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U.S. Securities and Exchange Commission

Statement at Open Meeting on Amendments to Rule 15a-6


Chairman Christopher Cox

U.S. Securities and Exchange Commission

Washington, D.C.
June 25, 2008

The next item on our agenda is a recommendation from the Division of Trading and Markets to amend Rule 15a-6 under the Exchange Act.

Just by way of background, Rule 15a-6 provides a framework under which U.S. investors can obtain services from foreign broker-dealers. A rule such as Rule 15a-6 is necessary because of the broad scope of the broker-dealer registration provision under the Exchange Act. Under Section 15(a), any person who induces or attempts to induce the purchase or sale of a security using the mails or some other means of interstate commerce must register as a broker-dealer. There is no explicit territorial limitation to this requirement. When the Commission adopted Rule 15a-6 in 1989 in response to the increasing internationalization of the securities markets, the purpose was to address how non-U.S. broker-dealers fit into this statutory scheme. The staff followed up throughout the 1990s with no-action letters.

The increased investor interest in non-U.S. securities that originally gave rise to Rule 15a-6 has only intensified since the rule was adopted. In 1980, U.S. gross trading activity in foreign securities was $53 billion. Today, it is over $7.5 trillion. That's more than the GDP of Japan and China combined. Roughly two-thirds of American investors own securities of non-U.S. companies, and that figure is up 30 percent from just five years ago.

Rule 15a-6 and the no-action letters issued in the 1990s have acted as a key safety valve in channeling this new and ever-growing demand by U.S. investors without sacrificing the Commission's regulatory needs. However, as the men and women that must comply with the cumbersome requirements of this rule will tell you, it has not kept up with the times.

So I am pleased that the staff today is recommending that the Commission propose that Rule 15a-6 be overhauled and updated. Of greatest significance is that foreign broker-dealers would be able to interact with U.S. institutional investors with $25 million or more in investments. Currently, such foreign broker-dealers may only interact with institutions with financial assets of more than $100 million. In addition, the staff recommends extending the ability to interact with U.S. customers to include natural persons who own or control investments of more than $25 million.

Under the proposal, foreign broker-dealers would also be able to provide more services directly to U.S. investors. Currently, any contact by a foreign broker-dealer with a U.S. institution must be chaperoned by a person registered with a U.S. broker-dealer when providing services to U.S. investors. In practice this requirement has proven unwieldy as investors face significant inconvenience caused by differences in time zones and limitations on when investors could be contacted. In many cases, it amounted to simply making them pay twice. Further difficulties for U.S. investors arise because U.S. registered broker-dealer personnel have to be available for visits from and oral communications with foreign broker-dealers. Taken together, these limitations seriously hamper the service of U.S. investors and, in its most acute form, also effectively limit access to certain foreign investments.

The proposal would modify the chaperoning requirement so that foreign broker-dealers meeting the rule's conditions could effect all aspects of a transaction. For example, they could maintain the custody of funds and assets. Customers could be contacted directly and without restrictions on the time of day in which contacts could be made. Foreign broker-dealers providing such services would be required to disclose that they are not regulated by the SEC. They also would be required to disclose that U.S. bankruptcy and account segregation provisions, as well as protections under the Securities Investor Protection Act, would not apply. Importantly, foreign broker-dealers would be required to conduct a "foreign business" where at least 85% of its business was in foreign securities.

Other highlights are that more U.S. investors would be able to receive research directly from foreign broker-dealers. Expanding the reach of information to investors will go a long way to modernizing this part of the rule to reflect the reality of a world connected to the Internet. To accommodate institutional trading techniques such as basket trades, the proposal would also permit foreign broker-dealers to provide limited amounts of U.S. securities to U.S. investors. These limited trades in U.S. securities would allow U.S. investors to invest more efficiently and avoid the added complexity and risk that come with doing in many steps what could be done in one.

I would like to thank the staff of the Division of Trading and Markets for their commendable work on this matter, specifically Director Erik Sirri, Deputy Director Bob Colby, Paula Jenson, Brian Bussey, Matthew Daigler, Max Welsh, and Marlon Paz. I would also like to thank their colleagues in the Office of the General Counsel, Office of Economic Analysis, and the Division of Enforcement for their contributions and collaborative efforts. Finally, I would like to thank the other Commissioners and all of our counsels for their work and comments on this proposed rule.


Modified: 06/25/2008