Subject: File No. S7-16-08
From: Ed Buscemi

July 18, 2008

The Commission is to be congratulated for taking this opportunity to propose revisions to. Rule 15a-6 of the Exchange Act. The incorporation of the term Qualified Investor as defined by the Exchange Act is a significant improvement over the dual tiered categories of institutional investor currently in the Rule.

An outstanding issue is that many foreign banks and brokers are swap counterparts to US investors and often the collateral required by the foreign bank (as margin) will be in US securities. Therefore I would considering lowering the bar for US investors to Eligible Swap Participant in those cases (only) that the securities component is merely collateral and not a general custody service in US securities applicable to retail investors. While it is clear that OTC commodity transactions such as swaps denominated in underlying US securities would be classified as US business for the purpose of meeting the (A) (1) revenue test, what is not clear is how to incorporate the non-securities derived total revenue of the foreign broker-dealer and how that would be incorporated in the overall calculation.

I personally think these distinctions are by necessity convoluted and would hope that the Commission would do away with the two classes of foreign dealers. If the tests for class of investors and types of transactions permitted are met then that should be enough of a limitation. The where and the why of an investors decision to custody their property should be left to the investors informed judgment not subject to proscriptive rules of The Commission. In fact the idea that a foreign broker with the greater experience in dealing with US securities be barred from providing custody services while the foreign broker-dealer with the lesser experience as evaluated by percentage of revenues received stands the idea on its head that the Rule is designed to protect US investors.
One exception I recommend is where the Commission or other US authorities have knowledge of fraud or other unsavory information concerning a foreign custodians practices. In that event the Commission should be able to proscribe that particular institution as unqualified for deposits of property by US persons. If the protection of US investors is indicated that is.

The Commission is to be applauded for allowing the records to be kept in the format required by the Foreign Regulatory Regime in which the foreign broker dealer or bank is subject to.
Section 17 of the Exchange Act requires records to be kept in what amounts to a write once read many format (WORM) or an equivalent to eliminate the possibility of post facto altering of the records upon a Commission or other legal or regulatory investigation. If I am correct in assuming the records maintained by the foreign broker dealer for the US persons transactions would need the same treatment, and if these records are to be maintained and be the responsibility of the US broker-dealer, then I would in conjunction with the foreign broker-dealer, then think that the requirement of Rule 17a-8 could in fact be met and also the responsibility for compliance with the Bank Secrecy Act could be met by the US broker-dealer directly or by the US broker-dealer placing reliance of the foreign broker dealer for appropriate anti-money laundering controls.

The Commission states that each of 700 foreign broker dealers expected to avail themselves of the exemptions provided by this Rule proposal will only need to spend two hours apiece in reviewing their disclosure documents for a total of 1400 hours. I fear that this a gross underestimate considering it would take more than two hours to figure out US segregation requirements anomalies much less SIPA and US Bankruptcy law intricacies. Should the foreign broker dealer need an opinion from competent US and local counsel will be just one issue to be considered which by itself could take more than two hours.

On a more substantive note, the Rule proposal is not detailed on what is meant by U.S. segregation requirements. If this phrase means the operation of Securities Exchange Act Rule 15c3-3, I think the Commission should come up with a boiler plate level of description to provide the industry with guidance as to the level of detail required to satisfy the Rule. Ditto for SIPA and US Bankruptcy considerations. The Rule should require that the disclosure of the foreign jurisdictions requirements at a minimum match the specificity of the US disclosure. For example of the level of specificity should involve the right of a US broker-dealer to re-hypothecate securities up to 140% of the indebtedness of any clients positions (but not more than 100% of the total indebtedness of all clients ) The foreign broker dealer should expound on exactly what they may do with the collateral. And if re-hypothecated securities involve a loss of voting rights or dividend classification for tax purposes that should be made clear on the foreign broker-dealers disclosure. The Commission may want to consider what collateral assets of US persons may be allowed to be re-hypothecated calculated as a percentage of the customers gross exposure to the foreign broker-dealer as a matter of good practice.

The Commission should also consider providing equal treatment to foreign broker dealers regarding disclosure under Exchange Act Section 13 as to securities held as collateral with rights of re-hypothecation where it is customary to let the client vote the securities if the securities are not in fact re-hypothecated. Securities under lien in a US margin account are currently not counted (Rule 13d-3 (d) (2) for members of a National Securities Exchange).

The Commission is to be commended for addressing the thorny issue of foreign options exchanges. One drafting question I have is does this rule proposal address all the Securities Act concerns or should there be some form of Securities Act amendment or relief granted in order to implement?.