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Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Wednesday, June 25, 2008

SEC Proposes Overhaul of Rule 15a-6

At its open meeting the SEC also considered a recommendation from the Division of Trading and Markets to amend Rule 15a-6 under the Exchange Act.  Rule 15a-6 provides a framework under which U.S. investors can obtain services from foreign broker-dealers. The SEC adopted Rule 15a-6 in 1989 in response to the increasing internationalization of the securities markets, to address how non-U.S. broker-dealers fit into the statutory scheme. The staff followed up throughout the 1990s with no-action letters.  According to Chairman Cox,

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.

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