U.S. Regulation of the International Securities and Derivatives Markets, § 14.01, INTRODUCTION
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U.S. Regulation of the International Securities and Derivatives Markets, § 14.01, INTRODUCTION U.S. Regulation of the International Securities and Derivatives Markets, § 14.01, INTRODUCTION U.S. Regulation of the International Securities and Derivatives Markets 1 Edward F. Greene, Alan L. Beller, Edward J. Rosen, Leslie N. Silverman, Daniel A. Braverman, Sebastian R. Sperber, Nicolas Grabar & Adam E. Fleisher, U.S. Regulation of the International Securities and Derivatives Markets § 14.01 (11th and 12th Editions 2014-2017) 11th and 12th Editions Click to open document in a browser Securities brokers and dealers (commonly collectively referred to as "broker-dealers") that are required by the Exchange Act to register with the SEC are subject to a comprehensive U.S. federal regulatory scheme that includes stringent financial, recordkeeping, customer protection and other substantive requirements. SEC- registered broker-dealers are also required to become members in one or more securities industry self- regulatory organizations ( "SROs") and to comply with the SROs' additional detailed rules. [1] The regulatory reach of both the SEC and the SROs extends in many respects to all activities of an SEC- registered broker-dealer, not only to its U.S. personnel and activities or to its securities activities. Consequently, the first line of consideration for non-U.S. financial institutions contemplating U.S. activities is whether SEC registration as a broker-dealer is required. If the proposed U.S. activities would require registration, an international financial organization should generally seek to arrange its U.S. securities activities so that they may be conducted in a separate SEC-registered broker-dealer without subjecting the organization's non-U.S. activities or nonsecurities activities to SEC registration and regulation. Entities that effect transactions in futures contracts or swaps also may be subject to regulation under the Commodity Exchange Act ( "CEA") as futures commission merchants ( "FCMs"). [2] Entities that deal in security- based swaps may also be subject to regulation by the SEC as security-based swap dealers ( "SBSDs") and entities that deal in other types of swaps may be subject to regulation by the U.S. Commodity Futures Trading Commission ( "CFTC"). Footnotes 1 In addition, broker-dealers may be subject to registration and regulation in the states where they have offices or customers. Under the National Securities Markets Improvement Act of 1996 (hereinafter the "NSMIA"), Pub. L. No. 104-290, 110 Stat. 3416 (1996), however, a state may not generally impose regulatory requirements (other than the requirement to register with and pay filing fees to the state securities administrator) that differ from or add to those established by the SEC. See § 14.12. 2 Entities that effect transactions in security futures products are subject to registration both as broker-dealers under the Exchange Act and FCMs (or introducing brokers) under the CEA, although intermediaries registered as an FCM (or an introducing broker) under the CEA or as a broker-dealer under the Exchange Act, but not both, may avail themselves of a notice registration procedure to register in the other capacity for the limited purpose of trading security futures products. See U.S. REGULA TION OF THE INTERNA TIONA L SECURITIES A ND DERIVATIVES MARKETS, TWELFTH EDITION, DERIVATIVES MA RKETS, Chapter 4. Security futures products generally are defined as futures contracts on individual nonexempt securities or narrow-based groups or indices of nonexempt securities. See U.S. REGULA TION OF THE INTERNA TIONA L SECURITIES A ND DERIVATIVES MARKETS, TWELFTH EDITION, DERIVATIVES MA RKETS, § 2.16[5][c]. © Cleary Gottlieb Steen & Hamilton LLP, 2019. 930 All rights reserved. U.S. Regulation of the International Securities and Derivatives Markets, § 14.02, SEC JURISDICTION U.S. Regulation of the International Securities and Derivatives Markets, § 14.02, SEC JURISDICTION U.S. Regulation of the International Securities and Derivatives Markets 1 Edward F. Greene, Alan L. Beller, Edward J. Rosen, Leslie N. Silverman, Daniel A. Braverman, Sebastian R. Sperber, Nicolas Grabar & Adam E. Fleisher, U.S. Regulation of the International Securities and Derivatives Markets § 14.02 (11th and 12th Editions 2014-2017) 11th and 12th Editions Click to open document in a browser p. 14-6 Section 15(a)(1) of the Exchange Act makes it "unlawful for any broker or dealer … to make use of the mails or any means or instrumentality of interstate commerce [3] to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security … unless such broker or dealer is registered … [with the SEC]." [4] The literal meaning of this language is to require SEC registration by any non-U.S. broker-dealer that telephones or sends documents into the United States (commonly referred to as using "jurisdictional means") to contact U.S. investors. The SEC endorses this interpretation, stating that a "broker-dealer operating outside the physical boundaries of the United States, but using the U.S. mails, wires, or telephone lines to trade securities with U.S. persons located in this country, would not be… transact[ing] a business in securities without the jurisdiction of the United States." [5] Indeed, the SEC has stated that § 15 of the Exchange Act could require registration by a [6] non-U.S. broker-dealer whose only U.S. contacts are the execution of unsolicited orders from U.S. customers. The SEC has also claimed authority to require registration in several circumstances that go beyond the literal language of § 15, stating that it could require the registration of any non-U.S. broker-dealer that (i) effected a transaction, even from outside the United States, in a security registered in the United States or listed on a U.S. [7] exchange or (ii) specifically targeted p. 14-6 p. 14-7 [8] identifiable groups of foreign-based U.S. citizens ( e.g., military and embassy personnel). As discussed below, the SEC has not required broker-dealer registration in all circumstances where its view of the scope of its jurisdiction would permit. Footnotes 3 Interstate commerce includes any "trade, commerce, transportation, or communication… between any foreign country and any State … [and] any [use of a] facility of a national securities exchange or of a telephone." § 3(a)(17) of the Exchange Act. 4 See also §§ 15B(a) and 15C(a) of the Exchange Act (requiring registration of certain dealers in municipal securities and certain brokers and dealers in government securities). 5 SEC Release No. 34-27017 (July 11, 1989) (hereinafter the "Rule 15a-6 Adopting Release"), 54 Fed. Reg. 30,013, 30,016 n.41 (July 18, 1989). 6 See Rule 15a-6 Adopting Release at 54 Fed. Reg. 30013, 30017 (July 18, 1989) ( "the requirements of section 15(a) do not distinguish between solicited and unsolicited transactions"). 7 To illustrate the extent of the SEC's asserted authority to require broker-dealer registration under § 15, the Rule 15a-6 Adopting Release cites, among other cases, Schoenbaum v. Firstbrook , 405 F.2d 200, 208 (2d Cir.), rev'd in part on other grounds, 405 F.2d 215 (2d Cir. 1968) ( en banc), cert. denied sub nom. Manley v. Schoenbaum, 395 U.S. 906 (1969). Rule 15a-6 Adopting Release, 54 Fed. Reg. 30,013, 30,016 n.41 (July 18, 1989). That case held that U.S. courts have jurisdiction under the Exchange Act over an antifraud claim relating to a foreign security registered with the SEC and traded on a U.S. exchange. There is some © Cleary Gottlieb Steen & Hamilton LLP, 2019. 931 All rights reserved. U.S. Regulation of the International Securities and Derivatives Markets, § 14.02, SEC JURISDICTION indication that U.S. courts are more likely to extend U.S. jurisdiction to non-U.S. activities in the context of asserted fraud or manipulation than in matters involving registration or filings. In 2010, in Morrison v. National Australian Bank Ltd., 561 U.S. 247 (2010), the Supreme Court limited the extraterritorial reach of the antifraud provisions of the Exchange Act by providing that § 10(b) of the Exchange Act applied only to securities transactions in the United States or securities listed on U.S. exchanges. A month later, the Dodd- Frank Act restored SEC and Department of Justice (the "DOJ") extraterritorial power ( see §§ 929P(b) and 929Y of the Dodd-Frank Act), but the Morrison transactional test still applies for private rights of action. In 2012, the SEC released a study "on the Cross-Border Scope of the Private Right of Action Under Section 10(b) of the Securities Exchange Act," which did not take a position on whether Congress should override the Morrison transactional test for private rights of action. See SEC, STUDY ON THE CROSS-BORDER SCOPE OF THE PRIVATE RIGHT OF ACTION UNDER SECTION 10(B) OF THE SECURITIES EXCHA NGE ACT OF 1934 AS REQUIRED BY SECTION 929Y OF THE [DODD-FRA NK ACT] (Apr. 11, 2012). While the SEC's view is that anyone who facilitates any stock transaction through conduct in the United States must register with the SEC under § 15(a), one federal district court has applied Morrison to interpret the Exchange Act more narrowly to exclude certain entities that operate in the United States but where the ultimate and intended purchase and sale is foreign and does not occur on a national securities exchange. See SEC v. Benger, 934 F. Supp. 2d 1008, 1013 (C.D. Ill. 2013) ( "[A] broker's failure to register under Section 15(a) of the [Exchange] Act is not actionable in those cases where the ultimate and intended purchase and sale was foreign and thus, itself, outside the scope of the Act."). For additional discussion on Morrison, see § 11.10[3].