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U.S. Securities and Exchange Commission

Speech by SEC Staff:
Proposed Amendments to Exchange Act Rule 15a-6 — Conditional Exemption of Certain Foreign Brokers or Dealers


Erik R. Sirri

Director, Division of Trading and Markets
U.S. Securities and Exchange Commission

Commission Open Meeting
Washington, D.C.
June 25, 2008

Thank you, Mr. Chairman. The Division of Trading and Markets recommends that the Commission propose to amend Exchange Act Rule 15a-6, which provides conditional exemptions from broker-dealer registration to foreign entities engaged in activities involving certain U.S. investors. As you've noted, Mr. Chairman, among the most significant trends in the financial services industry during the last several decades has been the increased demand for foreign investments by U.S. investors, coupled with the continuing internationalization and interconnection among local securities markets and market intermediaries.

While current Rule 15a-6 has provided a useful framework for U.S. investors to access foreign broker-dealers for almost two decades, ever increasing market globalization suggests that it is time to revisit that framework to consider whether it could be made more workable, consistent with the Commission's mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

The proposed amendments to Rule 15a-6 would expand the category of U.S. investors that foreign broker-dealers may contact for the purpose of providing research reports and otherwise soliciting securities transactions by replacing the categories of "major U.S. institutional investor" and "U.S. institutional investor" with the category of "qualified investor," as that term is defined in the Exchange Act.

The proposed amendments also would reduce the role U.S. registered broker-dealers must play in intermediating transactions effected by foreign broker-dealers on behalf of certain U.S. investors, and correspondingly permit foreign broker-dealers to play a greater role in the resulting transactions.

For instance, U.S. broker-dealer personnel would no longer have to "chaperone" foreign broker-dealer personnel. The current chaperoning requirements have been criticized as impractical and as imposing unnecessary operational and compliance burdens, particularly for investors communicating with broker-dealers in time zones outside those of the United States. In addition, to maximize flexibility for U.S. investors, foreign broker-dealers relying on the proposed rule would be able to do so under two approaches:

Under the first approach, 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). Under this approach, 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 U.S. 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 would retain the section related to the provision of research, along with the conditions in the current rule, but expand the category of U.S. investors with which a foreign broker-dealer may interact from "major U.S. institutional investors" to "qualified investors." We understand from discussions with industry representatives that these conditions have been workable for both foreign broker-dealers and U.S. registered broker-dealers, and we have no knowledge of investor protection concerns having been raised with regard to foreign broker-dealers that operate in compliance with the current exemption. Accordingly, we do not propose to amend them.

As a result, foreign broker-dealers would be permitted to provide research reports to investors that 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, as under the current rule. This expanded category of investors should likely possess a high level of sophistication and experience with foreign securities and foreign markets.

The proposed rule 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.

Finally, the proposed rule would provide an 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.

I would like to thank Robert Colby, Marlon Paz, Paula Jenson, Brian Bussey, Matthew Daigler, and Max Welsh on my staff for their hard and diligent work on this project as well as Paul Dudek in the Division of Corporation Finance; Charlotte Buford and Lidian Pereira in the Enforcement Division; James Overdahl and Amy Edwards in the Office of Economic Analysis; and Meridith Mitchell, Janice Mitnick; and David Dimitrious in the Office of the General Counsel. We are happy to answer any questions you have on the proposed rules.


Modified: 06/26/2008