June 23, 2006
Ms. Philomena Scamardella
Dear Ms. Scamardella:
In your letter of July 25, 2005 and reiterated in your letter of October 27, 2005 on behalf of Dinosaur Securities, LLC ("Dinosaur"), you requested assurances that the staff of the Division of Market Regulation ("Staff") would not recommend enforcement action to the Commission under Section 15(a) of the Securities Exchange Act of 1934 ("Exchange Act") if Dinosaur, a registered broker-dealer and member of NASD, paid certain unregistered foreign companies transaction-based compensation in exchange for those companies referring non-U.S. nationals, non-U.S. citizens or non-U.S. entities to Dinosaur. As discussed more fully below, we are unable to provide you with these assurances.
As we noted in a telephone conversation with you on September 19, 2005, NASD Rule 1060 provides specific guidance for NASD member firms that wish to pay transaction-related compensation to unregistered foreign persons. In particular, Rule 1060(b) permits an NASD member firm, and persons associated with a member firm, to pay unregistered foreign persons transaction-related compensation based upon the business of customers those persons direct to the member firm if the member meets the conditions enumerated in the rule. Among other things, the rule requires a member firm to "assure itself that the nonregistered foreign person who will receive the compensation (the "finder") is not required to register in the U.S. as a broker/dealer."1 As we explained in our conversation with you, the Staff does not, as a matter of practice, provide no-action relief to member firms that are attempting to satisfy their obligation under this provision. Rather, Dinosaur or its counsel would need to make its own determination that it meets this condition, as well as the other conditions, of NASD Rule 1060(b).
In your October 27th letter, you indicated that you view NASD Rule 2420 as requiring you to request and receive a no-action letter from the Staff, and you cited a letter from NASD staff that you believe supports your view.2 We disagree. As we discussed last September, NASD Rule 1060 is directly applicable to Dinosaur's proposed activities.
We note that you only requested assurances that the activities you described would not require the foreign companies to register as broker-dealers. In making your determination under NASD Rule 1060(b)(1), you will need to focus more broadly on all of those companies' activities to determine whether they would be required to register in the U.S. as broker-dealers. In this regard, you or your counsel may wish to review the adopting release for Exchange Act Rule 15a-6, and in particular the discussion on general principles of U.S. registration for international broker-dealers contained in Part III.B.3
In sum, based on the facts and representations set forth in your letters, the Staff is unable to assure you that the foreign companies to which Dinosaur wishes to pay transaction-related compensation under your proposal are not required to register in the U.S. as broker-dealers. We express no view with respect to other questions Dinosaur's proposed activities may raise, including the applicability of any other provision of the federal securities laws, any state law, any self-regulatory organization rules, or foreign law. If you have any questions on how to satisfy Dinosaur's obligations under Rule 1060(b), or the interrelationship between Rule 1060(b) and Rule 2420, we suggest that you or your counsel contact NASD.
Brian A. Bussey
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