(The article featured below is a selection from International Securities and Financial Reporting Update, which is available to subscribers of that publication.)

SEC Approves Proposals on Foreign Broker-Dealers

The SEC recently approved the release of proposed changes to 1934 Act rule 15a-6 to expand the conditions under which a foreign broker-dealer could operate without triggering 1934 Act registration and reporting requirements. The amendments are intended to remove barriers to investor access while maintaining key investor protections.

The existing rule permits a foreign broker-dealer to provide research reports to certain institutional investors and effect any resulting transactions without the intermediation of a U.S. registered broker-dealer. The proposed rule would retain the same conditions but expand the category of investors to which a foreign broker-dealer could provide research reports directly.

Foreign broker-dealers would be permitted to provide research reports to all registered investment companies, corporations or partnerships that own or invest on a discretionary basis $25 million or more, and natural persons who own or invest on a discretionary basis at least $25 million, rather than only to institutional investors that own or control greater than $100 million in total assets.

The current rule provides an exemption for foreign broker-dealers that induce or attempt to induce securities transactions by certain institutional investors, if a U.S. registered broker-dealer intermediates certain aspects of the transactions. Under the proposed rule, U.S. broker-dealer personnel would no longer have to "chaperone" foreign broker-dealer personnel.

Chairman Christopher Cox said that the chaperoning requirement has created problems because investors face significant inconvenience caused by differences in time zones and limitations on when investors can be contacted, and because U.S. registered personnel have to be available for communications with foreign broker-dealers. These limitations hamper the service of U.S. investors while making them pay for brokerage services twice, and limit U.S. investors' access to certain foreign investments, he said.

In order to maximize flexibility for U.S. investors, the proposal offers foreign broker-dealers relying on the proposed rule two possible approaches. Under the first, a foreign broker-dealer could effect all aspects of a transaction with a qualified investor, including maintaining custody of funds and assets, provided it makes certain disclosures and conducts a "foreign business" (i.e., at least 85% of its business under the proposed rule is in foreign securities). A U.S. registered broker-dealer would have to maintain copies of all books and records relating to any resulting transactions, although the books and records could be kept with the foreign broker-dealer.

Under the second approach, a foreign broker-dealer could effect all aspects of a transaction with a qualified investor in both U.S. and foreign securities, provided that a U.S. registered broker-dealer maintains custody of the qualified investor's funds and securities in connection with any resulting transactions and maintains books and records relating to any resulting transactions. There would be no foreign business test.

The proposed rule also would provide a new exemption for transactions by foreign broker-dealers with any U.S. person that acts as a fiduciary of a foreign resident client, subject to certain conditions designed to protect U.S. investors. In addition, the proposed rule calls for a new exemption to allow foreign options exchanges to engage in limited efforts to familiarize qualified investors with their markets without triggering additional obligations for their foreign broker-dealer members under U.S. law.

Currently, relief under rule 15a-6 is provided through no-action letters. If the new rule is adopted, it would supersede the no-action guidance on the issue, according to the staff of the Division of Trading and Markets. If the rule is adopted, the staff will recommend that all outstanding positions with respect to rule 15a-6 should be withdrawn.