- organizing and sponsoring conferences in the U.S.;
- participating as one of several broker-dealers in initial public offerings; and
- meeting with U.S. investors on a one-on-one basis.
Chaperoning Agreements for Foreign Broker-Dealers. Rule 15a-6 under the Exchange Act provides conditional exemptions under which unregistered foreign broker-dealers may effect transactions with or for U.S. institutional investors in certain limited circumstances. More specifically, Rule 15a-6 provides that an unregistered foreign broker-dealer may legally engage in certain U.S. cross-border business if such foreign broker-dealer has entered into a chaperoning agreement with a U.S. registered broker-dealer. Under such agreements, the U.S. registered broker-dealer must agree to perform the following functions on behalf of the unregistered foreign broker-dealer:
- effect the transactions, other than negotiating their terms;
- issue all required confirmations and account statements;
- maintain required capital related to such transactions;
- be responsible for extending or arranging margin, if any, to or for the customer;
- receive, deliver and safeguard funds and securities on behalf of the customer;
- maintain required books and records related to the transaction;
- participate to the extent necessary in oral communications between associated persons of the foreign broker-dealer and U.S. institutional investors;
- obtain information from the foreign broker-dealer necessary to determine that the foreign broker-dealer is not disqualified by disciplinary history from use of the exemption; and
- serve as agent for service of process for civil actions brought by the SEC or any self-regulatory organization against the foreign broker-dealer.
After being contacted by the SEC, each of the Respondents undertook corrective action, including entering into chaperoning agreements as provided for in Rule 15a-6, and in one case, initiating registration with the SEC as a broker-dealer.
Sanctions. In their settlements with the SEC, each Respondent agreed to a censure and disgorgement of an amount proportionate to the transaction-based compensation earned in violation of Section 15(a) of the Exchange Act and the applicable rules promulgated thereunder.