Client Alert. SEC Staff Provides New Guidance Regarding the Rule 15a-6 Registration Exemption for Foreign Broker-Dealers.

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1 Number 1495 April 8, 2013 Client Alert Latham & Watkins Corporate Department SEC Staff Provides New Guidance Regarding the Rule 15a-6 Registration Exemption for Foreign Broker-Dealers The FAQs provide much welcome guidance at a time when cross-border transactions have become an integral part of the securities markets. On March 21, 2013, the Staff of the Division of Trading and Markets of the US Securities and Exchange Commission published guidance in the form of Frequently Asked Questions on Rule 15a-6 under the Securities Exchange Act of The FAQs resulted from the efforts of a Task Force assembled by the Trading and Markets Subcommittee of the American Bar Association to discuss and seek clarification from the Staff with respect to certain recurring issues regarding Rule 15a-6. 2 This clarification was requested in the form of published FAQs to provide greater transparency to the industry and to resolve certain inconsistencies created by, among other things, Staff turnover and general confusion by the industry and other regulators as to the proper application of the Rule s rather complex provisions to a marketplace that has become markedly more global and technologically advanced in the nearly 25 years since the Rule s adoption. 3 In the FAQs, the Staff affirms the general applicability of certain previously issued interpretive guidance and addresses certain aspects of the operation of Rule 15a-6, primarily with respect to issues concerning solicitation, the dissemination of research reports, recordkeeping requirements and chaperoning arrangements between foreign broker-dealers and SEC-registered broker-dealers. Although necessarily limited in scope, the FAQs provide much welcome guidance at a time when cross-border transactions have become an integral part of the securities markets. Background Rule 15a-6 permits foreign broker-dealers 4 to conduct certain limited activities in the United States and with US persons without having to register as a broker or dealer under the Exchange Act. Under Rule 15a-6, foreign broker-dealers may (i) effect unsolicited transactions with any person; (ii) solicit and effect securities transactions with SEC-registered broker-dealers, US banks acting in compliance with certain exceptions from the definitions of broker and dealer, certain supranational organizations, foreign persons temporarily present in the United States, US citizens resident abroad and foreign branches and agencies of US persons; and (iii) subject to a number of conditions, provide research to and effect resulting securities transactions with certain types of large institutional investors. 5 Rule 15a-6 also provides that a foreign broker-dealer may engage in a broader Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. Latham & Watkins practices in Saudi Arabia in association with the Law Office of Salman M. Al-Sudairi. In Qatar, Latham & Watkins LLP is licensed by the Qatar Financial Centre Authority. Under New York s Code of Professional Responsibility, portions of this communication contain attorney advertising. Prior results do not guarantee a similar outcome. Results depend upon a variety of factors unique to each representation. Please direct all inquiries regarding our conduct under New York s Disciplinary Rules to Latham & Watkins LLP, 885 Third Avenue, New York, NY , Phone: Copyright 2013 Latham & Watkins. All Rights Reserved.

2 scope of activities, including soliciting and entering into transactions with specified categories of institutional investors, with the assistance or intermediation of an SECregistered broker-dealer (the establishment of such an arrangement is typically referred to as a chaperoning arrangement and the SEC-registered broker-dealer is often referred to as the chaperoning broker-dealer ). 6 Although Rule 15a-6 provides a foreign broker-dealer with a safe harbor from having to register as a broker or dealer with the SEC if its US-related activities conform to the confines of the Rule, 7 the Rule leaves unanswered a number of critical questions and the significant operational and other limitations of the Rule have diminished its utility, particularly in recent years. Two Staff no-action letters issued, respectively, in 1996 and 1997 (together, the Prior Staff Letters), alleviated certain of the Rule s operational burdens, but only in a fairly narrow set of circumstances. 8 Moreover, in the years following the issuance of the Prior Staff Letters, questions arose as to whether they were broadly applicable to all foreign broker-dealers or just those expressly named in the letters and others considered similarly situated (a term which itself evoked considerable confusion). Increased calls to modernize and expand Rule 15a-6 led the SEC to issue a significant rule change proposal in mid-2008, but the ensuing financial crisis derailed those efforts. 9 The FAQs represent the first significant step regarding Rule 15a-6 since the issuance of the 2008 proposal, and hopefully will prompt renewed efforts to achieve more expansive, and much-needed, Rule 15a-6 reform. Although this Alert does not seek to address each aspect of the FAQs, we highlight certain of them below. The FAQs Unsolicited Transactions by Foreign Broker-Dealers Under the exemption from broker-dealer registration provided by Rule 15a-6(a)(1), a foreign broker-dealer may effect transactions in securities with or for persons that have not been solicited by the foreign broker-dealer. 10 The SEC, however, has traditionally taken a broad view of what constitutes solicitation and generally considers it to include any affirmative effort by a broker or dealer intended to induce transactional business for the broker-dealer or its affiliates. 11 Because of this expansive interpretation of solicitation, many practitioners have advised clients to take a one bite at the apple approach and cautioned against subsequent transactions with the same investor in reliance on this exception. The Staff clarifies in the FAQs that, absent any other indicia of solicitation, a foreign broker-dealer may rely on Rule 15a-6(a)(1) to effect more than one unsolicited securities transaction on behalf of a single US investor. The Staff emphasizes in this regard that the inquiry is as to the nature of the activities of the broker-dealer, as opposed to the number of transactions effected. Nonetheless, the Staff cautions that a series of frequent transactions or a significant number of transactions between a foreign broker-dealer and a US investor [may be] indicative of solicitation through the establishment of an ongoing securities business relationship. 12 The Staff also notes if a foreign broker-dealer regularly effects transactions directly with or for a US investor, the investor might reasonably expect to be protected by US laws, regulations and supervisory structures applicable to registered broker-dealers. 13 The FAQs also confirm that foreign broker-dealers may send trade confirmations, account statements and other required documents (including, e.g., prospectuses and proxy statements) to US persons in connection with transactions effected in reliance on Rule 15a-6(a)(1) without such communications being deemed solicitations 2 Number 1495 April 8, 2013

3 in respect of a securities transaction. However, the Staff cautions that the foreign broker-dealer may not send a US person any document in reliance on this provision that includes advertising or other material intended to induce securities transactions or encourage a transactional relationship with the foreign broker-dealer or its affiliates. 14 Global Employee Stock Option Plans Given the SEC s expansive definition of solicitation, it was not clear whether a foreign broker-dealer could directly contact US employees in connection with the administration of a foreign issuer s employee stock option plan (an ESOP), or whether it needed to effect such communications and resulting transactions through an SEC-registered broker-dealer or US bank pursuant to Rule 15a-6(a)(4) or other available exemption (or, alternatively, whether US employees would need to be excluded from participation in the plans). The Staff states in the FAQs that certain limited activities engaged in by a foreign broker-dealer relating to its administration of a foreign issuer s ESOP or other employee plan would not be viewed as solicitation for purposes of its reliance on the Rule 15a-6(a)(1) exemption. In this regard, the Staff notes that the foreign broker-dealer must (i) deal exclusively with management and employee benefit representatives of the foreign issuer (provided that such persons are located outside the United States); and (ii) limit its activities with respect to US persons to the following (and such activities relate solely to the foreign securities acquired by such US persons pursuant to the ESOP or other employee plan): Facilitating the transfer of the foreign issuer s securities to a US person employed by the foreign issuer or its US subsidiary; Sending required plan documents, account statements, confirmations and other legally required documents to the employee; and Selling, transferring or otherwise disposing of the foreign issuer s securities. The Staff updated the FAQs on March 28, 2013 to clarify that the foregoing position applies equally to situations in which the US plan participants receive, transfer or hold the foreign issuer s shares pursuant to a sponsored American Depositary Receipt program. 15 Distribution of Research Reports to Major US Institutional Investors Rule 15a-6(a)(2) provides that a foreign broker-dealer may directly furnish research reports to US persons that satisfy the definition of major US institutional investors, 16 provided that: (i) the research reports do not recommend the use of the foreign broker-dealer to effect trades in any security, (ii) the foreign broker-dealer does not initiate contact with the recipients to follow up on the research reports and does not otherwise induce securities transactions with those recipients and (iii) the foreign broker-dealer does not provide research pursuant to any express or implied understanding that the recipients will direct commission income to the foreign broker-dealer. In addition, Rule 15a-6(a)(2) allows the foreign broker-dealer to effect any resulting transactions with respect to the securities discussed in the research reports (subject to the limitations described above) with major US institutional investors unless the foreign broker-dealer has a chaperoning arrangement with an SEC-registered broker-dealer. If such a chaperoning arrangement exists, Rule 15a-6(a)(2) requires that any transactions in securities discussed in the research report be effected only through the chaperoning broker-dealer in compliance with the provisions of Rule 15a-6(a)(3). 3 Number 1495 April 8, 2013

4 Certain regulators had raised questions as to whether the existence of a chaperoning arrangement would (in addition to the requirement to effect resulting transactions) also require the chaperoning broker-dealer to distribute the foreign broker-dealer s research to major US institutional investors and/or review, approve or retain copies of the research reports distributed by the foreign broker-dealer. The FAQs clarify that the Rule does not require the chaperoning broker-dealer to distribute the foreign broker-dealer s research reports, nor does it require the chaperoning broker-dealer to review or approve the reports if it was not involved in their preparation. Moreover, the FAQs confirm that the chaperoning brokerdealer has no obligation to retain a copy of research reports distributed directly by the foreign broker-dealer. Nonetheless, the Staff cautions that if the chaperoning broker-dealer does come into possession of a research report so distributed, it should retain a copy in light of its obligations to effect resulting transactions in compliance with Rule 15a-6(a)(3) (which includes compliance with the record retention requirements of Rules 17a-3 and 17a-4 under the Exchange Act). Chaperoning Arrangements Pursuant to Rule 15a-6(a)(3) and the Prior Staff Letters, if a foreign broker-dealer enters into a chaperoning arrangement with an SEC-registered broker-dealer, the foreign broker-dealer may (i) contact major US institutional investors from outside the United States at any time without a registered representative of the chaperoning broker-dealer present; (ii) contact US institutional investors that are not major US institutional investors from outside the United States (a) at any time with a registered representative of the chaperoning broker-dealer present or (b) without the participation of a registered representative of the chaperoning broker-dealer if such contact takes place outside of the trading hours of the New York Stock Exchange and no orders, other than those involving foreign securities, are accepted by the foreign broker-dealer during such contact; and (iii) (a) visit major US institutional investors and US institutional investors at any time in the United States if accompanied by a registered representative of the chaperoning broker-dealer, and (b) without being accompanied by a registered representative of the chaperoning broker-dealer, visit major US institutional investors if the number of days on which such visits occur does not exceed 30 per year and the foreign broker-dealer does not accept orders to effect any securities transactions (whether for US or non-us securities) while in the United States. Under Rule 15a-6(a)(3), the chaperoning broker-dealer must take responsibility for, among other things, complying with applicable net capital requirements, issuing required confirmation statements to the US investor, and maintaining appropriate books and records with respect to transactions entered into under the chaperoning arrangement, each of which requirements are addressed by the FAQs. 17 Net Capital Requirements The FAQs respond to several questions regarding the net capital requirements of chaperoning broker-dealers. Importantly, the Staff confirms prior informal guidance that allowed certain functions integral to the chaperoning arrangement to be split between an introducing broker and its clearing firm. Moreover, the FAQs confirm that a chaperoning broker-dealer may maintain minimum net capital in an amount less than $250,000 in certain limited circumstances. In particular, the FAQs provide that an SEC-registered broker-dealer that enters into a chaperoning arrangement with a foreign broker-dealer under Rule 15a-6(a)(3) is subject to a minimum net capital requirement of $250,000, 18 unless (i) the 4 Number 1495 April 8, 2013

5 chaperoning broker-dealer has entered into a fully disclosed carrying agreement with another SEC-registered broker-dealer that has agreed, in writing, to comply with the SEC s broker-dealer financial responsibility rules with respect to the chaperoning arrangement or (ii) the foreign broker-dealer s business under Rule 15a-6 is limited to giving advice to a US institutional investor or a major US institutional investor contemplating an acquisition of a company. In each of the foregoing clauses, the chaperoning broker-dealer s minimum net capital requirement would be $5,000 (absent any other activities subject to higher net capital requirements). 19 The FAQs also clarify that a chaperoning broker-dealer must take a net capital charge for failed transactions, regardless of local law requirements applicable to the foreign broker-dealer, and must maintain books and records that identify open trades and failed transactions. If the chaperoning broker-dealer has entered into a fully disclosed carrying agreement with another SEC-registered broker-dealer that has agreed to comply with the financial responsibility rules in connection with chaperoned transactions, the carrying broker-dealer would instead be required to take the net capital charge for failed transactions. The Staff notes, however, that this would not relieve the chaperoning broker-dealer of its requirement to maintain accurate books and records that identify open trades and failed transactions. 20 Confirmations and Statements Although a chaperoning broker-dealer is required under Rule 15a-6(a)(3) to issue all required statements and confirmations to the US institutional investor or the major US institutional investor, the FAQs permit a foreign broker-dealer to send confirmations and account statements directly to such US counterparties if required under foreign law or the foreign broker-dealer s own internal policies and procedures applicable to its global business. The Staff notes, however, that the chaperoning broker-dealer would continue to be responsible for ensuring the delivery of confirmations and account statements that comply with all applicable US requirements (including, e.g., Exchange Act Rule 10b-10). Recordkeeping Requirements The FAQs state that an SEC-registered broker-dealer acting as a chaperone for a foreign broker-dealer must comply with Exchange Act Rules 17a-3 and 17a-4 and is also required to make and keep current books and records that reflect trades between US counterparties and the foreign broker-dealer, including, but not limited to, transaction records and failed transaction records. The FAQs provide, however, that the chaperoning broker-dealer may obtain this information from the foreign broker-dealer or another source. 21 Persons Temporarily Present in the US Rule 15a-6(a)(4)(iii) permits foreign broker-dealers to effect securities transactions directly with a non-us person that is temporarily present in the United States if the foreign broker-dealer had a bona fide pre-existing relationship with the person before he or she entered the United States. The scope of temporarily present in this context was not well-understood, however, and often practitioners would advise limiting the use of this exception to situations in which a customer of the foreign broker-dealer was vacationing for a brief period in the United States and not for more extended visits or indefinite relocations. 5 Number 1495 April 8, 2013

6 The Staff reiterates in the FAQs that the determination of whether a person is temporarily present in the United States is ultimately dependent on the facts and circumstances of each particular situation, but notes that a foreign person should be deemed temporarily present in the United States, if such person (1) is not a US citizen and (2) is not a lawful permanent resident of the United States (i.e., a Green Card holder ). 22 Applicability of the Prior Staff Letters As noted above, questions had been raised in recent years as to the applicability of the Prior Staff Letters to foreign broker-dealers that were not affiliated with SEC-registered broker-dealers. The FAQs clarify that the Seven Firms Letter applies to any foreign broker-dealer that complies with its substantive terms and does not require that such foreign broker-dealer be affiliated with an SEC-registered broker-dealer. The FAQs also confirm that the Nine Firms Letter may be relied on by any foreign broker-dealer that complies with the chaperoning and other substantive requirements of that letter. In this regard, the Staff notes that the chaperoning arrangement entered into to achieve compliance with the terms of the letter may be with either an affiliated or non-affiliated SEC-registered broker-dealer. 23 The FAQs also confirm that the expanded definition of major US institutional investor set forth in the Nine Firms Letter applies to every provision of Rule 15a-6 in which that term is used. 24 If you have any questions about this Client Alert, please contact one of the authors listed below or the Latham lawyer with whom you normally consult: Dana G. Fleischman dana.fleischman@lw.com New York Stephen P. Wink stephen.wink@lw.com New York Kaitlin M. Betancourt kaitlin.betancourt@lw.com New York 6 Number 1495 April 8, 2013

7 Endnotes 1 See The FAQs were updated on March 28 and April 2, 2013 to clarify certain issues arising under Questions 2 and 8 after the initial publication date. 2 Latham & Watkins partner Dana Fleischman is the current Chair of the ABA Trading and Markets Subcommittee and, in that capacity, led the Task Force that sought and obtained the FAQs. The Task Force is continuing to discuss other Rule 15a-6 issues with the Staff and anticipates that the FAQs will continue to evolve and expand over time. 3 See SEC Release (July 11, 1989); 54 FR (July 18, 1989) (the Rule 15a-6 Adopting Release). 4 Exchange Act Rule 15a-6(b)(3) defines the term foreign broker or dealer to include any non-us resident person (including any US person engaged in business as a broker or dealer entirely outside the United States, except as otherwise permitted by this rule) that is not an office or branch of, or a natural person associated with, a registered broker or dealer, whose securities activities, if conducted in the United States, would be described by the definition broker or dealer in Sections 3(a)(4) or 3(a)(5) of the [Exchange] Act. 5 See Exchange Act Rule 15a-6(a)(1), (a)(4) and (a)(2), respectively. 6 See Exchange Act Rule 15a-6(a)(3). 7 It is important to note that Rule 15a-6 provides only an exemption from the broker-dealer registration requirements of Sections 15(a)(1) and 15B(a)(1) of the Exchange Act. It does not provide an exemption from the broker-dealer registration requirements of each of the various states and territories of the United States. Similarly, it does not provide an exemption from registration as a government securities broker or dealer (although the US Treasury issued a largely parallel exemption under 17 C.F.R ), nor does it provide an exemption from registration with the US Commodity Futures Trading Commission in respect of activities that fall within the CFTC s jurisdiction (the CFTC s similar cross-border exemption is set forth in its Part 30 regulations). 8 See Letter re: Transactions in Foreign Securities by Foreign Brokers or Dealers with Accounts of Certain Foreign Persons Managed or Advised by US Resident Fiduciaries (Jan. 20, 1996) (the Seven Firms Letter) and Letter re: Securities Activities of US-Affiliated Foreign Dealers (April 9, 1997, as modified by the Staff Letter dated April 28, 1997) (the Nine Firms Letter). 9 See SEC Release (June 27, 2008). 10 See Rule 15a-6(a)(1). 11 Rule 15a-6 Adopting Release at 54 FR See FAQs, Response to Question This expectation is not consistent with the underlying policy rationale for the unsolicited securities exception, which is based on the notion that US persons seeking out unregistered foreign brokerdealers outside the United States cannot expect the protection of US broker-dealer standards. See Rule 15a-6 Adopting Release at 54 FR See FAQs, Response to Question See FAQs, Responses to Questions 2 and The term major US institutional investor is defined in Rule 15a-6(b)(4), but was effectively expanded by the Nine Firms Letter to encompass any entity (other than a natural person) that owns or controls, or has under management, in excess of US$100 million in aggregate financial assets. See Nine Firms Letter; see also FAQs, Response to Question See Rule 15a-6(a)(3); See also FAQs, Responses to Questions 10 through This requirement also applies to chaperoning broker-dealers for DVP/RVP transactions. 19 See FAQs, Responses to Questions 10 through See FAQs, Response to Question See FAQs, Response to Question 16; see also Rule 15a-6(a)(3)(iii). 7 Number 1495 April 8, 2013

8 22 See FAQs, Response to Question 1. The Staff has indicated that this FAQ is not meant to preclude other situations in which a non-us person may be shown to be temporarily present in the United States for purposes of this exception. 23 See FAQs, Responses to Questions 6, 8 and See FAQs, Response to Question 7. Client Alert is published by Latham & Watkins as a news reporting service to clients and other friends. The information contained in this publication should not be construed as legal advice. Should further analysis or explanation of the subject matter be required, please contact the lawyer with whom you normally consult. A complete list of our Client Alerts can be found on our website at If you wish to update your contact details or customize the information you receive from Latham & Watkins, visit to subscribe to our global client mailings program. Abu Dhabi Barcelona Beijing Boston Brussels Chicago Doha Dubai Frankfurt Hamburg Hong Kong Houston London Los Angeles Madrid Milan Moscow Munich New Jersey New York Orange County Paris Riyadh* Rome San Diego San Francisco Shanghai Silicon Valley Singapore Tokyo Washington, D.C. * In association with the Law Office of Salman M. Al-Sudairi 8 Number 1495 April 8, 2013