On March 21, 2013, the staff of the United States Securities and Exchange Commission Division of Trading and Markets published long awaited “Frequently Asked Questions Regarding Rule 15a-6 and Foreign Broker-Dealers (‘FAQs’).” Bingham lawyers were part of the ABA task force that obtained these FAQs from the Division of Trading and Markets Staff.
The SEC adopted Rule 15a-6 under the Securities Exchange Act of 1934, in order to provide exemptions from broker-dealer registration and regulation for non-U.S. broker-dealers. The Rule provides four alternative exemptions, each of which has presented issues for entities trying to comply with their terms.
The FAQs address issues that a U.S. registered broker-dealer must consider when it undertakes to provide to a non-U.S. broker-dealer the services required for the non-U.S. broker-dealer to be eligible to have direct contacts for the purpose of soliciting and effecting transactions with certain institutional investors in the United States. The U.S. broker-dealer providing the services is often referred to as the “chaperoning broker-dealer,” and the agreements memorializing the arrangements for provision of the services are referred to as “chaperoning agreements.”
The FAQs also provide a consolidation and clarification of informal guidance that the SEC staff has previously articulated with respect to the other Rule 15a-6 exemptions for non-U.S. broker-dealers that do not require chaperoning agreements, including the exemption for effecting unsolicited transactions, the exemption for sending research directly to “Major U.S. Institutional Investors,” and the exemption for soliciting and effecting transactions directly with certain entities, such as U.S. broker-dealers and international banks and individuals.
The SEC staff states that it will update and supplement these FAQs in the future. Below we provide an overview of the FAQs. We recommend that any U.S. broker-dealer or non-U.S. broker-dealer considering the scope of these exemptions and related obligations read the full text of the FAQs, a copy of which can be found here.1
Must a U.S. and Non-U.S. Broker-Dealer be Affiliated to Rely on Prior Interpretive Guidance?
In 1996 and 1997, the SEC staff issued interpretive/no-action guidance related to Rule 15a-6. This guidance was provided to affiliated U.S. and non-U.S. broker-dealers seeking clarification of several points related to when a chaperoning agreement was required and also how responsibilities were to be allocated between the chaperoning broker-dealer and the non-U.S. broker-dealer. There has been confusion regarding whether unaffiliated U.S. and non-U.S. broker-dealers could rely on this guidance.
In one letter, called the “Nine Firms Letter,” the SEC staff allowed non-U.S. broker-dealers that enter into chaperoning agreements, among other things, to have some direct, un-chaperoned contact with Major U.S. Institutional Investors, to accept orders in foreign securities and to directly clear and settle the transactions with the U.S. client, provided that certain additional conditions are satisfied.2 This letter, called the “Nine Firms Letter,” also substantially expanded the definition of Major U.S. Institutional Investor to include all entities with at least $100 million in financial assets, or with at least $100 million in financial assets under management.
The other letter, called the “Seven Firms Letter,” allowed a non-U.S. broker-dealer to deal directly with a U.S.-based fiduciary, including soliciting and accepting orders from the U.S. based fiduciary, provided that, among other things, the fiduciary is acting for a client that is a not a U.S. person.3
Questions 6, 8—Affiliation is not required to rely on the Nine Firms Letter and the Seven Firms Letter.
- The SEC Staff clarifies that the relief in the Nine Firms and Seven Firms Letters is available regardless of whether the chaperoning broker-dealer is affiliated or unaffiliated with the non-U.S. broker-dealer. The SEC staff states that this reflects its understanding of the SEC’s intent in adopting Rule 15a-6 without an affiliation requirement.
Question 7—“Major U.S. Institutional Investor” is defined as noted above, for all purposes of Rule 15a-6.
- The SEC staff clarifies that the definition of “Major U.S. Institutional Investor” in the Nine Firms Letter applies whenever that term is used in Rule 15a-6.
What are the Net Capital Requirements for a Chaperoning Broker-Dealer?
There has been substantial confusion regarding the correct level of net capital for a chaperoning U.S. broker-dealer. Both the SEC staff and the staff of the Financial Industry Regulatory Authority (“FINRA”) have indicated in various informal contexts, including during examinations, their collective view that a chaperoning broker-dealer is required to maintain a minimum net capital level of $250,000. Chaperoning broker-dealers generally have not been aware of this view prior to being so apprised during their examinations or during the application process wherein they changed their membership agreements to add chaperoning activity. Therefore, many chaperoning broker-dealers had maintained clearing agreements with clearing firms, and maintained the minimum net capital of $5,000. Other chaperoning broker-dealers maintained minimum net capital of $100,000 in reliance on the fact that all transactions for U.S. clients that were entered with foreign broker-dealers under the chaperoning agreement were effected DVP/RVP (delivery versus payment/receipt versus payment), and were cleared and settled in local markets in reliance on the Nine Firms Letter. The SEC staff in the FAQs provides guidance regarding the appropriate level of net capital a chaperoning broker-dealer must maintain, depending on the nature of the chaperoning broker-dealer’s activities and the nature of any agreements with a carrying broker.
Question 10—Minimum net capital is presumed to be $250,000, but $5000 is possible under certain circumstances.
- The SEC staff states that a chaperoning broker-dealer must maintain minimum net capital of at least $250,000 unless the chaperoning broker-dealer has entered into a fully-disclosed carrying agreement with another registered broker-dealer. If a fully disclosed clearing agreement is entered into, the carrying broker-dealer must agree, in writing, to comply with the broker-dealer financial responsibility rules (Rule 15c3-1 and Rule 15c3-3 in particular) with respect to the chaperoning agreement between the chaperoning broker-dealer and the non-U.S. broker-dealer.
- When a chaperoning broker-dealer enters into a fully disclosed carrying agreement as described above, the chaperoning broker-dealer is only subject to a $5,000 net capital requirement with regard to the chaperoning activities. (Other activities could, of course, raise the chaperoning broker-dealer’s minimum net capital requirements.)
Question 11—Minimum net capital when activities are limited to M&A advisory services.
- The SEC staff states that a chaperoning broker-dealer whose business is limited to chaperoning M&A advisory services is subject to a $5,000 net capital requirement in connection with those chaperoning activities. (Other activities of the chaperoning broker-dealer could require a higher minimum net capital level.)
Question 12—The Nine Firms Letter relief is available to a chaperoning broker-dealer that has entered into a fully disclosed carrying agreement.
- The SEC staff states that a chaperoning broker-dealer may rely on the Nine Firms Letter even if it has a fully disclosed carrying agreement with another registered broker-dealer. In this case, the chaperoning broker-dealer’s minimum net capital requirement (related to the 15a-6 activities) is $5,000 because the fully-disclosed carrying broker-dealer is responsible for compliance with all financial responsibility rules.
Question 13—A chaperoning broker-dealer cannot maintain minimum net capital of $100,000.
- The SEC staff clarifies that a chaperoning broker-dealer that wishes to enter into a chaperoning agreement with a non-U.S. broker-dealer in which the parties will rely on the relief in the Nine Firms Letter cannot rely on the Rule 15c3-3(k)(2)(i) exemption from compliance with Rule 15c3-3 and therefore cannot maintain minimum net capital of $100,000.
- The minimum net capital for a chaperoning broker-dealer that wishes to rely on the Nine Firms Letter (for instance the provisions in that letter allowing for direct clearance and settlement between the non-U.S. broker-dealer and the U.S. client) is $250,000 unless the chaperoning broker-dealer has entered into a fully-disclosed clearing agreement as described above, in question 10, in which case it can maintain a minimum net capital of $5,000.
- SEC staff explains that a chaperoning broker-dealer is subject to a $250,000 net capital requirement unless it shifts all financial responsibility through a fully-disclosed carrying agreement to a carrying registered broker-dealer, or it limits its activities to chaperoning a foreign-broker dealer that is only providing advisory services for mergers and acquisitions (“M&A advisory services”).
Question 14—Minimum net capital when transactions are DVP/RVP.
- The SEC staff clarifies that a chaperoning broker-dealer cannot take advantage of the lower net capital requirement under Rule 15c3-1(a)(2)(ii) of $100,000, even if all transactions are effected DVP/RVP and settle in the local market of the non-U.S. broker-dealer in compliance with the Nine Firms Letter. The SEC staff states that the minimum net capital requirement for a chaperoning broker-dealer, even when transactions are DVP/RVP, is $250,000 based on the chaperone’s responsibilities under Rule 15a-6(a)(3)(iii). The only exception to this is that if the chaperoning broker-dealer enters into a fully disclosed carrying agreement as described above, its minimum net capital requirement is $5,000.
Question 15—Net Capital charges for fails.
- The SEC staff clarifies that a chaperoning broker-dealer must take a net capital charge for any failed transaction effected pursuant to the chaperoning agreement, even if the foreign broker-dealer is required to take a “fails charge” under foreign law. A chaperoning broker-dealer can relieve itself of this responsibility only with a fully-disclosed carrying agreement as described above.
- Even if the chaperoning broker-dealer enters into a fully disclosed clearing agreement, it must maintain records compliant with Rules 17a-3 and 17a-4 that identify open trades and fails.
When is a Non-U.S. Individual “Temporarily Present in the United States”?
Question 1—A non-U.S. person residing in the United States may be “temporarily present in the United States” provided that certain conditions are satisfied.
- The SEC staff clarifies that when a foreign person resides in the United States for educational, employment or similar purposes for a finite period of time, that foreign person will never-the-less be considered “temporarily present in the United States” for the purposes of Rule 15a-6(a)(4)(iii).
- The foreign person must have a bona fide, pre-existing relationship with the foreign broker-dealer.
- The foreign person must not be a U.S. citizen and must not be a “lawful permanent resident of the United States” (i.e., a “Green Card holder”).
- The SEC staff notes that the presumption of temporary presence is rebuttable, depending on specific facts and circumstances.
- Therefore, a non-U.S. broker-dealer should establish good documentary records if it will engage directly with individuals it believes are “temporarily present in the United States.”
When are Transactions Solicited?
Rule 15a-6(a)(1) specifically exempts a foreign broker-dealer from registration in the United States if it effects unsolicited transactions for U.S. persons. There has been considerable confusion, however, about when the SEC would consider this exemption unavailable, based on a foreign broker-dealer’s interactions with U.S. persons. The FAQs address when certain activity is, and is not, considered a solicitation.
Question 9—A foreign broker-dealer may effect more than one unsolicited transaction for a U.S. investor, but it should not do so frequently or in the context of establishing an ongoing relationship with the U.S. investor.
- The SEC staff clarifies that a foreign broker-dealer can rely on Rule 15a-6(a)(1) to effect more than one unsolicited transaction on behalf of a single U.S. investor.
- However, the SEC staff cautions that it likely would view a series of frequent transactions or significant number of transactions as indicative of solicitation through the establishment of an “ongoing securities business relationship.”
- This guidance reflects the understanding that if a U.S. investor regularly transacts with a foreign broker-dealer, the investor might reasonably expect to be protected by U.S. laws.
Question 3—Sending confirmations and account statements to U.S. investors will not be considered a solicitation, however sending marketing and similar materials may constitute solicitation.
- A foreign broker-dealer relying on Rule 15a-6(a)(1) may send to U.S. investors account statements and confirmations with regard to the unsolicited transactions without being deemed to be engaged in brokerage activity requiring registration.
- Foreign-brokers relying on Rule 15a-6(a)(1) to effect unsolicited transactions are cautioned not to send advertising or other materials “intended to induce either a securities transaction or a transactional business,” as these materials be deemed solicitations.
Question 2—Securities transactions for U.S. employees participating in Global Employee Stock Option Plans (“ESOPs”) and other Employee Benefit Plans will be considered unsolicited, provided certain conditions are satisfied.
- The SEC staff clarifies that a foreign broker-dealer may administer a global employee benefit plan established by a foreign issuer in accordance with foreign law without being considered to have solicited U.S. employees, if the foreign issuer’s principal office and place of business are outside the United States, and certain other conditions are met.
- The foreign broker-dealer must deal exclusively with the management and foreign issuer’s employee benefit representatives and limit its activities in relation to the global plans to:
- Facilitating the transfer of the foreign issuer’s securities to U.S. employees of the foreign issuer or a U.S. subsidiary;
- Sending required plan documents, account statements, confirmations, privacy notices, prospectuses, proxy statements, or other legally required documents to the U.S. employees;
- Selling, transferring, or otherwise disposing of the foreign issuer’s securities acquired by the U.S. employees only as a result of the employee benefit plan.
- Foreign-broker dealers may solicit foreign issuers in an effort to become plan administrators so long as that solicitation occurs entirely outside the United States and does not involve the foreign issuer’s U.S. employees.
- The SEC staff emphasizes that any activity beyond this guidance risks classification as solicitation causing the foreign broker-dealer to lose its ability to rely on the exemption provided in Rule 15a-6(a)(1) for unsolicited transactions.
What Entity is Responsible for Confirmation and Account Statements in a Chaperoning Agreement?
Question 4—Foreign broker-dealers may send confirmations and account statements that satisfy both local and U.S. requirements, provided certain conditions are satisfied.
- The SEC staff confirms that a non-U.S. broker-dealer can send confirmations and account statements directly to U.S. counterparties as required under local law.
- If the confirmations and account statements that the foreign broker-dealer sends comply with U.S. requirements, then the U.S. chaperoning broker-dealer need not send a separate statement.
- Any document sent directly to a U.S. counterparty by a foreign broker-dealer must clearly identify the U.S. chaperoning broker-dealer on behalf of which the foreign broker-dealer is sending the document.
- The SEC staff reminds readers that even when a joint confirmation or account statement is sent by the foreign broker-dealer, the U.S. broker-dealer remains obligated to be sure that the confirmations and account statements comply with all applicable U.S. requirements.
Does the Chaperoning U.S. Broker-Dealer Have Obligations in Connection With the Direct Distribution of Research to Major U.S. Institutional Investors?
Rule 15a-6(a)(2) expressly allows a foreign broker-dealer to distribute its research directly or indirectly to Major U.S. Institutional Investors. There has been confusion, however, in particular on the part of certain regulatory staff, about whether a chaperoning broker-dealer has obligations beyond effect the resulting transactions when a chaperoning agreement has been entered into. In particular, some chaperoning broker-dealers have been told that they must take responsibility for research distributed by the foreign broker-dealer in reliance on Rule 15a-6(a)(2), or that the chaperoning broker-dealer must receive and maintain records of all research reports distributed by the foreign broker-dealer that is relying on Rule 16a-6(a)(2).
Question 5—The chaperoning broker-dealer does not have any obligations to review or maintain records of research reports the non-U.S. broker-dealer sends directly to Major U.S. Institutional Investors pursuant to Rule 15a-6(a)(2).
- The SEC staff clarifies that a U.S. broker-dealer with a chaperoning agreement has no obligation with respect to review, approval or retention of a research report sent directly to a Major U.S. Institutional Investor by the foreign broker-dealer, if the U.S. broker-dealer was not involved in the distribution of the research report.
- The SEC staff reiterates the Rule’s requirement, however, that the chaperoning broker-dealer must effect any resulting transactions.
- In connection with the transactions, if the chaperoning broker-dealer comes into possession of a research report, the SEC staff states that the U.S. broker-dealer must retain a copy of the research report. The SEC staff seems to be concluding that the research report, if in the possession of the U.S. broker-dealer, becomes part of the record related to the effected transaction(s).
What Books and Records Must the Chaperoning Broker-Dealer Create and Maintain?
Question 16—A chaperoning broker-dealer must maintain a full set of books and records on transactions, and also of the materials required regarding the foreign broker-dealer and its associated persons.
- The SEC staff reminds chaperoning broker-dealers that they must comply with the recordkeeping requirements under Rules 17a-3 and 17a-4 with respect to transactions between foreign broker-dealers and U.S. customers.
The FAQs issued by the SEC staff help to clarify numerous points of ongoing confusion in chaperoning arrangements and other aspects of the Rule 15a-6 exemptions. Further FAQs may address additional areas where a lack of clarity remains. In addition, it is possible that the SEC may, someday, return to the project it began in 2008, to overhaul Rule 15a-6 in order to more closely align the rule and its exemptions with the global marketplace that has developed since the rule was originally adopted in 1989.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:Kroll-AmyJoseph-RogerBurke-TimothyBoch-DavidBlake-Margaret
See 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 (Jan. 20, 1996) (the “Seven Firms Letter”).
Letter re: Securities Activities of U.S.-Affiliated Foreign Dealers (April 9, 1997) (the “Nine Firms Letter”).