SEC Issues FAQ on Rule 15a-6 (with Lofchie Comment)

The SEC's Division of Trading and Markets issued a series of FAQs on SEC Rule 15a-6, which provides an exemption from SEC registration for non-U.S. broker-dealers conducting limited securities activities using U.S. jurisdictional means. The FAQs address several important aspects of the Rule, including:

• Research to Majors: The FAQs confirm that non-U.S. broker-dealers may distribute research directly to "major U.S. institutional investors" ("Majors") under Rule 15a-6(a)(2) without any involvement of an SEC-registered broker-dealer. The FAQs further note that where the non-U.S. firm has an arrangement with an SEC-registered broker-dealer (a "chaperoning broker") to effect transactions under Rule 15a-6, any securities transactions arising from such research reports must be effected through the chaperoning broker in accordance with SEC Rule 15a-6(a)(3).

• Minimum Net Capital Requirement for Chaperoning Brokers. The FAQs confirm that the minimum net capital requirement for a chaperoning broker effecting securities transactions under Rule 15a-6(a)(3) is generally $250,000. A chaperoning broker may not generally rely on the $100,000 net capital requirement for firms that effect transactions on a DVP/RVP basis in accordance with SEC Rule 15c3-3(k)(2)(i). However, a chaperoning broker may rely on the minimum net capital requirement of $5,000 where (i) the chaperoning broker enters into a fully disclosed clearing agreement with an SEC-registered broker-dealer that has agreed, in writing, to comply with the SEC's financial responsibility rules with respect to the chaperoning arrangement, including taking capital charges on fails; or (ii) the non-U.S. broker-dealer's Rule 15a-6 business is limited to M&A advisory services. (To put this differently, if the non-U.S. broker-dealer is executing transactions that require clearance, the chaperoning broker-dealer, either alone or with a separate clearing broker-dealer, must have the legal authority to be responsible for clearing for customers – which requires at least $250,000 in capital.)

• Records of Rule 15a-6 Transactions. The FAQs confirm that a chaperoning broker must maintain records of transactions between the U.S. customer and the non-U.S. broker-dealer, including records of fails. The chaperoning broker may obtain this information from the non-U.S. broker-dealer, but remains responsible for the accuracy of these records.

• Scope of No-Action Guidance. The FAQs confirm that the guidance in the Nine Firm Letter and Offshore Client Letter applies to non-U.S. broker-dealers regardless of whether these firms are affiliated with an SEC-registered broker-dealer. The FAQs also confirm that the expanded definition of a "Major" in the Nine Firm Letter, which includes any entity with aggregate financial assets exceeding $100 million, applies to all provisions of Rule 15a-6.

• Persons Temporarily Present in the United States. The FAQs note that non-U.S. broker-dealers may rely on the exemption for persons "temporarily present in the United States" for individuals with whom they have a bona fide pre-existing relationship that are temporarily working or attending college in the United States provided such individuals are not U.S. citizens or Green Card holders.

• Unsolicited Transactions. The FAQs clarify that a non-U.S. broker-dealer may rely on the unsolicited transaction exemption under Rule 15a-6(a)(1) to administer a foreign issuer's global employee stock option plan subject to certain conditions. The FAQs also describe the limited circumstances in which non-U.S. firms may conduct multiple securities transactions for U.S. investors under the unsolicited transaction exemption. Finally, the FAQs confirm that non-U.S. firms may send U.S. customers for whom they effected unsolicited securities transactions trade confirmations, account statements and other documents (e.g., a prospectus), as required under non-U.S. law or the firm's internal policies and procedures.

Lofchie Comment: These FAQs are the first guidance that the SEC has provided on Rule 15a-6 in several years. The principal no-action letters under Rule 15a-6, the Nine Firm Letter and Offshore Client Letter, were issued in 1996 and 1997, respectively. While the SEC had issued a proposal for reform of Rule 15a-6 in 2008, this proposal has remained dormant since the financial crisis, and is unlikely to be revived, especially since it is one of those proposals relating to the liberalization of custody arrangements with non-U.S. firms. Chaperoning brokers should note, in particular, the requirement to maintain minimum net capital of $250,000 unless they have an arrangement with a clearing firm that assumes responsibility for capital charges on fails, or the non-U.S. broker-dealer's Rule 15a-6 business is limited to M&A advisory services. Also useful is the clarification that non-U.S. firms may conduct securities transactions with individuals temporarily working in the United States, and that firms may operate ESOPs under the unsolicited transaction exemption. Perhaps equally significant are those issues that the FAQs do not address, including the application of Rule 15a-6 to derivatives transactions and financing arrangements. Rule 15a-6 was originally adopted in 1989 to address cash market transactions, and has not been subsequently updated to address derivatives and financing arrangements. It will be interesting to see whether the SEC addresses these topics in tandem with its rulemakings on security-based swaps.

See here for the link to the FAQ (on the SEC's website). See also link to the FAQ on Rule 15a-6 and Reg AC (also on the SEC's website). For a general discussion of Rule 15a-6, see theNon-U.S. Broker-Dealer Chapter of Lofchie's Guide to Broker-Dealer Regulation.