Alert March 26, 2013

SEC 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)

Research

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)

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