Federal Register / Vol. 54, No. 136 / Tuesday, July 18, 1989 / Rules and Regulations -30013 length and not more than a 32-bit in certain activities involving U.S. exemptions incorporating many of the internal architecture are regarded as 16- investors and securities markets. The positions originally set forth in the bit systems for purposes of this final rule incorporates the proposed proposed interpretive statement. The restriction); interpretive statement that the Commission has included in this release (d)'A maximum CPU to memory Commission issued for comment when a discussion of the purposes and scope bandwidth of less than 160 Mbit/s; proposing the rule. In another release of broker-dealer regulation and the (e) A CPU bus architecture that does also issued today, the Commission is general principles of U.S. registration for not support multiple bus masters; and soliciting further comment on the international broker-dealers, in order to (f) The systems do not include concept of recognition of foreign emphasize the importance that the controlled "related equipment" other securities regulation as a substitute for Commission attaches to broker-dealer than input/output control unit/disk U.S. registration of foreign broker- registration and regulation in the drive combinations having all of the dealers. international context. following characteristics- EFFECTIVE DATE: August 15, 1989. Finally, the Commission has issued a (1)A "total transfer rate" not FOR FURTHER INFORMATION CONTACT: separate release discussing the concept exceeding 10.3 Mbit/s; Robert L.D. Colby, Chief Counsel, (202) of an exemption from broker-dealer (2)A total connected "net capacity" 272-2844, or John Polanim, Jr., Special registration based on recognition of not exceeding 140 MByte; and Counsel, (202) 272-2848, Division of foreign regulation. Many commenters (3)A "total access rate" not exceeding Market Regulation, or Thomas S. addressing the proposed rule favored 80 accesses per second with a maximum "access rate" of 40 accesses Harman, Chief Counsel, (202) 272-2030, this approach, but the Commission per second Division of Investment Management believes that the numerous complex per drive. (regarding investment adviser issues raised by this approach require Note: The decontrol does not affect registration requirements discussed in further exploration before any action is microprocessor based personal computers Part IV), Securities and Exchange taken on the concept. To clarify the that are: Commission, 450 Fifth Street NW application of U.S. broker-dealer (a)Ruggedized above a commercial/office Washington, DC 20549. registration requirements to the cross- environment; (b)Highly portable computers (those that SUPPLEMENTARY INFORMATION: border activities of foreign broker- dealers, the Commission is adopting the can be battery powered or other self I. Executive contained form of power); or Summary Rule now, while soliciting more detailed (c)Stand-alone graphic workstations with The Commission is adopting proposed comments on the parameters of the characteristics equalling or exceeding the Rule 15a-6 to provide conditional concept of an exemption from broker- parameters inECCN 1565A Advisory Note exemptions from broker-dealer dealer registration based on recognition 9(a)(7) (i)and (iv). registration for foreign broker-dealers of foreign securities regulation. Note: For the purposes of this decontrol, that engage in certain activities I. Introduction personal computers are defined as involving U.S. investors and securities microprocessor based computers that are: markets. These activities include (i) Rule 15a-6 is based on the (a)Designed and advertised by the "nondirect" contacts by foreign broker- Commission's recognition of the fact manufacturer for personal, home or business dealers with U.S. investors and markets, that the pace of internationalization in use; and through execution securities markets around the world (b)Are normally sold through retail of unsolicited establishments. securities transactions, and provision of continues to accelerate.' As the research to certain U.S. institutional Commission noted when it published investors; and [ii) "direct" contacts, Rule 15a-6 for comment,2 multinational Dated: July 13,1989. involving the execution of transactions offerings of securities have become James M. 3 LeMunyon, through a registered broker-dealer frequent, and linkages are developing DeputyAssistantSecretaryfor Export intermediary with or for certain U.S. between secondary. arkets 4 and Admnmnistration. institutional investors, and without this [FR Doc. 89-16841 Filed 7-17-89; 8:45 am] intermediary with or for registered In its recent PolicyStatementon Regulation of BILLING CODE 3510-OT-M broker-dealers, banks acting in a broker InternationalSecurities Markets, the Commission or dealer capacity, certain international outlined its views on the appropriate regulatory SECURITIES AND EXCHANGE response to this development, which it broadly organizations, foreign persons described as facilitating efficient and honest temporarily present in the United'States, markets where investors and issuers can seek the COMMISSION U.S. citizens resident abroad, and greatest return on investment and the lowest cost of foreign branches and agencies of U.S. capital, without regard for national boundanes. 17 CFR Part 240 Securities Act Release No. 6807 (Nov. 14,1988), 53 persons. The Commission's goals in FR 46963. [Release No. 34-27017, International Series adopting Rule 15a-6 at this time are (i) Securities Exchange Act Release No. 25801 (June Release No. 105; File No. S7-11-88] to facilitate access to foreign markets by 14,1988), 53 FR 23645, 23648 ("Release 34-25801"). U.S. institutional See Internationalizationof the Securities RIN: 3235-AD27 investors through foreign broker-dealers and the research Markets, Report of the Staff of the U.S. Securities and Exchange Commission to the Senate Committee Registration Requirements for Foreign that they provide, consistent with on Banking, Housing, and Urban Affairs and the Broker-Dealers maintaining the safeguards afforded by House Committee on Energy and Commerce (July broker-dealer registration; and (ii) to 27,1987) ("Report on Intemationalization") at 111-43 AGENCY: Securities and Exchange provide clear guidance to foreign broker- to 1II-53. Commission. dealers seeking to Since 1985. the Commission has approved operate in compliance several linkages between U.S. and foreign ACTION:Final rule. with U.S. broker-dealer registration exchanges, including the link between the Montreal requirements. Stock Exchange and the Boston Stock Exchange, SUMMARY: The Commission is adopting In addition, the Commission is and the links between the Toronto Stock Exchange proposed Rule 15a-6, which provides withdrawing the interpretive statement and the American and Midwest Stock Exchanges, exemptions from broker-dealer respectively. See Report on Internationalization at that it proposed together with Rule 15a- V-49 to V-57 Presently, only the Montreal Stock registration for foreign entities engaged 6. The final rule ("Rule") includes Continued 30014 Federal Register / Vol. 54, No. 136 / Tuesday, July 18, 1989 / Rules and Regulations clearing systems.5 The desire of The Commission responded to this Believing that expansion of proposed investors to trade in financial markets international expansion in broker-dealer Rule 15a-6 to include additional around the world is increasing steadily, activities by publishing Release 34- portions of the interpretive statement and many major institutional investors, 25801. This release had two purposes. deserved "serious consideration, the comment on an particularly investment companies, First, as discussed at greater length Commission solicited1 insurance companies, pension funds, below, the Commission sought to make expanded rule. 2 and large commercial banks, are active known the existing U.S. requirements for The Commission received thirty-two 6 on an international basis. registration of foreign broker-dealers. comment letters in response to proposed As interest in foreign securities has Second, the Commission sought to Rule 15a-6 and the interpretive 13 grown, the geographical reach of facilitate investment by U.S. statement. The commenters generally intermediaries based in national institutional investors in foreign supported the Commission's goal of markets has expanded greatly. Many securities markets by proposing a rule facilitating access to foreign markets by U.S. and foreign broker-dealers are that would increase access to foreign U.S. institutional investors, consistent developing an international securities broker-dealers, consistent with the with the purposes underlying broker- business, establishing offices throughout investor safeguards afforded by broker- dealer registration. Commenters also the worldJ According to statistics dealer regulation. The Commission generally supported expansion of the compiled by the Commission's Office of recognized that foreign broker-dealets proposed rule to include the substance Economic Analysis, 179 registered U.S. can provide valuable market experience, of the interpretive statement. broker-dealers were affiliated with trade execution, and research services foreign broker-dealers or foreign banks to U.S. institutions interested m entering Ill Broker-Dealer Regulation as of 1987 In contrast, in 1973 there overseas markets. were approximately twenty-eight non- Release 34-25801 comprised an A. PurposesandScope ofBroker-Dealer Canadian U.S. broker-dealers with 8 interpretive statement and a proposed Regulation foreign parents. As of 1988, there were rule. The interpretive statement was a approximately fifty members of the New summary of the staff's current positions In the context of adopting exemptions York Stock Exchange in which foreign regarding broker-dealer registration by from the U.S. broker-dealer regulatory entities had an ownership interest. In foreign entities. Proposed Rule 15a-6, scheme, the Commission believes that it 9 1973, there were four. developed from past interpretive, no- is important to reiterate the fundamental action, and exemptive positions, would significance of broker-dealer registration Exchange/Boston Stock Exchange linkage is in have exempted from the broker-dealer within the structure of U.S. securities operation. In addition, the Commission has registration requirements of section market regulation. Because of the approved pilot program developed by the National Association of Securities Dealers, Inc. ("NASD"i) 15(a) of the Securities Exchange Act of broker-dealer's role as an intermediary and the International Stock Exchange of the United 1934 ("Exchange Act") 10 foreign broker- between customers and the securities Kingdom and the Republic of Ireland, Ltd. ("ISE"), dealers that engaged in securities markets, broker-dealers have been linking the NASD's automated quotations system transactions with certain non-U.S. required to register with the Commission ("NASDAQ") and the ISE's electronic quotation persons or with specified U.S. system ("SEAQ"). Securities Exchange Act Release since 1935,14 and they were registered No. 23158 (Apr. 21, 1986), 51 FR 15989. The pilot institutional investors under limited with numerous states before enactment program has been extended to October 2 1989. conditions. of the Exchange Act in .15 The Securities Exchange Act Release No. 24979 (Oct. 2, 19 34 Subsequently, members of the definitions in the Exchange Act of the 1987). 51 FR 37684. The Commission also has Committee on Federal Regulation of approved a pilot-program providing for an exchange of quotations between NASDAQ and the Stock Securities of the Section of Business Exchange of Singapore. Securities Exchange Act Law of the American Bar Association 12 Securities Exchange Act Release No. 26136 Release No. 25457 (Mar. 14,1988), 53 FR 9156. ("ABA") submitted a comment letter (Sept. 30, 1988), 53 FR 38967 ("Release 34-26136"). E.g., Letter from Jonathan Kallman, Assistant suggesting an expanded version of Director, Division of Market Regulation, SEC, to '3 A detailed comment summary has been Karen L. Saperstein, Esq., Associate General proposed Rule 15a-6, which generally prepared and placed in the Commission's public Counsel, International Securities Clearing reflected the substance of the files, together with all comment letters received. See Corporation ("ISCC") (Sept. 20,19881 (ISCC linkage interpretive statement. The ABA File No. S7-11-88, 14As originally enacted, the Exchange Act with Japan Securities Clearing Corporation). suggested that an expanded rule, among dealt Greenwich Associates. Institutional Investors primarily with exchange regulation, and section 15 1989, 9-12, 72-07. other things, would "spell out clearly in of the Exchange Act authorized the Commission to One commentator recently estimated that one place the ground rules to which provide, by rule, for registration of brokers or approximately thirty broker-dealers will possess the foreign broker-dealers are subject" and dealers that were not already exchange members. integrated back-office trading and management be "more consistent with orderly After the Commission initially adopted rules information systems necessary to execute and clear development of the law in this area. requiring registration of over-the-counter broker- securities transactions on global basis by the year dealers, Congress in 1936 amended section 15 to 2000. Kraus, Growth Predicted in Global Traders. codify the Commission's rules on broker-dealer American Banker, Mar. 20,1989, at 14. 10 15 U.S.C. 78o(a). registration. See L. Loss, Fundamentals of Securities New York Stock Exchange Advisory Committee Regulation 409-10 (1988) and the concept release on International Capital Markets, I I Letter from John M. Liftin, Esq., Committee on also issued today. infra note 34. Recommendations Regarding ForeignAccess to the Federal Regulation of Securities, Section of Business i5 U.S. SecuritiesMarkets (July 1973), Appendix B. Law, ABA, to Jonathan G. Katz, Secretary, SEC See generally L. Loss &E. Coweti, Blue Sky Id. at12. (Sept. 14. 1981). Law 26-30 (1958). Federal Register / Vol. 54, No. 136 / Tuesday, July 18, 1989 / Rules and Regulations 30015 terms "broker" 16 and "dealer" 17 and the registration requirements of section must be members of a self-regulatory 15(a) of the Exchange Act 18 were organization ("SRO") 23 and the Section 3(a)(4) of the Exchange Act defines drawn broadly by Congress to Securities Investor Protection 16 4 "broker" as "any person engaged in the business of encompass a wide range of activities Corporation ("SIPC").2 They are effecting transactions in securities for the account of involving investors and'securities subject to statutory disqualification others, but does not include a bank. 15 U.S.C. markets.' 9 Section 15(a) of the standards and the Commisston's 78c(a)(4). The term "bank, however, is limited by Exchange Act generally requires that disciplinary authority,2 5 which are section 3(a)(6) of the Exchange Act, 15 U.S.C. 78c(a(6), to banks directly regulated by U.S. state or any broker or dealer using the mails or designed to prevent persons with an federal bank regulators, and thus foreign banks that any means or instrumentality of adverse disciplinary history from act as brokers or dealers within the jurisdiction of interstate commerce (referred to as the becoming, or becoming associated with, the United States are subject to U.S. broker-dealer jurisdictional means) 20 to induce or registered broker-dealers. They also are registration requirements. See Release 34-25801, 53 effect transactions in securities 21 must required by the Commission's net FR at 23645 n.1. To the extent, however, that a register as a broker-dealer with the capital regulations 26 to maintain foreign bank establishes a branch or agency in the capital to operate safely. In United States that is supervised and examined by a Commission. sufficient federal or state banking authority and otherwise Registered broker-dealers are subject addition, they are required to maintain meets the requirements of section 3(a)(6), the to a panoply of U.S. regulations and adequate competency levels, by Commission would consider this branch or agency supervisory structures intended to satisfying SRO qualification to be a "bank" for purposes of sections 3(a)(4) and protect investors and the securities requirements."7 3(a)(5) of the Exchange Act. markets.2 2 Registered broker-dealers Further, registered broker-dealers are The Commission believes that the determination under extensive recordkeeping and whether any particular financial institution meets 28 i8 See supra note 10. reporting obligations, fiduciary the requirements of section 3(a)(6) is the 8 0 responsibility of the financial institution and its 19 For instance, if a U.S. Issuer sells its securities duties 29 and special antifraud rules, counsel. Cf. Securities Act Release No. 6661 (Sept. in the United States through its own employees, the and the Commission's broad 23,1986). 51 FR 34460 ("Release 33-8061") activities of these employees may require broker- enforcement authority over broker- (determination as to whether branch or agency of dealer registration. This is also true for foreign 31 issuers using their employees to sell securities dealers. That authority, in turn, helps foreign bank falls within the definition of "bank" within the United States. However, the Commission assure that broker-dealers are under section 3(a)2) of Securities Act of 1933 has adopted Rule 3a4-1, 17 CFR Z40.3a4-1, which complying with the statutory and ("Securities Act"], 15 U.S.C. 77c(a)(2), is provides a safe-harbor exemption from broker- responsibility of issuers and their counsel]. The regulatory provisions governing the U.S. dealer registration for an issuer's personnel selling 8 2 Commission notes. however, that section 4(d) of the the issuer's securities under certain circumstances. securities industry. Moreover, the International Banking Act, 12 U.S.C. 3102(d), See Securities Exchange Act Release No. 22172 expressly prohibits agencies of foreign banks (June 27, 1985), 50 FR 27940. established under federal law from receiving sections 15(b)(4) and 15(b)(6) of the Exchange Act. 20 Specifically, section 15(a)(1). 15 U.S.C. 15 U.S.C. 78o(b)(4j and 78o(b)(6); Rules 15c3-1, 15c3-- deposits or exercising fiduciary powers, criteria 78o(a){1), refers to "use ofthe mails or any means or 3, 17a-3,17a-4, and 17a-5, 17 CFR 240.15c3-1, 15c3- necessary for qualification as a bank under section instrumentality of interstate commerce to effect any 3,17a-3, 17a-4. and 17a-5. Nevertheless, the staff 3{a](6)(C). See Conference ofState Bank transactions in, or to induce or attempt to induce the would not recommend that the Commission take Supervisors v. Conover,715 F.2d 604 (D.C. Cir. 1983), purchase or sale of,any security (other than an enforcement action against foreign broker-dealers cert. dened,466 U.S. 927 (1984) (federally-chartered exempted security or commercial paper, bankers' for want of compliance with those provisions, with agencies of foreign banks prohibited from receiving acceptances, or commercial bills) Given the the exception of sections 15(b)(4) and 15(b)(6). if the deposits from foreign, as well a3 domestic, sources). broad definition of "interstate commerce" in section foreign broker-dealers were exempt from broker- It also should be noted that the definition of bank 3(a)(17) of the Exchange Act, 15 U.S.C. 78c(a)(17), dealer registration under the Rule. which includes "trade, commerce, transportation, or under section 3(a)(6) of the Exchange Act differs 23 Section 15(b)(8) of the Exchange Act, 15 U.S.C. communication between any foreign country somewhat from the definition of bank under section and any State, virtually any transaction-oriented 78o(b)(8). 3(a)(2) of the Securities Act, particularly with contact between a foreign broker-dealer and the 24 Section 3(a)(2) of the Securities Investor respect to exercising fiduciary powers and receiving U.S. securities markets or a U.S. investor in the Protection Act of 1970,15 U.j.C. 78ccc(a)(2). deposits. As discussed mnfra note 168, the Securities United States involves interstate commerce and 25 See sections 3(a)(39), 15(b)(4), and 15(b)(6) of Act definition is applicable in determining whether could provide the jurisdictional basis for broker- the Exchange Act. 15 U.S.C. 78c(a)(39, 78o(b)(4), U.S. branches and agencies of foreign banks qualify dealer registration. and 78oab)(6). as U.S. institutional investors under the Rule. 21 Section 15(a) does not require registration for 26 See Rule 15c3-1,17 CFR 240.15c3-1. i7 Section 3{a)(5) of the Exchange Act, 15 U.S.C. transactions in exempted securities, which are 27 E.g., NASD Schedules to By-Laws, Schedule C, 78c(a)5), defines "dealer" as "any person engaged defined in section 3(a)(12) of the Exchange Act, 15 NASD Manual (CCH) 117872-91. See section in the business of buying and selling securities for U.S.C. 78c(a)(12), commercial paper, bankers' 15(b)(7) of the Exchange Act. 15 U.S.C. 78o(b)(7). his own account, through broker or otherwise, but acceptances, and commercial bills. 15 U.S.C. 28 E.g., Rules 17a-3 (recordkeeping). 17a-4 (record does not include a bank, or any person insofar as he 78o(a)(1). The Canadian Bankers' Association asked preservation), and 17a- (reporting), 17 CFR the Commission to clarify-that the U.S. broker- buys and sells securities for his own account, either 240.17a-3, 17a-4, and 17a-5. In addition, for dealer registration requirements do not apply to nonresident registered broker-dealers the individually or in some fiduciary capacity, but not transactions in U.S. commercial paper by Canadian as a part of a regular business. Although by its Commission has adopted Rule 17a-7, which banks in the U.S. market. Commercial paper, establishes requirements for U.S. maintenance of terms this definition is broad, it has been bankers' acceptances, and commercial bills are not interpreted to exclude various activities not within records by these broker-dealers. 17 CFR 240.17a-7. defined in the Exchange Act. Nonetheless, the See also NASD Schedules to By-Laws, Schedule C the intent of the definition, such as buying and Commission notes that the definition of "security" (VIl), NASD Manual(CCH) 1790. selling for investment. See, e.g., Letter from Robert In section 3(a)(10) of the Exchange Act, 15 U.S.C. See Hanly V. SEC, 415 F.2d 589, 598 (2d Cir. L.D. Colby, Chief Counsel, Division of Market 78c(a)(10), generally is understood to exclude 2 instruments exempt from registration under section 1969) ("A securities dealer occupies aspecial Regulation. SEC, to Elizabeth J.Tolmach, Esq., relationship to abuyer of securities in that by his Caplin & Drysdale (Apr. 2,1987) (United Savings 3(a)(3) of the Securities Act, 15 U.S.C. 77c(a)(3), by position he implicitly represents he has an adequate Association of Texas) (no-action position on virtue of their classification as commercial paper. See Securities Exchange Act Release No. 4412 (Sept. basis for the opinions he renders"). government securities dealer registration). In 30 E.g., section 15(c) of the Exchange Act, 15 addition, the registration requirements of section 20, 1961) 11957-61 Transfer Binder], Fed. Sec. L. Rep. (CCH) 12045 (factors identifying exempted U.S.C. 780(c), and the rules thereunder, e.g., Rule 15(a) of the Exchange Act exclude from registration commercial paper under section 3(a)(3) of Securities 15cl-2, 17 CFR 240.15c-2. additional categories of persons, such as intrastate Act); Sanders v. John Nuveen & Co., 463 F.2d 1075 3i See sections 15(c) and 21 of the Exchange Act, broker-dealers. Cf. Douglas & Bates, Some Effects of (7th Cir.). cert. demed, 409 U.S. 1009 (1972) (applying 15 U.S.C. 78o(c) and 78u. the Securities Act Upon Investment Banking, 1 U. same factors under section 3(a)(I0) of Exchange 32 Eg.. Rule 14b-1, 17 CFR 240.14b-1 (prompt Chi. L. Rev. 283. 302 n.68 (1934): Douglas & Bates, Act). forwarding of proxy information to beneficial The Federal Securities Act of 1933, 43 Yale L.J. 171, 22 Many of the statutory and regulatory owners of securities); Rule 17a-8, 17 CFR 240.17a-8 206 n.189 (1933) ("rule of reason should apply to provisions cited below as applicable to registered (financial recordkeeping and reporting of currency similarly broad "dealer" definition in section 2(12) broker-dealers actually are applicable by their and foreign transactions), Rule 17a-13, 17 CFR of Securities Act, 15 U.S.C. 77b(12)). terms to other unregistered broker-dealers. E.g., Continued 30016 Federal Register / Vol. 54, No. 136 / Tuesday, July 18, 1989 / Rules and Regulations ..... I

Commission's financial supervision of general principles governing U.S. 1. Broker-Dealer Operations entities participating in the registration of brokers and dealers interdependent network of securities engaging in international activities. a 7 As a policy matter, the Commission professionals contributes to the The definitions of "broker" a8 and now uses a territorial approach in financial soundness of this nation's "dealer" 39 do not refer to nationality, applying the broker-dealer registration securities markets. requirements to the international and the scope of these definitions 4 2 These considerations remain includes both domestic and foreign operations of broker-dealers. Under important regardless of whether a persons 40 performing the activities this approach, all broker-dealers broker-dealer's activities involve described therein. Consequently, any physically operating within the United contacts with individual or institutional use of the U.S. jurisdictional means to States that effect, induce, or attempt to investors. When Congress authorized engage in these activities could trigger induce any securities transactions and subsequently required the would be required to register as broker- the broker-dealer registration 4 1 Commission to register broker-dealers, requirements of section 15(a). dealers with the Commission, even if Congress did not condition the these activities were directed only to requirement for registration on the type 37 These principles similarly would apply to foreign investors outside the United of investor registration of government securities brokers or involved. In 1975, Congress government securities dealers under section 15C of States. Conversely, as explained in the amended section 15(a) to extend the the Exchange Act, 15 U.S.C. 78i-5. and to interpretive statement in Release 34- broker-dealer registration requirements registration of municipal securities dealers under 25801, U.S. entities would not be to all broker-dealers trading exclusively section 15B of the Exchange Act, 15 U.S.C. 780-4. Neither these required to register if they conducted on a national securities exchange or in pnnmples nor the Rule, however, 33 necessarily reflect the requirements of any state their sales activities43 entirely outsidi the municipal securities. Moreover, as securities laws, which may apply to the activities of United States, noted m the concept release issued foreign broker-dealers within the junsdiction of today,3 4 Congress recently reaffirmed those states. Foreign broker-dealers exempt from registration by virtue of compliance with the Rule In their comment letters, the College Retirement the importance of regulating securities still could be subject to the registration Equities Fund ("CREF"), Westpac Banking professionals who operated in a largely requirements established by state securities laws, Corporation, and Debevoise &Plimpton argued that institutional market by enacting the since the Commission has no authority to grant section 30(b) should exempt from Commission Government Securities Act of 1986.3 5 exemptions from those requirements. regulation foreign broker-dealers operating 38 See note 16 supra. exclusively outside this country and contacting U.S. Congress enacted this legislation to 39 See note 17 supra. institutional investors in the United States from remedy serious problems, including a 40 Section 3(a)(9) of the Exchange Act. 15 U.S.C. outside this country. They asserted that reading depositors' run on savings and loan 78c(a)(9). defines "person" as a "natural person. section 30(b) to protect only foreign broker-dealers associations and savings company, government, or political subdivision, not using the U.S. junsdictional means to effect. banks that induce, or attempt to induce any transactions in resulted in the temporary closing of agency, or instrumentality of a government, again without reference to nationality. securities with or for U.S. persons would render the seventy-one of those financial 41 See supranote 20 and accompanying text. section meaningless, on the grounds that foreign institutions, that had developed in a Apart from concerns about broker-dealer broker-dealers avoiding this use of the U.S. primarily institutional market in registration, foreign broker-dealers should be jurisdictional means would not be subiect to the due requirements of section 15(a) in the first place. part to inadequate regulation of the careful that any offers or sales of securities comply with the registration provisions of the Securities The Commission's position on the application of professional intermediaries in that section 30(b) histoncally has been. and continues to 36 Act. when applicable. See Securities Act Releases market. No. 4708 (July 9,1964). 29 FR 9828 ("Release 33- be, that the phrase "without the junsdiction of the Accordingly, after reviewing the 4708"). and No. 6779 (June10, 1988). 53 FR 22661 United States" in that section does not refer to the ("Release 33-6779"). territorial limits of this country. See, e.g., Securities comments, the Commission is and Exchange Commission, BriefAmicus Curiaeon proceeding cautiously by adopting the A potential limitation on the broad application of section 15(a)may be found in section 30(b) of the Rehearingby the Full Court,Schoenbaum v. limited exemptions incorporated in the Exchange Act, which excludes from the application Firstbrook(2d Cir. 1968) at 23. Moreover, even if Rule. As discussed previously, however, of the Exchange Act or the rules thereunder any section 30(b) were read to incorporate territorial the Commission person "transactling] a business in securities approach, the Comnssion does not believe that is seeking comment in section 30(b) would exempt from broker-dealer the Concept Release without the jurisdiction of the United States, in the on a conceptual absence of Commission rules explicitly applying registration the activities suggested by the approach that might increase the ability those provisions to these persons. 15 U.S.C. 78dd(b). commenters. In particular, directed selling efforts to of U.S. institutional investors to deal While no rules have been adopted, the exemption U.S. investors in the United States hardly could be with provided by section 30(b) has been held unavailable considered activities not traversing the U.S. foreign broker-dealers in a manner territorial limits. A broker-dealer operating outside that is if transactions occur in a U.S. securities market, consistent with the protection of Roth v. Fundof Funds,Ltd., 405 F.2d 421 (2d Cir. the physical boundaries of the United States, but those investors and with the Exchange 1988), cert.denied 394 U.S. 975, reh. denied, 395 using the U.S, mails, wires, or telephone lines to Act. U.S. 941 (1969); Schoenbaum v. Firstbrook,405 F.2d trade securities with U.S. persons located in this 200, 208 (2d Cir., rev'din part on othergrounds,405 country, would not be, in the words of section 30(b), B. GeneralPrinciplesof U.S. F.2d 215 (2d Cir. 1968) (en banc), cert.deniedsub "transactlting a business insecurities without the Registrationfor InternationalBroker- nom.Manley v. Schoenbaum,395 U.S. 906 (1969); lurisdiction of the United States. Dealers Seizer v. The Bank ofBermuda, Ltd., 385 F. Supp. "'Proposed Regulation S also follows territorial 415 (S.D.N.Y. 1974); In the Matterof1O.S.. Ltd. approach, see Release 33-6779, 53 FR at 2265--66. Before discussing the exemptions in (S.A.), 11971-72 Transfer Binder Fed. Sec. L Rep. Tlus territoral approach is different from the (CCH) 178637 (Mar. 14,1972); if offers and sales are limited nationality approach taken in Release 33- the Rule, it is useful to review the made abroad to U.S. persons or in the United States 4708, which stated that, to avoid being subiect to the to facilitate sales of securities abroad. SEC v. registration requrements of the Securities Act an 240.17a-13 (quarterly security counts): Rule 17f-1. 17 UnitedFinancialGroup Inc., 474 F.2d 354 (9th Cir. offering must be "made under circumstances CFR 240.17f-1 (reports and inquiries concerning 1973): Troves v. Anthes ImperialLtd., 473 F.2d 515 reasonably designed to preclude distribution or missing, lost. counterfeit, or stolen securities): Rule (8th Cir. 1973P Leasco DataProcessingEquipment redistribution of the securities within, or to 17f-2, 17CFR 240.17f-2 (fingerprinting of securities Corp.v. Maxwell 468 F.Zd 1326, 1336 n.6 (2d Cir. nationalsof,the United States. 29 FR at 9829 industry personnel). 1972b Bersch v. Drexel Firestone,Inc. 389 F. Supp. (emphasis added). 43 See Release 34-25801, 33 Securities Act Amendments of 1975, Pub. L. No. 446. 453-59 (S.D.N.Y. 1974), aff'd in port and rev d in 53 FR at 23646 n.9 and 94-29. § 11,89 Stat. 97. 121 (1975). port.519 F.2d 974 (2d Cir. 1975), cert.deniedsub accompanying text. After the effective date of the noma. Bersch v.Arthur Andersen &Co., 423 U.S. 1018 34 Securities Exchange Act Release No. 27018 Rule, the staff will withdraw two prior inconsistent (1975); or if the United (July 11, 1989) ("Concept Release"). States is used as base for no-action positions regarding arrangements under securities fraud perpetrated on foreigners, Arthur 3*Pub. L.No. Stat. which sales or related activities involving 99-571. 100 3208 (1966). LipperCorp. r.SEC. 547 F.Zd 171 (2d Cir. 1976), reh. 36 See S. Rep. No. 99-426, 99th Cong., 2d Sess. 6- exclusively foreign persons emanated from within denieL 551 F.2d 915 (2d Cir. 1977), cert.denied,434 this country. Letter from Amy Natterson Kroll, 10 [1986). U.S. 1009 (198). Continued Federal Register / Vol. 54, No. 136 / Tuesday, July 18, 1989 / Rules and Regulations 30017

Also, the Commission uses an entity the Commission believes that it is 3. Solicitation approach with respect to registered consistent with these principles for a The proposed interpretive statement broker-dealers. Under this approach, if a registered broker-dealer s registered explained that if a transaction with a foreign broker-dealer physically representative stationed outside the person in the United States is solicited, operates a branch in the United States, United States with a foreign broker- the broker-dealer effecting the 52 and thus becomes subject to U.S. dealer to contact persons in the United transaction must be registered. registration requirements, the States from within or without this Although the requirements of section registration requirements and the country on behalf of the registered 15(a) do not distinguish between regulatory system governing U.S. broker- broker-dealer. solicited and unsolicited transactions, dealers would apply to the entire foreign 2. U.S. Investors the Commission does not believe, as a broker-dealer entity. If the foreign policy matter, that registration is broker-dealer establishes an affiliate in In addition to requiring broker-dealer necessary if U.S. investors have sought the United States, however, only the operations physically located within the out foreign broker-dealers outside the affiliate must be registered United States to register, the United States and initiated transactions as a broker- Commission's dealer, the foreign broker-dealer parent territorial approach in foreign securities markets entirely of would not be required to register.4 4 generally would require broker-dealer their own accord. In that event, U.S. registration by foreign broker-dealers Under this arrangement, absent investors would have taken the that, from outside the United States, initiative to trade outside the United exemptions, only the registered U.S. induce or attempt to induce trades by affiliate would be authorized to trade 4 9 States with foreign broker-dealers that any person in the United States. The are not conducting activities within this with any person in the United States or Commission would not require perform securities functions on behalf of country. Consequently, the U.S. registration, however, of foreign broker- investors would have little reason to those customers, such as effecting dealers dealing from abroad with trades, extending credit, maintaining expect these foreign broker-dealers to foreign persons domiciled abroad but be subject to U.S. broker-dealer records and issuing confirmations, and 50 temporarily present in this country. requirements. Moreover, requiring a receiving, delivering, and safeguarding 4 5 If foreign broker-dealers are effecting foreign broker-dealer to register as a and securities. funds trades outside the United States with or broker-dealer with the Commission Some commenters questioned for individual U.S. citizens resident because of unsolicited trades with U.S. whether, under these principles, a abroad, but have no other contacts persons could cause that foreign broker- registered broker-dealer's personnel within the jurisdiction of the United dealer to refuse t6 deal with U.S. who are stationed outside the United States, the Commission generally would persons under any circumstances. States with a foreign broker-dealer may not expect these foreign broker-dealers As noted in the proposed interpretive contact U.S. and foreign persons located to register. Most U.S. citizens residing statement,5 3 however, the Commission in the United States on behalf of the abroad typically would not expect, in generally views "solicitation, in the registered broker-dealer, provided that choosing to deal with foreign broker- context of broker-dealer regulation,5 4 as these personnel are U.S.-registered and dealers, that these foreign broker- including any affirmative effort by a subject to U.S. regulatory supervision. 46 dealers would be subject to U.S. broker or dealer intended to induce Assuming these persons were subject to registration requirements. Nor would transactional business for the broker- 55 the registered broker-dealer's foreign broker-dealers soliciting U.S. dealer or its affiliates. Solicitation citizens resident abroad normally supervision and control 47 and satisfied 48 expect that they would be covered by all U.S. SRO qualification standards, abroad, such as military personnel, would be U.S. broker-dealer requirements, since regarded as subject to Securities Act registration): they generally would not be directing SEC v.Siamencan Securities, Ltd.. Litigation Attorney, Division of Market Regulation, SEC. to their sales efforts toward groups of U.S. Release No. 6937 (June 17,1975) (charging, among Kevin McMahon, Esq., Jones, Grey & Bayley, P.S. nationals. To make other things, violation of section 15(a) regarding (Aug. 1,1986) (Barons Mortgage Association): Letter clear that solicitation of securities transactions from from Lynne G.Masters, Attorney, Office of Chief registration is not required of foreign American citizens stationed in Southeast Asia. for Counsel, Division of Market Regulation, SEC, to broker-dealers dealing with U.S. persons execution primarily on U.S. exchanges and over-the- Chester 1.jachimiec, Esq., Winstead. McGuire, resident abroad, including branches and counter markets). See also Release 33-6779, 53 FR at Sechrest & Mtnick (Aug. 3, 1987) (States Petroleum, agencies of U.S. persons located'abroad, 22670 n.106 [offerings specifically targeted at Inc.). The withdrawal of these no-action positions identifiable groups of U.S. citizens resident abroad" was discussed when the interpretive statement was the Commission has included in the Rule would not be eligible for safe-harbor exemption proposed, but no comments were received. See a specific exemption for these foreign from Securities Act registration tinder Rule 903 of Release 34-25801. 53 FR at 23650 n.48. broker-dealers, as discussed in greater proposed Regulation S). By "targeting the 44 Similarly, only the affiliate's personnel must be detail below. The Commission Commission means selling efforts intentionally licensed appropnately by the NASD or another historically has taken the view, directed toward identifiable groups of U.S. citizens SRO. See sections 3(a)(18) and 15(c)(8) of the resident abroad. Exchange Act. 15 U.S.C. 78c(a)(18) and 78o(c)18). however, that foreign broker-dealers 12 See Release 34-25801. 53 FR at 23646: see also 4 See note 189 infra regarding whether specifically targeting identifiable groups Report on Internationalization at V-42. registered broker-dealer would be permitted to of U.S. persons resident abroad, e.g., 5a Release 34-25801. 53 FR at 23650. 54 Section function as an introducing broker to an unregistered U.S. military and embassy personnel, 15(a)(1) of the Exchange Act requires foreign broker-dealer. registration of brokers and dealers that effect could be subject to U.S. broker-dealer securities transactions or "induce or attempt to 46 The Securities Industry Association ("SIA") registration requirements. 5 and Merrill Lynch & Co., Inc. The SIA inquired ' This iduce the purchase or sale of,any security. 15 concerning contacts originating from outside the position is reflected in the exemption. U.S.C. 78ola)(1 [emphasis added). If foreign United States, while Merrill Lynch addressed broker-dealer a securities activities brought it within the definitions of "broker or "dealer in section contacts originating inside this country also. 49 See proposed interpretive statement, Release 3(a) (4) or (5). using the U.S. jurisdictional means to '7 Section 15(b)4)(E) of the Exchange Act, 15 34-25801, 53 FR at 23649-51. solicit trades from U.S. customers would be U.S.C. 78o(b)(4]{E), imposes reasonable 50 The Rule incorporates an exemption for foreign sufficient to trigger the registration requirements of supervision standard, and section 20{a) of the broker-dealers engaging in securities activities with section 15(a). Exchange Act. 15 U.S.C. 78t~a1. establishes both these persons. See Part IV.B. infra. 3- The Report on Internationalization said that controlling person liability and good faith defense. 51See Release 34-4708 (a public offering of "[kley to the issue of solicitation is whether the *I See text accompanying note 27 supro. securities specifically directed toward U.S. citizens Continued 30018 Federal Register / Vol. 54, No. 136 / Tuesday, July 18, 1989 / Rules and Regulations 30018 includes efforts to induce a single The Commission generally believes the Securities Law Committee of the transaction or to develop an ongoing that a narrow construction of Chicago Bar Association ("CBA") securities business relationship. solicitation would be inconsistent with concurred. Sullivan &Cromwell Conduct deemed to be solicitation the express language of section 15(a)(1), maintained that the fact-specific nature includes telephone calls from a broker- which refers to both inducing or of these arrangements rendered them dealer to a customer encouraging use of attempting to induce the purchase or more suitable for resolution by the staff the broker-dealer to effect transactions, sale of securities,60 and would be through no-action or interpretive as well as advertising one s function as unwarranted in the context of the procedures. The Public Securities a broker or a market maker in domestic application of U.S. broker- Association ("PSA") suggested that, if a foreign broker-dealer participated in a newspapers or periodicals of general dealer registration requirements. As a circulation in the United States or on third-party quotation system matter of policy, however, the 'principally directed at foreign any radio or television station whose Commission has created a conditional broadcasting is directed into the United persons, dissemination of its quotations exemption in the Rule to permit to U.S. institutional investors should not States.. Similarly, conducting investment expanded U.S. distribution of foreign seminars for U.S. investors, whether or be considered solicitation of those broker-dealers' research reports to not the seminars are hosted by-a investors, provided that the foreign is registered U.S. broker-dealer, would major U.S. institutions, which broker-dealer did not engage in other 5 8 discussed below. constitute solicitation. A broker- activities in the United States6 5 requiring dealer also would solicit customers by, In addition, the Commission believes broker-dealer registration. among other things, recommending the that expanded third-party distribution of At the present time, the Commission purchase or sale of particular securities, foreign broker-dealers' quotations in this generally would permit the U.S. with the anticipation that the customer country without registration should be distribution of foreign broker-dealers' will execute the recommended trade allowed on an interpretive basis. 6 1 As quotations by third-party systems, e.g., through the broker-dealer. the proposed interpretive statement systems operated by foreign 6 2 Thirteen commenters argued that this explained, the dissemination in the marketplaces or by private vendors, that definition of solicitation should be United States of a broker-dealer's distributed these quotations primarily in narrowed.6 7 In particular, Fidelity quotes for a security typically would be foreign countries. The Commission Investments did not think that visits to a form of solicitation. The staff recognizes that access to foreign market this country by an unregistered foreign nonetheless has given assurances that makers' quotations is of considerable broker-dealer "to introduce itself as enforcement action would not be interest to registered broker-dealers and being available to execute trades" or "to recommended for lack of broker-dealer institutional investors, who seek timely information on foreign market explain regulatory changes occurring in registration with respect to the 66 its own jurisdiction" should be deemed collective distribution by organized conditions. The Commission's solicitation, based on Fidelity's foreign exchanges of foreign market position, however, would apply only to assumption that these activities would makers' quotes, in the absence of other third-party systems that did not allow not constitute inducements to effect inducements to trade on the part of securities transactions to be executed trades through the foreign broker- these market makers.6 3 Several between the foreign broker-dealer and 58 States through the dealer. The other comments supported commenters discussed an exemption in persons in the United broader latitude with respect to the systems. In addition, foreign broker- the Rule for the collective distribution of dealers whose quotes were distributed distribution of research by foreign foreign broker-dealers' quotations. The broker-dealers to U.S. institutional through the systems would not be ABA suggested exempting from allowed to initiate contacts with U.S. investors and with respect to the registration foreign broker-dealers that distribution in this country by foreign persons, beyond those exempted under acted as market makers and provided the Rule, without registration or further exchanges of foreign market makers their names, addresses, telephone quotations, both of which the proposed exemptive rulemaking. The Commission numbers, and quotes as part of the interpretive statement treated as believes that questions regarding the distribution by a "recognized solicitation. 59 collective future development of third-party foreign securities market" of foreign quotation systems with internal market makers' quotes.6 4 Members of foreign broker-dealer's contacts with U.S. markets execution capabilities designed, for reasonably may be viewed as attempting to induce example, to facilitate cross-border an investor's purchase or sale of security. Report 60 See supranote 54. trading in securities while the domestic on Internationalization at V-42. See also Letter from 61 See Part IV.B. infra. The Commission also has markets for those securities are closed, David Romanski, Attorney, Division of Market created an exemption In the direct contact Regulation, SEC. to Hugh Seymour, Hoare &Govett, provisions of the Rule to permit associated persons should be addressed under present Ltd. (Sept. 28, 1973), discussed in Release 34-25801, of foreign broker-dealers to make visits to U.S. 53 FR at 23646 n.12 and accompanying text. institutional investors under limited conditions. The 65 Letter from Frances R. Bermanzohn, Senior 56 See Hoare & Govett letter, supra note 55. Rule does not permit foreign associated persons to Vice President and General Counsel, PSA, to 57 Fidelity Investments, Madrid Stock Exchange, conduct any other activities within this country, Jonathan G. Katz, Secretary, SEC (Oct. 25, 1988), at Dechert Pnce &Rhoads, Ross &Hardies, CREF unless those activities would not require broker- 9. Stikeman, Elliott, Continental Bank, Association of dealer registration. 9GThe Commission would have reservations, German Banks, Toronto Stock Exchange. the SIA, e2 Release 34-25801, 53 FR at 23651. however, about certain specialized quotation the ABA, the Committee on International Banking. a See Release 34-25801, 53 FR at 23647 nn.21-27 systems, which might constitute a more powerful Securities, and Financial Transactions of the and accompanying text. The staff's no-action inducement to effect trades because of the nature of International Law and Practice Section of the New assurances also extended to the execution of trades the proposed transactions. For example, foreign York State Bar Association ("NYSBA"), and resulting from these quotes. broker-dealer whose quotations were displayed in Sullivan & Cromwell. e4Letter from Liftin to Katz, supra note 11, at 4. system that disseminated quotes only for large 5a Letter from John 1.Fitzgerald. Vice President The ABA did not offer any specific criteria for block trades might well be deemed to have engaged and General Counsel, Fideltiy Investments, to defining "recognized foreign securities market, in solicitation requiring broker-dealer registration, Jonathan G. Katz, Secretary. SEC (Sept. 13.1988). at which it defined as foreign securities market as opposed to a foreign broker-dealer whose quotes 3. Several other commenters agreed. See Part IV.B. determined by the Commission (or the staff, were displayed in a system that disseminated the infro. pursuant to delegated authority) to be entitled to quotes of numerous foreign dealers or market 59 See Release 34-25801, 53 FR at 23650-51. this treatment. makers in the same security. Federal Register / Vol. 54, No. 136 / Tuesday, July 18, 1989 / Rules and Regulations 30019 circumstances by the staff on a case-by- seeking comment in the Concept Release Seventeen commenters favored some case basis or by the Commission in on a conceptual approach based on form of mutual recognition.7 3 Several of further rulemaking proceedings. The recognition of foreign regulation as a these commenters advocated permitting Commission also believes that the direct substitute in part for U.S. broker-dealer a foreign broker-dealer to deal directly dissemination of a foreign market registration. with U.S. institutional investors after the maker's quotations to U.S. investors, Commission made a formal such as through a private quote system 1. Rule 15a-6 determination that its home country s controlled by a foreign broker-dealer, broker-dealer regulatory regime was The first two prongs of this approach 74 would not be appropriate without are incorporated in the Rule, which the adequate, particularly if there were a registration, because the dissemination decided to adopt in an satisfactory information-sharing and Commission has mutual cooperation agreement between of these quotations would be a direct, expanded format substantially as 75 exclusive inducement to trade with that U.S. and foreign regulators. published in Release 34-26136. The Rule foreign broker-dealer. thus incorporates much of the proposed The comments indicate great interest 4. Registered Broker-Dealers interpretive statement to realize the by U.S. institutional investors and foreign market professionals and benefits of codification identified by Some commenters asked the 7 securities authorities in an exemption Commission to confirm that foreign many commenters. As adopted, the from broker-dealer registration based on broker-dealers would not become Rule contains exemptions from broker- recognition of foreign regulation. The subject to the registration requirements dealer registration for nondirect many complex issues inherent in this of section 15(a) by using the U.S. contacts through unsolicited approach require careful deliberation by jurisdictional means to deal only with transactions and the distribution of the Commission and foreign securities registered broker-dealers.6 7 The staff research reports, and it allows for direct authorities before the parameters of this already has taken no-action positions on contacts with certain U.S. institutional exemption could be defined sufficiently broker-dealer registration with respect investors through intermediaries and to realize the desired goals of increased to foreign broker-dealers engaging in with certain other defined classes of access to foreign markets by U.S. securities transactions with registered persons without intermediaries. institutional investors, and more broker-dealers and with banks acting in Z.Recognition of Foreign Securities efficient regulation of the cross-border a broker or dealer capacity (including activities of foreign broker-dealers, acting as municipal or governmental Regulation without resulting in reduced protection 68 securites dealers). The Commission The third prong of the Commission s for U.S. investors and securities has codified this position as an approach is represented by the Concept markets. Therefore, the Commission has 69 exemption in the Rule, so that Release on recognition of foreign decided to adopt the Rule at the present transactions by foreign broker-dealers securities regulation also issued today. time, in light of the increasing cross- with registered broker-dealers acting as In the proposed interpretive statement, border activities of foreign broker- principal or agent, or with banks acting the Commission noted that the dealers and the need for clarification of in a broker or dealer capacity, need not development of comprehensive broker- the application of the U.S. broker-dealer take place within the framework 70 dealer regulation in foreign nations registration requirements to these established by the proposed rule. suggested that agreements with foreign activities, while also soliciting specific IV Rule 15a-6 and Concept Release securities authorities as to some form of comment on a conceptual approach recognition of foreign broker-dealer based on recognition of foreign A. Overview regulation might be possible in the securities regulation. The Commission's response to the future. Under this conceptual approach, 3.Withdrawal of Proposed Interpretive issues raised by the comments on the a country could recognize regulation of a Statement interpretive statement and proposed foreign broker-dealer by the latter's Rule 15a-6 is threefold. First, the home country as a substitute, to some In view of its other actions, the Commission is adopting exemptions extent, for its own domestic regulation. Commission considers it unnecessary to allowing nondirectcontacts between The Commission pointed out, however, publish separately a final interpretive foreign broker-dealers and U.S. statement. The Rule as adopted includes that this approach "could raise the many of the investors. Second, the Commission is of reduced U.S. investor exemptions incorporatihg possibility positions originally set forth in the adopting exemptions allowing direct protection, unless the foreign \ contacts between foreign broker-dealers proposed interpretive statement, and jurisdiction had a broker-dealer this release specifically discusses and certain U.S. investors through regulatory system that was comparable intermediaries, and between foreign and compatible with that of the United broker-dealers and certain other persons States, this system was 1- Andras Research Capital Inc., Bank of directly. Third, the Commission is America. Brown Brothers Harman. Fidelity comprehensively enforced, and ready Investments. National Companies and Securities cooperation in surveillance and Commission (Australia) ("NCSC"),Ross & Hardies. 67 The Institute of International Bankers, the enforcement matters between the CREF. Stikeman. Elliott. Westpac Banking ABA, the PSA, the SIA, Securitiy Pacific Corporation. The Toronto Stock Exchange, the Corporation, and Sullivan & Cromwell. United States and the foreign Institute of International Bankers. the SIA. James 68 Letter from John Polani, Jr., Attorney, Office jurisdiction was the norm. 72 In light of Capel & Co., Debevoise & Plimpton. the Vancouver of Chief Counsel. Division ofMarket Regulation, these factors, the Commission stated Stock Exchange, the NYSBA. and The Montreal SEC, to Robert L. Tortonello, Esq., Cleary, Gottlieb, some Exchange. Steen & Hamilton (July 7,1988) (National that it was weighing whether 74 Westpac Banking Corporation. the Institute of Westminster Bank PLC): Letter from Robert L.D. degree of mutual recognition of International Bankers, James Capel. and Debevoise Colby, Chief Counsel, Division of Market international broker-dealers might be & Plimpton. Regulation, SEC, to Robert L TortorIello. Esq.. possible in the future. 7.-The SIA advocated that the Commission Cleary, Gottlieb, Steen & Hamilton [Apr. 1. 1988) require participating foreign regulators to accord (Security Pacific Corporation). U.S. broker-dealers "national treatment. i.e.. 69 See Part IV.B infr. 71See suprm notes 11-13 and accompaning text. treatment similar to that accorded to domestic 70 See Release 34-25801. 53 FR at 23653-54. 12 Release 34-25801.53 FR at23652. broker-dealers in the foreign country. 30020 Federal Register / Vol. 54, No. 136 / Tuesday, July 18, 1989 / Rules and Regulations others, especially in connection with the Commission concurs with those 15B(a)(4) of the Exchange Act,8 4 the general principles stated above. To comments suggesting that an expanded Commission has made the exemptions avoid confusion, the Commission-is rule would be understood more easily; in the Rule applicable to foreign broker: withdrawing the proposed interpretive especially by foreigners: unfamiliar with dealers engaging in municipal securities statement, but the staff's interpretive the Commission interpretive practices. activities involving U.S. investors, and no-action letters and the Therefore, Rule 15a-6 as adopted although the Commission belijeves that Commission exemptions cited therein incorporates many of the positions these activities are not likely to be will remain valid until expressly articulated in the interpretive statement, extensive. In addition, the Commission modified or withdrawn. In addition, the although it differs in some respects from will recommend to the Department of the Treasury that the latter exercise its. Commission wishes to confirm that the the expanded rule published in Release staff's guidance will continue to remain authority under section 15C(a)(4) of the 34-26136. For ease of reference, the Rule Exchange Act 85 to provide similar available regarding both the application has been organized into nondirect of the Rule and the general application exemptions to foreign broker-dealers of the U.S. broker-dealer registration contacts, direct contacts, and trading engaging in government securities requirements to the activities of foreign with or for specified persons. activities involving U.S. investors. broker-dealers.76 Rule 15a-6[a) exempts only foreign As proposed, Rule 15a--6(a) was brokers or dealers, which are defined in phrased as a conditional exemption B. Rule 15a-6 paragraph (b)(3) to mean persons not from the broker-dealer registration The Commission is adopting proposed resident in the United States that are not requirements of section 15(a).8 6 The Rule 15a-6 under section 15(a)(2) of the offices or branches of, or natural expanded rule stated instead that a Exchange Act 7 to provide conditional qualifying broker-dealer "is not subject persons associated with, registered 8 7 exemptions from broker-dealer broker-dealers, and whose securities to" these registration requirements registration for foreign broker-dealers activities would fall within the Several commenters objected that an that do not initiate direct contacts with definitions of "broker" or "dealer" in exemption implied that the exempted U.S. persons, that solicit or effect activities required registration absent sections 3(a)(4) or 3(a)(5) of the 8 transactions by certain U.S. institutional Exchange Act, respectively.7 9 The the exemption. The Commission has investors through registered broker- definition in paragraph (b)(3) expressly determined to adopt Rule 15a-6 as an dealers, or that solicit or effect securities includes any U.S. person engaged in exemption, rather than as an exclusion transactions by certain other persons. business as a broker or dealer entirely from registration. In the Commission s view, many of the activities covered by 1. Structure of the Rule outside the United States. This provisions-of the Rule plainly would As previously noted, the Commission definition also includes foreign banks to require registration, absent an is adopting Rule 15a-6 in an expanded the extent that they operate from exemption. To keep the rule as simple as outside the United States, but not their format similar to that published in 8 0 possible, the Commission is adopting all Release 34-26136. A majority of U.S. branches or agencies. the provisions of the Rule as exemptions commenters that addressed the issue The proposed rule would have from registration, pursuant to sections supported expansion of the proposed exempted foreign broker-dealers only 15(a)(2) and 15B(a)(4) of the Exchange exemptive rule to include the substance from section 15(a). The expanded rule Act.89 of the interpretive statement, 78 and the also would have exempted foreign Several commenters argued that broker-dealers required to register as failure to comply with the proposed rule 76 Questions on this subject should be addressed municipal securities dealers by section in one instance should not affect the to the Office of Chief Counsel, Division of Market 15B(a)(1) of the Exchange Act,"i and availability of the exemptions under the Regulation, Securities and Exchange Commission, several commenters believed that proposed rule in other cases.a0 The 450 Fifth St. NW., Mail Stop 5-1,'Washington, DC justifications proffered by these 20549, (202) 272-2848. foreign broker-dealersrequired to 11 15 U.S.C. 70o(a)(2}. register as government securities commenters were the desire to avoid 10 Of the thirteen commenters who addressed the brokers or dealers by section 15C(a)(1) attaching "unduly severe consequences question of whether the substance of the of the Exchange Act8 2 should be to "isolated, inadvertent violations" 9 interpretive statement should be included in the 8 3 proposed rule, eleven supported expansion of the included as well. Pursuant to section rule: Continental Illinois National Bank and Trust s4 15 U.S.C. 78,-4(a)(4). Company of Chicago, the PSA, The Toronto Stock Exchange argued against an expanded rule. 85'15 U.S.C. 78o-5(a){4). Exchange, the Institute of International Bankers. believing that codification of interpretive positions so See supra note.10. Chase Manhattan Government Securities, the SIA. on foreign broker-dealer registration would impair s Release 34-26136, 53 FR at 38968. Security Pacific Corporation, Salomon Brothers Inc., the staffs ability to exercise its judgment on this ss The ABA, Sullivan & Cromwell. the PSA. and Sullivan & Cromwell, Merrill Lynch. and the CBA. subject in flexible manner. Continental Bank. The NYSBA, while not commenting explicitly on 79 Supro notes 16-17. See also note 19 supro 89 See notes 77 and 84 supr. Section (a) of the expansion of the proposed rule. suggested that in regarding Rule 3a4-1.17 CFR 240.3a4-1. proposed rule also stated that the rule applied to terpretive statement be "converted into an any foreign broker-dealer "subject to the so interpretive rule" to provide foreign broker-dealers The Institute of International Bankers registration requirements of paragraph (1) of section contended that U.S.-regulated branches or agencies "aclearer basis" on which to evaluate the 15(a) of the Act, because it induces or attempts to application of U.S. law to their activities. Letter of foreign banks should be excluded from broker- induce the purchase or sale of any security by U.S. dealer registration in the same way as domestic person. Release 34-25801. 53 FR'at 23655. This from Lauren D.Rachlin, Chairman, NYSBA, to banks, by virtue of section 3(a)(6) of the Exchange Jonathan G.Katz, Secretary, SEC (Nov. 7,1988). at 5. language has bees deleted from the Rule, because it The Institute of International Bankers suggested Act, 15 U.S.C. 78c(a)(6). As explained in note 16 merely restated the language of section 15la)llI, 15 that the Commission retain the proposed supro, the Commission has taken the position that U.S.C. 78o~a)(1). The exemption under Rule 15a-6 is interpretive statement for discussion of matters not the status of these branches and agencies under necessary only if the registration requirements of specifically addressed by the ABA's formulation of section 3(a)(6) is factspecific, and U.S. branches or section 15(a) are triggered. As stated in'Part IV.A. the proposed rule. The SIA, Security Pacific, agencies of foreign banks that fall within the above, the staff" guidance will continue to be Salomon Brothers, and Merrill Lynch believed that definition of bank -under section 3(a)(2) of the available on this issue. the Commission should make clear that future Securities Act will be treated as U.S. institutional '0 The PSA, Security, Pacific Corporation. and investors under the Rule. See 0/so note 168 ifr. Sullivan &Cromwell. requests for interpretive guidance still would be 6 1 15 U.S.C, 78o-4[a )(1). considered after the adoption of the Rule. Only the 9'1Letter from Dan C. Aardal. Assistant Geperal SA (which preferred the ABA' approach if the 02 15 U.S.C. 78o-5(a)(1). Counsel. Security.Pacific Corporation.,to Jonathan Commission adopted the Rule) and The Montreal "7The ABA. the PSA. and the CBA. C. Katz. Secretary. SEC (Oct. 31. 1988). Federal Register / Vol. 54, No. 136 / Tuesday, July 18, 1989 / Rules and Regulations 30021 I and the belief that enforcement 2. Nondirect Contacts The expanded rule did not define the considerations did not prohibit a a. UnsolicitedTransactions.As concept of solicitation, and neither does transactional approach, since remedies the Rule as adopted. The Commission's are available to both the Commission discussed previously, the Commission believes that registration should not be general views on meaning of the term and private investors on a transactional "solicitation" have 9 2 required when a foreign broker-dealer been discussed basis. effects an unsolicited trade for a U.S. previously. Taking into account the In the Commission's view, failure to expansive, fact-specific, and variable comply with the conditions of one investor. Accordingly, paragraph (a)(1) of the Rule nature of this concept, the Commission exemption in the Rule regarding certain exempts from registration a activities would not prevent reliance on foreign broker-dealer to the extent that believes that the question of solicitation it "effects transactions in securities the same or other exemptions in the with is best addressed by the staff on a case- Rule with respect or for persons that have not been by-case basis, consistent with the to other activities. solicited by the foreign broker or Also the Commission is modifying the principles elucidated in this release. dealer. This paragraph codifies part of b. ProvisionofResearch to U.S. position expressed in the proposed the proposed interpretive statement interpretive statement that a 95 Persons.As noted in the interpretive foreign and generally has been taken from 97 broker-dealer's obligation to register, statement, the provision of research to paragraph (a)(2) of the expanded rule investors also may constitute once incurred, "continues until the published in Release.34-26136. 9a foreign broker-dealer completely ceases solicitation by a broker or dealer. to do business with or for [U.S.] U.S.C. 78c(a)48), includes a broker-dealer "required Broker-dealers often provide research to investors" whom it has solicited and to register" pursuant to section 15(a). Also included customers on a nonfee basis, with the with or for whom it has effected are brokers and dealers registered or required to expectation that the customer securities transactions. 93 With respect register pursuant to section 15B, 15 U.S.C. 780-4. eventually will trade through the broker- and, with respect to the definition of "member" in to the Commission's exercise of its section 3(a)(3), 15 U.S.C. 78c(a)(3), and sections 6 dealer. They may provide research to enforcement authority under section and 15A regarding national securities exchanges acquaint potential customers with their 15(a), the Commission would view a and registered securities associations, respectively, existence, to maintain customer violation of U.S. registration 15 U.S.C. 78f and 78o-3, those entities and government securities brokers and government goodwill, or to inform customers of their requirements by a foreign broker-dealer securities dealers registered or required to register knowledge of specific companies or as an ongoing violation until the foreign pursuant to section 15C(a)(1)(A), 15 U.S.C. 78o- markets, so that these customers will be broker-dealer completely ceased to 5(a)(1)(A). encouraged to use their execution conduct U.S. securities activities that It should be noted also that a foreign broker. dealer dealing with U.S. investors in violation of the services for that company or those were not exempt under the Rule, or that broker-dealer registration requirements potentially markets. In each instance, the basic required registration under the general would be exposed to customers' rescission actions purpose of providing the nonfee principles discussed earlier in this brought under section 29(b) of the Exchange Act, 15 research is to generate transactional release. Of course, the foreign broker- U.S.C. 78cc(b). See, e.g., Regional Properties, Inc. v. Financial &Real Estate Consulting Co., 678 F.2d business for the broker-dealer. In the dealer would remain liable for its 552 558 (5th Cir. 1982), affdon other grounds, 752 Commission's view, the deliberate violative conduct, even after it ceased F.2d 178 (5th Cir. 1985) (later appeal); Eastside or Church transmission of information, opinions, all nonexempt U.S. securities activities. of Christv. NationalPlan, Inc., 391 F.2d 357 recommendations to investors in the Further, if a foreign broker-dealer (5th Cir.). cert dened,393 U.S. 913 (1968) (allowing investors to rescind transactions with unregistered United States, whether directed at repeatedly engaged in nonexempt U.S. broker-dealer). See also Gruenbaum &Steinberg, securities activities intermittently with individuals or groups, could result in the Section 29(b) of the Securities Exchange Act of conclusion that the foreign broker-dealer exempt U.S. activities, this course of 1934: A Viable Remedy Awakened, 48 Geo. Wash. conduct could support the conclusion L. Rev. 1 (1979). The right of rescission under section has solicited those investors. 29(b), 15 U.S.C. 78cc(b), ordinarily would be invoked Consistent with earlier staff no-action that the foreign broker-dealer was in by private parties, and the Commission believes violation of section 15(a) during the positions,98 however, the proposed 9 4 that it would not he appropriate to make general entire course of its U.S. activities. statement on the availability of that right in the interpretive statement took the position context of adopting the Rule. that the provision to U.S. persons of Of course, the broker-dealer's securities 95 The commenters did not elaborate or mention activities research reports prepared by a foreign would continue to be subject to the antifraud explicitly section 29(b) of the Exchange Act. 15 provisions of the federal securities laws, e.g., broker-dealer would not require broker- U.S.C. 78cc(b). See note 94 infra, section 17(a) of the Securities Act, 15 U.S.C. 77q(a). dealer registration by that foreign 93 Release 34-25801. 53 FR at 23651. and sections 10(b) and 15(c) of the Exchange Act, 15 broker-dealer, if the research reports 94 If foreign broker-dealer deals with U.S. U.S.C. 78l(b) and 78o(c), and the rules thereunder. were distributed to U.S. persons by an investors in violation of the broker-dealer e.g., Rules 10b-5 and 15cl-2. 17 CFR 240.10b-5 and registration requirements, It would be sublect to 240.15c-2, irrespective of the firm's lack of affiliated U.S. broker-dealer, if that Commission enforcement action under section 15(a) registration. The extraterritorial application of the affiliated broker-dealer prominently of the Exchange Act, supra note 10. Indeed, one antifraud provisions of the federal securities laws stated on the research report that it had commenter, even while recommending changes to was discussed in the proposed interpretive for its content, if proposed Rule i5a-16, exhorted the Commission. statement. Release 34-25801, 53 FR at 23649 n.39. accepted responsibility "after spending extensive efforts In developing See also note 41 supra. The Commission continues the research report prominently concise codification of interpretative and exemptive to believe that the antifraud provisions should be indicated that any U.S. persons positions which will inure to the benefit of all interpreted broadly to restrain securities fraud receiving the research and wishing to broker-dealers, domestic and foreign, ttoi be affecting the United States. See Consolidated Cold prepared to demand appropriate compliance with Fields PLC v. Minorca S.A., 871 F.2d 252 (2d Cir. effect transactions in any security the registration requirements of the 1934 Act with 1989). discussed therein should do so with the respect to entities engaging in activity which 95 See Release 34-25801, 53 FR at 23650-51. U.S. affiliate, not the foreign broker- requires registration and which is outside of the 96 The adopted language differs from the dealer, and if transactions with U.S. exemptions provided by proposed Rule i5a-16, expanded rule in two ways. The expanded rule Letter from Donald N. Gershuny. Merrill Lynch & referred to "execution" of transactions, but "effects" persons in any securities identified in Co.. Inc.. to Jonathan C. Katz, Secretary, SEC (Oct. is consistent with the express language of section the research actually were effected only 31, 1988). 15(a)(1) of the Exchange Act. 15 U.S.C. 78o(a)(1). with or through the U.S. affiliate, not the The foreign broker-dealer also still would be Also, the expanded rule referred to solicitation of subject to the Commission's broker-dealer ruies, "customers" without defining them, but "persons" is because the definition of "registered broker or preferable because of its definition in section 3(a)(9) 91 Release No. 25810, 53 FR at 23650-51. dealer" in section 3(a)(48J of the Exchange Act, 15 of the Exchange Act. See note 40 supra. 90 See Release 34-25801, 53 FR at 2364--48. 30022 Federal Register / Vol. 54, No. 136 / Tuesday, July 18, 1989 / Rules and Regulations " I I 99 foreign broker-dealer. This position These foreign broker-dealers believed The research report must not was incorporated into paragraph (a)(3) that it would be difficult for them to recommend the use of the foreign of the expanded rule in Release 34- screen out transactions from U.S. .broker-dealer to effect trades in any 26136, although the requirement for institutional investors that have security, 10 9 and the foreign broker- affiliation between the registered received their research. They dealer must not initiate follow-up brbker-dealer and the foreign broker- maintained that it would be too costly contact with the major U.S. institutional dealer was deleted. for smaller foreign broker-dealers to Some commenters criticized this investors receiving the research, or establish U.S. affiliates to be responsible otherwise induce or attempt to induce position on research as too for and distribute their research 00 and the purchase or sale of any security b restrictive. 1 For example, Fidelity effect any resulting trades, and that 3 those major U.S. institutional Investments claimed that, while the larger foreign broker-dealers thus would 0 research that it receives from foreign have a competitive advantage. The investors.I 1 Ifthese conditions are met, broker-dealers is "voluminous, it plays Association the foreign broker-dealer may effect "only of German Banks also a very small part" in the final objected to the requirement that the U.S. trades in the securities discussed in the investment decisions made by its fund affiliate prominently state that it had research or other securities at the managers.' The Madrid Stock accepted responsibility for a research request of major U.S. institutional Exchange argued that research report prepared by a foreign broker- investors receiving the report. Under distributed free of charge in the United dealer. The SIA, while not objecting to these conditions, the Commission States by foreign broker-dealers to U.S. the proposed interpretive position on believes that direct distribution would institutional investors "on a routine research itself, suggested that foreign be consistent with the free flow of basis, for information purposes" should broker-dealers should be allowed to information across national boundaries not be deemed solicitation of brokerage send research directly to U.S. without raising substantial investor business.10 2 CREF agreed that any other institutional investors, as long as U.S. protection concerns. position would impede the flow of affiliates accepted responsibility for the If, however, the foreign broker-dealer foreign research to U.S. institutional research0 4and effected any resulting already had a relationship with a investors. trades.' registered broker-dealer that facilitated Dechert Price &Rhoads, on behalf of In publishing the proposed rule and compliance with the direct contact five Spanish interpretive broker-dealers, argued that statement, the Commission exemption In the Rule, the Rule would provision of research to existing U.S. was motivated, in part, by the desire of require all trades resulting from the institutional clients should U.S. institutional investors for access to not be provision of research to 'be effected deemed solicitation, even foreign markets through foreign broker- if trades were through that registered broker-dealer effected for those clients as a result.10 3 dealers and the research that they pursuant to the provisions of that provide. 105 Accordingly, the Rule takes exemption. If the foreign broker-dealer " Article ill, section 35(d)(2) of the NASD Rules into account the comments on the of Fair Practice requires that all "laldvertisements important role of research in facilitating had entered into this prior relationship, and sales literature shall contain the name of the access to these markets. The the procedures for identifying trades [NASD] member, (and of) the person or firm Commission does not wish to restrict from major U.S. institutional investors preparing the material, if other than the member" and routing them through the registered and that "Isitatistical tables, charts, graphs or other major U.S. investors' ability to obtain illustrations used by members should disclose research reports of foreign origin if broker-dealer largely would have been the source of the Information if not prepared by the adequate regulatory safeguards are established. Thus, the benefits of a member. NASD Manual(CCH) I 2195 at 2177-78. present. registered broker-dealer's Under section 35(a)(1), "advertisement" means any "material published, or designed for use in" varous Paragraph (a)(2) of the Rule therefore intermediation in effecting trades would public pnnt and electronic media. Id.at 2174. Under provides an exemption from registration section 35(a)(2), "sales literature" specifically for foreign broker-dealers that famish $100 million. Paragraph (b7)of the Rule defines includes "research reports, market letters, "U.S. institutional investor" as a registered performance research reports 1o directly or reports or summanes. land] seminar investment company, bank, savings and loan texts. " indirectly 507 to major U.S. institutional Id. Rule 472.40(7 of the New York association, Insurance company, business Stock Exchange investors ("NYSE") requires that 105 under certain conditions. development company, small business Investment communications with the public that are "not company, or employee benefit plan defined in Rule prepa;ed under the direct supervision of the [NYSE] 501(a)(1) of Regulation D under the Securities Act, member organization or its correspondent that the foreign broker-dealer was engaged in the INYSE l 17 CFR 230.501(a)(1), a private business member organization should show the person (by securities business within the jurisdiction of the United development company defined in Rule 501(a)(2). 17 name and appropriate title) or outside organization States, by virtue of having regular customers, and thus CFR 230.501(a)(2), an organization described in which prepared the material. NYSEGuide was subject to U.S. broker-dealer (CCH) registration reqirements. section 501(c)(3) of the Internal Revenue Code, as 2472.40(7) at 4027. Under Rule 472.101), a 104 While expressing general agreement defined in Rule 501(a)(3), 17 CFR 230.Sti1a)(3), or a "communication" Includes "market letters with the andl trust defined in Rule 501(a)(7), 17 CFR 230.501(aj7). research reports Id. at 12472.10(1). The discussion of research in the proposed-interpretive statement, Sullivan &Cromwell To determine the total assets of an investment Commission would not view an activity that merely concurred with the SIA on this point, as did the NYSBA and the ABA, company under the Rule, registered investment complied with these requirements, in itself, as although the solicitation by a foreign broker-dealer. ABA did not suggest imposition of the company may include the assets of any family of 1ee See note 13 supr. execution condition explicitly. investment companies of which it s a part, and the i01 Release 34-25801, 53 FR at 23648. term "family 1ei Letter from Fitzgerald to Katz, supra note 58, of investment companies" is defined in ies Paragraph (a)2)of the Rule would not paragraph (b)[1) of the Rule. at 3. distinguish between research reports provided i09 The Commission would not consider i02 Letter from Enrique Benito in Rodriquez, written or electronic form. disclosure in the research report that the foreign Chairman. Madrid Stock Exchange, to Jonathan C. 107 As adopted, paragraph (a)(2) is broader than broker-dealer is a market maker in a security Katz, Secretary. SEC (Oct. 21, 19811), at 2. the proposed interpretive discussed in the report to violate this requirement. 101 CREF also said that communications between statement in that, like the expanded rule, it permits the distribution of foreign iO if foreign broker-dealer wished to nitiate a foreign broker-dealer and a U.S. investor after the research in this country directly by foreign broker- direct contact with U.S. persons, it could do so using investor had opened its account with the foreign dealer. the direct contact exemption in paragraph (a)(3) of broker-dealer on the investor's own initiative ias Paragraph (b)14) of the Rule defines "major the Rule, and the conditions imposed by that should not be deemed solicitation. The Toronto and U.S. institutional investor" as a US. institutional exemption, including the participation of a Vancouver Stock Exchanges agreed. The investor with assets, or assets under management, registered broker-dealer intermediary, would Commission believes, however, that the existence of in excess of $100 million, or a registered investment address the investor protection oon';erns raised these communications could support by the conclusion adviser with assets under management inexcess of those contacts. I

Federal Register / Vol. 54, No. 136 / Tuesday, July 18, 1989 / Rules and Regulations 30023 II be provided without imposing research report prominently indicated Release 34-25801 2set2 forth above would substantial additional costs. that any U.S. persons receiving thQ be inapplicable.' Although this exemption is limited to research and wishing to effect any c. Investment Adviser Registration. major U.S. institutional investors, the transactions in any security discussed in Finally, it is important to emphasize that Rule's research exemption is broader the report should do so with the foreign broker-dealers must consider than either the proposed interpretive registered broker-dealer, not the foreign separately other registration statement or the expanded rule in that a broker-dealer, and if transactions with requirements contained in the U.S. registered broker-dealer would not be U.S. recipients of the report in any securities laws. Specificplly, in the required to take responsibility for the securities identified in the research content of the report. I I In addressing proposed interpretive statement, the actually were effected only with or Commission noted that if a branch or the responsibilities of the U.S. affiliate through the registered broker-dealer, not under paragraph (a) of the proposed affiliate of a foreign entity in the United the foreign broker-dealer. This position States disseminated research rule, some commenters maintained that is consistent with the Commission's goal the registered broker-dealer's information, registration as an of facilitating the flow of information investment adviser might be required performance of supervisory and capital across national responsibilities would result in little under section 203 of the Investment boundaries. ii7 Advisers Act of 1940 ("Advisers additional protection, at least with 23 respect to substantial institutional The Commission wishes to emphasize, Act").' Several commenters requested investors. 'i 2 however, that neither the exemption nor clarification on this point, one By its terms, the exemption in this position regarding research is expressing concern that a previous no- paragraph (a)(2) of the Rule is available applicable with respect to "soft-dollar" action position taken by the Division of only with respect to research provided arrangements between foreign broker- Investment Management 124 might not to major U.S. institutional investors. dealers and U.S. persons."" As apply in light of the direct discussed in the proposed interpretive Therefore, the Commission has decided 9 communications between foreign to retain the narrower position regarding statement," 1 in many cases research is broker-dealers and certain U.S. the distribution of research expressed in provided to customers with the express institutional investors that could take Release 34-25801 with respect to other or implied understanding that the place under the proposed rule if investors.' i3 Under this position, the customers will pay for it by directing adopted. A foreign broker-dealer Commission would not require broker- trades to the broker-dealer that'result in providing research to U.S. persons dealer registration by a foreign broker- an agreed-upon level of commission 1 generally would be an investment dealer whose research reports were dollars. 20 These "soft-dollar" research adviser within the meaning of the distributed 114 to U.S. persons by a arrangements are used widely by Advisers Act. The staff takes the registered broker-dealer, 115 if that broker-dealers both in the United States position that the broker-dealer exclusion 12 broker-dealer prominently stated on the and abroad. ' If a foreign broker- in section 202(a)(11)(C) of the Advisers research report that it had accepted dpaler provided research to a U.S. Acts i 25-for broker-dealers who responsibility for its content,' 16 if the investor pursuant to an express or provide investment advice that is solely unplied understanding that the investor incidental to their brokerage business SIIOf course, if a foreign broker-dealer, for its would direct a given amount of and who receive no special own business reasons, chose to distribute its commission income to the foreign compensation for such advice-is research in the United States through registered broker-dealer, the Commission would broker-dealer, affiliated or not, the SRO rules available only to registered broker- discussed in note 99 suprawould require disclosure consider the foreign broker-dealer to dealers. of the identity of the preparer of the research. have induced purchases and sales of The Division of Investment 112 E.g.. Association of German Banks. securities, irrespective of whether the Management, however, generally would 113 See supro notes 98-99 and accompanying text. trades received from the investor related I 4 The Commission would not require expect to respond favorably to no-action to the particular research that had been requests regarding registration under the registration by a foreign broker-dealer whose provided. Accordingly, both the research reports were included in broadly- Advisers Act by foreign brokers and distributed electronic database to which U.S. exemption for research in paragraph dealers who meet the conditions of persons who were not major U.S. institutional (a)(2) and the position retained from investors had access, provided that (i) registered paragraph (a)(2), (a)(3), or (a)(4) of the broker-dealer accepted responsibility for the Rule if their activities are limited to research and for its inclusion in the database, (ii) its responsibility under the Rule if it took those described in section the registered broker-dealer prominently stated on reasonable steps to satisfy itself regarding the key 202(a)(11)(C) 126 -that is, if they provide the research report [as displayed in the database) statements in the research. Incases where there are that it had accepted responsibility for its content, no indications that the content of the research is investment advice solely incidental to and (iii)'the research report prominently indicated suspect, this responsibility can be fulfilled by their brokerage business and receive no that any U.S. persons accessing the report and reviewing the research inquestion and comparing it special compensation for it. In the wishing to effect any transactions in the securities with other public information readily available discussed in the report should do so with the regarding the issuer, to make certain that neither the future, the Commission may consider registered broker-dealer, not the foreign broker- facts nor the analysis appear inconsistent witl whether to propose and adopt an dealer. This position would not limit the research outstanding information regarding the issuer. exemptive rule under the Advisers Act 17 See supra note exemption in paragraph (a)(2) of the Rule for 1. for foreign broker-dealers providing the research distributed directly to mator U.S. I Paragraph (a}(2)(iv} of the exemption so institutional investors, whether in written or provides. types of services covered by the Rule. electronic form. '9Release 34-25801, 53 FR at 23651. 115 The requirement for affiliation between the 11 See Release 34-25801, 53 FR at 23646 n.16 and 122 CREF explicitly stated that its position against foreign broker-dealer and the registered broker- accompanying text. deeming research to be solicitation did not apply to dealer through ownership or control has been 2 For example, the Securities and Investments "soft-dollar" arrangements. deleted here as in the Rule. Board ("SIB") notes in recent discussion paper 123 15 U.S.C. 80b-3. See Release 34-25801, 53 FR 16 As noted above, commenters expressed that soft-dollar arrangements in the United Kingdom concern over the ability of the registered broker- have increased significantly at time when the at 23651 n.56. dealer to accept responsibility for research prepared level of brokerage commissions generally has 12, Citicorp[pub. avail. Sept. 14, 1986). by the foreign broker-dealer. The Commission decreased. SIB, Soft Commission Arrangements ii i'2 15 U.SC. 80b-2(a)[11)[C). believes that a registered broker-dealer would meet the Securities Markets (February 1989). 12a0 d. 30024 Federal Register / Vol. 54, No. 136 / Tuesday, July 18, 1989 / Rules and Regulations

3. Direct Contacts the letter to Chase Capital Markets US The foreign broker-dealer's personnel a. Transactionswith U.S. Institutional provided that the foreign broker-dealer involved in contacts with U.S. would assist the Commission in the have been In vestors and MajorU.S. Institutional institutional investors would Investors. Paragraph (a)[3) of the Rule conduct of investigations by furnishing subject to certain requirements, and the information concerning its contacts with registered broker-dealer would have provides an exemption from broker- U.S. investors and dealer registration for a foreign broker- trading records been responsible for supervising the relating to the execution of U.S. contact and any resulting trades. If a dealer that induces or attempts to investors' orders by the firm. Both the rule would induce the purchase or sale of any trade was agreed upon, letters also indicated that the foreign have required the registered broker- security by a U.S. institutional investor broker-dealers would endeavor, directly investor,i12 dealer to effect the trade on behalf of or a major U.S. institutional or indirectly, to obtain the consent of the investor, taking full responsibility for provided that any resulting transactions foreign customers to the release of any all aspects of the trade. In proposing are effected through a registered broker- information sought by the Commission. Rule 15a--6, the Commission stated that dealer and certain conditions are met by In the Commission's view, it is requiring the intermediation of a the foreign broker-dealer, foreign desirable to broaden U.S. investors' registered broker-dealer would maintain associated persons, and the registered access to foreign sources of information important regulatory safeguards. The broker-dealer. As described in the 28 through structures that maintain registered broker-dealer's responsibility proposed interpretive statement,' fundamental investor protections. for effecting all trades, combined with many foreign broker dealers have Accordingly, the Commission supports its recordkeeping and reporting duties established registered broker-dealer allowing direct contact between foreign pursuant to section 17 of the Exchange 3 affiliates in the United States that are broker-dealers and U.S. institutional Act i3O and the rules thereunder,' fully qualified to deal with U.S. investors, subject to requirements "would facilitate Commission review of investors and trade in U.S. securities. concerning these contacts and the this trading and also subject this trading Nonetheless, these foreign broker- execution of orders.13 2 The Rule as to the U.S. broker-dealer's supervisory dealers may prefer to deal with adopted allows a foreign broker-dealer responsibility. iss institutional investors in-the United to contact U.S. institutional investors if Fifteen commenters argued that the States from their overseas trading desks, an associated person of a registered Comnssion should not require the where their dealer operations are based. broker-dealer participates in each of participation of a registered broker- In addition, because overseas trading these contacts. The Rule also allows a dealer affiliate in transactions with desks often are principal sources of foreign broker-dealer to contact major major institutional investors.' a " In current information on foreign market U.S. institutional investors without the particular, commenters asserted that conditions and foreign securities, many participation of an associated person of U.S. institutions meeting the $100 million U.S. institutions want direct contact a registered broker-dealer in any of asset test in the proposed rule should be with overseas traders. Foreign broker- these contacts. In each case, any able to be solicited by foreign broker- dealers themselves often are not willing resulting transactions must be effected dealers and then transact business to register as broker-dealers directly through an intermediary registered s3 directly with those broker-dealers, with the Commission, however, because broker-dealer, which need not be because requiring the intermediation of registration would require the entire firm affiliated with the foreign broker-dealer a registered broker-dealer would to comply with U.S. broker-dealer through ownership or control. The 1 29 increase costs, impede the flow of requirements. Comussion believes that these versions foreign research to U.S. institutions, and The no-action request granted to of the intermediary concept used in the reduce the ability of these institutions to Chase Capital Markets US 0soallowed Chase Capital Markets US letter and set invest in foreign markets in which local foreign trading operations to receive forth in the proposed rule and the broker-dealers had not established calls from U.S. institutional investors expanded rule greatly increase the registered U.S. affiliates.' 4 0 Other without the foreign broker-dealers utility of the exemption in paragraph commenters maintained that the (a)(3) of the Rule, the operation of which 3 4 Commission should grant an exemption registering with the Commission. Under fully below.' the terms of that letter, foreign broker- is described more from the registration requirements of dealers could be put in touch with U.S. (1)Comments on U.S. broker-dealer section 15(a) to foreign broker-dealers institutional investors by a registered requirement. As proposed, Rule 15a-6 would have provided an exemption from broker-dealer affiliate, with a U.S. required to be affiliated with the foreign broker- qualified representative participating in broker-dealer registration for foreign dealer. See note 142 afr. telephone conversations, effecting any broker-dealers that effected trades with 's815 U.S.C. 78q. certain U.S. 137 See note 28 supra. resulting transactions, and taking full institutional investors 3 5 through a registered broker-dealer.' iS Release 34-25801, 53 FR at 23654. responsibility for the trades. Like an iSS Andras Research Capital Brown Brothers earlier Commission exemption letter, 1 ' Harriman, Fidelity Investments. Madrid Stock 132 See Release 34-25801,53 FR at 23652. Exchange, Ross & Hardies, CREF Dechert Price & It would be permissible for more than one Rhoads, Association of German Banks, Westpac ,21 See mnfro notes 15-69 and accompanying registered broker-dealer to serve as Intermediary Banking Corporation, Toronto Stock Exchange, text: see alsonote 108 supra. between U.S. Institutional investors, major U.S. Institute of International Bankers, 128 Release 34-25801, 53 FR at 23651. Chase Manhattan institutional investors, and a foreign broker-dealer Government Securities, the ABA, The Canadian 129 See supranotes 44-45 and accompanying text. seeking to comply with the Rule. Bankers' Association, and The Montreal Exchange. 180 Letter from Amy Natterson Krol. Attorney, 1' The Division of Investment Management i"0 For example, the Toronto Stock Exchange Office of Chief Counsel, Division of Market generally would expect to respond favorably to no- believed that the costs of establishing registered Regulation, SEC. to Frank C. Puleo. Esq.. Milbank, action requests regarding registration as an U.S. broker-dealer affiliate would be significant. In Tweed. Hadley & McCloy fJuly 28, 1987]. investment adviser from foreign broker-dealers addition, the PSA and Chase Manhattan 131 See Letter from Jonathan Katz. Secretary. complying with the provisions of paragraph ta){3) of Government Securities argued that requiring the SEC, to Marcia MacHarg, Esq.. Debevoise & the Rule. See supra notes 123-M28and accompanying participation of a U.S. affiliate would be excessively Plimpton (Aug. 13,1986) (Vickers da Costa text. brdensome where the only contact with U.S. Securities inc./Citicorp), i'fronote 205 and 13 Release 34-25801 did not make clear. investors related to transactions in U.S. government accompanying text. however, whether the registered broker-dealer was securities. Federal Register / Vol. 54, No. 136 / Tuesday July 18, 1989 / Rules and Regulations 30025 that deal only with institutional commenter emphasized the protection merely retain responsibility for errors or investors, on the grounds that these afforded by other provisions in the omissions in their performance. With investors can fend for themselves in the proposed rule and the registered broker- respect to the recordkeeping 4 international securities markets.' 1 As dealer's difficulty in supervising foreign requirements in the Rule, however, the discussed below in Part IV.B., however, personnel operating independently47 in Commission notes that it might be more the Commission believes that not all the different time zones.' efficient and less costly for the regulatory concerns raised by such an Other commenters took a slightly registered broker-dealer to handle data exemption would be alleviated by the different approach, suggesting that the processing in a centralized fashion. As institutional nature or size of these registered broker-dealer be allowed to long as the registered broker-dealer has investors. delegate certain functions, but not physical possession of all records The Commission had requested. liability for performing them, to the required by the Rule, employing a third comment on whether the nature of the foreign broker-dealer. Thus, these party, such as the foreign broker-dealer, relationship between the foreign broker- commenters would allow the registered to process these records mechanically dealer and the registered broker-dealer broker-dealer to assume liability for the would be permissible. "should involve a specified degree of acts and omissions of the foreign broker- The Commission believes that the ownership or control. 142 Three dealer, rather than actually performing concerns expressed by commenters over commenters replied that no affiliate the functions assigned to the registered the proposed rule's imposition on the relationship should be required between broker-dealer by the proposed rule. registered broker-dealer of supervisory the foreign broker-dealer and the They also opposed requiring the intermediary registered broker- registered broker-dealer to maintain all responsibility concerning transactions 43 dealer.' These commenters generally books and records for U.S. institutional tinder paragraph (a)(3) between the argued that the use of any registered investors' accounts, claiming that the foreign broker-dealer and U.S. broker-dealer to perform the duties set requirement in the rule for the foreign institutional investors or major U.S. forth in the proposed rule would provide broker-dealer to provide the institutional investors are, to some sufficient investor protection and would Commission, upon request, with extent, valid. Accordingly, the lower the costs of compliance with the information or documents within its Commission would no longer take the rule by smaller foreign broker-dealers. possession, custody, or control would be position that the Rule requires the Finally, one commenter suggested that an adequate substitute. registered broker-dealer to implement nonresident registered broker-dealers be The Commission has determined to procedures to obtain positive assurance permitted to perform the duties assigned continue to require the intermediation of that the foreign broker-dealer is to the registered broker-dealer by the a registered broker-dealer, 4 a to address operating in accordance with U.S. proposed rule, regardless of their concerns regarding financial requirements. 1 5 The Commission location or affiliation with the foreign responsibility and the effective believes, however, that the registered 14 4 broker-dealer. enforcement of U.S. securities laws. The broker-dealer, in effecting trades Nine commenters argued that the Rule does not require, however, any arranged by the foreign broker-dealer, responsibilities imposed on the affiliation between the foreign broker- has a responsibility to review these. registered broker-dealer affiliate by the dealer and the registered broker-dealer trades for indications of possible proposed rule should be reduced in through ownership or control. This violations of the federal securities laws. fashion. 145 The comments stated some position, together with the conditional The registered broker-dealer's that the registered broker-dealer's eligibility of nonresident registered supervisory responsibilities regarding intermediation in these trades is broker-dealers to serve as intermediary intended to help protect U.S. investors the activities of the foreign broker- 49 under the Rule,1 should reduce greatly and securities markets. The registered dealer should be relaxed, because the the costs incurred by a foreign broker- registered broker-dealer's lack of broker-dealer would have an obligation. dealer in establishing a relationship as it has for all customer accounts, to information and control regarding the to with a registered broker-dealer review any Rule 15a-6 account for foreign broker-dealer's activities and comply with the conditions of the direct 2 indications of potential problems.' 5 relative lack of expertise in foreign contact exemption. Accordingly, the securities and markets would hinder the Commission does not believe that it is performance of its supervisory duties. In appropriate to allow the registered ', Release 34-25801.53 FR at 23654. particular, one commenter said that the broker-dealer to delegate the foreign broker-dealer alone should be 's In particular. SRO rules impose specific performance of its duties under the Rule supervisory duties on SRO members regarding responsible for all requirements to the foreign broker-dealer, with the customers accounts. E.g.. Article Il. Section 27 concerning confirmation and extension exception of physically executing NASD Rules of Fair Practice. NASD Manual CCI I1 of credit m connection with securities foreign securities trades in foreign 1217- at 2109 ("Each member shall review the transactions, "and correspondingly markets or on foreign exchanges,' 50 and activities of each office, which shall include the liable in case of failure. 1i4Another periodic examination of customer accounts to detect and prevent irregularities or abuses. '1: NYSE ', Security Pacific. Rule 342.16. NE'SE Gutde (CCHI) 2342 at 3587 ,41E.g., the SIA. 141 The Rule drews on the definition of "U.S. of registered representatives 142 Release ("Duties ofsupervisors 34-25801.53 FR at23653 n.68. broker or dealer" in the expanded rule. Paragraph should ordinarily include tileast review of 142 institute of International Bankers, Sullivan & (b)(5) of the Rule defines the term "registered broker correspondence of registered representatives. D. Quayle. Esq., of Ropes & the Cromwell. and Dwight or dealer to include persons registered with transactions, and customer accounts.": NYSE Rule Cray. Commission under sections 151b). 15Ba)121, or 405. NYSE Gride [CCHI) 2405 at 396 ("Every "4 Quayle. 15Cla)(2) of the Exchange Act, 15 U.S.C. 78o(b). 780- member organization is required to 11) "r Fidelity Investments, the NCSC. the PSA, 4(a)(2). or 78o-5(aJ12), respectively. i49 The Rule permits a nonresident registered Use due diligence to learn the essential facts Westpac Banking Corporation, the SIA. Debevoise to every customer, every order. landi every & Plimpton. Security Pacific, Sullivan & Cromwell, broker-dbaler to serve as intermediary under the relative and Merrill Lynch. Rule, provided that the nonresident broker-dealer cash or margin account accepted or carried by i,6Letter from Dennis H. Greenwald. Chairman. complies with Rule 17a-7(a). 17 CFR 240.17a-7(a). such organization. (2] Supervise diligently all Federal Regulation Committee, SIA. to Jonathan G. See Part iv.B. nfr. accounts handled by registered representatives of Katz. Secretary. SEC tOct. 31,1988). at 11. 151 See infra note 185 and accompanying text. the orgaization.") 30026 Federal Register / Vol. 54, No. 136 / Tuesday, July 18, 1989 / Rules and Regulations

Moreover, if the registered broker-dealer registered under section 15(b) of the Alternatively, some commenters ignores indications of irregularity that Exchange Act,1 57 insurance companies, proposed other asset tests for major should alert the registered broker-dealer registered investment companies, small institutional investors, ranging18 from2 $1 to the likelihood that the foreign broker- business investment companies, million to 25 million in assets. dealer is taking advantage of U.S. employee benefit plans, private business Another commenter suggested that, after customers or otherwise violating U.S. development companies, and certain a one-year trial period, the Commission securities laws, and the registered section 501(c)(3) organizations under the consider broadening the definition of broker-dealer nevertheless continues to 158 effect questionable transactions Internal Revenue Code. Registered major U.S. institutional investor to on include more institutions.16 3 Finally, behalf of the foreign broker-dealer or its investment advisers were included as customers, the registered broker-dealer's U.S. institutional investors within the two commenters specifically said that role in the trades may give rise to rule if they had in excess of $100 million the definition of U.S. institutional in assets under management. Further, if investor should include U.S. branches or possible violations of the federal 18 4 securities laws.153 a registered investment company itself agencies of foreign banks. Finally, Rule 15a-6 as adopted does did not have total assets in excess of As discussed in the Concept Release, not allow banks to serve as the $100 million, it qualified as a U.S. the Commission recognizes that intermediary in transactions between institutional investor if it was part of a substantial institutional investors often U.S. institutional investors or major U.S. family of investment companies (as have greater financial sophistication institutional investors and foreign defined in the rule) that had total assets than individual investors. At the same broker-dealers. Despite the views in excess of $100 million. time, the Commission does not believe 1 54 expressed by several banks, the The expanded rule allowed direct that sophistication is in all Commission does not believe that it contact with specified institutional circumstances an effective substitute for would be appropriate to permit any investors, using the structure set out in broker-dealer regulation. For example, unregistered entity to perform this the Chase Capital Markets U.S. systemic safeguards flowing from function, since this entity would not be letter.1 59 Under broker-dealer registration, such as subject the expanded rule, a to the Commission's extensive foreign broker-dealer financial responsibility requirements, statutory authority to regulate, examine, either could contact these institutional investors with are benefits that can be assured more and discipline registered broker- effectively through governmental 15 5 the participation of an associated person dealers. regulation.'8 5 (2)Comments on U.S. institutional supervised by a U.S. registered broker- dealer, or could contact major After considering the comments, the investor classifications. Proposed Rule Commission has decided to retain the 15a-6 would have allowed unregistered institutional investors directly. Similar conditions applied to both alternatives. proposed rule's $100 million asset test foreign broker-dealers to contact certain for foreign broker-dealers contacting classes of U.S. institutional investors, Six commenters opined that the definition major U.S. institutional investors which were limited to U.S. persons of U.S. institutional investor without an associated person of a described in Rule 501(a) (1), (2), or (3) of should be expanded to include all Regulation registered broker-dealer participating in D under the Securities accredited investors under Regulation D, the contact.168 As the Commission Act 156 that, with the exception regardless of assets.18 0 In particular, the of registered broker-dealers, claim was made that persons qualifying is2 Security had total assets in excess of $100 as accredited investors under Regulation Pacific, the Institute of International million. These Bankers, and the Toronto Stock Exchange. investors included D, but with less than $100 million in 16s The NYSBA. domestic banks, savings and loan assets, possessed adequate '54 The Institute of International Bankers and the associations, brokers or dealers sophistication and judgment in financial NYSBA. In proposing Rule 15a-6, the Commission matters to deal directly with foreign noted that accredited institutional investors under Regulation D included only domestic banks. Release 16a Cf. Merrill Lynch, Pierce, Fenner& Smith, broker-dealers, consistent with their 34-25801, 53 FR at 23654. But see note 168 nfra. Inc., Securities Exchange Act Release No. 19070 ability to make investment decisions i6 Similarly, in proposing Rule 144A, which (Sept. 21, 1982), 26 SEC Docket 254 (continued execution of orders placed by investment adviser without the disclosure afforded by the would provide a safe-harbor exemption from the with discretion over account may subject broker- registration requirements of the registration requirements of the Securities Act for resales of securities to institutional investors, the dealer to aiding and abetting liability, if broker- Securities Act. It was averred that an dealer has knowledge of improprieties in adviser's Commission sought to define a limited class of handling of account and adviser commits primary asset test did not necessarily correlate institutional investors that it could be "confident violation of securities laws). with the degree of sophistication have extensive experience" in the market, Securities Act Release No. 6806 (Oct. 25,1988), 53 154 The Canadian Bankers Association, the required to deal with unregistered Institute FR 44016, 44028 ("Release 33-6806"). The of International Bankers, and the Bank of foreign broker-dealers. Other Commission proposed America expressed to permit only a subset of the view that domestic banks institutions, those with over $100 million in assets, snould be permitted to serve as the U.S. commenters expressed a somewhat intermediary narrower view, asserting to resell securities free of resale restrictions. for affiliated foreign broker-dealers. that the Release They claimed 33-6806, 53 FR at 44027-29. All comments that, although U.S. banks are not definition of U.S. institutional investor received on proposed Rule 144A, together with a registered with the Commission and thus, as pointed out should be limited to institutional comment summary, are publicly available in File by the ABA, are not subject to the Commission's 6 No. S7-23-88. regulatory, supervisory, or disciplinary authority, accredited investors. ' 1 supervision by banking regulatory authorities would iSS Some commenters on proposed Rule 144A, be an adequate substitute for Commission supronote 165, suggested that the rule, if adopted. regulation. 357 15 U.S.C. 78o(b). permit only those institutions with over $100 million 155 As explained below, however, the i5s 26 U.S.C 501(c)(3). in investment securities to resell securities free of Commission has decided to include banks acting in i59 Supra note 130. resale restrictions. The staff is giving this suggestion broker or dealer capacity (including acting as isa CREF Continental Bank, the PSA, Westpac serious consideration, in addition to considering other changes to the definition in Rule 144A of municipal or government securities broker or Banking Corporation. Chase Manhattan institutional investor including the scope of the term dealer) in the category of persons with or for whom Government Securities, and Debevoise & Plimpton. "family of investment companies that also appears a foreign broker-dealer could effect, induce, or iSi The ABA, Sullivan & Cromwell, and Merrill attempt to induce transactions and still qualify for in the Rule. If the Commission incorporates these .n exemption Lynch. Continental Bank urged the Commission to changes into Rule 144A, then the Commission also from registration under the Rule. adopt 156 17 CFR 230.501(a) (1), (2), or (3). this approach if the Rule was not made will consider whether to incorporate similar applicable to all accredited Investors. standards into Rule 15a-6. . Federal Register / Vol. 54, No. 136 / Tuesday, July 18, 1989 / Rules and Regulations 30027 I stated in proposing the rule, the asset The Commission notes that the requirements are subject to an exception test was based on the view that "direct expandedrule deleted the language in for information, documents, testimony, U.S. oversight of the competence and the proposed rule that included the or assistance withheld in compliance conduct of foreign sales personnel may following.in the definition of U.S. with foreign blocking statutes or secrecy be of less significance where they are institutional investor institutions laws. soliciting only U.S. institutional organized or incorporated under the If, after the foreign broker-dealer has investors with high levels of assets," laws of the United States, its territories exercised its best efforts to provide this and the $100 million asset level was or possessions, or any state or the information, documents, testimony, or intended "to increase the likelihood that District of Columbia; institutions assistance, which specifically includes the institution or its investment advisers organized or incorporated under the requesting the appropriate foreign have prior experience m foreign markets laws of any foreign jurisdiction but governmental body and, if legally that provides insight into the reliability conducting business principally in the necessary, its customers (with respect to and reputation" of foreign broker- 6 7 United States; and branches of foreign customer information) to permit the dealers.1 entities located in the United States or foreign broker or dealer to provide the Currently, the Commssion continues its territories or possessions. The requested information, documents, to believe that institutions with this Commission has deleted these testimony, or assistance to the level of assets are more likely to have references from the Rule as Commission, the foreign broker-dealer is the skills and experience to assess unnecessary, because these entities prohibited by applicable foreign law or independently the integrity and already are included in the definition regulations from satisfying the competence of the foreign broker- without regard to nationality. Comnussion's request, then it would use of the procedures dealers providing this access. Moreover, Accordingly, the continue to qualify for the exemption these larger institutions have greater specified in the exemptions under the under paragraph (a)(3). Under paragraph Rule, in lieu of broker-dealer ability to demand information (c), however, the Commission, after registration, would demonstrating the financial position of be required of notice and opportunity for hearing, may foreign broker-dealers that solicited the foreign broker-dealer., the withdraw the direct contact exemption Accordingly, the Rule allows foreign permanent U.S. branches or agencies of under paragraph (a)(3) of the Rule with any foreign entities. 169 This position is broker-dealers to contact U.S. respect to the subsequent activities of consistent with the general principles institutional investors with the the foreign broker-dealer, or class discussed above regarding foreign participation of a U.S. associated thereof, whose home country's law or persons present in this country on other person, and to contact independently regulations have prohibited the foreign U.S. institutional mvestors-with over than a temporary basis. (3) Operation. Paragraph (a}[3)(i) of broker-dealer from responding to the $100 million in assets or assets under Commission's requests for information, management. The Rule thus adds the the Rule sets forth the conditions to be met by a foreign broker-dealer wishing documents, testimony, or assistance $100 million asset test to the U.S. under paragraph (a)(3)1i)(B). institutional investor definition for to engage in direct contacts with U.S. 1 6 Several commenters suggested that certain purposes. 8 institutional investors or major U.S. institutional investors without the Commission not require foreign registration. Paragraph (a)l3)(i)(A) broker-dealers to comply with the i67 Release 34-25801, 53 FR at 23654. requirements in paragraph {a)[3)(i)[B) to 168 See supra note 108 and accompanying text requires the foreign broker-dealer to the extent that doing so actually would regarding U.S. distributiQn of foreign research; see effect these transactions through a infranotes 178-80 and accompanying.text regarding registered broker-dealer, as discussed result in a violation of foreign blocking U.S. visits by foreign associated persons. The Rule below. Under paragraph (a)(3)[i)B), the statutes, secrecy laws, or legal also includes certain trusts recognized under Rule foreign broker-dealer must provide the requirements to obtain the consent of 501a)(7), 17 CFR 23.5011a)(7), within the definition foreign customers.i17i The Commission of US. institutional investor. In addition, when Commission, upon request or pursuant proposing Rule iSa--6,the Commission said that U.S. to agreements reached between any agrees with the commenters that branches or agencies of foreign-banks could not "foreign securities authority" 170 and automatic removal of a foreign broker- qualify as U.S. institutional investors, because the Commission or the U.S. government, dealer from the Rule's protections would Regulation D treated only domestic banks as be inappropriate. Nevertheless, given accredited investors. See supra note 164. Rule with any information or documents 501(a)[1),17 CFR z3o.501fa)(), refers to banks within the possession, custody, or the importance of the Commission's defined in section 3(a)[2) of the Securities Act, control of the foreign broker-dealer, any access to information, documents, which generally means "any national bank, or any testimony of foreign associated persons, testimony, and assistance concerning banking institution organized under the laws of any foreign broker-dealers' exempted State, Territory, or the District of Columbia. the and any assistance m taking the business of which is substantially confined to evidence of other persons, wherever activities for the Commission's banking and is supervised by the State or territonal located, that the Commission requests enforcement of the U.S. securities laws, banking commission or similar official. 15 U.S.C. and that relates to transactions under the Commission believes that foreign 77c(a)(2j. In Release 33-6661, supr note 16,the broker-dealers should be given strong Commission decided that U.S. branches or agencies the direct contact exemption under of foreign banks sublect to an appropriate level of paragraph (a)[3) of the Rule. Unlike the incentives to use their best efforts to U.S. banking regulation would be deemed "banks" proposed rule, however, these provide requested information, for purposes of section 3(a)(2). A recent staff letter documents, testimony, and assistance to confirmed that U.S. branches and agencies of the Commission, including consulting foreign banks satisfying the standards of Release 169 See supra note 168 regarding US. branches No. 6681, so that their securities would be exempt and agencies of foreign banks. with the foreign securities authority or from Securities Act registration by virtue of section ilo New section 31a)(50) of the Exchange Act, 15 other appropriate governmental body 3(a)(2), are treated as accredited investors under U.S.C. 78c(a)(50, defines this term to mean "any administering any relevant foreign law Rule 501(a){1). Letter from Richard K.Wulff,Chief. foreign government, or any governmental body or or regulations restricting compliance. Office of Small Business Policy. Division of regulatory organization empowered by a foreign Corporation Finance. SEC. to Lawrence R. Uhlick, government to administer or enforce its laws as Esq., Institute of International Bankers (Jan. 4,1989). they relate to securities matters. See Insider 171 Quayle, Union Bank of Switzerland. the Therefore, these U.S. branches and agenies of Trading and Securities Fraud Enforcement Act of Institute of International Bankers, the PSA, the SIA, foreign banks are included in the definition of U.S. 1988, Pub. L. No. 101-704, section 6[a), 102 Stat. 4677, lames Capel, the ABA, Security Pacific, the NYSBA, institutional investor in the Rule. 4681. and Sullivan &Cromwell. 30028 Federal Register / Vol. 51, No. 136 / Tuesday July 18, 1989 / Rules and Regulations _.

Therefore, the Commission has Paragraph (a)(3)(ii) of the Rule added to the proposed rule in response retained these requirements in imposes requirements on foreign to several comments that foreign paragraph (a)(3), subject to an exception associated persons of the foreign broker- associated persons should be allowed to for information, documents, testimony, dealer. Paragraph (b)(2) of the Rule visit U.S. institutions in this country, to or assistance that the foreign broker- defines "foreign associated person" to create and sustain business dealer has used its best efforts to mean any natural person resident relationships with these investors.is provide, but has been prohibited from outside the United States who is an The proposed rule prohibited any U.S. associated person, as defined in section associated persons, making available by foreign laws or 17 7 activities by foreign regulations.172 Moreover, the 3(a)(18) of the Exchange Act, of a but the Commission believes that, where Commission would have the ability foreign broker-dealer, and who a registered broker-dealer is present and participates in the solicitation of a U.S. acts as an intermediary in the execution under paragraph (c) to remove the of orders, exemption for a foreign broker-dealer or institutional investor or a major U.S. visits to these investors institutional investor under paragraph class of foreign broker-dealers in should be permitted. (a)(3) of the Rule. The Commission has Paragraph (a)(3)(ii)(B) of the Rule circumstances where the Commission adopted this definition from paragraph believes that its inability to obtain requires that foreign associated persons (b)(3) of the proposed rule, with the not be subject to a statutory information, documents, testimony, or addition of the phrase "under paragraph assistance because of foreign blocking disqualification specified in section (a)(3) of this rule for clarification. any statutes or secrecy laws raises serious Paragraph (a)(3)(ii)(A) of the Rule 3(a)(39) of the Exchange Act,'"' or investor protection or enforcement requires foreign associated persons of substantially equivalent foreign {i) concerns. Under paragraph (c), the the foreign broker-dealer effecting expulsion or suspension from exemption under paragraph (a)(3) can be transactions with U.S. institutional membership, (ii) bar or suspension from withdrawn only prospectively, and only investors or major U.S. institutional association, (iii) denial of trading by Commission order after notice and investors to conduct all their securities privileges, (iv) order denying, hearing, to which the usual procedural activities from outside the United suspending, or revoking registration or 7 barring or suspending association, or (v) rights would attach. 7. In addition, States,i 8 with one exception. This Commission withdrawal of the exception allows a foreign associated finding with respect to causing any such effective foreign suspension, expulsion, exemption is discretionary, not person to conduct visits to U.S. institutional investors and major U.S. or order, not have been convicted of any mandatory, and it would be subject to foreign offense, enjoined from any the same review as other Commission institutional investors within the United 174 foreign act, conduct, or practice, or orders. States, provided that the foreign associated person is accompanied on found to have committed any foreign act The requirements in paragraph these visits by an associated person of a substantially equivalent to any of those (a)(3)(i)(B) of the Rule apply only to registered broker-dealer that accepts listed m section 15(b)(4) (B), (C), (D), or transactions effected under the responsibility ,71 for the foreign (E) of the Exchange Act; 182 and not provisions of paragraph (a)(3). As associated person's communications have been found to have made or proposed by the Commission, these with these investors, and that caused to be made any false foreign requirements would have applied to any transactions in any securities discussed statement or omission substantially transactions of a foreign broker-dealer by the foreign associated person are equivalent to any of those listed in with a U.S. institutional investor or the effected only through that registered section 3(a)(39)(E of the Exchange 18 3 registered broker-dealer through which broker-dealer pursuant to the provisions Act. This language is a more they were effected. The limitation in the of paragraph (a)(3), not by the foreign complete description of the applicable Rule was suggested by several broker-dealer. This exception has been disciplinary disqualifications cited in commenters.' 7 5 The Commission does paragraph (a)(1)(ii) of the proposed rule not wish to impose unnecessary burdens 17? 15 U.S.C. 78c(a)(18). and paragraph (b){2)(ii) of the expanded on foreign broker-dealers seeking to '7s Paragraph (b)(6) of the Rule defines the term rule, both of which referred to violations "United States" to mean the United States of claim this exemption, and the of substantially equivalent18 4 foreign America, including the states and any territories statutes or regulations. Commission believes that it will be able and other areas subject to Its jurisdiction. This to obtain the information necessary to definition has been adopted from paragraph (c)(6) of Finally, paragraph (a)(3)(iii) of the carry out its enforcement the expanded rule, and the term is not defined in the Rule requires the use of a registered responsibilities, with respect to a foreign Exchange Act or the rules thereunder. Section broker-dealer as an intermediary in 3(a)(16 of the Exchange Act, however, already effecting trades between U.S. broker-dealer's activities outside the defines "State" to mean "any State of the United Rule, through cooperation with foreign States, the District of Columbia, Puerto Rico, the institutional investors or major U.S. securities authorities.' 7 6 Virgin Islands, or any other possession of the institutional investors and the foreign United States. 15 U.S.C. 78c(a}(16). broker-dealer as a condition for this "19 The Commission would expect the associated exemption. Paragraph (a)(3)(iii)(A) first 172 the Commission If requested testimony of a person to be familiar with the foreign broker- requires that transactions with these foreign associated person who no longer was dealer's research reports discussed during these associated with the foreign broker-dealer, or who visits, to conduct prior review of any written investors be effected through the terminated association with the foreign broker- materials to be distributed during the visits, along dealer after the Commission made its request, the with summaries or outlines of the foreign associated iso Quayle, the PSA, Chase Manhattan person's Commission would consider the foreign broker- oral presentation, and tWknow whether the Government Securities, the ABA, the SIA, Security dealer to have complied with the Rule if it then used foreign associated person's statements were consistent with the foreign broker-dealer's current Pacific, the NYSBA, Sullivan &Cromwell, and its best efforts to assist the Commission in taking Merrill Lynch. the evidence of those persons. recommendatiQns. In general, the Commission's Is'15 U.S.C. 78c~a) (39). II See 5 U.S.C. 554. expectations regarding the responsibility imposed on the registered broker-deqler and discharged '82 15 U.S.C. 78o(b)(4) (B), (C, (D), or (E). i14 See 5 U.S.C. 701-706. through its associated person during these visits ,6315 U.S.C. 78c(a}(39)(E. 175 The the Bank of America, Quayle, PSA, the would be the same as those regarding the ,s4 See proposed International Securitiesz SIA, the ABA. Security Pacific, and Sullivan & responsibility of registered broker-dealer in Enforcement Cooperation Act of 1989, H.R. 1396, Cromwell. connection with the distribution of research to U.S. 101st Cong., 1st Seas., 135 Cong. Rec. 790 (1989), '7 See note 170 supra. institutional investors. See supro note 116. sections 3 and 4. Federal Register / Vol. 54, No. 136 / Tuesday, July 18, 1989 / Rules and Regulations 30029 registered broker-dealer. This means functions required of the registered process may be served on the registered that the registered broker-dealer must broker-dealer in paragraph (a)(3)(iii)(A) broker-dealer as provided on that handle all aspects of these transactions are taken from the proposed rule, with broker-dealer's current Form BD. This except the negotiation of their terms, 185 some exceptions.i 90 language follows the text of the which may occur between the investors Paragraph (a)(4)(iii)(B) of the Rule proposed rule. Some commenters argued and the foreign broker-dealer (through requires the registered broker-dealer to that both the information provision and its foreign associated persons). participate through an associated person consent requirements as proposed were Paragraph (a)(3)(iii)(A) requires the overbroad and would restrict use of the in all oral communications between 4 registered broker-dealer through which foreign associated persons and U.S. Ruleis but the Commission does not transactions with these investors are institutional investors. By virtue of this believe that it is desirable to draw the effected to be responsible for carrying participation, the registered broker- requirement to consent to service of out specified functions, so as to make dealer would become responsible for the process more narrowly to relate only to the performance of these functions content of these communications, and transactions effected in reliance on the subject to direct Commission oversight. Rule's intermediary exemption. the Commission's statements regarding Further, paragraph (a)(3)(iii)(E) of the The registered broker-dealer must issue the nature and discharge of similar all required confirmations 1i8e and Rule requires the registered broker- responsibilities regarding the dealer to maintain a written record of account statements to the investors. distribution of research These documents are significant points and U.S. visits the information and consents required by foreign associated persons would 195 of contact between the investor and the 19 1 by paragraphs (a)(3)(iii) (C) and (D), broker-dealer, and they provide apply. and all records in connection with important information. Also, as between The requirement in paragraph trading activities of U.S. institutional the foreign broker-dealer and the (a)(4)(iii)(C) of the Rule for the investors or major U.S. institutional registered broker-dealer, the latter is registered broker-dealer to obtain from investors involving the foreign broker- required to extend or arrange for the the foreign broker-dealer, for each dealer conducted under paragraph (a)(3) extension of any credit to these foreign associated person, the of the Rule, in an office of the registered investors m connection with the information specified in Rule 17a- broker-dealer located in the United purchase of securities. 17 In addition, 3(a)(12),i92 including sanctions imposed States (thus, with respect to nonresident the registered broker-dealer is by foreign securities authorities, U.S. broker-dealers, pursuant to Rule responsible for maintaining required exchanges, or associations (including 17a-7(a)) i9e and make these records books and records relating to the without limitation those described in available to the Commission upon transactions conducted under paragraph paragraph (a)(3)(ii)(B) of the Rule), also request. This language follows the (a)(3) of the Rule, including those has been drawn from the proposed rule. proposed rule, with the exception of the required by Rules 17a-3 and 17a-4,isS In addition, paragraph (a)(3)(iii)(D) of reference to nonresident registered which facilitates Commission the Rule requires the registered broker- broker-dealers. One commenter supervision and investigation of these dealer to obtain from the foreign broker- suggested that these broker-dealers transactions.'S As adopted, the dealer and each foreign associated should be allowed to serve as person written consent to service of intermediary registered broker-dealers 7 £56 Of course, the rules of foreign securities process for any civil action brought by under the Rulei and the Commission exchanges and over-the-counter markets may or proceeding before the Commission or agrees, as stated above. The require the foreign broker-dealer, as a member or any SRO, as defined in section 3(a)(26) Comnussion attaches considerable market maker, to perform the actual physical of the Exchange Acti9s stating that importance, however, to preserving its execution of transactions in foreign securities listed on those exchanges or traded in those markets. The access to records relating to activities Rule would permit the foreign broker-dealer to compliance with that rule. Sullivan & Cromwell conducted under paragraph (a)(3). These perform this function. spoke without elaboration of aregistered broker- records will enable the Commission to i'l See Rule i0b-. 17 CFR 240.10b-10. The dealer that "introduced" its U.S. customers to a carry out its enforcement confirmation requirements imposed by Rule lOb-10 foreign broker-dealer. if this term signified the are a significant antifraud measure. presence of an introducing-clearing relationslup, responsibilities and exercise its 161The extensive U.S. regulation of these where the foreign broker-dealer held U.S. supervision over the registered broker- functions is intended to protect both U.S. investors customers' funds and securities, registration of the dealer intermediary. This intermediary, and securities markets. See, e.g.. sections 7(c) and foreign broker-dealer would be required. See Part therefore, whether resident or 11(d) of the Exchange Act, 17 U.S.C.78g(c) and III.B. supra. nonresident, must maintain all the 7skid). and the rules and regulations thereunder. iS0 Like paragraph (b)(3) of the expanded rule, the e.g.. Regulation T, 17 CFR 220.1-220.18, and Rule Rule deletes as unnecessary the express records called for by the Rule in an 1idi-24 17 CFR 240.11d1-2. requirement that the registered broker-dealer effect office within the territorial limits of the iss17 CFR 240.17a-3 and 17a-4. But see note 150 transactions "with or for" the U.S. Institutional United States. 19a supra and accompanying text concerning delegation investor or the maior U.S. institutional investor. As explained above, paragraph (a)(4)(i){A) of the Rule of data processing functions to the foreign broker- is4 The SIA. the ABA. dealer. already requires the foreign broker-dealer to effect. Security Pacific. and transactions "through" the registered broker-dealer. Sullivan & Cromwell. 199 Of course, because the registered broker- 196 The Commission notes that SROs exercising dealer would "book" Rule 15a-6 trades as its own. it The phrase "as between the foreign broker or dealer would be required to comply with the provisions of and the registered broker or dealer" in paragraph their authority to inspect their members performing Rule 15c3-1.17 CFR 240.15c3-1. the Commission's (a)(3)(iii)(A)(3) concerning extension of credit, found the intermediary function under the Rule should net capital rule, with respect to these transactions, in paragraph (b)(39i)(B) of the expanded rule, has examine the records of the information and the and it would be responsible for receiving, been added for clarification. consents required by the Rule. The Commission delivering, and safeguarding funds and securities on i9i See supre notes 116 and 179. This requirement would encourage these SROs to consider whether it behalf of the investors pursuant to Rule 15c3-3, 17 for "participation" under the Rule would be would be more efficient for them to adopt specific CFR 240.15c3-3. Merrill Lynch believed that it satisfied if the associated person of the registered rules requiring those members to file these records should be permissible for foreign custodian banks to broker-dealer was present, either physically or with the SROs soon after obtaining the required handle the clearance and settlement of foreign telephonically, during these oral communications. information and consents. securities transactions by the investors under the and was able to take part in them as they occurred. 196 17 CFR 240.17a-7(a). Rule. The Commission notes that Rule 15c3-3(c)(4), 192 17 CFR 240.17a--3(a)(12). Rule 17a-3(a} also 197Quayle. 17 CFR 240.15c3-3(c)(4), already permits the use of requires that this information be kept current. 17 190 Nonresident registered broker-dealers still designated foreign control locations deemed CFR 240.17a-3{a). could maintain other records outside the United satisfactory by the Commission for purposes of 193 15 U.S.C. 78c(a)(26). Continued 30030 Federal Register / 'Vol. 54, No. 136 / Tuesday July 18, 1989 / Rfiles and Regulations

those securities. If, however, the foreign as suggested by several b. Transactionswith CertainPersons. pension funds,20 7 Paragraph (a)(4) of the Rule provides an broker-dealer controlled the registered commenters. exemption for a second type of direct broker-dealer's day-to-day market (3] Foreign persons temporarily contact by broker-dealers. It exempts making activities by explicit restrictions present in the United States. Paragraph foreign broker-dealers that effect any on the U.S. broker-dealer's ability to (a}(4)(iii) of the Rule includes any transactions in securities with or for, or execute orders against the foreign foreign person temporarily present in induce or attempt to induce the broker-dealer's positions or to take the United States, with whom the purchase or sale of any securities by, the independent positions, the foreign 99 foreign brokdi':-'d616Tibad6a bona fide, following defined classes of persons.i broker-dealer could be considered a pre-existing relationship before the (1) Registered broker-dealers and dealer subject to U.S. broker-dealer20 5 foreign person entered the United banks. Paragraph (a)(4){i] includes registration requirements. States. This paragraph codifies part of registered brokers or dealers, whether 20 8 (2) International organizations. the proposed interpretive statement, acting as principal for their own account Paragraph (a)(4](ii) of the Rule exempts and is taken from paragraph (a)(1)(v) of or as agent for others. This exemption foreign broker-dealers that deal with the expanded rule, with one exception. was in paragraph (a)(1)(iii) of the certain international organizations, The phrase "before the foreign person expanded rule. Commenters argued that, regardless of their location or whether entered the United States" has been while the proposed interpretive the U.S. jurisdictional means are of the statement said that a foreign broker- implicated. They include the African added to clarify the nature relationship. The Commission is of the dealer could purchase U.S. securities Development Bank, the Asian from a registered broker-dealer for Development Bank, the Inter-American view that a foreign broker-dealer that resale to foreign investors without solicits or engages in securities 20 0 Development Bank, the International registering with the Commission, it Bank for Reconstruction and transactions with or for these persons created a misimpression by not also Development, the International while they are temporarily present in this country need not register with the stating that foreign broker-dealers could Monetary Fund, the United Nations, and 20 9 sell securities to registered broker- their agencies, affiliates, and pension Commission. dealers without registration 20 i In funds. These are the same international One commenter asked, the response, the Commission expressly has organizations specified in proposed Commission to define U.S. residency for exempted trades of foreign broker- Regulation S,206 together with their purposes of compliance with this and dealers with registered broker-dealers other exemptions in the Rule. 210 The and with banks acting in a broker or 206 See, e.g., the Vickers da Costa/Citicorp order, Commission does not believe that it dealer capacity. 20 2 The Commission supra note 131, which exempted several related would be appropriate to establish a notes that the staff has taken no-action foreign broker-dealers from U.S. broker-dealer registration requirements. Because of Glass-Steagall separate standard of residency for the positions regarding foreign broker- Act restrictions applicable to the U.S.-affiliate see purpose of claiming this exemption dealers effecting transactions with or for -12 U.S.C. 24 and 378, the foreign broker-dealers different from those generally both registered broker-dealers and agreed to provide the U.S. affiliate with standing established under state or federal orders to buy and sell the securities in which the 21 banks acting in a broker or dealer U.S. affiliate previously had acted as a market law. As stated in Release 34-25801, capacity as permitted by U.S statutory maker. Thus, the U.S. affiliate's quote in NASDAQ questions regarding the temporary 203 and regulatory provisions, and it has always would reflect a previously entered firm nature of a person's presence in this reflected this position in the Rule. order from the foreign broker-dealers. The U.S. 2 12 affiliate's activities would be limited to executing, country would be fact-specific. The The Commission does not intend this on a nskless principal basis, any orders received Commission would take the position, exemption to permit the foreign broker- from U.S. customers against these orders. This however, that a foreign person not dealer to act as a dealer in the United arrangement was approved by the Comptroller of otherwise deemed a resident of the the Currency. Letter from Judith A. Walter, Senior States through an affiliated registered United States under applicable law 2 0 4 Deputy Comptroller, to Ellis E. Bradford. Vice broker-dealer. The Commission President, Citibank, N.A. (June 13, 1986). would be presumed to be temporarily recognizes that dealers in foreign in its exemptive order, the Commission allowed present in this country for the purpose of markets may transmit securities the foreign broker-dealers to buy and sell paragraph (a)(3) of the Rule. This simultaneously on a continuing basis through the positions to U.S. broker-dealer affiliates U.S. affiliate without registering in the United States presumption, of course, would be after the foreign markets close, so that as broker-dealers. However, the Commission subject to rebuttal in light all of the facts the U.S. affiliates can continue trading imposed a number of limitations to provide and circumstances surrounding that additional regulatory safeguards. The foreign broker-dealers' control over the price and size of States, provided that the conditions of Rule 17a-7(b) their standing orders was limited in order to give 207 The SIA. the ABA, and Sullivan &Cromwell. were met. See 17 CFR 240.17a-7(b). the U.S. affiliate some discretion in its trading 208 Release 34-25801, 53 FR at 23649. See also io9 The Division of Investment Management activities. The U.S. affiliate also agreed to satisfy Security Pacific and National Westminster Bank generally would expect to respond favorably to no- additional net capital requirements intended to letters, supra note 68. action requests regarding registration as an increase its ability to meet its settlement obligations 20 This position is consistent with the proposal upon failure of the foreign broker-dealers. In investment adviser from foreign broker-dealers of the American Law Institute that a nonresident addition, the parent of the complying with the provisions of paragraph (8)(4) of broker-dealers with non- represented that information regarding the trading broker-dealer that "does business the Rule. See supra notes 123-26 and accompanying national of the United activities of the foreign broker-dealers would be States who is present as a text. nonresident within the United States and was 200 Release 34-25801, 53 FR at 23640. made available to the Commission in connection previously customer or client" should not be 2oi The Institute of International Bankers, the with any investigation, and that it would attempt to obtain customer consent to release of information subject to U.S.broker-dealer jurisdiction. ALI ABA. the SIA, Security Pacific, and Sullivan & concerning their trading, if requested. Finally. the Federal Securities Code § 1905(b)(2(1B (1980). Cromwell. parent agreed that it would be designated as the Professor Loss, the reporter for the Code, uses the 202 The exemption allows foreign broker-dealers foreign broker-dealers' agent for service of process example of "Canadian broker who uses the to effect transactions with or for certain banks or in any proceeding or other action involving the telephone to service a customer who is vacationing registered broker-dealers; direct contact by the foreign broker-dealers. The foreign broker-dealers in Florida."Id. at Comment 9. foreign broker-dealers with the U.S. customers of also limited their securities activities in the United 2 0 The NYSBA. the registered broker-dealers or banks, however, States to those enumerated in the letter, and the 21iSee generally, e.g., section 911 of the Internal would not be covered by this exemption. parent represented that the foreign broker-dealers Revenue Code, 26 U.S.C. 911, which provides certain 203 Security Pacific Corporation and National would not engage in any securities business with exclusions from the gross income of U.S. citizens Westminster Bank letters, supra note 68. U.S..citizens. resident abroad. 204 See note 205 infra. 206 Release 33-6779, 53 FR at 22677' 212 53 FR at 23649. Federal Register / Vol: 54, No. 136 / Tuesday, July 18, '198D /'Rules and Regulations 30031 foreign person's presence in the United reduce the costs and increase the PART 240-GENERAL RULES AND States. efficiency of international securities REGULATIONS, SECURITIES (4) Foreign agencies or branches of transactions as well as facilitate the EXCHANGE ACT OF 1934 U.S. persons. The proposed rule and the international flow of information. The expanded rule both provided an differing procedures in the Rule for 1. The authority citation for Part 240 is exemption for foreign broker-dealers nondirect and direct contacts by foreign amended by adding the following effecting or soliciting transactions by broker-dealers with U.S. investors also citation: agencies or branches of U.S. persons, will facilitate the access of U.S. Authority: Sec. 23, 48 Stat. 901, as amended which were located outside the United (15 U.S.C. 78w) § 240.15a-6, also investors to foreign securities markets issued under secs. 3, 10, 15, and 17 15 U.S.C. States and were operated for valid through those foreign broker-dealers and business reasons. The Commission has 78c, 78j, 78o, and 78q; retained this exemption in the Rule to the research that they provide, clarify that foreign broker-dealers that consistent with the regulatory 2. By adding § 240.15a--6 after the safeguards afforded by broker-dealer deal outside the United States with undesignated heading as follows: branches and agencies having an registration. In light of the importance established location outside the United that the Commission attaches to broker- Registration of Brokers and Dealers States do not need to register with the dealer registration and regulation in the §240.15a-6 Exemption of certain foreign Commission, provided that the international context, the Commission brokers or dealers. transactions occur outside the United believes that the exemptions in Rule 15a-6 are in the public interest and (a) A foreign broker or dealer shall be States. exempt from the registration Commenters suggested that the consistent with the protection of U.S. requirements of sections 15(a)(1) or presence of a valid business purpose investors. 15B(a)(1) of the Act to the extent that the was unnecessary in the broker-dealer VI. Effects on Competition and foreign broker or dealer: context. 2i3 The Commission agrees. Regulatory Flexibility Act Certification (1) Effects transactions in securities The Rule's exemption for unsolicited with or for persons that have not been trades reflects the view that U.S. Section 23(a)(2) of the Exchange solicited by the foreign broker or dealer; persons seeking out unregistered foreign Act 226 requires that the Commission, or broker-dealers outside the U.S. cannot when adopting rules under the Exchange (2) Furnishes research reports to expect the protection of U.S. broker- Act, consider the anticompetitive effects major U.S. institutional investors, and dealer standards. The Commission of those rules, if any, and balance any effects transactions in the securities believes that this rationale applies anticompetitive impact against the discussed in the research reports with or equally to U.S. branches and agencies regulatory benefits gained in terms of for those major U.S. institutional established overseas that choose to deal furthering the purposes of the Exchange investors, provided that: with unregistered foreign broker- 4 Act. The Commission believes that (i) The research reports do not 21 dealers. adoption of the Rule will not impose any recommend the use of the foreign broker (5) Nonresident U.S. citizens. Finally, burden on competition not necessary or or dealer to effect trades in any security; paragraph (a)(4)(v) of the Rule includes appropriate in furtherance of the (ii) The foreign broker or dealer does U.S. citizens resident outside the United purposes of the Exchange Act, not initiate contact with those major States, provided that the foreign broker- U.S. institutional investors to follow up dealer dqes not direct its selling efforts especially since the Rule provides exemptions for eligible foreign broker- on the research reports, and does not toward identifiable groups of U.S. otherwise induce or attempt to induce citizens resident abroad.2 is Like the dealers from the broker-dealer registration requirements under the the purchase or sale of any security by exemption regarding foreign branches those major U.S. institutional investors; and agencies of U.S. persons, all Exchange Act. (iii) If the foreign broker or dealer has transactions must occur outside the Pursuant to section 3(b) of the Regulatory Flexibility Act,2 17 when the a relationship with a registered broker United States. As discussed above in or dealer that satisfies the requirements Part III.B., neither U.S, citizens resident Commission proposed Rule 15a-6 of paragraph (a)(3] of this section, any abroad nor foreign broker-dealers Chairman Ruder certified that the proposed rule, if adopted, would not transactions with the foreign broker or normally would expect that the U.S. dealer in securities discussed in the broker-dealer registration requirements have a significant economic impact on a of small entities. 2 8 research reports are effected only would be triggered by non-U.S. substantial number through that registered broker or dealer, securities transactions between them. The Commission did not receive any pursuant to the provisions of paragraph V Conclusion comments on the Chairman's (a)(3) of this section; and certification. The Commission believes that the (iv) The foreign broker or dealer does conditional exemptions in Rule 15a-6 for List of Subjects in 17 CFR Part 240 not provide research to U.S. persons foreign broker-dealers engaging in pursuant to any express or implied Reporting and recordkeeping understanding that those U.S. persons certain activities involving U.S. requirements, Securities. investors and securities markets will will direct commission income to the VII. Statutory Basis and Text of foreign broker or dealer; or (3) Induces or attempts to induce the 213 The SIA, the ABA, and Sullivan &Cromwell. Amendments purchase or sale of 2 14 The Commission has deleted the exemption in any security by a the proposed rule that referred to affiliates or The Commission hereby amends Part U.S. institutional investor or a major subsidiaries of U.S. persons that were located 240 of Chapter II of Title 17 of the Code U.S. institutional investor, provided that: outside this country and organized or incorporated of Federal Regulations as follows: (i) The foreign broker or dealer: under the laws of any foreign lurisdiction. The (A) Effects any resulting transactions Commission has decided that this exemption is unnecessary, since these entities should not 21615 U.S.C. 78w(a)(2). with or for the U.S. institutional investor properly be regarded as U.S. persons. 217 5 U.S.C. 603(b). or the major U.S. institutional investor 2i See supranote 51 and accompanying text. 18Release 34-25801, 53 FR at 23655. through a registered broker or dealer in 30032 Federal Register / Vol. 54, No. 136 / Tuesday, July 18, 1989 / Rules and Regulations I I II ' I the manner described by paragraph (ii) Bar or suspension from Rule shall include sanctions inposed by (a)(3)(iii) of this section; and association, foreign securities authorities, exchanges, (B)Provides the Commission (upon (ifii Denial of trading privileges, or associations, including without request or pursuant to agreements (iv] Order denying, suspending, or limitation those described in paragraph reached between any foreign securities revoking registration or barring or (a)(3)(ii)(B) of this section; authority, including any foreign suspending association, or (D)Has obtained from the foreign government, as specified in section (v) Finding with respect to causing broker or dealer and each foreign 3(a)(50) of the Act, and the Commission any such effective foreign suspension, associated person written consent to or the U.S. Government) with any expulsion, or order; service of process for any civil action information or documents within the (2)Not to have been convicted of any brought by or proceeding before the possession, custody, or control of the foreign.offense, enjoined from any Commission or a self-regulatory foreign broker or dealer, any testimony foreign act, conduct, or practice, or organization (as defined in section of foreign associated persons, and any found to have committed any foreign act 3(a)(26) of the Act), providing that assistance in taking the evidence of substantially equivalent to any of those process may be served on them by other persons, wherever located, that listed in sections 15(b)(4) (B), (C), (D), or service on the registered broker or the Commission requests and that (E) of the Act; and dealer in the manner set forth on the relates to transactions under paragraph (3) Not to have been found to have registered broker's or dealer's current (a)(3) of this section, except that if, after made or caused to be made any false Form BD; and the foreign broker or dealer has foreign statement or omission (E)Maintains a written record of the exercised its best efforts to provide the substantially equivalent to any of those information and consents required by information, documents, testimony, or listed in section 3(a](39](E) of the Act; paragraphs (a](3)(iii) (C) and (D)of this assistance, including requesting the and section, and all records in connection appropriate governmental body and, if (iii) The registered broker or dealer with trading activities of the U.S. legally necessary, its customers (with through which the transaction with the institutional investor or the major U.S. respect to customer information) to U.S. institutional investor or the major institutional investor involving the permit the foreign broker or dealer to U.S. institutional investor is effected: foreign broker or dealer conducted provide the information, documents, (A) Is responsible for: under paragraph (a)(3) of this section, in testimony, or assistance to the (1) Effecting the transactions an office of the registered broker or Commission, the foreign broker or conducted under paragraph (a)(3) of this dealer located in the United States (with dealer is prohibited from providing this section, other than negotiating their respect to nonresident registered information, documents, testimony, or terms; (2)Issuing all required confirmations brokers or dealers, pursuant to Rule assistance by applicable foreign law or 17a-7(a) under the Act (17 CFR 240.17a- regulations, then this paragraph and statements to the U.S. institutional investor or the major U.S. institutional 7(a))), and makes these records (a](3)(i)(B] shall not apply and the available to the Commission upon foreign broker or dealer will be subject investor;, request; or to paragraph (c) of this section; (3) As between the foreign broker or dealer and the registered broker or (4) Effects transactions in securities (ii) The foreign associated person of with or for, or induces or.attempts to the foreign broker or dealer effecting dealer, extending or arranging for the extension of any credit to the U.S. induce the purchase or sale of any transactions with the U.S. institutional security by: investor or the major U.S. institutional institutional investor or the major U.S. institutional investor in connection with (i) A registered broker or dealer, investor: the registered broker or dealer (A) Conducts all securities activities the transactions; whether from outside the U.S., except that the (4) Maintaining required books and is acting as principal for its own account foreign associated persons may conduct records relating to the transactions, or as agent for others, or a bank acting visits to U.S. institutional investors and including those required by Rules 17a-3 in a broker or dealer capacity as major U.S. institutional investors within and 17a-4 under the Act (17 CFR permitted by U.S. law; the United States, provided that: 2410.17a-3 and 17a-4); (ii) The African Development Bank, (1)The foreign associated person is (5) Complying with Rule,15c3-1 under the Asian Development Bank,-the Inter- accompanied on these visits by an the Act (17 CFR 240.15c3-1) with respect American Development Bank, the associated person of a registered broker to the transactions; and International Bank for Reconstruction or dealer that accepts responsibility for (6) Receiving, delivering, and and Development, the International the foreign associated person's safeguarding funds and securities in Monetary Fund, the United Nations, and communications with the U.S. connection with the transactions on their agencies, affiliates, and pension institutional investor or the major U.S behalf of the U.S. institutional investor funds; institutional investor; and or the major U.S. institutional investor in (iii) A foreign person temporarily (2) Transactions in any securities compliance with Rule 15c3-3 under the present in the United States, with whom discussed during the visit by the foreign Act (17 CFR 240.15c3-3); the'foreign broker or dealer had a bona associated person are effected only (B) Participates through an associated fide, pre-existing relationship before the through the registered broker or dealer, person in all oral communications foreign person entered the United pursuant to paragraph (a)(3) of this between the foreign associated person States; section; and and the U.S. institutional investor, other ((iv) Any agency or branch of a U.S. (B)Is determined by the registered than a major U.S. institutional investor;, person permanently located outside the broker or dealer to: (C) Has obtained from the foreign United States, provided that the (1)Not be subject to a statutory broker or dealer, with respect to each transactions occur outside the United disqualification specified in section foreign associated person, the types of States; or 3(a)(39) of the Act, or any substantially information specified in Rule 17a- (v) U.S. citizens resident outside the equivalent foreign 3(a)(12) under the Act (17 CFR 240.17a- United States, provided that the I() Expulsion or suspension from 3(a)(12)), provided that the information transactions occur outside the United membership, required by paragraph (a)(12)(d) of that States, and that the foreign broker or Federal Register / Vol. 54, No. 136 / Tuesday, July 18, 1989 / Rules and Regulations 30033 dealer does not direct its selling efforts (6) The term "United States" shall General limitations of stay, to permit the toward identifiable groups of U.S. mean the United States of America, extension of the authorized duration of citizens resident abroad. including the States and any territories stay for one year for exchange visitors (b) When used in this rule, and other areas subject to its from the People's Republic of China who (1)The term "family of investment jurisdiction. entered the United States on or before companies" shall mean: (7) The term "U.S. institutional (i)Except for insurance company June 6, 1989, and whose authorized investor" shall mean a person that is: period of stay will expire before June 6, separate accounts, any two or more (i) An investment company registered separately registered investment 1990. This action is taken in consonance with the Commission under section 8 of with the current foreign policy of the companies under the Investment the Investment Company Act of 1940; or Company Act of 1940 that share the (ii) A bank, savings and loan United States as evidenced by the White same investment adviser or principal association, insurance company, House of June 5. underwriter and hold themselves out to business development company, small EFFECTIVE DATES: This temporary rule is investors as related compames for business investment company, or effective from June 6, 1989, and shall purposes of investment and investor employee benefit plan defined in Rule remain in effect until June 6, 1990. services; and 501(a)(1) of Regulation D under the ADDRESS: Merry Lymn, Assistant (ii)With respect to insurance Securities Act of 1933 (17 CFR company separate accounts, any two or 230.501(a)(1)); a private business General Counsel, Office of the General more separately registered separate development company defined in Rule Counsel, Room 700, United States accounts under the Investment 501(a)(2) (17 CFR 230.501(a)(2)1; an Information Agency, 301 4th Street SW., Company Act of 1940 that share the organization described in section Washington, DC 20547 same investment adviser or pnncipal 501(c)(3) of the Internal Revenue Code, FOR FURTHER INFORMATION CONTACT: underwriter and function under as defined in Rule 501(a)(3) (17 CFR Merry Lymn, Assistant General Counsel, operational or accounting or control 230.501(a)(3)); or a trust defined in Rule Office of the General Counsel, Room systems that are substantially similar. 501(a](7) (17 CFR 230.501(a](7)). 700, United States Information Agency, (2) The term "foreign associated (c) The Commission, by order after 301 4th Street SW., Washington, DC person" shall mean any natural person notice and opportunity for hearing, may 20547 (202) 485-8829. domiciled outside the United States who withdraw the exemption provided in is an associated person, as defined m paragraph (a)(3) of this section with SUPPLEMENTARY INFORMATION: In section 3(a)(18] of the Act, of the foreign respect to the subsequent activities of a furtherance of the foreign policy, the broker or dealer, and who participates foreign broker or dealer or class of Agency amends the prescribed duration in the solicitation of a U.S. institutional foreign brokers or dealers conducted of stay in 22 CFR 514.23 to permit a one- investor or a major U.S. institutional from a foreign country, if the year extension for exchange visitors investor under paragraph (a)(3) of this Comnussion finds that the laws or from the People's Republic of China section. ,regulations of that foreign country have whose authorized period of stay will (3)The term "foreign broker or prohibited the foreign broker or dealer, expire before June 6, 1990. dealer" shall mean any non-U.S. or one of a class of foreign brokers or resident person This modification of the rule will (including any U.S. dealers, from providing, in response to a enable exchange visitors from the person engaged in business as a broker request from the Commission, People's Republic of China to maintain or dealer entirely outside the United information or documents within its States, except as otherwise permitted by their current J-visa status by applying to this rule) that is possession, custody, or control, the Immigration and Naturalization not an office or branch testimony of foreign associated persons, of, or a natural person associated with, Service for an extension. It does not a registered broker or dealer, whose or assistance in taking the evidence of apply to exchange visitors from the other persons, wherever located, related People's Republic of China arriving in securities activities, if conducted in the to activities exempted United States, would be described by by paragraph the United States after June 6, 1989. the definition of "broker" or "dealer" in (a)(3) of this section. Changes of category or program sections 3(a)(4) or 3(a)(5) of the Act. By the Commission. objective will not be permitted for (4)The term "major U.S. institutional Jonathan G.Katz, exchange visitors whose stay is investor" shall mean a person that is: Secretary. extended under this rule. (i) A U.S. institutional investor that July 11, 1989. Program sponsors may issue a new has, or has under management, total [FR Doc. 89-16725 Filed 7-17-89; 8:45 aml IAP-66 form to exchange visitors from assets in excess of $100 million; BILLING CODE 8010-01-M the People's Republic of China to permit provided, however, that for purposes of the one-year extension of the J-1 status determining the total assets of an UNITED STATES INFORMATION in accordance with this temporary rule. investment company under this rule, the investment company may include the AGENCY This action is taken without regard to assets of any family of investment the notice and comment provisions of companies of which it is a part; or 22 CFR Part 514 the Administrative Procedure Act, 5 (ii) An investment adviser registered U.S.C. 553, as it comes within the with the Commission under section 203 Exchange-Visitor Program; Extension exception at 5 U.S.C. 553(a)(1), a of the Investment Advisers Act of 1940 of Stay-Exchange Visitors From the "foreign affairs function of the United that has total assets under management People's Republic of China States. Further, because of the in excess of $100 million. AGENCY: United States Information immediacy of the problem of exchange (5) The term "registered broker or Agency. visitors from the People s Republic of dealer" shall mean a person that is ACTION: Temporary rule. China whose authorized stay will expire registered with the Commission under momentarily, notice and public comment sections 15(b). 15B(a)[2), or 15C(a)(2) of SUMMARY: This notice amends the thereon are impracticable and the Act. regulations found at 22 CFR 514.23, unnecessary.