SEC Rule 15a-6
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Brokerage Anatomy™
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Rule 15a-6 under the Securities Exchange Act of 1934 provides conditional exemptions from broker-dealer registration for foreign broker-dealers that engage in certain specified activities with U.S. investors including:
- Effecting unsolicited securities transactions;
- Providing research reports to major U.S. institutional investors, and effecting transactions in the subject securities with or for those investors;
- Soliciting and effecting transactions with or for U.S. institutional investors or major U.S. institutional investors through a “chaperoning broker/dealer”; and
- Soliciting and effecting transactions with or for registered broker-dealers, banks acting as broker/dealers, certain international organizations, foreign persons temporarily present in the U.S., U.S. citizens resident abroad, and foreign branches and agencies of U.S. persons.
In adopting Rule 15a-6, the SEC sought “to facilitate access to foreign markets by U.S. institutional investors through foreign broker-dealers and the research that they provide, consistent with maintaining the safeguards afforded by broker-dealer registration,” and “to provide clear guidance to foreign broker-dealers seeking to operate in compliance with U.S. broker-dealer registration requirements.”
Primary source is here on the Cornell University website: Rule 15a-6
Need to know
Summary
Rule 15a-6 allows a foreign broker-dealer to engage in US securities transactions without registering as a registered broker-dealer in certain circumstances.
Terminology
- US client: a U.S. institutional investor or a major U.S. institutional investor.
- US securities transaction: any transaction with a US client in a debt or equity security (whether a cash transaction or a derivative transaction).
- Cash transaction: a US securities transaction in physical form (i.e., not a derivative transaction).
- Derivative transaction: a US securities transaction in derivative form (including a repurchase or securities lending transaction).
- Foreign broker-dealer: a broker-dealer who is not located in the US or registered with the SEC.
- Registered broker-dealer: an SEC registered US broker dealer.
SEC Rule 15a-6 exemptions for US securities transactions
Full exemption – Broker dealers and certain other clients
Foreign broker-dealers may engage in transactions without restrictions under Rule 15a-6 with the following types of client:
- Broker-dealers: Registered broker-dealers (or US banks acting in a broker-dealer capacity), in each case as long as there is no direct contact with their clients;
- Supranationals: Certain supranational organisations (the African Development Bank, the Asian Development Bank, the Inter-American Development Bank, the IBRD, the IMF, the UN and certain related agencies);
- Foreign persons: Foreign persons, with whom the foreign broker-dealer had a pre-existing relationship, who happen to be temporarily present in the US;
- Foreign branches of US persons: Permanently-established branches of a US client situated outside the US.
Intermediary exemption: US securities transactions “effected” by registered broker-dealer as intermediary
Cash transactions
For US securities transactions other than those described above a registered broker-dealer must “effect” the transaction on behalf of the foreign broker-dealer. This means handling all aspects of the US securities transaction (except the negotiation of its terms) being responsible (among other things) for the following functions to the standard required by SEC rules, to make them subject to direct SEC oversight:
- Confirmations: issuing all required confirmations and account statements: the foreign broker-dealer may prepare confirmations as long as they clearly reflect that they have been issued as agent for the registered broker-dealer;
- Capital: maintaining necessary capital;
- Credit: extending any credit to US clients;
- Books and records: maintaining all books and records;
- Settlement of transactions: delivering and receiving the assets and settlement proceeds.
"The Commission's goals in adopting Rule 15a-6 at this time are (i) to facilitate access lo foreign markets by U.S. institutional investors through foreign broker-dealers and the research that they provide, consistent with maintaining the safeguards afforded by broker-dealer registration; and (ii) to provide clear guidance to foreign broker-dealers seeking to operate in compliance with U.S. broker-dealer registration requirements."
"If foreign broker-dealers are effecting trades outside the United States with or for individual US. citizens resident abroad, but have no other contacts within the jurisdiction of the United States, the Commission generally would not expect these foreign broker-dealers to register."
"Flnally, paragraph (a)(3)(iii) of the Rule requires the use of a registered broker-dealer as an intermediary in effecting trades between U.S. institutional investors or major U.S. institutional investors and the foreign broker-dealer as a condition for this exemption. Paragraph (a)(3)(iii)(A) first requires that transactions with these investors be effected through the registered broker-dealer. This means that the registered broker-dealer must handle all aspects of these transactions except the negotiation of their terms, which may occur between the investors and the foreign broker-dealer (through its foreign associated persons).
Paragraph (a)(3)(iii)(A) requires the registered broker-dealer through which transactions with these investors are effected to be responsible for carrying on specified functions, so as to make the performance of these functions subject to direct Commission oversight. The registered broker-dealer must issue all required confirmations and account statements to the investors. These documents are significant points of contact between the investor and the broker-dealer, and they provide important information. Also, as between the foreign broker-dealer and the registered broker-dealer, the latter is required to extend or arrange for the extension of any credit to these investors in connection with the purchase of securities. In addition, the registered broker-dealer is responsible for maintaining required books and records relating to the transactions conducted under paragraph (a)(3) of the Rule, including those required by Rules 17a-3 and 17a-4, which facililates Commission supervision and investigation of these transactions.
See also
Sayeth Dorsey & Witney:
Rule 15a-6, as supplemented by SEC no-action letters, can be used, at the federal level, to permit contacts by representatives of a Canadian firm with “U.S. Institutional Investors” and “Major U.S. Institutional Investors” (as defined in each case) if the account is maintained by a U.S. registered broker-dealer (which can either be affiliated or unaffiliated with the Foreign firm).
Non-U.S. dealers, including foreign affiliates of U.S. dealers, should also limit their contacts to institutional investors and registered broker-dealers, thereby benefiting from state broker-dealer registration exemptions.
U.S. Institutional Investors are defined in material part as (i) registered investment companies, (ii) banks, (iii) savings and loan associations, (iv) insurance companies, (v) pension plans directed by defined fiduciaries, (vi) tax-exempt entities, and (vii) trusts with sophisticated fiduciaries with total assets in excess of $5 million.
Major U.S. Institutional Investors are entities, regardless of whether they fall in the foregoing categories, with assets or assets under management in excess of $100 million.
The functions required to be performed by the U.S. dealer in the case of U.S. Institutional Investors and Major U.S. Institutional Investors areas follows:
- (a) Issue all required confirmations and account statements;
- (b) Maintain required capital related to such transactions;
- (c) Receive, deliver and safeguard funds and securities on behalf of the customer;
- (d) Maintain required books and records related to the transaction;