
[Federal Register: July 8, 2008 (Volume 73, Number 131)]
[Proposed Rules]               
[Page 39181-39212]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08jy08-33]                         


[[Page 39181]]

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Part IV





Securities and Exchange Commission





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17 CFR Part 240



Exemption of Certain Foreign Brokers or Dealers; Proposed Rule


[[Page 39182]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-58047; File No. S7-16-08]
RIN 3235-AK15

 
Exemption of Certain Foreign Brokers or Dealers

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or 
``SEC'') is proposing to amend a rule under the Securities Exchange Act 
of 1934 (``Exchange Act''), which provides conditional exemptions from 
broker-dealer registration for foreign entities engaged in certain 
activities involving certain U.S. investors. To reflect increasing 
internationalization in securities markets and advancements in 
technology and communication services, the proposed amendments would 
update and expand the scope of certain exemptions for foreign entities, 
consistent with the Commission's mission to protect investors, maintain 
fair, orderly and efficient markets and facilitate capital formation.

DATES: Comments should be received on or before September 8, 2008.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number S7-16-08 on the subject line; or
     Use the Federal eRulemaking Portal (http://
www.regulations.gov/). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-16-08. This file number 
should be included on the subject line if e-mail is used. To help us 
process and review your comments more efficiently, please use only one 
method. We will post all comments on the Commission's Internet Web site 
(http://www.sec.gov/rules/proposed.shtml). Comments are also available 
for public inspection and copying in the Commission's Public Reference 
Room, 100 F Street, NE., Washington, DC 20549, on official business 
days between the hours of 10 a.m. and 3 p.m. All comments received will 
be posted without change; we do not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Erik R. Sirri, Director, Marlon 
Quintanilla Paz, Senior Counsel to the Director, Brian A. Bussey, 
Assistant Chief Counsel, Matthew A. Daigler, Special Counsel, or Max 
Welsh, Attorney, Office of the Chief Counsel, Division of Trading and 
Markets, at (202) 551-5500, at the Securities and Exchange Commission, 
100 F Street, NE., Washington, DC 20549-6628.

SUPPLEMENTARY INFORMATION: The Commission is requesting public comment 
on the proposed amendments to Rule 15a-6 [17 CFR 240.15a-6] under the 
Exchange Act.

Table of Contents

I. Introduction and Background
II. The Regulatory Framework Under Rule 15a-6
    A. Unsolicited Trades
    B. Provision of Research Reports
    C. Solicited Trades
    D. Counterparties and Specific Customers
III. Proposed Amendments to Rule 15a-6
    A. Extension of Rule 15a-6 to Qualified Investors
    B. Unsolicited Trades
    C. Provision of Research Reports
    D. Solicited Trades
    E. Counterparties and Specific Customers
    F. Familiarization With Foreign Options Exchanges
    G. Scope of the Proposed Exemption
IV. Preliminary Findings
V. General Request for Comment
VI. Administrative Law Matters
VII. Statutory Basis
VIII. Text of Proposed Amendments

I. Introduction and Background

    Section 15(a) of the Exchange Act generally provides that, absent 
an exception or exemption, a broker or dealer that uses the mails or 
any means of interstate commerce to effect transactions in, or to 
induce or attempt to induce the purchase or sale of, any security must 
register with the Commission.\1\ The Commission uses a territorial 
approach in applying the broker-dealer registration requirements to the 
international operations of broker-dealers.\2\ Under this approach, 
broker-dealers located outside the United States that induce or attempt 
to induce securities transactions with persons in the United States are 
required to register with the Commission, unless an exemption 
applies.\3\ Entities that conduct such activities entirely outside the 
United States do not have to register. Because this territorial 
approach applies on an entity level, not a branch level, if a foreign 
broker-dealer establishes a branch in the United States, broker-dealer 
registration requirements would extend to the entire foreign broker-
dealer entity.\4\ The registration requirements do not apply, however, 
to a foreign broker-dealer with an affiliate, such as a subsidiary, 
operating in the United States.\5\ Only the U.S. affiliate must 
register and only the U.S. affiliate may engage in securities 
transactions and perform related functions on behalf of U.S. 
investors.\6\ The territorial approach also requires registration of 
foreign broker-dealers operating outside the United States that effect, 
induce or attempt to induce securities transactions for any person 
inside the United States, other than a foreign person temporarily 
within the United States.\7\
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    \1\ See 15 U.S.C. 78o(a)(1). Section 3(a)(4) of the Exchange Act 
generally defines a ``broker'' as ``any person engaged in the 
business of effecting transactions in securities for the account of 
others,'' but provides 11 exceptions for certain bank securities 
activities. Section 3(a)(5) of the Exchange Act generally defines a 
``dealer'' as ``any person engaged in the business of buying and 
selling securities for his own account,'' but includes exceptions 
for certain bank activities. 15 U.S.C. 78c(a)(4). Exchange Act 
Section 3(a)(6) defines a ``bank'' as a bank or savings association 
that is directly supervised and examined by state or federal banking 
authorities (with certain additional requirements for banks and 
savings associations that are not chartered by a federal authority 
or a member of the Federal Reserve System). 15 U.S.C. 78c(a)(6). 
Accordingly, foreign banks that act as brokers or dealers within the 
jurisdiction of the United States are subject to U.S. broker-dealer 
registration requirements. See Exchange Act Release No. 27017 (Jul. 
11, 1989), 54 FR 30013, 30015 n.16 (Jul. 18, 1989) (``1989 Adopting 
Release''); and Exchange Act Release No. 25801 (Jun. 14, 1988), 53 
FR 23645 at n.1 (Jun. 23, 1988) (``1988 Proposing Release''). To the 
extent, however, that a foreign bank establishes a branch or agency 
in the United States that is supervised and examined by a federal or 
state banking authority and otherwise meets the requirements of 
Section 3(a)(6), the Commission considers that branch or agency to 
be a ``bank'' for purposes of the exceptions from the ``broker'' and 
``dealer'' definitions. See 1989 Adopting Release, 54 FR at 30015 
n.16.
    \2\ See 1989 Adopting Release, 54 FR at 30016.
    \3\ See id.
    \4\ See id. at 30017.
    \5\ See id.
    \6\ See id.
    \7\ See id. For contacts by foreign broker-dealers with U.S. 
citizens domiciled abroad, the Commission generally does not require 
registration. Paragraph (a)(4)(v) of Rule 15a-6 specifically 
addresses this situation.
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    In response to numerous inquiries seeking no-action relief and 
interpretive advice regarding whether certain international securities 
activities required U.S. broker-dealer registration, the Commission 
issued a release on June 14, 1988, to clarify the registration

[[Page 39183]]

requirements for foreign-based broker-dealers, foreign affiliates of 
U.S. broker-dealers, and other foreign financial institutions.\8\ The 
release also proposed Rule 15a-6, which provided conditional exemptions 
from registration under Section 15(b) of the Exchange Act for foreign 
broker-dealers that induce or attempt to induce the purchase or sale of 
any security by certain U.S. institutional investors, if the foreign 
broker-dealer satisfied certain conditions. The Commission adopted Rule 
15a-6 on July 11, 1989, and it became effective August 15, 1989.\9\
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    \8\ See 1988 Proposing Release.
    \9\ 17 CFR 240.15a-6. See 1989 Adopting Release.
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    While the rule has provided a useful framework for certain 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.
    As discussed below, the amendments we propose today would generally 
expand the category of U.S. investors that foreign broker-dealers may 
contact for the purpose of providing research reports and soliciting 
securities transactions. The proposed amendments would also 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. Proposed new safeguards are intended to ensure that the 
expanded exemptions would remain consistent with the Commission's 
statutory mandate.

II. The Regulatory Framework Under Rule 15a-6

    As discussed below, Rule 15a-6 provides conditional exemptions from 
broker-dealer registration for foreign broker-dealers that engage in 
certain activities involving certain U.S. investors. Paragraph (b)(3) 
of the rule defines a ``foreign broker-dealer'' as ``any non-U.S. 
resident person * * * that is not an office or branch of, or a natural 
person associated with, a registered broker-dealer, whose securities 
activities, if conducted in the United States, would be described by 
the definition of `broker' or `dealer' in Section 3(a)(4) or 3(a)(5) of 
the Act.'' \10\ Among the activities that foreign broker-dealers may 
engage in under the rule are: (i) ``Nondirect'' contacts by foreign 
broker-dealers with U.S. investors through execution of unsolicited 
securities transactions and the provision of research reports to 
certain U.S. institutional investors and (ii) ``direct'' contacts, 
involving the execution of transactions through a registered broker-
dealer intermediary with or for certain U.S. institutional investors, 
and without this intermediary with or for certain entities such as 
registered broker-dealers and banks acting in a broker or dealer 
capacity.\11\
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    \10\ 17 CFR 240.15a-6(b)(3).
    \11\ See 1989 Adopting Release, 54 FR at 30013.
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A. Unsolicited Trades

    As we explained in adopting Rule 15a-6, a broker-dealer that 
solicits a transaction with a U.S. investor must be registered with the 
Commission.\12\ Because the Commission determined that, as a policy 
matter, registration is not necessary if a U.S. investor initiated a 
transaction with a foreign broker-dealer entirely by his or her own 
accord, paragraph (a)(1) of Rule 15a-6 \13\ provides an exemption for a 
foreign-broker dealer that effects unsolicited securities transactions 
with U.S. persons.\14\ As the Commission expressed in adopting Rule 
15a-6, solicitation is construed broadly as ``any affirmative effort by 
a broker or dealer intended to induce transactional business for the 
broker-dealer or its affiliates.'' \15\ For example, the Commission 
views telephone calls to U.S. investors, advertising circulated or 
broadcast in the United States and holding investment seminars in the 
United States, regardless of whether the seminars were hosted by a 
registered broker-dealer, as forms of solicitation.\16\ Solicitation 
also includes recommending the purchase or sale of securities to 
customers or prospective customers for the purpose of generating 
transactions.\17\
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    \12\ See id. at 30017.
    \13\ 17 CFR 240.15a-6(a)(1).
    \14\ See 1989 Adopting Release, 54 FR at 30017.
    \15\ See id.
    \16\ See id. at 30017-18.
    \17\ See id.
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    The exemption in paragraph (a)(1) is intended to allow a foreign 
broker-dealer to effect transactions with U.S. investors when the 
foreign broker-dealer does not make any affirmative effort to induce 
transactional activity with the U.S. investor. Because of the breadth 
of the meaning of solicitation in the broker-dealer registration 
context, this exemption typically would not be a viable basis for a 
foreign broker-dealer to conduct an ongoing business, which would 
likely involve some form of solicitation, in the United States.\18\
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    \18\ See id.; see also Exchange Act Release No. 39779, 
``Interpretation Re: Use of Internet Web Sites To Offer Securities, 
Solicit Securities Transactions, or Advertise Investment Services 
Offshore'' (Mar. 23, 1998), 63 FR 14806, 14813 (Mar. 27, 1998) 
(stating that ``[f]oreign broker-dealers that have Internet Web 
sites and that intend to rely on Rule 15a-6's `unsolicited' 
exemption should ensure that the `unsolicited' customer's 
transactions are not in fact solicited, either directly or 
indirectly, through customers accessing their Web sites.'').
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B. Provision of Research Reports

    The provision of research to investors also may constitute 
solicitation by a broker or dealer that would require broker-dealer 
registration.\19\ Broker-dealers often provide research to customers 
with the expectation that the customer eventually will trade through 
the broker-dealer.\20\ Paragraph (a)(2) of Rule 15a-6 \21\ provides an 
exemption from U.S. broker-dealer registration for foreign broker-
dealers that provide research reports to certain institutional 
investors under conditions that are designed to permit the flow of 
research without allowing foreign broker-dealers to do more to solicit 
transactions with U.S. investors.\22\
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    \19\ See 1989 Adopting Release, 54 FR at 30021-22.
    \20\ See id. (``Broker-dealers often provide research to 
customers on a non-fee basis, with the expectation that the customer 
eventually will trade through the broker-dealer. They may provide 
research to acquaint potential customers with their existence, to 
maintain customer goodwill, or to inform customers of their 
knowledge of specific companies or markets, so that these customers 
will be encouraged to use their execution services for that company 
or those markets. In each instance, the basic purpose of providing 
the non-fee research is to generate transactional business for the 
broker-dealer. In the Commission's view, the deliberate transmission 
of information, opinions, or recommendations to investors in the 
United States, whether directed at individuals or groups, could 
result in the conclusion that the foreign broker-dealer has 
solicited those investors.'').
    \21\ 17 CFR 240.15a-6(a)(2).
    \22\ See 17 CFR 240.15a-6(a)(2).
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    In particular, the rule exempts from U.S. broker-dealer 
registration a foreign broker-dealer that provides research to certain 
U.S. institutional investors if (i) the research reports do not 
recommend that the investor use the foreign broker-dealer to effect 
trades in any security, (ii) the foreign broker-dealer does not 
initiate follow up contacts or otherwise induce or attempt to induce 
investors to effect transactions in any security, (iii) transactions 
with the foreign broker-dealer in securities covered by the research 
reports are effected through a registered broker-dealer according to 
the provisions of paragraph (a)(3) of the rule, described below, and 
(iv) the provision of research is not pursuant to an understanding that 
the foreign broker-dealer will receive commission income from 
transactions effected by U.S. investors.\23\
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    \23\ See id.
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    The exemption in paragraph (a)(2) of Rule 15a-6 is available only 
with

[[Page 39184]]

respect to research reports that are furnished to ``major U.S. 
institutional investors.'' Paragraph (b)(4) of the rule defines a 
``major U.S. institutional investor'' as (i) a U.S. institutional 
investor \24\ that has, or has under management, total assets in excess 
of $100 million (which may include the assets of any family of 
investment companies of which it is a part); or (ii) an investment 
adviser registered with the Commission under Section 203 of the 
Investment Advisers Act of 1940 that has total assets under management 
in excess of $100 million.\25\
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    \24\ See Part II.C., infra, for discussion of the definition of 
``U.S. institutional investor.''
    \25\ See 17 CFR 240.15a-6(b)(4); cf. Letter from Richard R. 
Lindsey, Director, Division of Market Regulation, to Mr. Giovanni P. 
Prezioso, Cleary Gottlieb, Steen & Hamilton (Apr. 9, 1997) (``1997 
Staff Letter'').
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C. Solicited Trades

    As we discussed in adopting Rule 15a-6, although many foreign 
broker-dealers have established registered broker-dealer affiliates to 
deal with U.S. investors and trade in U.S. securities, they may prefer 
to deal with institutional investors in the United States from their 
overseas trading desks, where their dealer operations and principal 
sources of current information on foreign market conditions and foreign 
securities are based.\26\ For similar reasons, many U.S. institutions 
want direct contact with overseas traders. Except for limited instances 
of unsolicited transactions, such contact would require the foreign 
broker-dealer to register with the Commission.
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    \26\ See 1989 Adopting Release, 54 FR at 30024.
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    Paragraph (a)(3) of Rule 15a-6 \27\ provides an exemption for 
foreign broker-dealers that induce or attempt to induce securities 
transactions by certain institutional investors, if a U.S. registered 
broker-dealer intermediates certain aspects of the transactions by 
carrying out specified functions. In particular, the U.S. registered 
broker-dealer is required to effect all aspects of the transaction 
(other than negotiation of the terms).\28\ It must issue all required 
confirmations \29\ and account statements to the U.S. institutional 
investor or major U.S. institutional investor. As the Commission 
explained, these documents are significant points of contact between 
the investor and the broker-dealer, and they provide important 
information for investors.\30\ Also, as between the foreign broker-
dealer and the U.S. registered broker-dealer, the latter is required to 
extend or arrange for the extension of any credit to these investors in 
connection with the purchase of securities.\31\ In addition, the U.S. 
registered broker-dealer is responsible for maintaining required books 
and records relating to the transactions conducted under paragraph 
(a)(3) of the rule, including those required by Rules 17a-3 and 17a-
4,\32\ which facilitates Commission supervision and investigation of 
these transactions.\33\ Of course, the U.S. registered broker-dealer 
also must maintain sufficient net capital in compliance with Exchange 
Act Rule 15c3-1,\34\ and receive, deliver and safeguard funds and 
securities in connection with the transactions in compliance with 
Exchange Act Rule 15c3-3.\35\ Furthermore, the U.S. registered broker-
dealer must take responsibility for certain key sales activities, 
including ``chaperoning'' the contacts of foreign associated persons 
with certain U.S. institutional investors.\36\
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    \27\ 17 CFR 240.15a-6(a)(3).
    \28\ 17 CFR 240.15a-6(a)(3)(iii)(A). In adopting Rule 15a-6, the 
Commission recognized that rules of foreign securities exchanges and 
over-the-counter markets may require the foreign broker-dealer, as a 
member or market maker, to perform the actual physical execution of 
transactions in foreign securities listed on those exchanges or 
traded in those markets. See 1989 Adopting Release, 54 FR at 30029 
n.185. For this reason, the Commission stated that, while it does 
not believe that it is appropriate to allow the U.S. registered 
broker-dealer to delegate the performance of its duties under the 
rule to the foreign broker-dealer, it would permit such delegation 
in the case of physically executing foreign securities trades in 
foreign markets or on foreign exchanges. See 1989 Adopting Release, 
54 FR at 30025; cf. 1997 Staff Letter. As a result, the treatment of 
U.S. securities and foreign securities under paragraph (a)(3) of the 
rule differs. Specifically, with foreign securities the foreign 
broker-dealer may not only negotiate the terms, but also execute the 
transactions in the circumstances specified in the Adopting Release. 
See 1989 Adopting Release, 54 FR at 30029 n.185; cf. NASD Rule 
6620(g)(2) (trade reporting of transactions in foreign equity 
securities not required when the transaction is executed on and 
reported to a foreign securities exchange or over the counter in a 
foreign country and reported to the foreign regulator). With respect 
to U.S. securities, however, the U.S. broker-dealer is required to 
execute the transactions and to comply with the provisions of the 
federal securities laws, the rules thereunder and SRO rules 
applicable to the execution of transactions.
    \29\ See Rule 10b-10, 17 CFR 240.10b-10. See 17 CFR 240.15a-
6(a)(3)(iii)(A)(2).
    \30\ See 1989 Adopting Release, 54 FR at 30029.
    \31\ 17 CFR 240.15a-6(a)(3)(iii)(A)(3).
    \32\ 17 CFR 240.17a-3 and 17a-4. See 17 CFR 240.15a-
6(a)(3)(iii)(A)(4).
    \33\ See 1989 Adopting Release, 54 FR at 30029.
    \34\ 17 CFR 240.15c3-1. See 17 CFR 240.15a-6(a)(3)(iii)(A)(5).
    \35\ 17 CFR 240.15c3-3. See 17 CFR 240.15a-6(a)(3)(iii)(A)(6); 
cf. 1997 Staff Letter.
    \36\ See 17 CFR 240.15a-6(a)(3)(ii)(A) and (a)(3)(iii)(B); cf. 
1997 Staff Letter.
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    In adopting Rule 15a-6, the Commission pointed out that the U.S. 
registered broker-dealer's intermediation is intended to help protect 
U.S. investors and securities markets.\37\ For example, the U.S. 
registered broker-dealer has an obligation, as it has for all customer 
accounts, to review any Rule 15a-6(a)(3) account for indications of 
potential problems.\38\
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    \37\ See 1989 Adopting Release, 54 FR at 30025.
    \38\ See id. While the rule does not require the U.S. registered 
broker-dealer to implement procedures to obtain positive assurance 
that the foreign broker-dealer is operating in accordance with U.S. 
requirements, the U.S. registered broker-dealer, in effecting trades 
arranged by the foreign broker-dealer, has a responsibility to 
review these trades for indications of possible violations of the 
federal securities laws. Id.
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    This exemption in Rule 15a-6(a)(3) applies to transactions with 
major U.S. institutional investors, described above, as well as ``U.S. 
institutional investors.'' The rule defines a ``U.S. institutional 
investor'' as (i) an investment company registered with the Commission 
under Section 8 of the Investment Company Act of 1940; or (ii) a bank, 
savings and loan association, insurance company, business development 
company, small business investment company, or employee benefit plan 
defined in Rule 501(a)(1) of Regulation D under the Securities Act of 
1933 (``Securities Act''); a private business development company 
defined in Rule 501(a)(2); an organization described in Section 
501(c)(3) of the Internal Revenue Code, as defined in Rule 501(a)(3); 
or a trust defined in Rule 501(a)(7).\39\
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    \39\ See 17 CFR 240.15a-6(b)(7).
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D. Counterparties and Specific Customers

    Paragraph (a)(4) of Rule 15a-6 \40\ provides an exemption for 
foreign broker-dealers that effect transactions in securities with or 
for, or induce or attempt to induce the purchase or sale of securities 
by, five categories of persons: (1) Registered broker-dealers (acting 
either as principal or for the account of others) or banks acting 
pursuant to an exception or exemption from the definition of ``broker'' 
or ``dealer'' in Sections 3(a)(4)(B), 3(a)(4)(E), or 3(a)(5)(C) of the 
Exchange Act or the rules thereunder; \41\ (2) certain international 
organizations and their agencies, affiliates and pension funds; \42\

[[Page 39185]]

(3) foreign persons temporarily present in the United States with whom 
the foreign broker-dealer had a pre-existing relationship; (4) any 
agency or branch of a U.S. person permanently abroad; and (5) U.S. 
citizens resident outside the United States, as long as the 
transactions occur outside the United States and the foreign broker-
dealer does not target solicitations at identifiable groups of U.S. 
citizens resident abroad.
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    \40\ 17 CFR 240.15a-6(a)(4).
    \41\ While the exemption allows foreign broker-dealers to effect 
transactions with or for certain banks or registered broker-dealers, 
it does not allow direct contact by foreign broker-dealers with the 
U.S. customers of the registered broker-dealers or banks. See 1989 
Adopting Release, 54 FR at 30013 n.202.
    \42\ The organizations are the African Development Bank, the 
Asian Development Bank, the Inter-American Development Bank, the 
International Bank for Reconstruction and Development, the 
International Monetary Fund, the United Nations. See 17 CFR 240.15a-
6(a)(4)(ii).
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III. Proposed Amendments to Rule 15a-6

    The pace of internationalization in securities markets around the 
world has continued to accelerate since we adopted Rule 15a-6 in 1989. 
Advancements in technology and communication services have provided 
greater access to global securities markets for all types of 
investors.\43\ U.S. investors are seeking to take advantage of this 
increased access by seeking more direct contact with those expert in 
foreign markets and foreign securities. In addition, discussions over 
the years with industry representatives regarding Rule 15a-6 have 
suggested areas where the rule could be revised to achieve its 
objectives more effectively without jeopardizing investor 
protections.\44\
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    \43\ See, e.g., Spotlight On: Roundtable Discussions Regarding 
Mutual Recognition (Jun. 12, 2007) (available at: http://
www.sec.gov/spotlight/mutualrecognition.htm).
    \44\ See, e.g., id.
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    In response to these developments and suggestions, the Commission 
is proposing to amend Rule 15a-6 to remove barriers to access while 
maintaining key investor protections. In general, and as discussed more 
fully in Part III.G. below, the proposed amendments would expand and 
streamline the conditions under which a foreign broker-dealer could 
operate without triggering the registration requirements of Section 
15(a)(1) or 15B(a)(1) of the Exchange Act and the reporting and other 
requirements of the Exchange Act (other than Sections 15(b)(4) and 
15(b)(6)), and the rules and regulations thereunder, that apply 
specifically to a broker-dealer that is not registered with the 
Commission solely by virtue of its status as a broker or dealer, while 
maintaining a regulatory structure designed to protect investors and 
the public interest.\45\
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    \45\ See Part III.G., infra, regarding the scope of the 
exemption.
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A. Extension of Rule 15a-6 to Qualified Investors

    The proposed rule would expand the category of U.S. investors with 
which a foreign broker-dealer \46\ could interact under Rule 15a-
6(a)(2) and would expand, with a few exceptions, the category of U.S. 
investors with which a foreign broker-dealer could interact under Rule 
15a-6(a)(3) by replacing the categories of ``major U.S. institutional 
investor'' and ``U.S. institutional investor'' with the category of 
``qualified investor,'' as defined in Section 3(a)(54) of the Exchange 
Act.\47\ In adopting the definitions of ``U.S. institutional investor'' 
and ``major U.S. institutional investor,'' the Commission expressed the 
view that institutions with the major U.S. institutional investor 
``level of assets are more likely to have the skills and experience to 
assess independently the integrity and competence of the foreign 
broker-dealers providing [foreign market] access.'' \48\ As discussed 
below, we believe that advancements in communications and other 
technology have made it increasingly likely that a broader range of 
persons would have these skills and experience at a lower asset level.
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    \46\ The definition of ``foreign broker or dealer ''in the 
proposed rule would be the same as in the current rule, except as 
described below. See proposed Rule 15a-6(b)(2).
    \47\ The proposed rule would also eliminate the definition of 
``family of investment companies,'' which is currently used in the 
definition of ``major U.S institutional investor, ''because it would 
no longer be needed. See 17 CFR 240.15a-6(b)(1), (4) and (7).
    \48\ 1989 Adopting Release, 54 FR at 30027. In proposing the 
definition of ``U.S. institutional investor,'' the Commission stated 
that ``[t]he proposed asset limitation in the rule is based on the 
assumption that direct U.S. oversight of the competence and conduct 
of foreign sales personnel may be of less significance where they 
are soliciting only U.S. institutional investors with high levels of 
assets. The $100 million asset level * * * is designed to increase 
the likelihood that the institution or its investment advisers have 
prior experience in foreign markets that provides insight into the 
reliability and reputation of various foreign broker-dealers.'' 1988 
Proposing Release, 53 FR 23654.
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    The proposed rule would give the term ``qualified investor'' the 
same meaning as set forth in Section 3(a)(54) of the Exchange Act.\49\ 
The qualified investor standard is well known to the financial 
community. Section 3(a)(54)(A) defines a ``qualified investor'' as:
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    \49\ 15 U.S.C. 78c(54). The definition of ``qualified investor'' 
was added to the Exchange Act by the Gramm-Leach-Bliley-Act of 1999 
(Pub. L. 106-102, 113 Stat. 1338 (1999)) and has application to 
several of the bank exceptions from broker-dealer registration, 
including: (1) the broker exception for identified banking products 
when the product is an equity swap agreement (Section 206(a)(6) of 
Pub. L. 106-102, 15 U.S.C. 78c note, as incorporated into Exchange 
Act Section 3(a)(4)(B)(ix), 15 U.S.C. 78c(a)(4)(B)(ix)); (2) the 
dealer exception for identified banking products when the product is 
an equity swap agreement (Section 206(a)(6) of Pub. L. 106-102, 15 
U.S.C. 78c note, as incorporated into Exchange Act Section 
3(a)(5)(C)(iv), 15 U.S.C. 78c(a)(5)(C)(iv)); and (3) the dealer 
exception for asset-backed securities (Exchange Act Section 
3(a)(5)(C)(iii), 15 U.S.C. 78c(a)(5)(C)(iii)). These exceptions 
permit banks to sell certain securities to qualified investors 
without registering as broker-dealers with the Commission.
---------------------------------------------------------------------------

    (i) Any investment company registered with the Commission under 
Section 8 of the Investment Company Act of 1940 (``Investment Company 
Act'');
    (ii) Any issuer eligible for an exclusion from the definition of 
investment company pursuant to Section 3(c)(7) of the Investment 
Company Act;
    (iii) Any bank (as defined in Section 3(a)(6) of the Exchange Act), 
savings association (as defined in Section 3(b) of the Federal Deposit 
Insurance Act), broker, dealer, insurance company (as defined in 
Section 2(a)(13) of the Securities Act), or business development 
company (as defined in Section 2(a)(48) of the Investment Company Act);
    (iv) Any small business investment company licensed by the United 
States Small Business Administration under Section 301(c) or (d) of the 
Small Business Investment Act of 1958;
    (v) Any State sponsored employee benefit plan, or any other 
employee benefit plan, within the meaning of the Employee Retirement 
Income Security Act of 1974, other than an individual retirement 
account, if the investment decisions are made by a plan fiduciary, as 
defined in Section 3(21) of that Act, which is either a bank, savings 
and loan association, insurance company, or registered investment 
adviser;
    (vi) Any trust whose purchases of securities are directed by a 
person described in clauses (i) through (v) above;
    (vii) Any market intermediary exempt under Section 3(c)(2) of the 
Investment Company Act;
    (viii) Any associated person of a broker or dealer other than a 
natural person;
    (ix) Any foreign bank (as defined in Section 1(b)(7) of the 
International Banking Act of 1978); \50\
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    \50\ The definition of qualified investor includes any foreign 
bank. Unlike foreign governments (see note 51, infra), foreign banks 
may establish a permanent presence in the United States, such as a 
branch, that would not qualify under Exchange Act Section 3(a)(6) as 
a bank. See note 1, supra. Foreign broker-dealers need to rely on 
Rule 15a-6 to effect transactions with such entities.
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    (x) The government of any foreign country; \51\
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    \51\ Of course, foreign broker-dealers currently do not need to 
rely on Rule 15a-6 to effect transactions with foreign governments 
because foreign governments are neither located in the United States 
nor U.S. persons resident abroad.
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    (xi) Any corporation, company, or partnership that owns and invests 
on a

[[Page 39186]]

discretionary basis not less than $25,000,000 in investments;
    (xii) Any natural person who owns and invests on a discretionary 
basis not less than $25,000,000 in investments;
    (xiii) Any government or political subdivision, agency, or 
instrumentality of a government that owns and invests on a 
discretionary basis not less than $50,000,000 in investments; or
    (xiv) Any multinational or supranational entity or any agency or 
instrumentality thereof.
    The Commission proposes to use the definition of ``qualified 
investor'' in section 3(a)(54) of the Exchange Act for several reasons 
primarily related to the sophistication and likely experience with 
foreign securities and foreign markets of the investors included in the 
definition. For example, the entities described in paragraphs (i) 
through (ix) of Section 3(a)(54)(A) of the Exchange Act, without 
limitation based on ownership or investment, are all engaged primarily 
in financial activities, including the business of investing. The 
persons in paragraphs (xi), (xii) and (xiii) of Section 3(a)(54)(A) are 
not primarily engaged in investing and may have limited investment 
experience. Thus, Congress established ownership and investment 
thresholds for those latter persons as indicators of investment 
experience and sophistication.\52\ The Commission believes that 
Congress' standard for investors with significant investment experience 
and sophistication to deal with banks that are not registered as 
broker-dealers should ensure that these investors would possess 
sufficient experience with financial matters to be able to enter into 
securities transactions with foreign broker-dealers under the proposed 
exemption. Thus, the Commission believes that it would be appropriate 
and consistent with the protection of investors to extend the relief in 
proposed Rules 15a-6(a)(2) and (a)(3) to a corporation, company, 
partnership that, or a natural person who, owns and invests on a 
discretionary basis not less than $25,000,000 in investments, and to a 
government or political subdivision, agency or instrumentality of a 
government that owns and invests on a discretionary basis not less than 
$50,000,000 in investments.
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    \52\ See 15 U.S.C. 6801 et seq., Pub. L. 106-102, 113 Stat. 1338 
(1999). Congress did not include an ownership or investment 
threshold for multinational or supranational entities, or any 
agencies or instrumentalities thereof, presumably regarding such 
entities as possessing sufficient financial sophistication, net 
worth and knowledge and experience in financial matters to be 
considered a qualified investor. Exchange Act Release No. 47364 
(Feb. 13, 2003), 68 FR 8686, 8693 (Feb. 24, 2003).
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    The primary distinction between a major U.S. institutional investor 
and a qualified investor is the threshold value of assets or 
investments owned or invested and the inclusion of natural persons. As 
a result, under the proposed rule, the threshold would decline from 
institutional investors that own or control greater than $100 million 
in total assets to, among others, all investment companies registered 
with the Commission under Section 8 of the Investment Company Act and 
corporations, companies, or partnerships that own or invest on a 
discretionary basis $25 million or more in investments. In addition, 
under the proposed rule, natural persons who own or invest on a 
discretionary basis not less than $25,000,000 in investments would be 
included. In adopting Rule 15a-6, we explained that the $100 million 
asset level was designed ``to increase the likelihood that [the 
investor has] prior experience in foreign markets that provides insight 
into the reliability and reputation of various foreign broker-
dealers.'' \53\ While we believe this is still the right focus, 
increased access to information about foreign securities markets due to 
advancements in communication technology suggest that a broader 
spectrum of investors are likely to have this type of sophistication.
---------------------------------------------------------------------------

    \53\ See 1989 Adopting Release, 54 FR at 30027.
---------------------------------------------------------------------------

    We believe that the proposed use of the definition of qualified 
investor would more accurately encompass persons that have prior 
experience in foreign markets and an appropriate level of investment 
experience and sophistication overall. In certain instances, it would 
exclude persons that are currently included in the definition of U.S. 
institutional investor or major U.S. institutional investor. In each 
such instance, the proposed use of the definition of qualified investor 
would require greater investment experience of the entity than the 
current definition.
    For example, with respect to employee benefit plans, the definition 
of qualified investor includes plans in which investment decisions are 
made by certain plan fiduciaries. The definition of U.S. institutional 
investor does not require a fiduciary to make investment decisions and 
encompasses plans with $5 million or more in assets. While there is no 
asset requirement in the employee benefit plan section in the 
definition of qualified investor, the Commission believes that 
proposing to require investment decisions to be made by plan 
fiduciaries as a qualification for the definition would help ensure a 
higher level of investing experience and sophistication than a $5 
million asset threshold. Similarly, while a qualified investor applies 
to trusts whose purchases are directed by certain entities, the 
definition of ``U.S. institutional investor'' does not impose that 
limitation, but instead applies to certain trusts with $5 million or 
more in assets. Also, while the proposed definition (like the existing 
definition) would encompass business development companies as defined 
in Section 2(a)(48) of the Investment Company Act, the definition of 
``U.S. institutional investor'' extends to private business development 
companies defined in Section 202(a)(22) of the Investment Advisers Act 
of 1940. The definition of ``U.S. institutional investor,'' unlike the 
definition of ``qualified investor,'' further applies to certain 
organizations described in Section 503(c) of the Internal Revenue Code 
with assets of $5 million or more. Proposing to require the higher 
level of investing experience and sophistication would be appropriate 
in light of the expanded activities in which foreign broker-dealers 
would be permitted to engage under the proposed rule, as well as the 
reduced role that would be played by the U.S. registered broker-dealer.
    The Commission requests comment on the proposed use of the 
definition of ``qualified investor'' generally and, more specifically, 
whether allowing foreign broker-dealers to induce or attempt to induce 
transactions with the persons included in the proposed definition is 
appropriate. Are the ownership and investment thresholds applicable to 
certain persons included in the proposed use of the definition of 
``qualified investor'' appropriate? Does the definition encompass 
investors that likely would have an appropriate level of investing or 
business experience in foreign markets? If not, why not? Should the 
definition be tailored to include only investors that have a 
demonstrated pattern of appropriate transactional activity with U.S. 
registered or foreign broker-dealers in foreign securities? If so, how?
    The Commission also requests comment on whether the proposed use of 
the definition of ``qualified investor'' should include additional 
minimum asset levels for any of the persons included in Exchange Act 
Section 3(a)(54). For example, should the proposed rule use a new 
definition that includes a requirement that a small business investment 
company own and invest a certain amount of investments? Should it 
include any of the omitted

[[Page 39187]]

categories of persons from the definition of ``U.S. institutional 
investor''? Are there any categories of investors included in the 
proposed use of the definition of qualified investor that should be 
excluded, such as market intermediaries exempt under Section 3(c)(2) of 
the Investment Company Act?
    In addition, the Commission requests comment on whether the 
proposed use of the definition of ``qualified investor'' should include 
natural persons who own or invest on a discretionary basis at least 
$25,000,000 in investments. If not, should the Commission adopt a 
different threshold level of investments or ownership? What criteria, 
if any, should apply to help ensure that a natural person would have 
sufficient investment experience and sophistication specifically in 
foreign securities? Are there additional safeguards for natural persons 
that would be appropriate to include in the rule, such as increasing 
the involvement of U.S. registered broker-dealers in transactions 
solicited by foreign broker-dealers? For example, foreign broker-
dealers could be required to make suitability determinations before 
sales to natural persons under the exemption. If additional safeguards 
applied to transactions with natural persons who own or invest on a 
discretionary basis at least $25,000,000 in investments, would foreign 
broker-dealers choose to comply with those safeguards or choose not to 
do business directly with natural persons under such a rule? Finally, 
should any of the dollar thresholds in the proposed use of the 
definition of qualified investor be adjusted for inflation? If so, what 
mechanism should be used to make such adjustments?

B. Unsolicited Trades

    As we noted in adopting Rule 15a-6, although the requirements of 
Section 15(a) under the Exchange Act do not distinguish between 
solicited and unsolicited transactions, the Commission does not 
believe, as a policy matter, that registration is necessary if U.S. 
investors have sought out foreign broker-dealers outside the United 
States and initiated transactions in foreign securities markets 
entirely of their own accord.\54\ In that event, U.S. investors would 
have taken the initiative to trade outside the United States with 
foreign broker-dealers that are not conducting activities within this 
country and the U.S. investors would have little reason to expect these 
foreign broker-dealers to be subject to U.S. broker-dealer 
requirements.\55\ Therefore, the Commission is not proposing to amend 
paragraph (a)(1) of the current rule, other than to add the title 
``Unsolicited Trades.'' Notably, in order to rely on this exemption, 
foreign broker-dealers need to determine whether each transaction 
effected in reliance on it has been solicited under the proposed rule.
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    \54\ See 1989 Adopting Release, 54 FR at 30017.
    \55\ See id.
---------------------------------------------------------------------------

    Because the Commission construes solicitation broadly and 
relatively few transactions qualify for the unsolicited exemption,\56\ 
the Commission is proposing to provide further interpretive guidance 
related to solicitation under the proposed rule with respect to 
quotation systems. In adopting the current rule, we noted that access 
to foreign market makers' quotations is of considerable interest to 
registered broker-dealers and institutional investors that seek timely 
information on foreign market conditions.\57\ The Commission also 
stated that it generally would not consider a solicitation to have 
occurred for purposes of Rule 15a-6 if there were a U.S. distribution 
of foreign broker-dealers' quotations by third-party systems, such as 
systems operated by foreign marketplaces or by private vendors, that 
distributed these quotations primarily in foreign countries.\58\ The 
Commission's position applies only to third-party systems that do not 
allow securities transactions to be executed between the foreign 
broker-dealer and persons in the United States through the systems.\59\ 
The Commission noted that it would have reservations about certain 
specialized quotation systems, which might constitute a more powerful 
inducement to effect trades because of the nature of the proposed 
transactions.\60\ With respect to direct dissemination of a foreign 
market maker's quotations to U.S. investors, such as through a private 
quote system controlled by a foreign broker-dealer (as distinct from a 
third-party system), the Commission noted in adopting the current rule 
that such conduct would not be appropriate without registration, 
because the dissemination of these quotations would be a direct, 
exclusive inducement to trade with that foreign broker-dealer.\61\
---------------------------------------------------------------------------

    \56\ See id. at 30021.
    \57\ See id. at 30017.
    \58\ See id.
    \59\ See id.
    \60\ See id. at n.66. For example, the Commission stated that a 
foreign broker-dealer whose quotations were displayed in a system 
that disseminated quotes only for large block trades might well be 
deemed to have engaged in solicitation requiring broker-dealer 
registration, as opposed to a foreign broker-dealer whose quotes 
were displayed in a system that disseminated the quotes of numerous 
foreign dealers or market makers in the same security. See id.
    \61\ See id. at 30019. In making the statement that the conduct 
would not be appropriate ``without registration, ''the Commission 
did not intend to preclude a foreign broker-dealer from directly 
inducing U.S. investors to trade with the foreign broker-dealer via 
such a quotation system where the U.S. investor subscribes to the 
quotation system through a U.S. broker-dealer, the U.S. broker-
dealer has continuing access to the quotation system, the foreign 
broker-dealer's other contacts with the U.S. investor are 
permissible under the current rule and any resulting transactions 
are intermediated in accordance with the requirements of Rule 15a-
6(a)(3).
---------------------------------------------------------------------------

    Since the time the current rule was adopted, third-party quotation 
systems have become increasingly global in scope such that the 
distinction between systems that distribute quotations primarily in the 
United States and those that distribute quotations primarily in foreign 
countries is no longer a meaningful or workable distinction because 
most third-party quotation systems no longer serve a primary 
location.\62\ As a result, under the Commission's proposed 
interpretation, the Commission's previous guidance on U.S. distribution 
of foreign broker-dealers' quotations by third-party systems no longer 
would be limited to third-party systems that distributed their 
quotations primarily in foreign countries under the proposed rule. In 
other words, under the proposed interpretation, U.S. distribution of 
foreign broker-dealers' quotations by a third-party system (which did 
not allow securities transaction to be executed between the foreign 
broker-dealer and persons in the U.S. through the system) would not be 
viewed as a form of solicitation, in the absence of other contacts with 
U.S. investors initiated by the third-party system or the foreign 
broker-dealer.
---------------------------------------------------------------------------

    \62\ Cf. 1997 Staff Letter.
---------------------------------------------------------------------------

    The Commission seeks comment regarding whether retaining the 
proposed Unsolicited Trades exemption in paragraph (a)(1) is 
appropriate. Are any modifications to this exemption necessary to 
reflect increasing internationalization in securities markets and 
advancements in technology and communication services since the 
exemption was adopted in 1989? Commenters are invited to provide 
information on the specific circumstances in which foreign broker-
dealers use the exemption in paragraph (a)(1) of the current rule and 
particularly on the frequency of its use. The Commission also seeks 
comment on its proposed interpretation with respect to third-party 
quotation systems under the proposed rule. Are there other interpretive 
issues relating to third-party

[[Page 39188]]

quotation systems, or proprietary quotation systems, that the 
Commission should address? Is guidance needed under the Commission's 
interpretation of solicitation for other entities, such as third-party 
or proprietary systems that provide indications of interest, for 
purposes of the proposed amendments of Rule 15a-6?
    Because one of the requirements for being an alternative trading 
system under Regulation ATS \63\ is to be registered as a broker-dealer 
under Section 15(b) of the Exchange Act, a foreign broker-dealer 
relying on an exemption in proposed Rule 15a-6 would not be eligible to 
rely on the exemption in Regulation ATS. The Commission solicits 
comment on whether it should consider amending Regulation ATS to allow 
a foreign broker-dealer relying on an exemption in proposed Rule 15a-6 
to operate an alternative trading system in the United States so long 
as it otherwise complies with the terms of Regulation ATS.
---------------------------------------------------------------------------

    \63\ See 17 CFR 242.300 et seq.
---------------------------------------------------------------------------

C. Provision of Research Reports

    The provision of research to investors also may constitute 
solicitation by a broker-dealer, in part because broker-dealers often 
provide research to customers on a non-fee basis, with the expectation 
that the customers eventually will trade through the broker-dealer.\64\ 
As we noted in adopting Rule 15a-6, the Commission does not wish to 
restrict the ability of U.S. investors to obtain foreign research 
reports in the United States if adequate regulatory safeguards are 
present.\65\ Therefore, the Commission would retain the current 
exemption for the provision of research reports in paragraph (a)(2) of 
the current rule. However, for the reasons discussed above,\66\ the 
Commission is proposing to expand the class of investors to which the 
foreign broker-dealer could provide research reports directly from 
major U.S. institutional investors to qualified investors. As proposed, 
paragraph (a)(2) would permit a foreign broker-dealer, subject to the 
conditions discussed below, to furnish research reports to qualified 
investors and effect transactions in the securities discussed in the 
research reports with or for those qualified investors.
---------------------------------------------------------------------------

    \64\ See 1989 Adopting Release, 54 FR at 30021.
    \65\ See id.
    \66\ See Part III.A., supra.
---------------------------------------------------------------------------

    Paragraph (a)(2) of the proposed rule would retain the conditions 
in current Rule 15a-6(a)(2), modified solely to reflect the proposed 
expansion of the class of investors to qualified investors. 
Specifically, proposed paragraph (a)(2) would be available, provided 
that: (1) The research reports do not recommend the use of the foreign 
broker-dealer to effect trades in any security; (2) the foreign broker-
dealer does not initiate contact with the qualified investors to follow 
up on the research reports and does not otherwise induce or attempt to 
induce the purchase or sale of any security by the qualified investors; 
(3) if the foreign broker-dealer has a relationship with a registered 
broker-dealer that satisfies the requirements of paragraph (a)(3) of 
the proposed rule, any transactions with the foreign broker-dealer in 
securities discussed in the research reports are effected pursuant to 
the provisions of paragraph (a)(3); and (4) the foreign broker-dealer 
does not provide research to U.S. persons pursuant to any express or 
implied understanding that those U.S. persons will direct commission 
income to the foreign broker-dealer. 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.
    If these conditions are met, the Commission proposes to allow the 
foreign broker-dealer to effect transactions in the securities 
discussed in a research report at the request of a qualified investor. 
The Commission believes that, under the proposed conditions, the direct 
distribution of research to qualified investors would be consistent 
with the free flow of information across national boundaries without 
raising substantial investor protection concerns.\67\
---------------------------------------------------------------------------

    \67\ See 1989 Adopting Release, 54 FR at 30021.
---------------------------------------------------------------------------

    The Commission seeks comment on the proposed ``Research Reports'' 
exemption in paragraph (a)(2). Should any of the conditions of the 
current exemption be changed to address the proposed expansion of the 
class of institutional investors to which research reports may be 
distributed directly, or to reflect increasing internationalization in 
securities markets and advancements in technology and communication 
services since the exemption was adopted in 1989? If so, how? 
Similarly, should any of the conditions of the current exemption be 
changed to more closely align with the proposed modifications to the 
requirements of paragraph (a)(3) discussed below in Part III.D.? If so, 
how? Commenters are invited to provide information on the specific 
circumstances in which foreign broker-dealers use the exemption in 
paragraph (a)(2) of the current rule and on the frequency of its use.

D. Solicited Trades

    The proposed rule would significantly revise the conditions under 
which a foreign broker-dealer could induce or attempt to induce the 
purchase or sale of a security by certain U.S. investors under 
paragraph (a)(3) of Rule 15a-6. Overall, and as discussed more fully 
below, the proposed rule would reduce and streamline the obligations of 
the U.S. registered broker-dealer in connection with these transactions 
and, in certain situations, permit a foreign broker-dealer to provide 
full-service brokerage by effecting securities transactions on behalf 
of qualified investors and maintaining custody of qualified investor 
funds and securities relating to any resulting transactions.
1. Customer Relationship
    The proposed rule would require a foreign broker-dealer that 
induces or attempts to induce the purchase or sale of any security by a 
qualified investor to engage a U.S. registered broker-dealer under one 
of two exemptive approaches, to which we will refer as Exemption (A)(1) 
and Exemption (A)(2), corresponding to paragraphs (a)(3)(iii)(A)(1) and 
(A)(2) of the proposed rule.\68\ As explained below, under both 
proposed exemptions, the U.S. registered broker-dealer would have fewer 
obligations than under paragraph (a)(3) of the current rule and the 
foreign broker-dealer would correspondingly be permitted to play a 
greater role in effecting any resulting transactions. Both proposed 
exemptions would allow qualified investors the more direct contact they 
seek with those expert in foreign markets and foreign securities, 
without certain barriers such as the chaperoning requirements that may 
be unnecessary in light of other protections and investor 
sophistication. Nevertheless, as explained below, both proposed 
exemptions would retain important measures of investor protection that 
the Commission believes would, among other things, address the 
potential risks to qualified investors related to contacts with foreign 
associated persons with a disciplinary history and ensure that the 
books and records related to transactions for U.S. investors are 
available to the Commission.
---------------------------------------------------------------------------

    \68\ See proposed Rule 15a-6(a)(3)(iii)(A).

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[[Page 39189]]

    There are two primary differences between the two proposed 
exemptive approaches. First, Exemption (A)(1) could only be used by 
foreign broker-dealers that conduct a ``foreign business,'' \69\ while 
Exemption (A)(2) could be used by all foreign broker-dealers. Second, 
the foreign broker-dealer would be permitted to custody funds and 
securities of qualified investors in connection with resulting 
transactions under Exemption (A)(1), but not under Exemption (A)(2). 
These distinctions are discussed in the following paragraphs.
---------------------------------------------------------------------------

    \69\ See Part III.D.1.a.ii., infra, for discussion of ``foreign 
business.''
---------------------------------------------------------------------------

a. Exemption (A)(1)
i. Role of the U.S. Registered Broker-Dealer
    For transactions effected by a foreign broker-dealer pursuant to 
proposed Exemption (A)(1),\70\ a U.S. registered broker-dealer would be 
required to maintain copies of all books and records, including 
confirmations and statements issued by the foreign broker-dealer to the 
qualified investor, relating to any such transactions.\71\ As discussed 
below, the proposed rule would allow such books and records to be 
maintained by the U.S. registered broker-dealer in the form, manner and 
for the periods prescribed by the foreign securities authority (as 
defined in Section 3(a)(50) of the Exchange Act) \72\ regulating the 
foreign broker-dealer.\73\ The proposed rule would give the term 
``foreign securities authority'' the same meaning as set forth in 
Section 3(a)(50) of the Exchange Act,\74\ which defines ``foreign 
securities authority'' to mean ``any foreign government, or any 
governmental body or regulatory organization empowered by a foreign 
government to administer or enforce its laws as they relate to 
securities matters.''
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    \70\ As mentioned above and discussed more fully below, only 
foreign broker-dealers that conduct a ``foreign business ''would be 
eligible to effect transactions on behalf of qualified investors 
pursuant to Exemption (A)(1).
    \71\ See proposed Rule 15a-6(a)(3)(iii)(A)(1). Of course, this 
would not prevent the U.S. registered broker-dealer from performing 
other aspects of the transaction.
    \72\ 15 U.S.C. 78c(a)(50).
    \73\ See proposed Rule 15a-6(a)(3)(iii)(A)(1). Of course, this 
would not change any books and recordkeeping obligations a U.S. 
registered broker-dealer may have under Exchange Act Rules 17a-3 and 
17a-4 (17 CFR 240.17a-3 and 17a-4).
    \74\ 15 U.S.C. 78c(a)(50).
---------------------------------------------------------------------------

    Because proposed Exemption (A)(1) would allow a foreign broker-
dealer to effect transactions for qualified investors and custody their 
funds and assets, the foreign broker-dealer would generate books and 
records relating to the transactions. Proposed Exemption (A)(1) would 
allow the U.S. registered broker-dealer to maintain such books and 
records with the foreign broker-dealer, provided that the U.S. 
registered broker-dealer makes a reasonable determination that copies 
of any or all of such books and records could be furnished promptly to 
the Commission and promptly provides any such books and records to the 
Commission, upon request.\75\ In making such a determination, the U.S. 
registered broker-dealer would need to consider, among other things, 
the existence of any legal limitations in the foreign jurisdiction that 
might limit the ability of the foreign broker-dealer to disclose 
information relating to transactions conducted pursuant to proposed 
Exemption (A)(1) to the U.S. registered broker-dealer. Proposing to 
require U.S. registered broker-dealers to make a reasonable 
determination that the books and records could be furnished promptly to 
the Commission is designed to ensure that the ability of the Commission 
to obtain copies of the books and records would not be diminished. It 
should also significantly reduce the U.S. registered broker-dealer's 
cost of recordkeeping with respect to transactions effected pursuant to 
this exemption. Thus, the Commission believes that allowing U.S. 
registered broker-dealers to maintain books and records with a foreign 
broker-dealer would appropriately support the Commission's interest in 
the protection of investors--by being designed to ensure that the books 
and records related to transactions for U.S. investors are available to 
the Commission--while avoiding the burden that might be placed on U.S. 
registered broker-dealers under the exemption by requiring the books 
and records to be maintained in the form, manner and for the periods 
prescribed by Rules 17a-3 and 17a-4 under the Exchange Act,\76\ as if 
the U.S. registered broker-dealer had effected the transactions under 
proposed Exemption (A)(1).
---------------------------------------------------------------------------

    \75\ See Exchange Act Release No. 44992 (Oct. 26, 2001), 66 FR 
55818, 55825 & n.72 (Nov. 2, 2001) (``Generally, requests for 
records which are readily available at the office (either on-site or 
electronically) should be filled on the day the request is made. If 
a request is unusually large or complex, then the firm should 
discuss with the regulator a mutually agreeable time-frame for 
production. * * * Valid reasons for delays in producing the 
requested records do not include the need to send the records to the 
firm's compliance office for review prior to providing the 
records.'').
    \76\ See 17 CFR 240.17a-3 and 17a-4.
---------------------------------------------------------------------------

    Unlike under the current rule, under Exemption (A)(1), the 
intermediating U.S. registered broker-dealer would not be required to 
effect all aspects of the transaction.\77\ Thus, with respect to 
transactions effected pursuant to Exemption (A)(1), the intermediating 
U.S. registered broker-dealer would no longer be required to comply 
with the provisions of the federal securities laws, the rules 
thereunder and SRO rules applicable to a broker-dealer effecting a 
transaction in securities, unless it were otherwise involved in 
effecting the transaction.\78\ However, if a foreign broker-dealer 
effects a transaction pursuant to Exemption (A)(1) on a U.S. national 
securities exchange, through a U.S. alternative trading system, or with 
a market maker or an over-the-counter dealer in the United States, as 
is common with respect to U.S. securities, a U.S. registered broker-
dealer would be involved in effecting the transaction and would be 
required to comply with the provisions of the federal securities laws, 
the rules thereunder and SRO rules applicable to such activity. In 
other words, such provisions would apply with respect to all 
transactions in U.S. securities under Exemption (A)(1) other than 
certain over-the-counter transactions that a foreign broker-dealer does 
not effect by or through a U.S. registered broker-dealer.
---------------------------------------------------------------------------

    \77\ See 17 CFR 240.15a-6(a)(3)(iii)(A) (requiring the U.S. 
registered broker-dealer to effect all aspects of a transaction 
other than negotiation of its terms) and proposed Rule 15a-
6(a)(3)(iii)(A)(1); see also note 28, supra, for a discussion of the 
differing treatment of U.S. and foreign securities under current 
Rule 15a-6(a)(3)(iii)(A)(1).
    \78\ See note 28, supra, for a discussion of the differing 
treatment of U.S. and foreign securities under current Rule 15a-
6(a)(3)(iii)(A)(1).
---------------------------------------------------------------------------

    The intermediating U.S. registered broker-dealer also would no 
longer be required to extend or arrange for the extension of credit, 
issue confirmations and account statements, comply with Rule 15c3-1 
with respect to the transactions, or receive, deliver and safeguard 
funds and securities in connection with the transactions in compliance 
with Rule 15c3-3.\79\ In addition, the intermediating U.S. registered 
broker-dealer would no longer be required to maintain accounts for the 
customers of foreign broker-dealers relying on Exemption (A)(1),\80\ or 
comply with the requirements applicable to broker-dealers that maintain 
such accounts. As a result, among other requirements, the U.S. 
registered broker-dealer may not have obligations under Exchange Act 
Rule 17a-8 \81\ with respect to customers of foreign broker-dealers 
relying on Exemption (A)(1). Rule 17a-8 requires a

[[Page 39190]]

U.S. registered broker-dealer to comply with the reporting, 
recordkeeping and record retention requirements in regulations 
implemented under the Bank Secrecy Act.\82\ As discussed above, current 
Rule 15a-6 permits an unregistered foreign broker-dealer to effect 
transactions directly with U.S. persons on an unsolicited basis,\83\ 
and to solicit certain U.S. institutional investors by means of 
research reports and effect transactions in securities discussed in 
such reports, subject to certain conditions,\84\ in either case without 
intermediation by a U.S. registered broker-dealer subject to Rule 17a-
8. Would permitting a foreign broker-dealer to effect securities 
transactions on a solicited basis with certain U.S. persons under 
proposed Exemption (A)(1) present any concerns with respect to Rule 
17a-8 or anti-money laundering obligations under the Bank Secrecy Act? 
How should these concerns, if any, be addressed? For example, are there 
specific circumstances in which the Commission should consider imposing 
additional obligations on the U.S. registered broker-dealer or the 
foreign broker-dealer under proposed Exemption (A)(1) or alternatively 
prohibiting the use of Exemption (A)(1)?
---------------------------------------------------------------------------

    \79\ See 17 CFR 240.15a-6(a)(3)(iii)(A)(1), (2), (3), (4) and 
(5) and the discussion in Part II.C., supra.
    \80\ See text accompanying note 38, supra.
    \81\ 17 CFR 240.17a-8.
    \82\ Currency and Foreign Transactions Reporting Act of 1970 
(commonly referred to as the Bank Secrecy Act). See 31 U.S.C. 5311 
et seq., 12 U.S.C. 1829b and 12 U.S.C. 1951-1959. The Secretary of 
the U.S. Department of Treasury has delegated responsibility for the 
administration of the Bank Secrecy Act to the Director of the 
Financial Crimes Enforcement Network (``FinCEN''), a bureau of the 
U.S. Department of Treasury. See Treasury Order 180-01 (Sep. 26, 
2002).
    \83\ See Part II.A., supra.
    \84\ See Part II.B., supra.
---------------------------------------------------------------------------

    The Commission requests comment generally on the proposed 
requirements in Exemption (A)(1) of the proposed rule. In particular, 
the Commission requests comment on whether the Commission should 
require the U.S. registered broker-dealer to comply with any 
requirements with respect to transactions under Exemption (A)(1) other 
than the proposed requirement to maintain books and records relating to 
the transactions. Should the requirements differ based on whether the 
securities are U.S. securities or foreign securities? If so, why and 
how? The Commission also requests comment on whether the Commission 
should require the U.S. registered broker-dealer to maintain books and 
records relating to the transactions in the form, manner and for the 
periods prescribed by Rules 17a-3 and 17a-4 under the Exchange Act as 
if the U.S. registered broker-dealer had effected the transactions 
under Exemption (A)(1). In addition, the Commission requests comment on 
whether the Commission should permit the U.S. registered broker-dealers 
to maintain copies of books and records resulting from transactions 
under paragraph Exemption (A)(1) with the foreign broker-dealer. Should 
it depend on the adequacy of the books and recordkeeping requirements 
to which the foreign broker-dealer is subject? Should the Commission 
provide more guidance on or should the proposed rule provide parameters 
for what would constitute a reasonable determination? In lieu of the 
proposed requirement of a reasonable determination by the U.S. 
registered broker-dealer under Exemption (A)(1), should the Commission 
condition the exemption on the foreign broker-dealer filing a written 
undertaking with the Commission to furnish the books and records to the 
U.S. registered broker-dealer or the Commission upon request?
    Furthermore, the Commission requests comment on whether the 
requirement under Exemption (A)(1) that the U.S. registered broker-
dealer make a reasonable determination that books and records relating 
to any resulting transactions could be furnished promptly to the 
Commission upon request, and promptly provide such books and records to 
the Commission upon request, is the appropriate standard given the 
potential time-zone differences and the fact that such records may be 
maintained in paper form. If not, what is the appropriate standard and 
why?
ii. Role of the Foreign Broker-Dealer
    The proposed rule would limit the availability of Exemption (A)(1) 
to foreign broker-dealers that are regulated for conducting securities 
activities (such as effecting transactions in securities), including 
the specific activities in which the foreign broker-dealer engages with 
the qualified investor, in a foreign country by a foreign securities 
authority.\85\ This requirement is designed to ensure that only foreign 
entities that are legitimately in the business of conducting securities 
activities (such as effecting transactions in securities), and that are 
regulated in the conduct of those activities, could rely on Exemption 
(A)(1).
---------------------------------------------------------------------------

    \85\ See proposed Rule 15a-6(b)(2)(i).
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    Both Exemption (A)(1) and Exemption (A)(2) would require the 
foreign broker-dealer to disclose to the qualified investor that it is 
regulated by a foreign securities authority and not by the Commission. 
Unlike under Exemption (A)(2), for the reasons discussed below,\86\ the 
foreign broker-dealer operating under proposed Exemption (A)(1) would 
also be required to disclose that U.S. segregation requirements (e.g., 
the requirement that customer funds and assets be segregated from the 
broker-dealer's own proprietary funds and assets), U.S. bankruptcy 
protections (e.g., preference to creditors in bankruptcy) and 
protections under the Securities Investor Protection Act (``SIPA'') 
\87\ will not apply to any funds and securities of the qualified 
investor held by the foreign broker-dealer.\88\
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    \86\ See Part III.D.b.ii., infra.
    \87\ 15 U.S.C. 78aaa et seq. The SIPA created the Securities 
Investor Protection Corporation (``SIPC''), a nonprofit, private 
membership corporation to which most registered brokers and dealers 
are required to belong, and established a fund administered by SIPC 
designed to protect the customers of brokers or dealers subject to 
the Act from loss in case of financial failure of the member.
    \88\ See proposed Rule 15a-6(a)(3)(i)(D)(1) and (2).
---------------------------------------------------------------------------

    These disclosure requirements are intended to help to put qualified 
investors on notice that foreign broker-dealers operating pursuant to 
Exemption (A)(1) of the proposed rule would not be subject to the same 
regulatory requirements as U.S. registered broker-dealers. This notice 
would be important because the proposed rule would eliminate the 
current chaperoning requirements, as described below, and allow a 
foreign broker-dealer to effect transactions on behalf of qualified 
investors and custody qualified investor funds and securities relating 
to any resulting transactions with more limited participation in the 
transactions by a U.S. registered broker-dealer. This should be 
sufficient notice given the level of sophistication of the investors 
with which the foreign broker-dealer would be engaging in transactions 
under Exemption (A)(1). Specifically, proposing to require disclosure 
that the foreign broker-dealer is regulated by a foreign securities 
authority and not the Commission should alert qualified investors that 
the foreign broker-dealer would not be subject to the full scope of the 
Commission's broker-dealer regulatory framework. Proposing to require 
disclosure that U.S. segregation requirements, U.S. bankruptcy 
protection and protections under the SIPA would not apply to the funds 
and securities of the qualified investor held by the foreign broker-
dealer should alert the qualified investor that its funds and assets 
would not receive the same protections that they would under U.S. law.
    Exemption (A)(1) would only be available to foreign broker-dealers 
that

[[Page 39191]]

conduct a ``foreign business.'' \89\ As explained below, the proposed 
rule would define ``foreign business'' to mean the business of a 
foreign broker-dealer with qualified investors and foreign resident 
clients \90\ where at least 85% of the aggregate value of the 
securities purchased or sold in transactions conducted pursuant to both 
paragraphs (a)(3) and (a)(4)(vi) of the proposed rule by the foreign 
broker-dealer, calculated on a rolling two-year basis, is derived from 
transactions in foreign securities, as defined below.\91\ In general, 
the Commission believes that making Exemption (A)(1) available only to 
a foreign broker-dealer conducting a foreign business would provide 
U.S. investors increased access to foreign securities and markets 
without creating opportunities for regulatory arbitrage vis-[aacute]-
vis U.S. securities markets because the foreign broker-dealer's 
business in U.S. securities would be limited.
---------------------------------------------------------------------------

    \89\ See proposed Rule 15a-6(b)(2)(ii).
    \90\ See Part III.E., infra.
    \91\ See proposed Rule 15a-6(b)(3).
---------------------------------------------------------------------------

    The proposed definition of foreign securities would include both 
debt and equity securities of foreign private issuers and debt 
securities of issuers organized or incorporated in the United States 
but where the distribution is wholly outside the United States in 
compliance with Regulation S, as well as certain securities issued by 
foreign governments. The proposed definition is not restricted to 
certain types of securities, rather, to the extent that qualified 
investors are interested in purchasing foreign securities, the 
Commission believes that they should be able to access a broad range of 
foreign securities. The proposed rule would define ``foreign 
securities'' to mean:
    (i) An equity security (as defined in 17 CFR 230.405) of a foreign 
private issuer (as defined in 17 CFR 230.405); \92\
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    \92\ 17 CFR 230.405 defines ``foreign private issuer'' to mean 
any foreign issuer other than a foreign government, except issuers 
that meet the following conditions: (1) More than 50 percent of the 
outstanding voting securities of such issuer directly or indirectly 
owned of record by residents of the United States; and (2) any of 
the following: (i) the majority of the executive officers or 
directors are U.S. citizens or residents; (ii) more than 50 percent 
of the assets of the issuer are located in the United States; or 
(iii) the business of the issuer is administered principally in the 
United States. The rule sets forth guidelines for determining the 
percentage of outstanding voting securities owned of record by 
residents of the United States.
---------------------------------------------------------------------------

    (ii) A debt security (as defined in 17 CFR 230.902) of a foreign 
private issuer (as defined in 17 CFR 230.405);
    (iii) A debt security (as defined in 17 CFR 230.902) issued by an 
issuer organized or incorporated in the United States in connection 
with a distribution conducted solely outside the United States pursuant 
to Regulation S (17 CFR 230.903 et seq.); \93\
---------------------------------------------------------------------------

    \93\ Thus, debt securities of an issuer organized or 
incorporated under the laws of the United States would not qualify 
as ``foreign securities'' if they were offered and sold as part of a 
global offering involving both an offer and sale of the securities 
in the United States and a contemporaneous distribution outside the 
United States. This would be consistent with the purpose of the 
foreign business test, as discussed below.
---------------------------------------------------------------------------

    (iv) A security that is a note, bond, debenture or evidence of 
indebtedness issued or guaranteed by a foreign government (as defined 
in 17 CFR 230.405) that is eligible to be registered with the 
Commission under Schedule B of the Securities Act; and
    (v) A derivative instrument on a security described in subparagraph 
(i), (ii), (iii), or (iv) of this paragraph.\94\
---------------------------------------------------------------------------

    \94\ See proposed Rule 15a-6(b)(5).
---------------------------------------------------------------------------

    The proposed rule would require the foreign broker-dealer to 
compute the absolute value of all transactions pursuant to both 
paragraphs (a)(3) and (a)(4)(vi) of the proposed rule (i.e., without 
netting the transactions) each year to determine the aggregate amount 
for the previous two years. For example, a foreign broker-dealer that 
sold 100 shares of Security A at $10.00 per share and bought 100 shares 
of Security A at $10.00 per share pursuant to paragraphs (a)(3) and 
(a)(4)(vi) of the proposed rule would have an aggregate value of 
securities bought and sold of $2000.00 (or (100 x $10.00) + (100 x 
$10.00)).
    We note that the definition of foreign security would include, 
among other things, derivative instruments on debt and equity 
securities of foreign private issuers. Given that the proposed rule 
would provide an exemption for foreign broker-dealers that effect 
transactions in securities, the proposed definition of ``foreign 
securities'' would not include derivative instruments that are not 
themselves securities. Thus, foreign broker-dealers would not need to 
include the value of swap agreements that meet the definition of ``swap 
agreement'' in Section 206A of the Gramm-Leach-Bliley Act (``GLBA'') in 
the foreign business test calculation because they are excluded from 
the definition of security.\95\ In the case of other derivative 
instruments that are securities, the valuation would depend on the 
product. For example, the value of options on a security or group or 
index of securities bought or sold would be the premium paid by the 
buyer, not the value of the underlying security or securities. 
Similarly, the value of a security future would be the price times the 
number of securities to be delivered at the time the transaction is 
entered into.
---------------------------------------------------------------------------

    \95\ The GLBA defines ``swap agreement,'' in part, as an 
agreement between eligible contract participants (as defined in 
Section 1a(12) of the Commodity Exchange Act), the material terms of 
which (other than price and quantity) are subject to individual 
negotiation. Swap agreements may be based on a wide range of 
financial and economic interests. Section 206B of the GLBA defines 
``security-based swap agreement'' as a swap agreement of which ``a 
material term is based on the price, yield, value, or volatility of 
any security or any group or index of securities, or any interest 
therein.'' Section 3A of the Exchange Act excludes from the 
definition of security both security-based swap agreements and 
``non-security-based swap agreements.'' The Commission retains, 
however, antifraud authority (including authority over insider 
trading) over security-based swap agreements. See, e.g., Section 
10(b) of the Exchange Act.
---------------------------------------------------------------------------

    Foreign broker-dealers should be able to use this valuation 
information to calculate the total, combined value of the securities 
purchased or sold in transactions conducted pursuant to both paragraphs 
(a)(3) and (a)(4)(vi) of the proposed rule to determine the percentage 
of foreign securities bought from, or sold to, U.S. investors.
    The calculation of the composition of the foreign broker-dealer's 
business on a rolling, two-year basis would mean that, after the first 
year the foreign broker-dealer relies on the exemption, the foreign 
broker-dealer would calculate the aggregate value of securities 
purchased and sold for the prior two years to determine whether it has 
complied with the foreign business test to be eligible for proposed 
Exemption (A)(1). This proposed requirement would allow for short-term 
fluctuations that otherwise could cause a foreign broker-dealer to be 
out of compliance with the exemption on isolated occasions. A foreign 
broker-dealer would have the flexibility to elect to use a calendar 
year or the firm's fiscal year for purposes of complying with the 
foreign business test. In addition, to provide foreign broker-dealers 
sufficient time to obtain and verify the relevant aggregate value data, 
the proposed rule would allow foreign broker-dealers to rely on the 
calculation made for the prior year for the first 60 days of a new 
year.\96\ Hence, a foreign broker-dealer that had a foreign business 
over years 1 and 2 would be deemed to have a foreign business for the 
first 60 days of year 4, regardless of the result of the calculation 
for year 3. We believe that 60 days would be an appropriate ``grace 
period'' because it would give a foreign broker-dealer time to make the 
necessary calculation and to cease relying on Exemption (A)(1) if the 
calculation revealed that it was no longer conducting a foreign 
business.
---------------------------------------------------------------------------

    \96\ See proposed Rule 15a-6(b)(3).
---------------------------------------------------------------------------

    Making Exemption (A)(1) available only to a foreign broker-dealer

[[Page 39192]]

conducting a foreign business would provide U.S. investors increased 
access to foreign securities and foreign markets without creating 
opportunities for regulatory arbitrage vis-[aacute]-vis U.S. securities 
markets because the foreign broker-dealer's business in U.S. securities 
would be limited. We believe this is particularly important because, 
under Exemption (A)(1), for the first time, a foreign broker-dealer 
would be able to provide full-service brokerage services (including 
maintaining custody of funds and securities from resulting 
transactions) to certain U.S. investors.
    We are proposing an 85% percent threshold for determining whether a 
foreign broker-dealer conducts a foreign business because we understand 
from industry representatives that foreign broker-dealers currently 
effect transactions pursuant to paragraph (a)(3) of Rule 15a-6 
primarily in foreign securities and only do a small percentage of 
business in U.S. securities (less than 10%, by most estimates). The 
Commission has not been given any indication that foreign broker-
dealers would seek to use an expanded exemption to increase their 
business in U.S. securities. The 85% threshold should accommodate 
existing business models and allow foreign broker-dealers to continue 
to do a limited amount of business in U.S. securities, whether as an 
accommodation to their clients or as part of program trading (i.e., any 
trading strategy involving the related purchase or sale of a group of 
stocks as part of a coordinated trading strategy, which could include 
U.S. securities), without causing those foreign broker-dealers to lose 
the benefit of the exemption. Any lower threshold could allow a foreign 
broker-dealer to conduct significant business in U.S. securities with 
certain U.S. investors without being subject to the full scope of the 
Commission's broker-dealer regulatory framework. This, in turn, could 
hinder the ability of the Commission to protect investors, maintain 
fair, orderly and efficient markets and facilitate capital 
formation,\97\ as well as affect the competitive positions of U.S. 
registered broker-dealers and foreign broker-dealers.\98\
---------------------------------------------------------------------------

    \97\ See Exchange Act Section 2, 15 U.S.C. 78b.
    \98\ See Exchange Act Section 3(f); see also Part VI.C., infra.
---------------------------------------------------------------------------

    The Commission seeks comment on proposed Exemption (A)(1) 
generally. We invite comment on the proposed limitation of foreign 
broker-dealers to those that are regulated for conducting securities 
activities by a foreign securities authority and that conduct a foreign 
business. The Commission also seeks comment on whether the proposed 
disclosures provide appropriate notice to qualified investors that 
foreign broker-dealers would not be subject to the same regulatory 
requirements as U.S. registered broker-dealers. Would notice be 
sufficient? Are there other disclosures that should be required, in 
particular if the foreign jurisdiction does not require the segregation 
of qualified investor funds and assets or provide for bankruptcy 
protection for those funds and assets? Should the foreign broker-dealer 
be required to identify the foreign securities authority or authorities 
regulating the foreign broker-dealer? Should disclosure of the 
applicable dispute resolution system be required? In addition, the 
Commission requests comment regarding the proposed required form of 
these disclosures. Should the proposed disclosures be eliminated or 
modified in any way? If so, how and why?
    The Commission solicits comment on the proposed definition of 
foreign broker-dealer. Should the proposed rule require a foreign 
broker-dealer to be regulated for conducting securities activities, 
including the specific activities in which the foreign broker or dealer 
engages with the qualified investor, in a foreign country by a foreign 
securities authority? What if foreign securities authorities do not 
apply their regulations to the activities of their broker-dealers 
outside their country or with non-residents? The Commission also seeks 
comment on the proposed definition of foreign securities.\99\ Are there 
any other types of securities that should be included within the 
definition? Should any types of securities be excluded? Will reference 
to the equity and debt securities of a ``foreign private issuer,'' as 
that term is defined in 17 CFR 230.405, affect the interest of foreign 
issuers to cross-list on both foreign and U.S. exchanges? If so, how? 
Furthermore, will reference to the equity and debt securities of a 
``foreign private issuer,'' as that term is defined in 17 CFR 230.405, 
affect listings of American Depositary Receipts issued by depositaries 
against the deposit of the securities of foreign issuers on U.S. 
exchanges? If so, how?
---------------------------------------------------------------------------

    \99\ See proposed Rule 15a-6(b)(5).
---------------------------------------------------------------------------

    The Commission seeks comment on the proposed definition of 
``foreign business.'' \100\ Would the proposed test be workable? Would 
it be relatively easy for foreign broker-dealers to make the foreign 
business test calculation? Should the proposed test apply separately to 
debt and equity securities? Should the proposed test exclude U.S. 
government securities from the percentage of business in U.S. 
securities for purposes of computing the threshold? Is the proposed 
method of valuing options and security futures appropriate? Should we 
provide examples of how to value other types of derivative instruments?
---------------------------------------------------------------------------

    \100\ See proposed Rule 15a-6(b)(3).
---------------------------------------------------------------------------

    The Commission requests comment on whether the proposed 85% 
threshold would be sufficient to enable foreign broker-dealers to 
effect transactions in U.S. securities as an accommodation and engage 
in program trading with qualified investors. Would compliance with the 
threshold be easily determinable? Should it be raised or lowered to 
better protect against regulatory arbitrage or to achieve its stated 
purposes? Commenters suggesting a different threshold or a different 
method for determining compliance with the threshold should explain why 
the Commission should choose that threshold or method. Instead of 
requiring foreign broker-dealers to conduct a ``foreign business,'' 
should Exemption (A)(1) of the proposed rule instead permit foreign 
broker-dealers to effect transactions in foreign securities and U.S. 
government securities, with a limited exemption for the purchase of 
U.S. securities by qualified persons as part of a program trade, 
provided that the purchase or sale of foreign securities predominates?
b. Exemption (A)(2)
    Proposed Exemption (A)(2) is designed to be used by foreign broker-
dealers that would like to solicit transactions from qualified 
investors that have accounts, and custody their funds and securities, 
with U.S. registered broker-dealers. Because we expect that qualified 
investors would likely select a foreign broker-dealer for its knowledge 
of local markets and/or its ability to execute trades in particular 
markets, as they would under Exemption (A)(1), but the foreign broker-
dealer would not be acting as custodian of the funds and securities of 
the qualified investor (i.e., not acting as a full-service broker), we 
do not believe it would be necessary for Exemption (A)(2) to include 
certain of the requirements proposed to be included in Exemption 
(A)(1), particularly the proposed requirement that the foreign broker-
dealer conduct a foreign business, as described above.
i. Role of the U.S. Registered Broker-Dealer
    Under Exemption (A)(2), the U.S. registered broker-dealer would be 
responsible for maintaining books and

[[Page 39193]]

records, including copies of all confirmations issued by the foreign 
broker-dealer to the qualified investor, relating to any transactions 
effected under this exemption.\101\ This requirement is designed to 
ensure that the Commission would have access to books and records 
relating to resulting transactions, as well as copies of confirmations 
issued by the foreign broker-dealer to the qualified investor. Because 
the U.S. registered broker-dealer would carry the account of the 
qualified investor under Exemption (A)(2), we understand from 
discussions with industry representatives that it would be consistent 
with current business practices for the U.S. registered broker-dealer 
to maintain the books and records for transactions effected under this 
exemption.
---------------------------------------------------------------------------

    \101\ See proposed Rule 15a-6(a)(3)(iii)(A)(2)(i).
---------------------------------------------------------------------------

    Proposed Exemption (A)(2) would also require the U.S. registered 
broker-dealer to receive, deliver and safeguard funds and securities in 
connection with the transactions on behalf of the qualified investor in 
compliance with Rule 15c3-3 under the Exchange Act.\102\ As explained 
below, Exemption (A)(2) is designed to permit qualified investors that 
have an account with a U.S. registered broker-dealer to have access to 
foreign broker-dealers regardless of the types of securities that are 
involved.\103\
---------------------------------------------------------------------------

    \102\ 17 CFR 240.15c3-3. See proposed Rule 15a-
6(a)(3)(iii)(A)(2)(ii). Securities received and safeguarded under 
Exemption (A)(2) would be securities carried for the account of a 
customer under Rule 15c3-3(a)(2). 17 CFR 240.15c3-3(a)(2).
    \103\ Under Exemption (A)(2), the foreign broker-dealer would be 
permitted to clear and settle the transactions on behalf of the U.S. 
registered broker-dealer. The Commission believes that this is 
appropriate for transactions effected under Exemption (A)(2) for 
investors that possess the sophistication of qualified investors, 
particularly given that the exemption would require a U.S. 
registered broker-dealer to maintain books and records and receive, 
deliver and safeguard funds and securities in connection with the 
transactions.
---------------------------------------------------------------------------

    Unlike under the current rule, under Exemption (A)(2), the 
intermediating U.S. registered broker-dealer would not be required to 
effect the transaction.\104\ Thus, with respect to transactions 
effected pursuant to Exemption (A)(2), the intermediating U.S. 
registered broker-dealer would no longer be required to comply with the 
provisions of the federal securities laws, the rules thereunder and SRO 
rules applicable to a broker-dealer effecting a transaction in 
securities, unless it were otherwise involved in effecting the 
transaction.\105\ However, if a foreign broker-dealer effects a 
transaction pursuant to Exemption (A)(2) on a U.S. national securities 
exchange, through a U.S. alternative trading system, or with a market 
maker or an over-the-counter dealer in the United States, as is common 
with respect to U.S. securities, a U.S. registered broker-dealer would 
be involved in effecting the transaction and would be required to 
comply with the provisions of the federal securities laws, the rules 
thereunder and SRO rules applicable to such activity. In other words, 
such provisions would apply with respect to all transactions in U.S. 
securities under Exemption (A)(2) other than certain over-the-counter 
transactions that a foreign broker-dealer does not effect by or through 
a U.S. registered broker-dealer.
---------------------------------------------------------------------------

    \104\ See 17 CFR 240.15a-6(a)(3)(iii)(A) (requiring the U.S. 
registered broker-dealer to effect all aspects of a transaction 
other than negotiation of its terms) and proposed Rule 15a-
6(a)(3)(iii)(A)(2); see also note 28, supra, for a discussion of the 
differing treatment of U.S. and foreign securities under current 
Rule 15a-6(a)(3)(iii)(A)(1).
    \105\ See note 28, supra, for a discussion of the differing 
treatment of U.S. and foreign securities under current Rule 15a-
6(a)(3)(iii)(A)(1).
---------------------------------------------------------------------------

ii. Role of the Foreign Broker-Dealer
    A foreign broker-dealer relying on Exemption (A)(2) would not be 
permitted to maintain custody of qualified investor funds and 
securities relating to any resulting transactions. Because of this 
limitation, Exemption (A)(2) would be available to all foreign broker-
dealers and not just those that conduct a foreign business. Because 
entities that meet the definition of foreign broker-dealer under the 
proposed rule could not operate full-service brokerage under this 
exception, we believe that there is less risk of regulatory arbitrage.
    Like Exemption (A)(1), Exemption (A)(2) would only be available to 
foreign broker-dealers that are regulated for conducting securities 
activities, including the specific activities in which the foreign 
broker-dealer engages with the qualified investor, in a foreign country 
by a foreign securities authority.\106\ This requirement is designed to 
ensure that only foreign entities that are legitimately in the business 
of conducting securities activities (such as effecting transactions in 
securities), and that are regulated in the conduct of those activities, 
could rely on Exemption (A)(2). In addition, the foreign broker-dealer 
relying on Exemption (A)(2) would be required to disclose to the 
qualified investor that the foreign broker-dealer is regulated by a 
foreign securities authority and not by the Commission. Unlike under 
Exemption (A)(1), however, the foreign broker-dealer relying on 
Exemption (A)(2) would not be required to provide disclosures to the 
qualified investor regarding segregation requirements, bankruptcy 
protections and protections under SIPA. The Commission does not believe 
these disclosures would be necessary given that, under proposed 
Exemption (A)(2), the U.S. registered broker-dealer would be 
maintaining custody of funds and securities of qualified investors in 
connection with the resulting transactions.
---------------------------------------------------------------------------

    \106\ See proposed Rule 15a-6(b)(2)(i).
---------------------------------------------------------------------------

    As noted above, we expect that Exemption (A)(2) would be used by 
qualified investors that would like to access foreign broker-dealers 
but nonetheless would like to have an account, and maintain custody of 
their funds and securities, with a U.S. registered broker-dealer. 
Because a foreign broker-dealer would be selected for its knowledge of 
local markets and/or its ability to execute trades in particular 
markets, but would not be acting as custodian of the funds and 
securities of the qualified investor (i.e., not acting as a full-
service broker), we do not believe it would be necessary for proposed 
Exemption (A)(2) to include certain of the requirements contained in 
proposed Exemption (A)(1), particularly the requirement that the 
foreign broker-dealer conduct a foreign business, as described above.
    The Commission requests comment on proposed Exemption (A)(2) 
generally. How would this exemption likely be used and by whom? Should 
proposed Exemption (A)(2) be available when the U.S. registered broker-
dealer does not maintain custody of the qualified investor's funds and 
securities (e.g., when a U.S. or foreign affiliate of the U.S. 
registered broker-dealer custodies the funds and securities otherwise 
than pursuant to Rule 15c3-3 under the Exchange Act)? \107\
---------------------------------------------------------------------------

    \107\ 17 CFR 240.15c3-3.
---------------------------------------------------------------------------

    The Commission also seeks comment on whether the proposed rule 
should require the U.S. registered broker-dealer to comply with any 
requirements with respect to transactions under Exemption (A)(2) other 
than the proposed requirement to maintain books and records and 
maintain custody of qualified investors' funds and securities relating 
to the transactions. Should the requirements differ based on whether 
the securities are U.S. securities or foreign securities? If so, why?
    In addition, the Commission seeks comment on whether the proposed 
disclosures would provide appropriate notice to qualified investors 
that foreign broker-dealers would not be subject to the same regulatory 
requirements as U.S. registered broker-dealers. Would notice be 
sufficient? Are there are other

[[Page 39194]]

disclosures that should be required? In particular, should the foreign 
broker-dealer be required to identify the foreign securities authority 
or authorities regulating the foreign broker-dealer? Should disclosure 
of the applicable dispute resolution system be required? In addition, 
the Commission requests comment regarding the proposed required form of 
these disclosures. Should the proposed disclosures be eliminated or 
modified in any way? If so, how and why?
    In general, the Commission seeks comment on whether proposed 
Exemption (A)(1) and Exemption (A)(2) alternatives would provide a 
meaningful choice for qualified investors wishing to access foreign 
broker-dealers. What would be the advantages and disadvantages of using 
each alternative?
2. Sales Activities
    Both proposed Exemption (A)(1) and proposed Exemption (A)(2) would 
eliminate the requirements in current Rule 15a-6(a)(3) for foreign 
associated persons \108\ to be accompanied by an associated person of a 
U.S. registered broker-dealer during in-person visits with U.S. 
investors. The proposed rule also would eliminate the current 
requirement for an associated person of a U.S. registered broker-dealer 
to participate in communications between foreign associated persons and 
U.S. investors, whether oral or electronic.
---------------------------------------------------------------------------

    \108\ The proposed rule would retain the definition of ``foreign 
associated person'' that is in paragraph (b)(2) of the current Rule 
15a-6, but would substitute ``qualified investor'' for ``U.S. 
institutional investor or major U.S. institutional investor'' in the 
definition. See proposed Rule 15a-6(b)(1).
---------------------------------------------------------------------------

    From discussions with industry representatives, the staff 
understands that the current chaperoning requirements have been 
criticized as impractical and that they have been viewed as imposing 
unnecessary operational and compliance burdens particularly for 
communications with broker-dealers in time zones outside those of the 
United States. The current rule allows some unchaperoned contacts, in 
part due to the existence of other provisions of the rule that require 
review of ``the background of, foreign personnel who will contact U.S. 
institutional investors.'' \109\ The proposed amendments would retain 
the requirement that the background of foreign personnel be reviewed, 
albeit by the foreign broker-dealer,\110\ but would expand the ability 
of foreign broker-dealers to have unchaperoned contacts. Specifically, 
the proposed rule would not limit a foreign broker-dealer's ability to 
have unchaperoned communications, both oral and electronic, with 
qualified investors, as part of a transaction pursuant to either 
exemption in paragraph (a)(3) of the proposed rule. In addition, the 
proposed rule would provide that a foreign associated person may 
conduct unchaperoned visits to qualified investors within the United 
States, provided that transactions in any securities discussed during 
visits by the foreign associated person with qualified investors are 
effected pursuant to either exemption in paragraph (a)(3) of the 
proposed rule because these transactions would be viewed as being 
solicited.\111\ The Commission believes that increasing the ability of 
foreign broker-dealers to have unchaperoned contacts should provide 
greater flexibility for both investors and industry participants in 
conducting communications and that eliminating the requirement to have 
a U.S. registered broker-dealer present for such communications should 
not result in any significant loss of safeguards for qualified 
investors because of the sophistication and experience standards in the 
definition of qualified investor and the proposed disclosure 
requirements in Exemption (A)(1) and Exemption (A)(2).
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    \109\ See 1988 Proposing Release, 53 FR at 23653.
    \110\ See Proposed Rule 15a-6(a)(3)(i)(B) and (C).
    \111\ See proposed Rule 15a-6(a)(3)(ii).
---------------------------------------------------------------------------

    As noted above, the proposed rule would allow a foreign broker-
dealer to have unchaperoned visits within the United States. Whether a 
foreign associated person's stay in the United States would qualify as 
a ``visit'' for purposes of the proposed rule would be a facts and 
circumstances determination based on factors including, but not limited 
to, the purpose, length and frequency of any stays. The Commission 
proposes to interpret a ``visit'' as one or more trips to the United 
States over a calendar year that do not last more than 180 days in the 
aggregate. The purpose of this proposed limitation regarding visits is 
to prevent foreign broker-dealers from essentially having a permanent 
sales force in the United States, which may result in foreign broker-
dealers essentially conducting a U.S. based business, similar to U.S. 
registered broker-dealers, without appropriate regulatory oversight of 
these foreign broker-dealers. We preliminarily believe that 180 days 
strikes the proper balance between facilitating legitimate foreign 
broker-dealer activity in the United States, such as investment 
banking, and the potential competitive issues with U.S. registered 
broker-dealers and investor protection concerns.
    The Commission requests comment on its proposed interpretation of 
what would constitute a visit. Should the Commission provide a bright-
line definition of what constitutes a ``visit'' or is a more flexible 
approach appropriate? Is it appropriate to interpret ``visit'' as a 
specific number of days in a calendar year that a foreign broker-dealer 
could be in the United States? If so, is 180 days a calendar year 
appropriate? Or would a lower number such as 120, 90, 60, or 30 days a 
calendar year be more appropriate? We also solicit comment on the 
factors for determining what qualifies as a ``visit,'' described above. 
In addition, the Commission requests comment on eliminating the 
chaperoning requirements of the current rule. Are unchaperoned contacts 
between foreign broker-dealers and their associated persons and 
qualified investors appropriate?
3. Establishment of Qualification Standards
    Foreign broker-dealers intending to rely on proposed Rule 15a-
6(a)(3) would need to meet certain qualification requirements.\112\ As 
under the current rule, the foreign broker-dealer would be required to 
provide the Commission, upon request or pursuant to agreement between 
the Commission or the United States and any foreign securities 
authority, information or documents related to the foreign broker-
dealer's activities in inducing or attempting to induce securities 
transactions by qualified investors.\113\ This information would permit 
the Commission to monitor and follow up on transactional activity 
conducted under Rule 15a-6, as necessary and appropriate.
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    \112\ See proposed Rule 15a-6(a)(3)(i).
    \113\ See proposed Rule 15a-6(a)(3)(i)(A) and 17 CFR 240.15a-
6(a)(3)(i)(B).
---------------------------------------------------------------------------

    The proposed rule also would require the foreign broker-dealer to 
determine that its associated persons that effect transactions with 
qualified investors are not subject to a statutory disqualification 
under Section 3(a)(39) of the Exchange Act.\114\ This would be a change 
from the current rule, which requires the U.S. registered broker-dealer 
intermediating the transaction to make this determination.\115\ 
Specifically, current Rule 15a-6(a)(3)(ii)(B) requires a U.S. 
registered broker-dealer to determine that the foreign associated 
persons of a foreign broker-dealer effecting transactions with U.S. 
institutional investors or major U.S. institutional investors are not 
subject to

[[Page 39195]]

a statutory disqualification specified in Section 3(a)(39) of the 
Exchange Act, or certain substantially equivalent foreign disciplinary 
actions. Because of subsequent legislation, the proposed rule would no 
longer separately describe the foreign equivalents of statutory 
disqualification.\116\ The Commission believes shifting the 
responsibility for making the statutory disqualification determination 
would be appropriate because the foreign broker-dealer is in possession 
of the relevant information regarding its foreign associated persons. 
Thus, we believe, as a practical matter, foreign broker-dealers are 
already making this determination so that U.S. registered broker-
dealers can comply with their obligations under the existing rule. As 
discussed below, the proposed rule would require the U.S. registered 
broker-dealer to obtain a representation from the foreign broker-dealer 
that it has made this determination.
---------------------------------------------------------------------------

    \114\ See proposed Rule 15a-6(a)(3)(i)(B).
    \115\ See 17 CFR 240.15a-6(a)(3)(ii)(B).
    \116\ At the time the Commission adopted Rule 15a-6, the 
definition of ``statutory disqualification'' in Section 3(a)(39) did 
not include expulsions, suspensions or other orders under foreign 
statutes or foreign equivalents of U.S. regulatory authorities. The 
International Securities Enforcement Cooperation Act of 1990 amended 
Section 3(a)(39) to include certain foreign conduct and disciplinary 
action in the definition of ``statutory disqualification'', 
including each type of conduct or disciplinary action described in 
paragraphs (a)(3)(ii)(B)(1)(i)-(v), (a)(3)(ii)(B)(2) and 
(a)(3)(ii)(B)(3) of Rule 15a-6. See Pub. L. 101-550, 104 Stat. 2714 
(1990).
---------------------------------------------------------------------------

    Under the current rule, a U.S. registered broker-dealer must 
obtain, with respect to each foreign associated person, information 
specified in Rule 17a-3(a)(12) under the Exchange Act \117\ that 
relates to activities under paragraph (a)(3).\118\ The proposed rule 
would require the foreign broker-dealer to maintain this information in 
its files and make it available upon request by the U.S. registered 
broker-dealer or the Commission.\119\ This information would include 
the foreign associated person's name; address; social security number 
or foreign equivalent; the starting date of employment or other 
association with the foreign broker-dealer; date of birth; a complete, 
consecutive statement of all the foreign associated person's business 
connections for at least the preceding ten years, including whether the 
employment was part-time or full-time; a record of any denial of 
membership or registration, and of any disciplinary action taken, or 
sanction imposed, upon the foreign associated person by any agency, or 
by any securities exchange or securities association, including any 
finding that the foreign associated person was a cause of any 
disciplinary action or had violated any law; a record of any denial, 
suspension, expulsion or revocation of membership or registration of 
any foreign broker-dealer with which the foreign associated person was 
associated in any capacity when such action was taken; a record of any 
permanent or temporary injunction entered against the foreign 
associated person or any foreign broker-dealer with which the foreign 
associated person was associated in any capacity at the time such 
injunction was entered; a record of any arrest or indictment for any 
felony or foreign equivalent, or any misdemeanor or foreign equivalent 
pertaining to securities, commodities, banking, insurance or real 
estate (including, but not limited to, acting or being associated with 
a foreign broker-dealer), fraud, false statements or omissions, 
wrongful taking of property or bribery, forgery, counterfeiting or 
extortion, and the disposition of the foregoing; and a record of any 
other name or names by which the foreign associated person has been 
known or which the foreign associated person has used.\120\
---------------------------------------------------------------------------

    \117\ 17 CFR 240.17a-3(a)(12).
    \118\ See 17 CFR 240.15a-6(a)(3)(iii)(C).
    \119\ See Proposed Rule 15a-6(a)(3)(i)(C).
    \120\ 17 CFR 240.17a-3(a)(12).
---------------------------------------------------------------------------

    The proposed rule would provide that the information kept by the 
foreign broker-dealer as specified in Rule 17a-3(a)(12)(i)(D) \121\ 
must include documentation of sanctions imposed by foreign securities 
authorities, foreign exchanges, or foreign associations, including 
without limitation those described in Section 3(a)(39) of the Exchange 
Act.\122\ The Commission believes shifting the responsibility would be 
appropriate because the foreign broker-dealer is in possession of the 
relevant information regarding its foreign associated persons. Thus, we 
believe, as a practical matter, foreign broker-dealers are already 
making this determination so that U.S. registered broker-dealers can 
comply with their obligations under the existing rule. As discussed 
below, the proposed rule would require the U.S. registered broker-
dealer to obtain a representation from the foreign broker-dealer that 
it is maintaining the required information.
---------------------------------------------------------------------------

    \121\ 17 CFR 240.17a-3(a)(12)(i)(D) (requiring a broker-dealer 
to make and keep current a record of any denial of membership or 
registration, and of any disciplinary action taken, or sanction 
imposed, upon the associated person by any federal or state agency, 
or by any national securities exchange or national securities 
association, including any finding that the associated person was a 
cause of any disciplinary action or had violated any law).
    \122\ See proposed Rule 15a-6(a)(3)(i)(C).
---------------------------------------------------------------------------

    Consistent with the current rule, proposed Rule 15a-6(a)(3) would 
require the U.S. registered broker-dealer to obtain from the foreign 
broker-dealer and each foreign associated person written consent to 
service of process for any civil action brought by or proceeding before 
the Commission or a self-regulatory organization (as defined in Section 
3(a)(26) of the Exchange Act).\123\ The U.S. registered broker-dealer 
would also be responsible for obtaining from the foreign broker-dealer 
a representation that the foreign broker-dealer has determined that any 
foreign associated person of the foreign broker-dealer effecting 
transactions with the qualified investor is not subject to a statutory 
disqualification specified in Section 3(a)(39) of the Act, as required 
by paragraph (a)(3)(i)(B) of the proposed rule and discussed 
above.\124\
---------------------------------------------------------------------------

    \123\ See proposed Rule 15a-6(a)(3)(iii)(B) and 17 CFR 240.15a-
6(a)(3)(iii)(C). As in the current rule, the consent would be 
required to provide that process may be served on them by service on 
the registered broker-dealer in the manner set forth on the 
registered broker's or dealer's current Form BD. This would put 
individuals on notice of the manner in which process would be 
served.
    \124\ See proposed Rule 15a-6(a)(3)(iii)(C).
---------------------------------------------------------------------------

    In addition, the U.S. registered broker-dealer would be responsible 
for obtaining from the foreign broker-dealer a representation that it 
has in its files, and the foreign broker-dealer would make available 
upon request by the U.S. registered broker-dealer or the Commission, 
the types of information specified in Rule 17a-3(a)(12) under the Act, 
as required by paragraph (a)(3)(i)(C) of the proposed rule and 
discussed above.\125\ Finally, the proposed rule would require the U.S. 
registered broker-dealer to maintain records of these written consents 
and representations and, as in the current rule, make these records 
available to the Commission upon request.\126\ These proposed 
requirements are important because they are designed to ensure that the 
Commission would be able to obtain information regarding foreign 
associated persons if it were necessary in the context of an 
investigation into alleged misconduct by a foreign broker-dealer or 
persons associated with the foreign broker-dealer. The Commission 
believes that allowing U.S. registered broker-dealers to rely upon the 
determinations and representations of foreign broker-dealers discussed 
above is a balanced approach that should address the risks

[[Page 39196]]

to qualified investors related to, among other things, contacts with 
foreign associated persons with a disciplinary history.
---------------------------------------------------------------------------

    \125\ See id.
    \126\ See proposed Rule 15a-6(a)(3)(i)(D). The provisions of 
proposed Rules 15a-6(a)(3)(iii)(B) and (D) are similar to paragraphs 
(a)(3)(iii)(D) and (E) of the current rule, although the proposed 
rule would eliminate the requirement under current Rule 15a-
6(a)(3)(iii)(E) that the registered broker-dealer maintain a written 
record of all records in connection with trading activities of the 
qualified investor involving the foreign broker-dealer. This 
requirement is subsumed in other sections of the proposed rule. See 
proposed Rule 15a-6(a)(3)(iii)(A)-(D).
---------------------------------------------------------------------------

    The Commission seeks comment on the qualification standards that 
would apply to foreign broker-dealers and U.S. registered broker-
dealers under the proposed rule. Commenters are invited to discuss 
whether reliance by a U.S. registered broker-dealer upon the 
determinations and representations of a foreign broker-dealer 
appropriately addresses the potential risks to qualified investors 
related to, among other things, contacts with foreign associated 
persons with a disciplinary history. Should any of the responsibilities 
for making the statutory disqualification determinations or obtaining 
consents be shifted? Should the proposed rule require that the foreign 
broker-dealer (or the U.S. registered broker-dealer) determine whether 
the foreign associated persons are subject to statutory 
disqualifications?

E. Counterparties and Specific Customers

    As in the current rule, proposed Rule 15a-6(a)(4) would provide 
exemptions for foreign broker-dealers that effect transactions in 
securities with or for, or induce or attempt to induce the purchase or 
sale of any security, by certain persons, including registered broker-
dealers, certain international banks and bank organizations, certain 
foreign persons temporarily present in the United States and certain 
U.S. persons or groups of U.S. persons abroad. We understand from 
discussions with industry that these exemptions have been workable for 
both foreign broker-dealers and the U.S. entities and we have no 
knowledge of investor protection concerns being raised. Accordingly, we 
do not propose to amend them.
    We do, however, propose to provide an additional exemption for 
transactions with U.S. resident fiduciaries of accounts for ``foreign 
resident clients'' because it is our understanding that foreign 
resident clients would not assume that the broker-dealer through which 
a U.S. resident fiduciary is effecting transactions is regulated by the 
Commission.\127\ The proposed rule would define ``foreign resident 
client'' to mean ``(i) any entity not organized or incorporated under 
the laws of the United States and not engaged in a trade or business in 
the United States for federal income tax purposes; (ii) any natural 
person not a resident for federal income tax purposes; and (iii) any 
entity not organized or incorporated under the laws of the United 
States, 85 percent or more of whose outstanding voting securities are 
beneficially owned by persons in subparagraphs (i) and (ii) of this 
paragraph.'' \128\ Discussions with industry have indicated that these 
are the types of entities that would likely use the proposed exemption. 
We selected the 85 percent threshold to capture foreign entities that 
are predominantly foreign-owned, while accommodating a small amount of 
U.S. ownership.\129\
---------------------------------------------------------------------------

    \127\ Cf. Letter from Catherine McGuire, Chief Counsel, Division 
of Market Regulation, to Giovanni P. Prezioso, Cleary Gottlieb, 
Steen & Hamilton (Jan. 30, 1996).
    \128\ See proposed Rule 15a-6(b)(4).
    \129\ The Commission considers a person to be a control person 
if he or she directly or indirectly has the power to vote 25 percent 
or more of the voting securities or interests of an entity. See, 
e.g., 17 CFR 240.12b-2. The concept of control, which is found in 
all the statutes administered by the Commission, varies to some 
degree between statutes. Although the Exchange Act does not define 
``control,'' Rule 12b-2 under the Exchange Act defines ``control'' 
as ``the possession, direct or indirect, of the power to direct or 
cause the direction of the management and policies of a person, 
whether through the ownership of voting securities, by contract, or 
otherwise.'' This definition has been found to apply to all Exchange 
Act control determinations. In re Commonwealth Oil / Tesoro 
Petroleum Securities Litigation, 484 F. Supp. 253, 268 (W.D. Tex. 
1979) (the right to vote 25 percent or more of the voting securities 
or is entitled to 25 percent or more of the profits is presumed to 
control that company). The 85 percent threshold in proposed 
paragraph (b)(4)(iii) is designed to ensure that entities with U.S. 
control persons would not meet the proposed definition of ``foreign 
resident client.''
---------------------------------------------------------------------------

    For purposes of both the broker-dealer registration provisions of 
the Exchange Act and the proposed exemption provided by Rule 15a-
6(a)(4)(vi), a U.S. resident fiduciary is considered to be a U.S. 
person, regardless of the residence of the owners of the underlying 
accounts. Accordingly, absent an exemption, a foreign broker-dealer 
that induces or attempts to induce a securities transaction with a U.S. 
resident fiduciary would be required either to register with the 
Commission or effect transactions in accordance with Rule 15a-6(a)(3). 
We understand, however, that foreign resident clients of a U.S. 
resident fiduciary reasonably may not expect the U.S. broker-dealer 
regulatory requirements to apply to their transactions in foreign 
securities, in large part simply because the transactions are in 
foreign securities.
    Accordingly, the proposed rule would permit a foreign broker-dealer 
to effect transactions in, or induce or attempt to induce the purchase 
or sale of, securities, with or for any U.S. person, other than a 
registered broker-dealer or a bank acting pursuant to an exception or 
exemption from the definition of ``broker'' or ``dealer,'' \130\ that 
acts in a fiduciary capacity for an account of a foreign resident 
client. Consistent with our understanding of the expectations of 
foreign resident clients of a U.S. resident fiduciary, this proposed 
exemption would be available only to a foreign broker-dealer that 
conducts a foreign business.\131\ As indicated above, this exemption 
would recognize that foreign resident clients would not expect that the 
broker-dealer through which a U.S. resident fiduciary is effecting 
transactions is regulated by the Commission. Moreover, under the 
proposed rule, the foreign broker-dealer would be required to obtain a 
written representation from the U.S. fiduciary that the account is 
managed in a fiduciary capacity for a foreign resident client.\132\ 
This requirement is designed to ensure that the U.S. fiduciary is 
actually managing accounts for foreign resident clients.
---------------------------------------------------------------------------

    \130\ See Sections 3(a)(4)(B), 3(a)(4)(E) and 3(a)(5)(C) of the 
Exchange Act. Foreign broker-dealers that want to effect 
transactions for registered broker-dealers or banks acting pursuant 
to certain exceptions or exemptions from the definition of 
``broker'' or ``dealer'' can do so under the exemption in paragraph 
(a)(4)(i) of Rule 15a-6. See 17 CFR 240.15a-6(a)(4)(i).
    \131\ See proposed Rule 15a-6(b)(2)(ii).
    \132\ See proposed Rule 15a-6(a)(4)(vi)(B).
---------------------------------------------------------------------------

    The Commission seeks comment generally on the exemptions in 
paragraph (a)(4) of the proposed rule for transactions with certain 
U.S. entities. Are there entities or other categories of entities that 
should be included? The Commission particularly seeks comment on the 
proposed exemption for transactions with U.S. fiduciaries of accounts 
for foreign resident clients. Is the requirement that a foreign broker-
dealer conduct a foreign business necessary or appropriate? Should the 
rule apply to U.S. fiduciaries for accounts other than those of foreign 
resident clients? The Commission requests comment on the definition of 
``foreign resident client,'' in general, and the 85 percent foreign 
ownership threshold for entities not organized or incorporated under 
the laws of the United States, in particular. Should it be raised or 
lowered to better protect against regulatory arbitrage or to achieve 
its stated purposes? Commenters suggesting a different threshold or a 
different method for determining compliance with the threshold should 
explain why they would choose that threshold or method.

F. Familiarization With Foreign Options Exchanges

    Over the years, foreign options exchanges have inquired regarding 
the

[[Page 39197]]

permissibility of limited activities designed to familiarize U.S. 
entities that have had prior actual experience with traded options in 
U.S. options markets, such as U.S. registered broker-dealers and 
certain U.S. institutional investors, with the existence and operations 
of, and options on foreign securities traded on, such foreign options 
exchanges. These exchanges have limited the activities conducted by 
their representatives, who may be located in a foreign office or in a 
representative office in the United States, and by their foreign 
broker-dealer members.
1. Exchange Act Section 15(a)
    Because the activities by a representative of a foreign options 
exchange may constitute solicitation,\133\ they raise potential 
registration concerns for foreign broker-dealer participants on the 
exchanges under Section 15(a).\134\ This is in part because the 
activities are undertaken with the expectation that one or more U.S. 
registered broker-dealers or U.S. institutional investors will engage 
in foreign options transactions executed through the exchange, and thus 
trade through one or more foreign broker-dealer members of the 
exchange. Similarly, the activities of a foreign broker-dealer member 
of a foreign options exchange may constitute solicitation under the 
Commission's broad interpretation of solicitation.
---------------------------------------------------------------------------

    \133\ For a discussion of the Commission's broad interpretation 
of solicitation, see Parts II.A. and III.B., supra.
    \134\ The fact that the activities are conducted by the 
exchanges through their representatives does not necessarily 
eliminate the registration concerns of the participants on those 
exchanges. See Exchange Act Section 20(b), 17 U.S.C. 78t(b) (``It 
shall be unlawful for any person, directly or indirectly, to do any 
act or thing which it would be unlawful for such person to do under 
the provisions of this title or any rule or regulation thereunder 
through or by means of any other person'').
---------------------------------------------------------------------------

    The Commission recognizes the role of these activities in making 
certain U.S. investors aware of foreign options markets and the options 
on foreign securities traded on those markets. Accordingly, the 
Commission is proposing a new exemption to provide legal certainty for 
the foreign broker-dealer members and these foreign options exchanges. 
Paragraph (a)(5) of proposed Rule 15a-6 would allow a foreign broker-
dealer that is a member of a foreign options exchange to effect 
transactions in options on foreign securities listed on that exchange 
for a qualified investor that has not otherwise been solicited by the 
foreign broker-dealer.\135\ Under this exemption, a foreign broker-
dealer, a foreign options exchange and representatives of the foreign 
options exchange could conduct certain activities or communicate with a 
qualified investor in a manner that might otherwise be considered a 
form of solicitation, as described below.\136\ Transactions effected by 
or through the foreign broker-dealer with or for qualified investors 
that result from these activities or communications would not require 
registration or compliance with proposed Rule 15a-6(a)(3). However, 
while these activities would not necessarily constitute a form of 
solicitation, the Commission anticipates that given the broad 
interpretation of solicitation, it would be difficult, if not 
impractical, to conduct repeated transactions with the same qualified 
investor without the foreign broker-dealer engaging in some form of 
communication that would constitute solicitation. Therefore, the 
Commission anticipates that most transactions with qualified investors 
resulting from these activities or communications would need to be 
completed pursuant to proposed Rules 15a-6(a)(3).
---------------------------------------------------------------------------

    \135\ See proposed Rule 15a-6(a)(5).
    \136\ See proposed Rules 15a-6(a)(5)(i)-(iii).
---------------------------------------------------------------------------

    Paragraph (a)(5)(i) of proposed Rule 15a-6 would set forth the 
limited activities in which a representative of a foreign options 
exchange located in a foreign office or a representative office in the 
United States may engage vis-[agrave]-vis qualified investors. The 
proposed rule would allow the representative of a foreign options 
exchange to communicate with persons that he or she reasonably believes 
are qualified investors regarding the foreign options exchange, the 
options on foreign securities traded on the foreign options exchange, 
and, if applicable, the foreign options exchange's ``OTC options 
processing service,'' as defined below.\137\ Such communications could 
include programs and seminars in the United States.
---------------------------------------------------------------------------

    \137\ See proposed Rule 15a-6(a)(5)(i)(A).
---------------------------------------------------------------------------

    Proposed Rule 15a-6(b)(6) would define an ``OTC options processing 
service'' as ``a mechanism for submitting an options contract on a 
foreign security that has been negotiated and completed in an over-the-
counter transaction to a foreign options exchange so that the foreign 
options exchange may replace that contract with an equivalent 
standardized options contract that is listed on the foreign options 
exchange and that has the same terms and conditions as the over-the-
counter options.'' By utilizing an OTC options processing service, 
qualified investors would be able to take advantage of the flexible 
nature of the OTC options market, while realizing certain efficiencies 
and benefits available in an exchange-traded market. In particular, 
qualified investors would have greater opportunities to close out 
options positions. In a typical OTC options transaction, a party must 
either negotiate with its counterparty to close out the trade or enter 
into an offsetting transaction to reduce its risk. In addition, OTC 
options processing services would provide a means for qualified 
investors to reduce other risks that arise in trading in the OTC 
options market, including credit risks, liquidity risks, legal risks 
and operational risks. By using an OTC options processing service, 
qualified investors would be able to access the benefits available in 
the OTC options market while taking advantage of the benefits and 
decreased risks available in the exchange-traded market.
    The proposed rule would also permit a representative of a foreign 
options exchange to provide persons that the representative of the 
foreign options exchange reasonably believes are qualified investors 
with a disclosure document that provides an overview of the foreign 
options exchange and the options on foreign securities traded on that 
exchange, including the differences from standardized options in the 
U.S. options market and special factors relevant to transactions by 
U.S. entities in options on the foreign options exchange.\138\ In 
addition, a representative of a foreign options exchange could make 
available to persons that the representative of the foreign options 
exchange reasonably believes are qualified investors, solely upon the 
request of the investor, a list of participants on the foreign options 
exchange permitted to take orders from the public and any U.S. 
registered broker-dealer affiliates of such participants.\139\ 
Moreover, paragraph (5)(iii) would allow the foreign exchange to make 
available to qualified investors, through the foreign broker-dealer, 
the exchange's OTC options processing service.\140\
---------------------------------------------------------------------------

    \138\ See proposed Rule 15a-6(a)(5)(i)(B).
    \139\ See proposed Rule 15a-6(a)(5)(i)(C).
    \140\ See proposed Rule 15a-6(a)(5)(iii).
---------------------------------------------------------------------------

    In proposing to limit these activities, the proposed rule is 
designed to ensure that a foreign options exchange and its 
representatives do not engage in solicitation on behalf of a particular 
foreign broker-dealer or limited group of particular foreign broker-
dealers.
    Paragraph (a)(5)(ii) of the proposed rule would set forth the 
activities in which a foreign broker-dealer could engage in connection 
with transactions effected on a foreign options exchange

[[Page 39198]]

of which it is a member. A foreign broker-dealer would be permitted to 
make available to qualified investors the foreign options exchange's 
OTC options processing service.\141\ A foreign broker-dealer would also 
be permitted to provide qualified investors, in response to an 
otherwise unsolicited inquiry concerning foreign options traded on the 
foreign options exchange, with a disclosure document that provides an 
overview of the foreign options exchange and the options on foreign 
securities traded on that exchange, including the differences from 
standardized options in the U.S. domestic options market and special 
factors relevant to transactions by U.S. entities in options on that 
exchange.\142\
---------------------------------------------------------------------------

    \141\ See proposed Rule 15a-6(a)(5)(ii)(A).
    \142\ See proposed Rule 15a-6(a)(5)(ii)(B). Exchange Act Rule 
9b-1 requires an options market to file with the Commission an 
options disclosure document containing the information specified in 
Rule 19b-1(c). ``Options markets'' are defined in Rule 19b-1 to 
include foreign securities exchanges. See Exchange Act Rule 19b-
1(a)(1), 17 CFR 240.19b-1(a)(1). The Commission would not view the 
provision of the options disclosure document, which contains, among 
other things, a summary of the instruments traded and the mechanics 
of trading on that market, as a ``research report'' under proposed 
Rule 15a-6(a)(2). See Parts II.B. and III.C., supra.
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2. Exchange Act Sections 5 and 6
    Section 5 of the Exchange Act makes it ``unlawful for any broker, 
dealer, or exchange, directly or indirectly, to make use of the mails 
or any means or instrumentality of interstate commerce for the purpose 
of using any facility of an exchange with or subject to the 
jurisdiction of the United States to effect any transaction in a 
security, or to report any such transaction,'' unless such exchange is 
registered under Section 6 of the Exchange Act or exempt from such 
registration.\143\ As described above, paragraph (a)(5) of proposed 
Rule 15a-6 would establish the limited activities and communications in 
which a representative of a foreign options exchange located in a 
foreign office or a representative office in the United States may 
engage vis-[agrave]-vis qualified investors,\144\ and in which a 
foreign broker-dealer may engage in connection with transactions 
effected on a foreign options exchange in which it is a member.\145\ In 
addition, a foreign exchange could make available to qualified 
investors, through a foreign broker-dealer, the exchange's OTC options 
processing service.\146\
---------------------------------------------------------------------------

    \143\ 15 U.S.C. 78e.
    \144\ See proposed Rule 15a-6(a)(5)(i).
    \145\ See proposed Rule 15a-6(a)(5)(ii).
    \146\ See proposed Rule 15a-6(a)(5)(iii).
---------------------------------------------------------------------------

    The Commission is proposing to provide interpretive guidance that a 
foreign exchange would not be required to register as a national 
securities exchange under Section 6 of the Exchange Act or be exempt 
from such registration if the foreign exchange, its representatives, or 
its foreign broker-dealer members engaged in the limited activities and 
communications described in proposed paragraph (a)(5) of Rule 15a-6. 
The Commission's proposed interpretation is based on its preliminary 
view that, although a foreign exchange's OTC options processing service 
may be a facility of an exchange,\147\ the OTC options processing 
service would not effect any transaction in a security or report any 
such transaction.\148\ Accordingly, such activity would not trigger the 
registration requirements of Section 6 of the Exchange Act.\149\
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    \147\ See Section 3(a)(2) of the Exchange Act, 15 U.S.C. 
78c(a)(2) (defining ``facility'' of an exchange).
    \148\ See note 143 and accompanying text, supra (discussing 
Section 5 of the Exchange Act, which prohibits a broker, dealer, or 
exchange from using a facility of an exchange to effect a 
transaction in a security, or to report any such transaction, unless 
such exchange is registered under Section 6 of the Exchange Act).
    \149\ See Section 3(a)(1) of the Exchange Act, 15 U.S.C. 78c 
(defining ``exchange'') and Rule 3b-16 under the Exchange Act, 17 
CFR 240-3b-16 (further elaborating on the definition of ``exchange'' 
contained in the Exchange Act).
---------------------------------------------------------------------------

    The Commission seeks comment on its proposed interpretation that a 
foreign exchange would not be required to register as a national 
securities exchange under Section 6 of the Exchange Act if the foreign 
exchange, its representatives, or its foreign broker-dealer members 
engage in the limited activities and communications described in 
paragraph (a)(5) of proposed Rule 15a-6. Are any additional conditions 
necessary or are there other interpretive issues relating to the 
circumstances under which a foreign exchange would be required to 
register under Section 6 of the Exchange Act, or otherwise obtain an 
exemption from such registration requirements, that the Commission 
should address?
3. Exchange Act Section 17A
    Under proposed Rule 15a-6(a)(5), qualified investors would not 
become direct members of, or participants in, the foreign options 
exchange or any associated foreign clearing organization. Further, the 
foreign options exchange would not trade nor would the foreign clearing 
organization clear and settle options on U.S. securities for a foreign 
broker-dealer member or participant relying on proposed paragraph 
(a)(5) for the transaction. The foreign broker-dealer member or 
participant would execute transactions in options on foreign 
securities, or submit an options contract on foreign securities, and 
the foreign clearing organization would clear and settle these 
transactions for its foreign broker-dealer participants in the same 
manner as any other transaction executed on the foreign options 
exchange.
    Section 17A(b)(1) of the Exchange Act prohibits any clearing agency 
from directly or indirectly making ``use of the mails or any means or 
instrumentality of interstate commerce to perform the functions of a 
clearing agency with respect to any security (other than an exempted 
security),'' unless it is registered with the Commission.\150\ The 
Commission may conditionally or unconditionally exempt any clearing 
agency if the Commission finds that such exemption is consistent with 
the public interest, the protection of investors and the purposes of 
Section 17A.\151\
---------------------------------------------------------------------------

    \150\ 15 U.S.C. 78q-1(b)(1).
    \151\ Id.
---------------------------------------------------------------------------

    Previously, the Commission has required foreign clearing 
organizations to obtain an exemption from clearing agency registration 
only when the foreign clearing organization provides clearance and 
settlement services for U.S. securities directly to U.S. entities. For 
example, the Commission granted Euroclear and Clearstream (formerly 
Cedel Bank) exemptions from clearing agency registration in order that 
they could provide clearance and settlement services for U.S. 
government securities to their U.S. participants.\152\ Because only the 
foreign broker-dealer would have direct access to the foreign clearing 
organization to clear and settle foreign securities transactions under 
proposed Rule 15a-6(a)(5), the Commission does not believe that relief 
under Section 17A of the Exchange Act would be necessary. The 
Commission solicits comment on whether any interpretive guidance is 
needed under Section 17A with respect to activities under proposed Rule 
15a-6(a)(5). If so, what?
---------------------------------------------------------------------------

    \152\ See Exchange Act Release Nos. 43775 (Dec. 28, 2000), 66 FR 
819 (order exempting Euroclear Bank from clearing agency 
registration) and 39643 (Feb. 18, 1998), 63 FR 8232 (order exempting 
Euroclear Bank's predecessor, Morgan Guaranty Trust Company, as 
operator of the Euroclear system, from clearing agency registration) 
and Exchange Act Release No. 38328 (Feb. 24, 1997), 62 FR 9225 
(order exempting Clearstream Bank, formerly Cedel Bank, from 
clearing agency registration).
---------------------------------------------------------------------------

4. Securities Act
    Foreign option transactions that are effected through the 
facilities of a foreign exchange will generally involve the offer and 
sale of a security by an issuer of the security.\153\ As a result,

[[Page 39199]]

unless the foreign options were registered under the Securities Act, 
foreign option transactions involving U.S. persons would be required to 
come within an exemption from registration. To the extent that the 
activities undertaken by foreign options exchange in the United States 
can be deemed to constitute offers of foreign options under the 
Securities Act, such activities must also be undertaken in a fashion 
that is consistent with the requirements of the applicable 
exemption.\154\
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    \153\ With exchange traded options, the clearing house is the 
issuer of the option security. See Securities Act Release No. 8171 
(Dec. 23, 2002), 68 FR 188, 188 (Jan. 2, 2003).
    \154\ For example, to the extent that reliance is based on 
Securities Act Section 4(2), the activities of the foreign options 
exchange must not constitute a public offering of the securities.
---------------------------------------------------------------------------

5. Request for Comment
    The Commission seeks comment on the proposed exemption in paragraph 
(a)(5) for transactions effected by a foreign broker-dealer on a 
foreign options exchange of which it is a member. Should the Commission 
require a foreign broker-dealer or a representative of a foreign 
options exchange to determine that the persons with whom the 
representative communicates or otherwise provides information under 
proposed paragraphs (a)(5)(i)(A)-(C) are, in fact, qualified investors? 
Should the exemption be limited to unsolicited transactions? As a 
practical matter, because of the broad interpretation of solicitation, 
would foreign broker-dealers effecting transactions with qualified 
investors that have been approached by the representatives of a foreign 
options exchange effect these transactions in reliance on proposed 
paragraph (a)(3) of Rule 15(a)(6)? If not, should the proposed 
exemption permit foreign broker-dealers to engage in additional limited 
solicitation activities, such as the types of contacts that would be 
expected in an ongoing customer relationship? In general, should 
foreign representatives of foreign options exchanges or foreign options 
exchanges be permitted to engage in any other activities under the 
proposed rule? If so, what? Given the purpose of the exemption to allow 
familiarization activities for foreign options exchanges, are there 
other types of markets for which it would be appropriate to permit 
familiarization activities? If so, which markets and what should the 
permissible range of activities be? Should they be broader or narrower 
than the permissible range of activities for foreign options exchanges? 
If so, why? Commenters are requested to explain their views.

G. Scope of the Proposed Exemption

    When we adopted Rule 15a-6 in 1989, the Commission had authority, 
under Section 15(a)(2) of the Exchange Act, only to conditionally or 
unconditionally exempt from the broker-dealer registration requirements 
of Section 15(a)(1) any broker-dealer or class of broker-dealers, by 
rule or order, as it deems consistent with the public interest and the 
protection of investors.\155\ However, many of the statutory and 
regulatory provisions under the Exchange Act actually are applicable by 
their terms to broker-dealers regardless of their registration 
status.\156\ To provide foreign broker-dealers relying on the 
exemptions in Rule 15a-6 with relief from these provisions, the 
Commission stated in the 1989 Adopting Release, ``Nevertheless, the 
staff would not recommend that the Commission take enforcement action 
against foreign broker-dealers for want of compliance with those 
provisions, with the exception of sections 15(b)(4) and 15(b)(6), if 
the foreign broker-dealers were exempt from broker-dealer registration 
under the Rule.'' \157\
---------------------------------------------------------------------------

    \155\ See 15 U.S.C. 78o(a)(2); see also Section 15B(a)(4) of the 
Exchange Act, 15 U.S.C. 78o-4(a)(4) (giving the Commission similar 
authority with respect to municipal securities dealers).
    \156\ See 1989 Adopting Release, 54 FR at 30015 n.22 (``E.g., 
sections 15(b)(4) and 15(b)(6) of the Exchange Act, 15 U.S.C. 
78o(b)(4) and 78o(b)(6); Rules 15c3-1, 15c3-3, 17a-3, 17a-4, and 
17a-5, 17 CFR 240.15c3-1, 15c3-3, 17a-3, 17a-4, and 17a-5'').
    \157\ See 1989 Adopting Release, 54 FR at 30015 n.22.
---------------------------------------------------------------------------

    Since 1996, the Commission has had general exemptive authority 
under Section 36 of the Exchange Act to conditionally or 
unconditionally exempt any person, security, or transaction, or any 
class or classes of persons, securities, or transactions, from any 
provision or provisions of the Exchange Act or any rule or regulation 
thereunder, by rule, regulation or order, to the extent that such 
exemption is necessary or appropriate in the public interest and is 
consistent with the protection of investors.\158\
---------------------------------------------------------------------------

    \158\ See 15 U.S.C. 78mm; see also Capital Markets Efficiency 
Act of 1996, Sec. 105(b), Pub. Law 104-290, 110 Stat. 3416 (1996) 
(adding Section 36 to the Exchange Act).
---------------------------------------------------------------------------

    The Commission proposes to amend Rule 15a-6 to exempt foreign 
broker-dealers from not only the registration requirements of Section 
15(a)(1) or 15B(a)(1) of the Exchange Act, but also from the reporting 
and other requirements of the Exchange Act (other than Sections 
15(b)(4) and 15(b)(6)), and the rules and regulations thereunder, that 
apply specifically to a broker-dealer solely by virtue of its status as 
a broker or dealer rather than because of its registration with the 
Commission.
    Under the proposed rule, as under the current rule, however, 
foreign broker-dealers would not be exempt from provisions of the 
Exchange Act, and the rules and regulations thereunder, that are not 
specific to broker-dealers, such as Section 10(b) of the Exchange Act, 
or Rule 10b-5 thereunder.\159\ Such rules apply to ``persons'' 
regardless of their registration status, and thus apply equally to 
registered broker-dealers, unregistered broker-dealers and non-broker-
dealers. We also do not propose to exempt foreign broker-dealers from 
Exchange Act Sections 15(b)(4) and 15(b)(6), which give the Commission 
the authority to sanction broker-dealers and persons associated with 
broker-dealers, because these sections provide the Commission with 
flexibility to impose a bar against or place other limitations on 
associated persons or place limitations on broker-dealers in the 
circumstances specified in these sections.
---------------------------------------------------------------------------

    \159\ The proposed rule also would not affect any obligations a 
foreign broker-dealer may have under any other law, including the 
Securities Act.
---------------------------------------------------------------------------

    As discussed more fully below with respect to each of the 
exemptions in the proposed rule, the Commission preliminarily believes 
that exempting foreign broker-dealers from the registration 
requirements of Sections 15(a)(1) and 15B(a)(1) of the Exchange Act and 
the reporting and other requirements of the Exchange Act (other than 
Sections 15(b)(4) and 15(b)(6)), and the rules and regulations 
thereunder, that apply specifically to a broker-dealer that is not 
registered with the Commission solely by virtue of its status as a 
broker or dealer would be necessary or appropriate in the public 
interest, and would be consistent with the protection of investors.
1. Proposed Rule 15a-6(a)(2)
    As discussed above, proposed rule 15a-6(a)(2) would permit a 
foreign broker-dealer to provide research reports to qualified 
investors, but not otherwise induce or attempt to induce the purchase 
or sale of any security by qualified investors.\160\ Based on 
conversations with industry participants, we understand that foreign 
broker-dealers rarely rely on current Rule 15a-6(a)(2). This is in part 
because of the limitations on solicitation, as well as the requirement 
that if a foreign broker-dealer has a relationship with a U.S. 
registered broker-dealer that satisfies the requirement of paragraph 
(a)(3) of the current rule, any

[[Page 39200]]

transactions with the foreign broker-dealer in securities discussed in 
the research reports must be effected pursuant to the provisions of 
paragraph (a)(3).\161\
---------------------------------------------------------------------------

    \160\ See Part III.C., supra.
    \161\ See 17 CFR 240.15a-6(a)(2)(iii).
---------------------------------------------------------------------------

    Given the de minimis volume of transactions that likely would be 
conducted,\162\ and the level of financial sophistication of the 
investors that could receive the research reports under this proposed 
exemption, as well as the fact that the foreign broker-dealer would not 
otherwise be permitted to induce or attempt to induce the purchase or 
sale of any security by those investors under the proposed exemption, 
the Commission preliminarily believes that it would be necessary or 
appropriate in the public interest, and would be consistent with the 
protection of investors, to exempt foreign broker-dealers relying on 
paragraph (a)(2) of the proposed rule from the registration 
requirements of Sections 15(a)(1) and 15B(a)(1) of the Exchange Act and 
the reporting and other requirements of the Exchange Act (other than 
Sections 15(b)(4) and 15(b)(6)), and the rules and regulations 
thereunder, that apply specifically to a broker-dealer that is not 
registered with the Commission solely by virtue of its status as a 
broker or dealer.
---------------------------------------------------------------------------

    \162\ This estimate is based on information the staff obtained 
in discussions with industry representatives.
---------------------------------------------------------------------------

    The Commission solicits comment on whether it would be necessary or 
appropriate in the public interest, and consistent with the protection 
of investors, to exempt foreign broker-dealers relying on paragraph 
(a)(2) of the proposed rule from such rules and requirements. If not, 
which provisions or rules should apply and why?
2. Proposed Rule 15a-6(a)(3)
a. Exemption (A)(1)
    As discussed above, foreign broker-dealers relying on proposed 
Exemption (A)(1) under Rule 15a-6(a)(3) would be required to conduct a 
foreign business.\163\ The proposed rule would define ``foreign 
business'' to mean the business of a foreign broker-dealer with 
qualified investors and foreign resident clients \164\ where at least 
85% of the aggregate value of the securities purchased or sold in 
transactions conducted pursuant to both paragraphs (a)(3) and 
(a)(4)(vi) of the proposed rule by the foreign broker-dealer, 
calculated on a rolling two-year basis, is derived from transactions in 
foreign securities, as defined above.\165\ As explained above, the 
Commission believes that making Exemption (A)(1) available only to a 
foreign broker-dealer conducting a foreign business would provide U.S. 
investors increased access to foreign securities and markets without 
creating opportunities for regulatory arbitrage vis-[agrave]-vis U.S. 
securities markets because the foreign broker-dealer's business in U.S. 
securities would be limited.
---------------------------------------------------------------------------

    \163\ See Part III.D.1.a., supra.
    \164\ See Part III.E., supra.
    \165\ See proposed Rule 15a-6(b)(3).
---------------------------------------------------------------------------

    Given the requirement that foreign broker-dealers conduct a foreign 
business and the sophistication of qualified investors, as well as the 
other investor protections in the proposed rule, the Commission 
preliminarily believes that it would be necessary or appropriate in the 
public interest, and would be consistent with the protection of 
investors to exempt foreign broker-dealers relying on Exemption (A)(1) 
of the proposed rule from the registration requirements of Sections 
15(a)(1) and 15B(a)(1) of the Exchange Act and the reporting and other 
requirements of the Exchange Act (other than Sections 15(b)(4) and 
15(b)(6)), and the rules and regulations thereunder, that apply 
specifically to a broker-dealer that is not registered with the 
Commission solely by virtue of its status as a broker or dealer.
    The Commission solicits comment on whether it would be necessary or 
appropriate in the public interest, and consistent with the protection 
of investors, to exempt foreign broker-dealers relying on Exemption 
(A)(1) from such rules and requirements. If not, which rules should 
apply and why? Alternatively, and as under current Rule 15a-6(a)(3), 
should the intermediating U.S. registered broker-dealer be required to 
comply with certain rules in lieu of the foreign broker-dealer? If so, 
which rules and why? Should the requirements differ based on whether 
the securities are U.S. securities or foreign securities and where the 
transactions are executed? Would exempting foreign broker-dealers from 
such rules and regulations place U.S. registered broker-dealers at a 
competitive disadvantage?
b. Exemption (A)(2)
    Under proposed Exemption (A)(2), qualified investors that have an 
account with a U.S. registered broker-dealer would have access to 
foreign broker-dealers regardless of the types of securities that are 
involved. Foreign broker-dealers relying on proposed Exemption (A)(2) 
would be permitted to effect transactions in securities, provided, 
among other things, that a U.S. registered broker-dealer acts as 
custodian for any resulting transactions.\166\ As a result, a U.S. 
registered broker-dealer would hold the funds and securities of the 
qualified investor and be subject to the Commission's rules relating to 
the safeguarding of customer assets, such as Exchange Act Rule 15c3-3. 
As with proposed Exemption (A)(1), proposed Exemption (A)(2) would be 
limited to transactions with qualified investors, which we believe are 
sophisticated investors that can be expected to understand the risk of 
dealing with foreign broker-dealers that are not regulated by the 
Commission.
---------------------------------------------------------------------------

    \166\ See Part III.D.1.b., supra.
---------------------------------------------------------------------------

    Given the requirement that a U.S. registered broker-dealer maintain 
custody of qualified investors' funds and securities from any resulting 
transactions and the sophistication of qualified investors, as well as 
the other investor protections in the proposed rule, the Commission 
preliminarily believes that it would be necessary or appropriate in the 
public interest, and would be consistent with the protection of 
investors, to exempt foreign broker-dealers relying on Exemption (A)(2) 
of the proposed rule from the registration requirements of Sections 
15(a)(1) and 15B(a)(1) of the Exchange Act and the reporting and other 
requirements of the Exchange Act (other than Sections 15(b)(4) and 
15(b)(6)), and the rules and regulations thereunder, that apply 
specifically to a broker-dealer that is not registered with the 
Commission solely by virtue of its status as a broker or dealer.
    The Commission solicits comment on whether it would be necessary or 
appropriate in the public interest, and consistent with the protection 
of investors, to exempt foreign broker-dealers relying on Exemption 
(A)(2) from such rules and requirements. If not, which rules should 
apply and why? Alternatively, as under current Rule 15a-6(a)(3), should 
the intermediating U.S. registered broker-dealer be required to comply 
with certain rules in lieu of the foreign broker-dealer? If so, which 
rules and why? Should the requirements differ based on whether the 
securities are U.S. securities or foreign securities and where the 
transactions are executed? Would exempting foreign broker-dealers from 
such rules and regulations place U.S. registered broker-dealers at a 
competitive disadvantage?
3. Proposed Rule 15a-6(a)(4)
    As explained above, paragraph (a)(4) of proposed Rule 15a-6 would 
provide an additional exemption for foreign broker-dealers that effect 
transactions

[[Page 39201]]

for certain classes of investors, namely, U.S. persons that act in a 
fiduciary capacity for an account of a foreign resident client.\167\
---------------------------------------------------------------------------

    \167\ See Part III.E., supra.
---------------------------------------------------------------------------

    Because of the nature and/or location of these persons, the 
Commission preliminarily believes that it would be necessary or 
appropriate in the public interest, and would be consistent with the 
protection of investors, to exempt foreign broker-dealers relying on 
paragraph (a)(4)(vi) of the proposed rule from the registration 
requirements of Sections 15(a)(1) and 15B(a)(1) of the Exchange Act and 
the reporting and other requirements of the Exchange Act (other than 
Sections 15(b)(4) and 15(b)(6)), and the rules and regulations 
thereunder, that apply specifically to a broker-dealer that is not 
registered with the Commission solely by virtue of its status as a 
broker or dealer.
    The Commission solicits comment on whether it would be necessary or 
appropriate in the public interest, and be consistent with the 
protection of investors, to exempt foreign broker-dealers relying on 
paragraph (a)(4)(vi) of the proposed rule from such rules and 
requirements. If not, which rules should apply and why?
4. Proposed Rule 15a-6(a)(5)
    As explained above, paragraph (a)(5) of proposed Rule 15a-6 would 
allow a foreign broker-dealer that is a member of a foreign options 
exchange to effect transactions in options on foreign securities listed 
on that exchange for a qualified investor that has not otherwise been 
solicited by the foreign broker-dealer.\168\ Under this exemption, a 
foreign broker-dealer, a foreign options exchange and representatives 
of the foreign options exchange could conduct certain activities or 
communicate with a qualified investor in a manner that might otherwise 
be considered a form of solicitation, as described above.\169\ 
Transactions effected by or through the foreign broker-dealer with or 
for qualified investors that result from these activities or 
communications would not require registration or, in some situations, 
compliance with proposed Rule 15a-6(a)(3). However, while these 
activities would not necessarily constitute a form of solicitation, the 
Commission anticipates that given the broad interpretation of 
solicitation, it would be difficult, if not impractical, to conduct 
repeated transactions with the same qualified investor without a 
foreign broker-dealer engaging in some form of communication that would 
constitute solicitation. Therefore, the Commission anticipates that 
most transactions with qualified investors resulting from these 
activities or communications would need to be completed pursuant to 
proposed Rules 15a-6(a)(3).
---------------------------------------------------------------------------

    \168\ See Part III.F., supra.
    \169\ See proposed Rules 15a-6(a)(5)(i)-(iii).
---------------------------------------------------------------------------

    Hence, for the reasons given above in the discussion of paragraphs 
(a)(2) and (a)(3) of the proposed rule, the Commission preliminarily 
believes that it would be necessary or appropriate in the public 
interest, and would be consistent with the protection of investors to 
exempt foreign broker-dealers relying on paragraph (a)(5) of the 
proposed rule from the registration requirements of Sections 15(a)(1) 
and 15B(a)(1) of the Exchange Act and the reporting and other 
requirements of the Exchange Act (other than Sections 15(b)(4) and 
15(b)(6)), and the rules and regulations thereunder, that apply 
specifically to a broker-dealer that is not registered with the 
Commission solely by virtue of its status as a broker or dealer.
    The Commission solicits comment on whether it would be necessary or 
appropriate in the public interest, and be consistent with the 
protection of investors, to exempt foreign broker-dealers relying on 
paragraph (a)(5) of the proposed rule from such rules and requirements. 
If not, which rules should apply and why?

IV. Preliminary Findings

    Section 15(a)(2) of the Exchange Act provides that the Commission, 
by rule or order, as it deems consistent with the public interest and 
the protection of investors, may conditionally or unconditionally 
exempt from Section 15(a)(1) any broker or dealer or class of brokers 
or dealers. Section 36 of the Exchange Act provides general exemptive 
authority to the Commission to exempt any person or class of persons or 
transactions from any provision of the Exchange Act, to the extent that 
such exemption is necessary or appropriate in the public interest and 
is consistent with the protection of investors. As described in Part 
III.G., above, the Commission preliminarily believes that the proposed 
exemptions would be necessary or appropriate in the public interest and 
would be consistent with the protection of investors.

V. General Request for Comment

    In addition to the specific requests for comment above, the 
Commission seeks comment generally on all aspects of the proposed 
amendments to Rule 15a-6 under the Exchange Act. The Commission 
anticipates that all prior staff no-action relief under Rule 15a-6 
would be superseded if the Commission were to adopt this proposed rule 
and interpretive guidance. Are there additional issues stemming from 
the 1989 Adopting Release or related staff guidance that are not 
addressed in the proposal and that should be addressed by this rule or 
interpretive guidance? Commenters are invited to provide empirical data 
to support their views. Comments are of the greatest assistance to our 
rulemaking initiatives if accompanied by supporting data and analysis 
of the issues addressed, and if accompanied by alternative suggestions 
to our proposals when appropriate. Commenters are also welcome to offer 
their views on any other issues raised by the proposed amendments to 
Rule 15a-6.

VI. Administrative Law Matters

A. Paperwork Reduction Act Analysis

    Certain provisions of current Rule 15a-6 contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995.\170\ The Commission has previously submitted 
these information collections to the Office of Management and Budget 
(``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 
1320.11. The revised collections of information in the proposed 
amendments would impose certain burdens on U.S. registered broker-
dealers, foreign broker-dealers and U.S. persons acting as fiduciaries 
as described in proposed Rule 15a-6(a)(4)(vi). The Commission has 
submitted the revised collections of information, entitled ``Rule 15a-6 
under the Securities Exchange Act of 1934--Exemption of Certain Foreign 
Brokers or Dealers'' (OMB control No. 3235-0371), to the OMB for 
review. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid OMB control number.\171\
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    \170\ 44 U.S.C. 3501 et seq.
    \171\ See 44 U.S.C. 3512.
---------------------------------------------------------------------------

1. Related Collections of Information Under Proposed Paragraphs 
(a)(3)(i)(B) and (C) and (a)(3)(iii)(C) and (D)
    Current paragraph (a)(3)(ii)(B) of Rule 15a-6 requires a U.S. 
registered broker-dealer to determine that the foreign associated 
persons of a foreign broker-dealer effecting transactions with U.S. 
institutional investors or major U.S. institutional investors are not 
subject to a statutory disqualification as defined in Section 3(a)(39) 
of the Exchange Act, or certain substantially equivalent foreign

[[Page 39202]]

disciplinary actions. As described above, because the foreign 
equivalents of statutory disqualification are now included in Section 
3(a)(39), the proposed rule would no longer separately describe 
them.\172\ In addition, the proposed rule would place the burden on the 
foreign broker-dealer to determine that its foreign associated persons 
effecting transactions with a qualified investor are not subject to a 
statutory disqualification as defined in Section 3(a)(39) of the 
Exchange Act.\173\
---------------------------------------------------------------------------

    \172\ See Part III.D.3., supra; see also proposed Rule 15a-
6(a)(3)(i)(B).
    \173\ See proposed Rule 15a-6(a)(3)(i)(B).
---------------------------------------------------------------------------

    Current paragraph (a)(3)(iii)(C) of Rule 15a-6 requires a U.S. 
registered broker-dealer to obtain from the foreign broker-dealer, with 
respect to each foreign associated person, the types of information 
specified in Rule 17a-3(a)(12) under the Exchange Act,\174\ provided 
that the information required by paragraph (a)(12)(i)(D) of that rule 
includes sanctions imposed by foreign securities authorities, 
exchanges, or associations, including statutory disqualification.\175\ 
Proposed paragraph (a)(3)(i)(C) of Rule 15a-6 would require that the 
foreign broker-dealer have such information regarding its foreign 
associated persons in its files.
---------------------------------------------------------------------------

    \174\ See Part III.D.3., supra.
    \175\ See 17 CFR 240.15a-6(a)(3)(iii)(C).
---------------------------------------------------------------------------

    Proposed paragraphs (a)(3)(iii)(C) and (D) of Rule 15a-6 would 
require that a registered broker-dealer obtain and record a 
representation from the foreign broker-dealer that the foreign broker-
dealer has determined that its foreign associated persons effecting 
transactions with a qualified investor are not subject to a statutory 
disqualification as defined in Section 3(a)(39) of the Exchange Act and 
has the information required by proposed paragraph (a)(3)(i)(C) of Rule 
15a-6 in its files.
a. Collection of Information
    Proposed paragraphs (a)(3)(i)(B) and (C) and (a)(3)(iii)(C) and (D) 
of Rule 15a-6 all would require ``collections of information,'' as that 
term is defined in 44 U.S.C. 3502(3). Proposed paragraph (a)(3)(i)(B) 
would require a foreign broker-dealer to make a determination that its 
foreign associated persons effecting transactions with a qualified 
investor are not subject to a statutory disqualification as defined in 
Section 3(a)(39) of the Exchange Act.\176\ Proposed paragraph 
(a)(3)(i)(C) would require that the foreign broker-dealer have in its 
files information specified in Rule 17a-3(a)(12) under the Exchange 
Act, including information related to sanctions imposed by foreign 
securities authorities, foreign exchanges, or foreign 
associations.\177\ Thus, each requires a collection of information by 
the foreign broker-dealer.
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    \176\ See proposed Rule 15a-6(a)(i)(B).
    \177\ See proposed Rule 15a-6(a)(i)(C).
---------------------------------------------------------------------------

    Proposed paragraph (a)(3)(iii)(C) would require that a U.S. 
registered broker-dealer obtain a representation from the foreign 
broker-dealer that the foreign broker-dealer has made the 
determinations that would be required by proposed paragraph 
(a)(3)(i)(B) and has in its files the information that would be 
required by proposed paragraph (a)(3)(i)(C). Proposed paragraph 
(a)(3)(iii)(C) therefore would require a collection of information by 
both the foreign broker-dealer and the U.S. registered broker-dealer in 
that the foreign broker-dealer must provide the representation and the 
U.S. registered broker-dealer must obtain that representation.
    Proposed paragraph (a)(3)(iii)(D) would require a U.S. registered 
broker-dealer to maintain a record of the representations it obtains 
pursuant to proposed paragraph (a)(3)(iii)(C). This proposed paragraph 
would require a collection of information by the U.S. registered 
broker-dealer.
b. Proposed Use of Information
    The collections of information under proposed paragraphs 
(a)(3)(i)(B) and (C) and proposed paragraphs (a)(3)(iii)(C) and (D) are 
intended to protect U.S. investors from contacts with foreign 
associated persons with a disciplinary history.
c. Respondents
    As discussed above, proposed paragraphs (a)(3)(i)(B) and (C) and 
proposed paragraphs (a)(3)(iii)(C) and (D) of Rule 15a-6 would require 
collections of information by both foreign broker-dealers and U.S. 
registered broker-dealers. All foreign broker-dealers that take 
advantage of the exemption from registration under the proposed rule 
would be required to comply with proposed paragraphs (a)(3)(i)(B) and 
(C) and proposed paragraph (a)(3)(iii)(C). The Commission estimates 
that approximately 700 foreign broker-dealers would take advantage of 
the exemption from registration under the proposed rule and therefore 
be subject to the collection of information requirements in proposed 
paragraphs (a)(3)(i)(B) and (C) and proposed paragraph 
(a)(3)(iii)(C).\178\
---------------------------------------------------------------------------

    \178\ Based on information the staff obtained in discussions 
with industry representatives, the Commission estimates that 
approximately 40 U.S. registered broker-dealers would serve as U.S. 
registered broker-dealers under Exemption (A)(1) under the proposed 
rule. The Commission estimates that each of these 40 U.S. registered 
broker-dealers would do so for an average of 10 foreign broker-
dealers, so that an estimated total of 400 foreign broker-dealers 
would utilize Exemption (A)(1) under the proposed rule. The 
Commission also estimates based on information the staff obtained in 
discussions with industry that approximately 18 U.S. registered 
broker-dealers would be engaged under Exemption (A)(2) by foreign 
broker-dealers relying on the exemption provided by paragraph 
(a)(3)(iii)(A)(2) of the proposed rule. The Commission believes that 
Exemption (A)(2) under the proposed rule would be utilized by 
approximately 300 foreign broker-dealers (an average of 16.67 per 
each of the 18 U.S. registered broker-dealers acting under Exemption 
(A)(2)--assuming an even distribution of foreign broker-dealers per 
U.S. registered broker-dealer operating under the exemption, some 
U.S. registered broker-dealers would do so for 16 foreign broker-
dealers and some would do so for 17 foreign broker-dealers). 
Therefore, the Commission estimates that a total of 700 foreign 
broker-dealers would take advantage of one or both exemptions from 
registration under the proposed rule.
---------------------------------------------------------------------------

    Similarly, all U.S. registered broker-dealers engaged by foreign 
broker-dealers to assume the responsibilities of a U.S. registered 
broker-dealer under the proposed rule, under either exemption, would be 
required to comply with proposed paragraphs (a)(3)(iii)(C) and (D). The 
Commission estimates that approximately 40 U.S. registered broker-
dealers would be engaged by foreign broker-dealers to assume the 
responsibilities under Exemption (A)(1) and approximately 18 U.S. 
registered broker-dealers would be engaged by foreign broker-dealers to 
assume the responsibilities under Exemption (A)(2) under the proposed 
rule, for a total of approximately 58 U.S. registered broker-dealers 
assuming the responsibilities under paragraph (a)(3)(iii) and therefore 
be subject to the collection of information requirements in proposed 
paragraphs (a)(3)(iii)(C) and (D).
d. Reporting and Recordkeeping Burden
    The Commission estimates for the purposes of proposed paragraph 
(a)(3)(i)(B) that each of the approximately 700 foreign broker-dealer 
respondents would employ approximately 5 foreign associated persons 
that would effect transactions with qualified investors and would spend 
approximately 10 hours per year determining that these foreign 
associated persons are not subject to a statutory disqualification as 
defined in Section 3(a)(39) of the Exchange Act.\179\ The Commission 
also estimates for the purposes of proposed paragraph (a)(3)(i)(C) that 
each of the

[[Page 39203]]

approximately 700 foreign broker-dealer respondents would spend 
approximately 10 hours per year complying with the terms of that 
proposed paragraph. Thus, the Commission estimates for the purposes of 
proposed paragraph (a)(3)(iii)(C) that each of the approximately 700 
foreign broker-dealer respondents would spend approximately 5 hours per 
year providing representations to U.S. registered broker-dealers that 
they have complied with proposed paragraphs (a)(3)(i)(B) and (C). 
Therefore, the annual burden imposed by proposed paragraphs 
(a)(3)(i)(B) and (C) and proposed paragraph (a)(3)(iii)(C) on each of 
the 700 foreign broker-dealers would be approximately 25 hours for an 
aggregate annual burden on all foreign broker-dealers of 17,650 hours 
(700 foreign broker-dealers x 25 hours per foreign broker-dealer).
---------------------------------------------------------------------------

    \179\ As noted above, the bases for these estimates come from 
information the staff obtained in discussions with industry 
representatives. Unless otherwise indicated, each of the 
Commission's estimates used for the purposes of calculating the 
number of respondents or the burden imposed upon those respondents 
is based on such discussions.
---------------------------------------------------------------------------

    The Commission estimates for the purposes of proposed paragraphs 
(a)(3)(iii)(C) and (D) that each U.S. registered broker-dealer acting 
under Exemption (A)(1) would spend approximately 5 hours each year 
obtaining and recording representations required by proposed paragraphs 
(a)(3)(iii)(C) and (D). Similarly, the Commission estimates that each 
U.S. registered broker-dealer acting under Exemption (A)(2) would spend 
approximately 8 hours each year obtaining and recording representations 
required by proposed paragraphs (a)(3)(iii)(C) and (D). Thus, the 
aggregate annual burden imposed by proposed paragraphs (a)(3)(i)(C) and 
(D) on all U.S. registered broker-dealers would be approximately 344 
hours (40 U.S. registered broker-dealers acting under Exemption (A)(1) 
multiplied by 5 hours per broker-dealer plus 18 U.S. registered broker-
dealers acting under Exemption (A)(2) multiplied by 8 hours per broker-
dealer).
e. Collection of Information Is Mandatory
    These collections of information would be mandatory for foreign 
broker-dealers that choose to rely on the exemptions in paragraph 
(a)(3) of the proposed rule and U.S. registered broker-dealers that 
intermediate transactions for foreign broker-dealers that choose to 
rely on the exemptions in paragraph (a)(3) of the proposed rule.
f. Confidentiality
    Proposed paragraph (a)(3)(i)(C) would require foreign broker-
dealers to have in their files the type of information specified in 
Rule 17a-3(a)(12) under the Exchange Act, provided that the information 
required by paragraph (a)(12)(i)(D) of Rule 17a-3 shall include 
information relating to sanctions imposed by foreign securities 
authorities, foreign exchanges or foreign associations, including 
without limitation those described in Section 3(a)(39) of the Exchange 
Act. Proposed paragraph (a)(3)(iii)(D) would require U.S. registered 
broker-dealers to maintain a written record of the representations 
obtained from foreign broker-dealers, as required by proposed paragraph 
(a)(3)(iii)(C).
    All information related to transactions with qualified investors, 
whether kept by U.S. registered broker-dealers or foreign broker-
dealers, would be subject to review and inspection by the Commission 
and its representatives as required in connection with examinations, 
investigations and enforcement proceedings. Such information is not 
required to be disclosed to the public and will be kept confidential by 
the Commission.
g. Record Retention Period
    Proposed paragraphs (a)(3)(i)(B) and (C) and proposed paragraphs 
(a)(3)(iii)(C) and (D) would not include record retention periods. 
However, the U.S. registered broker-dealers would have to retain the 
representations for the period specified under 17 CFR 240.17a-4(b)(7), 
which requires broker-dealers to preserve all written agreements they 
enter into relating to their business for a period of not less than 
three years, the first two years in an easily accessible place.
2. Collection of Information Under Proposed Paragraph (a)(3)(i)(D)
a. Collection of Information
    Proposed paragraph (a)(3)(i)(D) would require ``collections of 
information,'' as that term is defined in 44 U.S.C. 3502(3), by foreign 
broker-dealers. Proposed paragraph (a)(3)(i)(D) would require that a 
foreign broker-dealer relying on either Exemption (A)(1) or Exemption 
(A)(2) disclose to qualified investors that the foreign broker dealer 
is regulated by a foreign securities authority and not by the 
Commission. Foreign broker-dealers relying on Exemption (A)(1) would 
also have to disclose to qualified investors whether U.S. segregation 
requirements, U.S. bankruptcy protections and protections under the 
SIPA would apply to any funds and securities held by the foreign 
broker-dealer.
b. Proposed Use of Information
    The collections of information required by proposed paragraph 
(a)(3)(i)(D) are designed to put U.S. investors on notice that foreign 
broker-dealers operating pursuant to the exemption in Rule 15a-
6(a)(3)(iii)(A)(1) are not subject to the same regulatory requirements 
as U.S. registered broker-dealers. This notice is important because the 
proposed rule would eliminate the current chaperoning requirements, as 
described below, and allow a foreign broker-dealer to effect 
transactions on behalf of qualified investors and custody qualified 
investor funds and securities relating to any resulting transactions 
with more limited participation in the transaction by a U.S. registered 
broker-dealer.\180\
---------------------------------------------------------------------------

    \180\ Similarly, because of the limited participation of the 
U.S. registered broker-dealer and the lack of chaperoning 
requirements, the proposed rule would require that the foreign 
broker-dealer be regulated for conducting securities activities in a 
foreign country by a foreign securities authority.
---------------------------------------------------------------------------

c. Respondents
    As discussed above, the Commission estimates that approximately 400 
foreign broker-dealers would rely on Exemption (A)(1) of the proposed 
rule. All 400 foreign broker-dealers would be required to comply with 
proposed paragraph (a)(3)(i)(D). The Commission also estimates that 
approximately 300 foreign broker-dealers would rely on Exemption (A)(2) 
of the proposed rule. These 300 foreign broker-dealers would only be 
required to comply with proposed paragraph (a)(3)(i)(D)(1).
d. Reporting and Recordkeeping Burden
    Each of the 700 foreign broker-dealers that would rely on either 
Exemption (A)(1) or Exemption (A)(2) of the proposed rule would have to 
make certain disclosures required by proposed paragraph (a)(3)(i)(D) to 
each qualified investor from which the foreign broker-dealer induces or 
attempts to induce the purchase or sale of any security. The Commission 
believes that such disclosures would be conveyed in the course of other 
communications between the foreign broker-dealer and the qualified 
investor, such as the foreign broker-dealer's standard account-opening 
documentation. Thus, we expect that the only collection of information 
burden that proposed paragraph (a)(3)(i)(D) would impose on a foreign 
broker-dealer would be the hour burden incurred in developing and 
updating as necessary the standard documentation it will provide to 
qualified investors. In addition, the Commission does not believe that 
there would be a significant difference in the burden placed foreign 
broker-dealers relying on either Exemption (A)(1) or Exemption (A)(2) 
of the proposed rule by proposed paragraph (a)(3)(i)(D). The Commission

[[Page 39204]]

estimates that each of the 700 foreign broker-dealers that would rely 
on either Exemption (A)(1) or Exemption (A)(2) of the proposed rule 
would spend approximately 2 hours per year in drafting, reviewing or 
updating as necessary their standard documentation for compliance with 
proposed paragraph (a)(3)(i)(D). Therefore, the aggregate annual 
collection of information burden imposed by proposed paragraph 
(a)(3)(i)(D) on foreign broker-dealers would be approximately 1,400 
hours (700 foreign broker-dealers multiplied by 2 hours per foreign 
broker-dealer).
e. Collection of Information Is Mandatory
    This collection of information would be mandatory for foreign 
broker-dealers that rely on either Exemption (A)(1) or Exemption (A)(2) 
of the proposed rule.
f. Confidentiality
    The disclosures required by proposed paragraph (a)(3)(i)(D) would 
be conveyed to a qualified investor in the course of communications 
between the foreign broker-dealer and the qualified investor, such as 
the foreign broker-dealer's standard account-opening documentation, and 
therefore would not be confidential.
g. Record Retention Period
    Proposed paragraph (a)(3)(i)(D) would not include a record 
retention period.
3. Related Collections of Information Under Proposed Paragraphs 
(a)(3)(iii)(B) and (D)
a. Collection of Information
    Proposed paragraphs (a)(3)(iii)(B) and (D) would require 
``collections of information,'' as that term is defined in 44 U.S.C. 
3502(3), by U.S. registered broker-dealers. Proposed paragraph 
(a)(3)(iii)(B) would require that a U.S. registered broker-dealer 
obtain from a foreign broker-dealer and each of the foreign broker-
dealer's foreign associated persons written consents to service of 
process for any civil action brought by or proceeding before the 
Commission or a self-regulatory organization (as defined in Section 
3(a)(26) of the Exchange Act).\181\ Proposed paragraph (a)(3)(iii)(D) 
would require that the U.S. registered broker-dealer maintain a written 
record of the consents to service of process obtained pursuant to 
proposed paragraph (a)(3)(iii)(B).
---------------------------------------------------------------------------

    \181\ The consent would indicate that process may be served on 
the foreign broker-dealer or foreign associated person by service on 
the U.S. registered broker-dealer in the manner set forth on the 
U.S. registered broker-dealer's current Form BD. See proposed Rule 
15a-6(a)(3)(iii)(B).
---------------------------------------------------------------------------

b. Proposed Use of Information
    The collections of information under proposed paragraphs 
(a)(3)(iii)(B) and (D) are designed to assist the Commission in its 
regulatory function by ensuring that foreign broker-dealers and their 
foreign associated persons effecting transactions with qualified 
investors have consented to service of process.
c. Respondents
    All U.S. registered broker-dealers engaged by foreign broker-
dealers to assume the responsibilities of a U.S. registered broker-
dealer under the proposed exemption would be subject to the collections 
of information. As discussed above, the Commission estimates that 
approximately 40 U.S. registered broker-dealers would act under 
Exemption (A)(1) for foreign broker-dealers relying on the exemption 
provided by paragraph (a)(3)(iii)(A)(1) of the proposed rule and that 
approximately 18 U.S. registered broker-dealers would act under 
Exemption (A)(2). Therefore, the Commission estimates that a total of 
approximately 58 U.S. registered broker-dealers would have to comply 
with the collection of information requirements in proposed paragraphs 
(a)(3)(iii)(B) and (D).\182\
---------------------------------------------------------------------------

    \182\ The Commission understands that U.S. registered broker-
dealers acting under Exemption (A)(2) are likely to also act under 
Exemption (A)(1) under the proposed rule. The Commission requests 
comment regarding how frequently this would occur.
---------------------------------------------------------------------------

d. Reporting and Recordkeeping Burden
    As discussed above, the Commission estimates that each of the 40 
U.S. registered broker-dealers that would serve under Exemption (A)(1) 
for affiliated foreign broker-dealers under the proposed rule would do 
so for an average of 10 foreign broker-dealers. The Commission also 
estimates that each such foreign broker-dealer would have an average of 
5 foreign associated persons engaged in business under the proposed 
rule. Therefore, proposed paragraphs (a)(3)(iii)(B) and (D) would 
require each U.S. registered broker-dealer acting under Exemption 
(A)(1) to obtain and record a total of 50 consents to service of 
process from foreign associated persons and 10 consents to service of 
process from foreign broker-dealers.
    As discussed above, the Commission estimates that each of the 18 
U.S. registered broker-dealers that would serve under Exemption (A)(2) 
for qualified investors would do so for approximately 16.67 foreign 
broker-dealers. Also as discussed above, the Commission estimates that 
each such foreign broker-dealer would have an average of 5 foreign 
associated persons engaged in business under the proposed rule. 
Therefore, proposed paragraphs (a)(3)(iii)(B) and (D) would require a 
U.S. registered broker-dealer acting under Exemption (A)(2) to obtain a 
total of 83.35 consents to service of process from foreign associated 
persons and 16.67 consents to service of process from foreign broker-
dealers.\183\
---------------------------------------------------------------------------

    \183\ Assuming a relatively even distribution of the estimated 
300 foreign broker-dealers across the 18 U.S. registered broker-
dealers acting under Exemption (A)(2), proposed paragraphs 
(a)(3)(iii)(B) and (D) would require some U.S. registered broker-
dealers acting under Exemption (A)(2) to obtain and record 83 
consents to service of process from foreign associated persons and 
some to obtain and record 84 consents to service of process from 
foreign associated persons.
---------------------------------------------------------------------------

    The Commission further estimates that each affected U.S. registered 
broker-dealer, acting under either exemption, would spend an average of 
0.5 hours in obtaining and recording one consent under proposed 
paragraphs (a)(3)(iii)(B) and (D). Each U.S. registered broker-dealer 
acting under Exemption (A)(1) would therefore spend an average of 35 
hours per year in its efforts at compliance with proposed paragraphs 
(a)(3)(iii)(B) and (D) (0.5 hours per consent per representation 
multiplied by the sum of 50 consents from foreign associated persons 
plus 10 consents to service of process from foreign broker-dealers plus 
10 representations). Similarly, each U.S. registered broker-dealer 
acting under Exemption (A)(2) would spend an average of 50.01 hours per 
year in its efforts at compliance with proposed paragraphs 
(a)(3)(iii)(B) and (D) (0.5 hours per consent per representation 
multiplied by the sum of 83.35 consents from foreign associated persons 
plus 16.67 consents to service of process from foreign broker-dealers). 
Therefore, the Commission estimates an annual aggregate reporting and 
recordkeeping burden of 2,300.18 hours for compliance with proposed 
paragraphs (a)(3)(iii)(B) and (D) (35 hours per 40 registered broker-
dealers acting under Exemption (A)(1) for a total of 1,400 hours, plus 
50.01 hours per 18 registered broker-dealers acting under Exemption 
(A)(2) for a total of 900.18 hours).
e. Collection of Information Is Mandatory
    This collection of information would be mandatory for U.S. 
registered broker-dealers that intermediate transactions for foreign 
broker-dealers that choose to

[[Page 39205]]

rely on the exemption in paragraph (a)(3) of the proposed rule.
f. Confidentiality
    The proposed rule would require that U.S. registered broker-dealers 
maintain a written record of the information and consents and make such 
records available to the Commission upon request. All information 
related to transactions with qualified investors, whether kept by U.S. 
registered broker-dealers or foreign broker-dealers, would be subject 
to review and inspection by the Commission and its representatives as 
required in connection with examinations, investigations and 
enforcement proceedings. Such information is not required to be 
disclosed to the public and will be kept confidential by the 
Commission.
g. Record Retention Period
    Proposed paragraphs (a)(3)(iii)(B) and (D) would not include 
separate record retention periods. However, the U.S. registered broker-
dealers would have to retain the consents for the period specified 
under 17 CFR 240.17a-4(b)(7), which requires broker-dealers to preserve 
all written agreements they enter into relating to their business for a 
period of not less than three years, the first two years in an easily 
accessible place.
4. Related Collections of Information Under Proposed Paragraph 
(a)(4)(vi)(B)
    Under the proposed rule, a foreign broker-dealer would be exempt 
from the registration, reporting and other requirements of the Exchange 
Act to the extent that it effects transactions in securities with or 
for, or induces or attempts to induce the purchase or sale of any 
security by any U.S. person, other than a registered broker-dealer or 
bank acting pursuant to an exception or exemption from the definition 
of ``broker'' or ``dealer'' in Section 3(a)(4)(B), 3(a)(4)(E), or 
3(a)(5)(C) of the Exchange Act or the rules thereunder, that acts in a 
fiduciary capacity for an account of a foreign resident client.\184\ As 
a condition of this exemption, the foreign broker-dealer would be 
required, among other things, to obtain and maintain a representation 
from the U.S. person that the account is managed in a fiduciary 
capacity for a foreign resident client.\185\
---------------------------------------------------------------------------

    \184\ See proposed paragraph (a)(4)(vi).
    \185\ See proposed paragraph (a)(4)(vi)(B).
---------------------------------------------------------------------------

a. Collection of Information
    Proposed paragraph (a)(4)(vi)(B) would require ``collections of 
information'' as that term is defined in 44 U.S.C. 3502(3) in that it 
would require foreign broker-dealers to obtain and maintain a 
representation for each account managed by a U.S. fiduciary that the 
account is managed in a fiduciary capacity for a foreign resident 
client. This would require foreign broker-dealers to obtain and record 
each representation. The proposed paragraph would also require a 
collection of information by the U.S. fiduciary, which would be 
required to provide the representation to the foreign broker-dealer.
b. Proposed Use of Information
    The collection of information in proposed paragraph (a)(4)(vi)(B) 
would assist foreign broker-dealers seeking to rely on the exemption 
under proposed paragraph (a)(4)(vi) in complying with the terms of that 
exemption and would provide the Commission with access to such 
information.
c. Respondents
    As discussed above, the Commission estimates that approximately 700 
foreign broker-dealers that would take advantage of either exemption 
under proposed paragraphs (a)(3)(iii)(A)(1) and (2).\186\ The 
Commission believes that these estimated 700 foreign broker-dealers 
represent the number of foreign broker-dealers that engage in 
international broker-dealer business and would take advantage of the 
exemption in proposed paragraph (a)(4)(vi). Even though not all of 
these 700 foreign broker-dealers may actually utilize the exemption in 
proposed paragraph (a)(4)(vi), for the purposes of determining the 
number of foreign broker-dealer respondents for the collection of 
information in proposed paragraph (a)(4)(vi)(B), the Commission 
estimates that all 700 foreign broker-dealers that engage in 
international business and that would otherwise take advantage of 
either exemption under proposed paragraph (a)(3)(iii)(A)(1) or (2) 
would also utilize the exemption in proposed paragraph (a)(4)(vi) and 
be respondents for the purposes of the collection of information in 
proposed paragraph (a)(4)(vi)(B).
---------------------------------------------------------------------------

    \186\ See note 178, supra.
---------------------------------------------------------------------------

    The Commission estimates that there are 349 U.S. fiduciaries that 
would be respondents for the purposes of the collection of information 
in proposed paragraph (a)(4)(vi)(B).
d. Reporting and Recordkeeping Burden
    The Commission estimates that each U.S. fiduciary would spend 
approximately 5 hours per year providing representations in accordance 
with proposed paragraph (a)(4)(vi)(B). Therefore, the Commission 
estimates that the aggregate burden imposed by proposed paragraph 
(a)(4)(vi)(B) on all of the approximately 349 U.S. fiduciaries would be 
approximately 1,745 hours per year (5 hours multiplied by 349 U.S. 
fiduciaries).
    The Commission also estimates that each foreign broker-dealer would 
spend approximately 5 hours per year obtaining and recording the 
representations required by proposed paragraph (a)(4)(vi)(B) from U.S. 
fiduciaries. Therefore, the Commission estimates that the aggregate 
burden imposed by proposed paragraph (a)(4)(vi)(B) on all the 
approximately 700 foreign broker-dealers would be approximately 3,500 
hours per year (5 hours multiplied by 700 foreign broker-dealers).
e. Collection of Information Is Mandatory
    These collections of information would be mandatory for U.S. 
fiduciaries and foreign broker-dealers that effect transactions 
according to the proposed exemption in proposed paragraph (a)(4)(vi) of 
the proposed rule.
f. Confidentiality
    The proposed rule would require that a foreign broker-dealer 
maintain the representations it would obtain from a U.S. fiduciary 
regarding the U.S. fiduciary's accounts. All information related to 
transactions with qualified investors, whether kept by U.S. registered 
broker-dealers or foreign broker-dealers, would be subject to review 
and inspection by the Commission and its representatives as required in 
connection with examinations, investigations and enforcement 
proceedings. Such information is not required to be disclosed to the 
public and will be kept confidential by the Commission.
g. Record Retention Period
    Proposed paragraph (a)(4)(vi)(B) would not include a record 
retention period.
5. Request for Comment
    The Commission requests comment on the proposed collections of 
information in order to: (1) Evaluate whether the proposed collection 
of information is necessary for the proper performance of the functions 
of the Commission, including whether the information would have 
practical utility; (2) evaluate the accuracy of the Commission's 
estimates of the burden of the proposed collections of information; (3) 
determine whether there are ways to

[[Page 39206]]

enhance the quality, utility and clarity of the information to be 
collected; (4) evaluate whether there are ways to minimize the burden 
of the collection of information on those who respond, including 
through the use of automated collection techniques or other forms of 
information technology; and (5) evaluate whether the proposed rules 
would have any effects on any other collection of information not 
previously identified in this section.
    Persons who desire to submit comments on the collection of 
information requirements should direct their comments to OMB, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
should also send a copy of their comments to Secretary, Securities and 
Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090, and 
refer to File No. S7-16-08. OMB is required to make a decision 
concerning the collections of information between 30 and 60 days after 
publication of this document in the Federal Register; therefore, 
comments to OMB are best assured of having full effect if OMB receives 
them within 30 days of this publication. Requests for the materials 
submitted to OMB by the Commission with regard to these collections of 
information should be in writing, refer to File No. S7-16-08, and be 
submitted to the Securities and Exchange Commission, Records Management 
Office, 100 F Street, NE, Washington, DC 20549-1110.

B. Consideration of Benefits and Costs

1. Expected Benefits
    The proposed rule would have several important benefits. First, the 
proposed rule would allow a broader category of U.S. investors \187\ 
greater access to foreign broker-dealers and foreign markets by 
expanding and streamlining the conditions under which a foreign broker-
dealer could operate without triggering the registration requirements 
of Section 15(a)(1) or 15B(a)(1) of the Exchange Act. Among the 
benefits to U.S. investors would be expanded investment and 
diversification opportunities and lower cost of accessing such 
opportunities. Because the proposed rule would broaden the category of 
U.S. investors that may interact with foreign broker-dealers, the 
expanded investment and diversification opportunities would be 
available to a greater number of U.S. investors that the Commission 
believes possess the investment experience to effect transactions with 
or through unregistered broker-dealers under the safeguards imposed by 
the proposed rule. This also would be a benefit to foreign broker-
dealers, which would have access to an expanded potential client base 
without being required to register with the Commission as broker-
dealers.
---------------------------------------------------------------------------

    \187\ As noted above, the proposed rule would expand the 
category of U.S. investors with which a foreign broker-dealer may 
interact under Rule 15a-6(a)(2) from major U.S. institutional 
investors to qualified investors and generally expand the category 
of U.S. investors with which a foreign broker-dealer may interact 
under Rule 15a-6(a)(3) from major U.S. institutional investors and 
U.S. institutional investors to qualified investors. This would 
allow foreign broker-dealers, for the first time, to interact with a 
corporation, company, or partnership that owns and invests on a 
discretionary basis $25 million or more in investments under 
paragraph (a)(3). In addition, under the proposed rule, natural 
persons who own or invest on a discretionary basis not less than 
$25,000,000 in investments would be included. See Part III.A., 
supra.
---------------------------------------------------------------------------

    In addition, the Commission understands that the current 
chaperoning requirements have been criticized as impractical and 
imposing unnecessary operational and compliance burdens, particularly 
for communications with broker-dealers in time zones outside those of 
the United States. In this regard, the Commission believes that the 
investor protections intended to be provided by the presence of 
associated persons of U.S. registered broker-dealers during in-person 
or telephonic communications between foreign associated persons of 
foreign broker-dealers and U.S. investors, as under the current rule, 
could be achieved by less operationally challenging methods. 
Specifically, foreign associated persons that are subject to statutory 
disqualification specified in Section 3(a)(39) of the Exchange Act 
would be precluded from contacting qualified investors and foreign 
broker dealers would be required to make disclosures to those 
investors, placing them on notice that the foreign broker-dealer is 
regulated by a foreign securities authority and not by the Commission 
and, in the case of Exemption (A)(1), informing them that U.S. 
segregation requirements, U.S. bankruptcy protections and protections 
under the SIPA would apply to any funds and securities held by the 
foreign broker-dealer.\188\ Accordingly, the proposed rule would allow 
a foreign broker-dealer to have unchaperoned visits within the United 
States and communications, both oral and electronic, with qualified 
investors, as long as a U.S. registered broker-dealer assumes certain 
limited responsibilities in connection with the foreign broker-dealer's 
activities, as described above. As a result, the proposed rule should 
facilitate communications between foreign broker-dealers and qualified 
investors to communicate, while utilizing more efficient methods 
designed to protect qualified investors.
---------------------------------------------------------------------------

    \188\ See proposed Rule 15a-6(a)(3)(i)(B) and (D).
---------------------------------------------------------------------------

    Second, the proposed rule would provide U.S. registered broker-
dealers and foreign broker-dealers with greater flexibility in how they 
conduct business under paragraph (a)(3) of Rule 15a-6. For instance, 
U.S. registered broker-dealers acting under Exemption (A)(1) would be 
allowed to maintain copies of books and records in the form prescribed 
by the foreign securities authority and with the foreign broker-dealer. 
In general, the proposed rule would allow a foreign broker-dealer to 
effect transactions on behalf of qualified investors and custody 
qualified investor funds and securities relating to any resulting 
transactions with more limited participation in the transaction by a 
U.S. registered broker-dealer. Among other things, this would have the 
benefit of eliminating the need for the U.S. registered broker-dealer 
to ``double book'' transactions under current Rule 15a-6(a)(3). It 
would also allow the foreign broker-dealer more flexibility in how it 
communicates with qualified investors, as described above.
    Third, while proposed Rule 15a-6 would impose certain costs on U.S. 
registered broker-dealers acting under either exemption, as discussed 
below, these costs would be markedly less than under current Rule 15a-
6. Most importantly, the proposed rule would significantly reduce the 
cost for a U.S. registered broker-dealer to intermediate transactions 
under paragraph (a)(3) of Rule 15a-6.
    Under Exemption (A)(1), the U.S. registered broker-dealer would not 
be required to effect transactions--and perform all of the functions 
associated with effecting transactions, including, for example, 
compliance with recording and recordkeeping rules, issuing 
confirmations and maintaining custody of customer funds and 
securities--on behalf of the qualified investor. Instead, under the 
proposed rule, the U.S. registered broker-dealer would only be required 
to collect and make available to the Commission certain limited 
information. Specifically, the proposed rule would require a U.S. 
registered broker-dealer acting under Exemption (A)(1) to maintain 
certain books and records, including confirmations and statements 
issued by the foreign broker-dealer to the qualified investor, but 
would permit the U.S. registered broker-dealer to maintain those books 
and records in the form, manner and for the

[[Page 39207]]

periods prescribed by the foreign securities authority regulating the 
foreign broker-dealer and with the foreign broker-dealer.\189\ The 
Commission believes that all U.S. registered broker-dealers acting 
under Exemption (A)(1) in Rule 15a-6(a)(3) relationships would take 
advantage of this option, thereby significantly lowering costs 
associated with collecting and maintaining books and records, including 
collection of information burdens under the Paperwork Reduction Act and 
associated costs. There would also be significant cost savings for U.S. 
registered broker-dealers acting under Exemption (A)(1) because they 
would not have to clear and settle transactions, safeguard customer 
funds and securities, or issue confirmations.
---------------------------------------------------------------------------

    \189\ See proposed Rule 15a-6(a)(3)(iii)(A)(1) and (2).
---------------------------------------------------------------------------

    In addition, regardless of whether the U.S. registered broker-
dealer acts under Exemption (A)(1) or Exemption (A)(2), the proposed 
rule would eliminate the current rule's requirement that the U.S. 
registered broker-dealer make certain determinations regarding the 
foreign broker-dealer and its associated persons. Under the proposed 
rule, the U.S. registered broker-dealer would only be required to 
obtain representations from the foreign broker-dealer regarding that 
information.\190\ This would be a significant cost savings with respect 
to the current rule because the U.S. registered broker-dealer would not 
have to make the determination itself for each foreign broker-dealer 
and its associated persons as under the current rule.
---------------------------------------------------------------------------

    \190\ See proposed Rule 15a-6(a)(3)(iii)(C).
---------------------------------------------------------------------------

    Finally, the proposed rule would reduce a foreign broker-dealer's 
costs of meeting the conditions of the exemption in two principal ways. 
First, the proposed amendments would make it less burdensome for 
foreign broker-dealers to communicate directly with qualified 
investors. Currently, Rule 15a-6 requires an associated person of a 
U.S. registered broker-dealer to chaperone certain in-person visits and 
oral communications between foreign associated persons and U.S. 
institutional investors, with certain exceptions, and chaperone in-
person visits between foreign associated persons and major U.S. 
institutional investors under certain conditions.\191\ The proposed 
rule would allow a foreign broker-dealer to hold in-person meetings and 
have oral and electronic communications with qualified investors 
without the intermediation of an U.S. registered broker-dealer. This 
would result in significant cost savings.
---------------------------------------------------------------------------

    \191\ See 17 CFR 240.15a-6(a)(3)(ii)(A)(1) and (iii)(B). This 
would be a cost savings for U.S. registered broker-dealers as well, 
as they would no longer need to chaperone the in-person visits and 
oral communications of foreign associated persons with U.S. 
investors.
---------------------------------------------------------------------------

    Second, the proposed rule would provide a foreign broker-dealer 
with the alternative of having a U.S. registered broker-dealer act 
under Exemption (A)(1) or under Exemption (A)(2). These alternatives 
would allow the foreign broker-dealer and the U.S. registered broker-
dealer, as well as the qualified investors, to determine the most cost 
effective method for complying with the rule.
2. Expected Costs
    Of course, reducing the cost of complying with paragraph (a)(3) of 
Rule 15a-6 may encourage more U.S. registered broker-dealers and 
foreign broker-dealers to rely on the rule, which would increase the 
overall costs associated with complying with the requirements of Rule 
15a-6. As noted above, the increased flexibility of the proposed rule 
would provide U.S. investors with increased access to foreign broker-
dealers and foreign markets, which would presumably lead to increased 
transactional activity under Rule 15a-6(a)(3). As a result, foreign 
broker-dealers may experience some incremental cost increase. In 
addition, because some of the responsibilities under paragraph (a)(3) 
of the proposed rule would be shifted to the foreign broker-dealer, 
foreign broker-dealers may incur some greater costs, some of which are 
described below. We believe these increased costs would be 
insignificant. For example, because foreign broker-dealers, as members 
of foreign exchanges, typically are required to clear and settle 
transactions in foreign securities, regardless of the requirements of 
Rule 15a-6(a)(3), shifting the responsibility for clearing and settling 
from the U.S. registered broker-dealer to foreign broker-dealers would 
not increase their cost of complying with Rule 15a-6. Similarly, other 
foreign governments or securities regulators may have laws or rules 
comparable to the provisions in Section 3(a)(39) of the Exchange Act 
related to statutory disqualification. Requiring foreign broker-dealers 
to review the fitness of their associated persons under the provisions 
of Section 3(a)(39), in addition to meeting the requirements of 
equivalent foreign laws or rules, would impose an incremental cost on 
those foreign broker-dealers.
    Shifting some of the responsibilities under paragraph (a)(3) of the 
proposed rule to foreign broker-dealers would have an effect on the 
business activities of U.S. registered broker-dealers. For example, 
shifting the responsibility for clearing and settling from the U.S. 
registered broker-dealer to foreign broker-dealers would reduce the 
compensation received by U.S. registered broker-dealers for these and 
other services. The elimination of the chaperoning requirements of the 
current rule may also reduce income to U.S. registered broker-dealers 
that perform such services for foreign broker-dealers.
    In addition, as described above, certain provisions of the proposed 
rule would impose ``collection of information'' requirements within the 
meaning of the Paperwork Reduction Act on foreign broker-dealers, U.S. 
registered broker-dealers and U.S. fiduciaries.\192\ For each of the 
collections of information that would be imposed by the proposed rule, 
the relevant respondent or respondents would incur an hour burden in 
complying with the collection of information requirements. For example, 
as described above, proposed paragraph (a)(3)(i)(B) would require that 
a foreign broker-dealer make a determination that its foreign 
associated persons effecting transactions with a qualified investor are 
not subject to a statutory disqualification. As explained, we estimate 
each foreign broker-dealer that takes advantage of the exemption under 
the proposed rule would spend approximately 10 hours per year in making 
the determination required by proposed paragraph (a)(3)(i)(B). While 
not a burden for the purposes of the PRA, the foreign broker-dealer 
would also incur certain costs related to the 10 hours per year spent 
making the determination required by proposed paragraph (a)(3)(i)(B). 
Specifically, the determination likely would be made by an employee of 
the foreign broker-dealer to whom the broker-dealer must pay a salary 
or hourly wage. Therefore, the salaries and wages foreign broker-
dealers, U.S. registered broker-dealers and U.S. fiduciaries must pay 
to the employees who would perform the work required by the collections 
of information imposed by the proposed rule would be additional costs 
of meeting the exemption in the proposed rule. These costs are 
described in the following paragraphs.
---------------------------------------------------------------------------

    \192\ See Part VI.A., supra.
---------------------------------------------------------------------------

a. Collection of Information Costs to Foreign Broker-Dealers
    As described above in the Paperwork Reduction Act Analysis, 
proposed paragraphs (a)(3)(i)(B), (a)(3)(i)(C), (a)(3)(i)(D), 
(a)(3)(iii)(C) and (a)(4)(vi)(B) each would impose collection of

[[Page 39208]]

information requirements on foreign broker-dealers. Other than proposed 
paragraph (a)(3)(i)(C), these collections of information would require 
the foreign broker-dealer to make certain legal determinations, provide 
or obtain legal representations or draft disclosures. Therefore, the 
Commission believes that the type of work required by each requirement 
would be performed by a compliance attorney at each foreign broker-
dealer. Proposed paragraph (a)(3)(i)(C), however, is a record-keeping 
requirement and the Commission believes that this type of work would be 
performed by a compliance clerk at each foreign broker-dealer.
    The Commission estimates that foreign broker-dealers pay compliance 
attorneys at an hourly rate of (U.S.) $270.00 and compliance clerks at 
an hourly rate of (U.S.) $62.00.\193\ Based on the estimates of the 
hourly burden imposed by proposed paragraphs (a)(3)(i)(B), 
(a)(3)(i)(B), (a)(3)(i)(D), (a)(3)(iii)(C) and (a)(4)(vi)(B) on foreign 
broker-dealers, the Commission further estimates that foreign broker-
dealers would incur a total cost of (U.S.) $6,560.00 per year complying 
with the collection of information requirements that would be imposed 
by those paragraphs.\194\
---------------------------------------------------------------------------

    \193\ See Securities Industry and Financial Markets 
Association's ``Management & Professional Earnings in the Securities 
Industry--2007'' (available at: http://www.sifma.org/research/
surveys/ professional-earning.shtml). The SIFMA study reflects a 
survey of U.S. earnings. We estimate that the earnings of comparable 
employees at foreign broker-dealers are similar, but solicit comment 
on whether foreign salaries vary and, if so, how.
    \194\ 10 hours per year at $270.00 per hour complying with 
proposed paragraph (a)(3)(i)(B), 10 hours per year at $62.00 per 
hour complying with proposed paragraph (a)(3)(i)(C), 2 hours per 
year at $270.00 per hour complying with proposed paragraph 
(a)(3)(i)(D), 5 hours per year at $270.00 per hour complying with 
proposed paragraph (a)(3)(iii)(C) and 5 hours per year at $270.00 
per hour complying with proposed paragraph (a)(4)(vi)(B). See Part 
VI.A., supra.
---------------------------------------------------------------------------

b. Collection of Information Costs to U.S. Registered Broker-Dealers
    As described above in the Paperwork Reduction Act Analysis, 
proposed paragraphs (a)(3)(iii)(B), (C) and (D) each would impose 
collection of information requirements on U.S. registered broker-
dealers. These collections of information would require the U.S. 
registered broker-dealer to obtain and record certain legal 
representations made by foreign broker-dealers. The Commission believes 
that this type of work would be performed by a compliance attorney at 
each U.S. registered broker-dealer. The Commission estimates that U.S. 
registered broker-dealers pay compliance attorneys at an hourly rate of 
(U.S.) $270.00. Based on the estimates of the hourly burden imposed by 
proposed paragraphs (a)(3)(iii)(B), (C) and (D) on U.S. registered 
broker-dealers, the Commission further estimates that U.S. registered 
broker-dealers intermediating transactions for foreign broker-dealers 
relying on Exemption (A)(1) would incur a total cost of (U.S.) 
$10,800.00 per year complying with the collection of information 
requirements that would be imposed by those paragraphs.\195\ The 
Commission estimates that U.S. registered broker-dealers intermediating 
transactions for foreign broker-dealers relying on Exemption (A)(2) 
would incur a total cost of (U.S.) $13,527.00 per year complying with 
the collection of information requirements that would be imposed by 
those paragraphs.\196\
---------------------------------------------------------------------------

    \195\ 5 hours per year at $270.00 per hour and 35 hours per year 
at $270.00 per hour. See id.
    \196\ 8 hours per year at $270.00 per hour and 50.1 hours per 
year at $270.00 per hour. See id. As discussed above in the PRA 
analysis, U.S. registered broker-dealers intermediating transactions 
for foreign broker-dealers relying on Exemption (A)(1) would spend 
different amounts of time complying with the collection of 
information requirements of proposed paragraphs (a)(3)(iii)(B), (C) 
and (D) than U.S. registered broker-dealers intermediating 
transactions for foreign broker-dealers relying on Exemption (A)(2). 
See Part VI.A., supra. Therefore, the monetary costs incurred in 
complying with these paragraphs would also be different for 
intermediating U.S. registered broker-dealers, depending on the 
exemption relied upon by the foreign broker-dealer. See id.
---------------------------------------------------------------------------

c. Collection of Information Costs to U.S. Fiduciaries
    As described above in the Paperwork Reduction Act Analysis, 
proposed paragraph (a)(4)(vi)(B) would impose collection of information 
requirements on U.S. fiduciaries in the form of a legal representation 
provided to foreign broker-dealers that, for each account managed by a 
U.S. fiduciary, the account is managed in a fiduciary capacity for a 
foreign resident client. The Commission believes that these legal 
representations would be made by a compliance attorney at each U.S. 
fiduciary.
    The Commission estimates that U.S. fiduciaries pay compliance 
attorneys at an hourly rate of (U.S.) $270.00. Based on the estimates 
of the hourly burden imposed by proposed paragraphs (a)(4)(vi)(B) on 
U.S. fiduciaries, the Commission further estimates that U.S. 
fiduciaries would incur a total cost of (U.S.) $1,350.00 per year 
complying with the collection of information requirements that would be 
imposed by that paragraph (5 hours per year at $270.00 per hour = 
$1,350.00 per year).\197\
---------------------------------------------------------------------------

    \197\ See id.
---------------------------------------------------------------------------

3. Comment Solicited
    We solicit comment on the costs and benefits to U.S. investors, 
foreign broker-dealers, U.S. registered broker-dealers and others who 
may be affected by the proposed amendments to Rule 15a-6. We request 
views on the costs and benefits described above as well as on any other 
costs and benefits that could result from adoption of the proposed rule 
amendments. The Commission renews its request for comment on the 
Commission's estimates of the hour burdens that would be imposed by the 
collections of information in the proposed rule and also solicits 
comment on its calculation of the monetary cost of those burdens. In 
particular, the Commission requests comment on whether the work 
required by the collections of information would be performed by the 
individuals identified. For the cost of work that would be performed by 
employees of foreign broker-dealers, is it reasonable to assume that 
such employees generally earn salaries and wages similar to comparable 
employees of U.S. registered broker-dealers, after conversion to U.S. 
dollars? Commenters are requested to provide empirical data and other 
factual support for their views, if possible.

C. Consideration of Burden on Competition, and on Promotion of 
Efficiency, Competition and Capital Formation

    Section 3(f) of the Exchange Act requires the Commission, whenever 
it engages in rulemaking and is required to consider or determine 
whether an action is necessary or appropriate in the public interest, 
to consider whether the action would promote efficiency, competition 
and capital formation.\198\ Exchange Act Section 23(a)(2) requires the 
Commission, in making rules under the Exchange Act, to consider the 
impact that any such rule would have on competition. This section also 
prohibits the Commission from adopting any rule that would impose a 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act.\199\
---------------------------------------------------------------------------

    \198\ 15 U.S.C. 78c(f).
    \199\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The Commission believes the proposed amendments would not impose 
any burden on competition not necessary or appropriate in furtherance 
of the Exchange Act. By streamlining the conditions under which a 
foreign broker-dealer may operate without

[[Page 39209]]

triggering the registration requirements of Section 15(a)(1) or 
15B(a)(1) of the Exchange Act and the reporting and other requirements 
of the Exchange Act (other than Sections 15(b)(4) and 15(b)(6)), the 
proposed amendments to Rule 15a-6 should promote competition by 
enhancing the ability of foreign broker-dealers to compete with U.S. 
registered broker-dealers in the U.S. market, particularly with respect 
to transactions in foreign securities.\200\
---------------------------------------------------------------------------

    \200\ See generally, Part III.D.1., supra.
---------------------------------------------------------------------------

    We note, in particular, that making Exemption (A)(1) available only 
to a foreign broker-dealer conducting a predominantly foreign business 
would provide U.S. investors increased access to foreign expertise and 
foreign securities and markets without creating opportunities for 
regulatory arbitrage vis-[agrave]-vis U.S. securities markets.\201\ As 
discussed above, this is particularly important because, under 
Exemption (A)(1), for the first time, a foreign broker-dealer would be 
able to provide full-service brokerage services (including maintaining 
custody of funds and securities from resulting transactions) to U.S. 
investors.\202\ We are proposing an 85 percent threshold for 
determining whether a foreign broker-dealer conducts a predominantly 
foreign business because a lower threshold may allow a foreign broker-
dealer to conduct significant business in U.S. securities with U.S. 
investors without being regulated by the Commission. While we believe 
that the 85% threshold would be effective in eliminating the 
opportunities for regulatory arbitrage, allowing foreign broker-dealers 
to conduct any business in U.S. securities could affect the competitive 
positions of U.S. registered broker-dealers and foreign broker-
dealers.\203\
---------------------------------------------------------------------------

    \201\ See Part III.D.1.a., supra.
    \202\ See id.
    \203\ See Part III.D.1.a.ii., supra.
---------------------------------------------------------------------------

    Exemption (A)(2), which would not require a foreign broker-dealer 
to conduct a predominantly foreign business, would allow foreign 
broker-dealers to compete more directly with U.S. registered broker-
dealers without limitation on the type of security, U.S. or foreign. In 
order to preserve measures of investor protection, however, the 
proposed rule would require a U.S. registered broker-dealer to keep 
books and records and act as custodian of funds and securities.\204\
---------------------------------------------------------------------------

    \204\ See Part III.D.1.b.i., supra.
---------------------------------------------------------------------------

    We solicit comment on whether the proposed amendments would promote 
competition, including whether investors would be more or less likely 
to choose to invest in foreign markets under the proposed rule.
    The Commission also believes the proposed amendments would promote 
efficiency. As U.S. investors increasingly invest in securities whose 
primary market is outside the United States, the ability of these 
investors to obtain ready access to foreign markets has grown in 
importance.\205\ In some cases, foreign broker-dealers may offer such 
access to these U.S. investors by more efficient means than a U.S. 
registered broker-dealer could. For example, a foreign broker-dealer 
may more efficiently provide a U.S. investor with the means to execute 
trades quickly in a wide range of foreign securities markets. A foreign 
broker-dealer may also offer expertise and access to research reports 
concerning foreign companies, industries and market environments.\206\ 
Allowing foreign broker-dealers to provide these services to certain 
classes of U.S. investors without registering, but subject to the 
conditions of proposed Rule 15a-6, would further stimulate the 
competition and efficiencies promoted by the current rule.
---------------------------------------------------------------------------

    \205\ See Part III.A., supra.
    \206\ See generally, Part III.D.1., supra.
---------------------------------------------------------------------------

    The proposed amendments to Rule 15a-6 are intended to promote 
efficiency by reducing the costs of compliance for both U.S. registered 
broker-dealers and foreign broker-dealers conducting transactions 
pursuant to paragraph (a)(3). As discussed above, the proposed rule 
should decrease the burden on U.S. registered broker-dealers acting 
under both Exemption (A)(1) and Exemption (A)(2) for foreign broker-
dealers. While some of this burden would be shifted to foreign broker-
dealers, overall the burden of complying with the proposed rule would 
be lessened. As a result, we believe that the proposed rule would 
enable U.S. investors to more efficiently gain access to foreign 
broker-dealers.
    Although the proposed amendments may facilitate capital formation 
and capital raising by foreign broker-dealers by increasing the 
available pool of U.S. investors foreign broker-dealers can contact 
directly, the Commission does not believe that they would have any 
significant effect on capital formation. We note that U.S. investors 
can currently obtain access to foreign securities through U.S. broker-
dealers.
    We solicit comment on whether the proposed amendments would impose 
a burden on competition or whether they would promote efficiency, 
competition and capital formation. Commenters are requested to provide 
empirical data and other factual support for their views if possible.

D. Consideration of the Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,'' \207\ the Commission must advise the Office 
of Management and Budget as to whether the proposed amendments to Rule 
15a-6 constitute a ``major'' rule. Under SBREFA, a rule is considered 
``major'' where, if adopted, it would result or is likely to result in: 
An annual effect on the economy of $100 million or more (either in the 
form of an increase or a decrease); a major increase in costs or prices 
for consumers or individual industries; or a significant adverse effect 
on competition, investment, or innovation.
---------------------------------------------------------------------------

    \207\ Pub. L. 104-121, Title II, 110 Stat. 857 (1996) (codified 
in various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C. 
601).
---------------------------------------------------------------------------

    If a rule is ``major,'' its effectiveness would generally be 
delayed for 60 days pending Congressional review. We request comment on 
the potential impact of the proposed amendments on the economy on an 
annual basis. Commenters are requested to provide empirical data and 
other factual support for their views to the extent possible.

E. Regulatory Flexibility Certification

    Section 3(a) of the Regulatory Flexibility Act (``RFA'') requires 
the Commission to undertake an initial regulatory flexibility analysis 
of the impact of a proposed rule on small entities, unless the 
Commission certifies that the rule, if adopted, would not have a 
significant economic impact on a substantial number of small entities. 
The application of the RFA to proposed Rule 15a-6 is limited, because 
its exemptive provisions would be restricted to foreign broker-dealers, 
which need not be considered under the RFA. In addition, to the extent 
that the proposed rule, if adopted, would impose any costs on U.S. 
registered broker-dealer affiliates of such foreign broker-dealers or 
on other domestic broker-dealers, those costs are not significant and 
would not impact a substantial number of small domestic broker-dealers. 
Staff discussions with industry have indicated that small domestic 
broker-dealers generally are not engaged in Rule 15a-6(a)(3) 
arrangements with foreign broker-dealers, and have not indicated that 
this would change in the event the conditions of the rule were amended. 
Accordingly, the Commission certifies that the proposed rule, if 
adopted, would not have a significant economic

[[Page 39210]]

impact on a substantial number of small entities.

VII. Statutory Basis

    Pursuant to the Exchange Act and particularly sections 3, 10, 15, 
17, 23, 30 and 36 thereof, 15 U.S.C. 78c, 78j, 78o, 78q, 78w, 78dd and 
78mm, the Commission proposes to amend Sec.  240.15a-6 of Title 17 of 
the Code of Federal Regulations in the manner set forth below.

VIII. Text of Proposed Amendments

Lists of Subjects in 17 CFR Part 240

    Broker-dealers, Reporting and recordkeeping requirements, 
Securities.
    In accordance with the foregoing, Title 17, Chapter II of the Code 
of Federal Regulations is proposed to be amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 
80b-11 and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise noted.
* * * * *
    2. Revise Sec.  240.15a-6 to read as follows:


Sec.  240.15a-6  Exemption of certain foreign brokers or dealers.

    (a) A foreign broker or dealer shall be exempt from the 
registration requirements of sections 15(a)(1) and 15B(a)(1) of the Act 
and the reporting and other requirements of the Act (other than 
sections 15(b)(4) and 15(b)(6)), and the rules and regulations 
thereunder, that apply specifically to a broker or dealer that is not 
registered with the Commission solely by virtue of its status as a 
broker or dealer, with respect to a particular transaction or 
solicitation, to the extent that the foreign broker or dealer operates 
in compliance with paragraph (a)(1), (a)(2), (a)(3), (a)(4) or (a)(5) 
of this section with respect to such transaction or solicitation.
    (1) Unsolicited trades. The foreign broker or dealer effects 
transactions in securities with or for persons that have not been 
solicited by the foreign broker or dealer.
    (2) Research reports. The foreign broker or dealer furnishes 
research reports to qualified investors, and effects transactions in 
the securities discussed in the research reports with or for those 
qualified investors, provided that the following conditions are 
satisfied:
    (i) The research reports do not recommend the use of the foreign 
broker or dealer to effect trades in any security;
    (ii) The foreign broker or dealer does not initiate contact with 
those qualified investors to follow up on the research reports, and 
does not otherwise induce or attempt to induce the purchase or sale of 
any security by those qualified investors;
    (iii) If the foreign broker or dealer has a relationship with a 
registered broker or dealer that satisfies the requirements of 
paragraph (a)(3) of this section, any transactions with the foreign 
broker or dealer in securities discussed in the research reports are 
effected pursuant to the provisions of paragraph (a)(3) of this 
section; and
    (iv) The foreign broker or dealer does not provide research to U.S. 
persons pursuant to any express or implied understanding that those 
U.S. persons will direct commission income to the foreign broker or 
dealer.
    (3) Solicited trades. The foreign broker or dealer induces or 
attempts to induce the purchase or sale of any security by a qualified 
investor, provided that the following conditions are satisfied:
    (i) The foreign broker or dealer:
    (A) Provides the Commission (upon request or pursuant to agreements 
reached between any foreign securities authority and the Commission or 
the U.S. government) with any information or documents within the 
possession, custody, or control of the foreign broker or dealer, any 
testimony of foreign associated persons, and any assistance in taking 
the evidence of other persons, wherever located, that the Commission 
requests and that relates to transactions under paragraph (a)(3) of 
this section, except that if, after the foreign broker or dealer has 
exercised its best efforts to provide the information, documents, 
testimony, or assistance, including requesting the appropriate 
governmental body and, if legally necessary, its customers (with 
respect to customer information) to permit the foreign broker or dealer 
to provide the information, documents, testimony, or assistance to the 
Commission, the foreign broker or dealer is prohibited from providing 
this information, documents, testimony, or assistance by applicable 
foreign law or regulations, then this paragraph (a)(3)(i)(A) shall not 
apply and the foreign broker or dealer will be subject to paragraph (c) 
of this section;
    (B) Determines that the foreign associated person of the foreign 
broker or dealer effecting transactions with the qualified investor is 
not subject to a statutory disqualification specified in section 
3(a)(39) of the Act;
    (C) Has in its files, and will make available upon request by a 
registered broker or dealer satisfying the requirements described in 
paragraph (a)(3)(iii) of this section or the Commission, the types of 
information specified in Sec.  240.17a-3(a)(12), provided that the 
information required by paragraph (a)(12)(i)(D) of Sec.  240.17a-3 
shall include sanctions imposed by foreign securities authorities, 
foreign exchanges, or foreign associations, including without 
limitation those described in section 3(a)(39) of the Act; and
    (D) Discloses to the qualified investor:
    (1) That the foreign broker or dealer is regulated by a foreign 
securities authority and not by the Commission; and
    (2) Solely when the foreign broker or dealer is relying on 
paragraph (a)(3)(iii)(A)(1) of this section, that U.S. segregation 
requirements, U.S. bankruptcy protections and protections under the 
Securities Investor Protection Act will not apply to any funds or 
securities held by the foreign broker or dealer;
    (ii) The foreign associated person of the foreign broker or dealer 
effecting transactions with the qualified investor conducts all 
securities activities from outside the United States, except that the 
foreign associated person may conduct visits to qualified investors 
within the United States, provided that transactions in any securities 
discussed during visits by the foreign associated person with qualified 
investors are effected pursuant to paragraph (a)(3) of this section; 
and
    (iii) A registered broker or dealer:
    (A) Is responsible for either:
    (1) Maintaining copies of all books and records, including 
confirmations and statements issued by the foreign broker or dealer to 
the qualified investor, relating to any resulting transactions, except 
that such books and records may be maintained:
    (i) In the form, manner and for the periods prescribed by the 
foreign securities authority regulating the foreign broker or dealer; 
and
    (ii) With the foreign broker or dealer, provided that the 
registered broker or dealer makes a reasonable determination that 
copies of any or all of such books and records can be furnished 
promptly to the Commission, and promptly provides to the Commission any 
such books and records, upon request; or

[[Page 39211]]

    (2) (i) Maintaining books and records, including copies of all 
confirmations issued by the foreign broker or dealer to the qualified 
investor, relating to any resulting transactions; and
    (ii) Receiving, delivering and safeguarding funds and securities in 
connection with the transactions on behalf of the qualified investor in 
compliance with Sec.  240.15c3-3;
    (B) Obtains from the foreign broker or dealer and each foreign 
associated person written consent to service of process for any civil 
action brought by or proceeding before the Commission or a self-
regulatory organization (as defined in section 3(a)(26) of the Act), 
providing that process may be served on them by service on the 
registered broker or dealer in the manner set forth on the registered 
broker's or dealer's current Form BD (17 CFR 249.501);
    (C) Obtains from the foreign broker or dealer a representation that 
the foreign broker or dealer has complied with the requirements of 
paragraphs (a)(3)(i)(B) and (C) of this section; and
    (D) Maintains records of the written consents required by paragraph 
(a)(3)(iii)(B) and the representations required by paragraph 
(a)(3)(iii)(C) of this section, and makes these records available to 
the Commission upon request.
    (4) Counterparties and specific customers. The foreign broker or 
dealer effects transactions in securities with or for, or induces or 
attempts to induce the purchase or sale of any security by:
    (i) A registered broker or dealer, whether the registered broker or 
dealer is acting as principal for its own account or as agent for 
others, or a bank acting pursuant to an exception or exemption from the 
definition of ``broker'' or ``dealer'' in section 3(a)(4)(B), 
3(a)(4)(E), or 3(a)(5)(C) of the Act or the rules thereunder;
    (ii) The African Development Bank, the Asian Development Bank, the 
Inter-American Development Bank, the International Bank for 
Reconstruction and Development, the International Monetary Fund, the 
United Nations and their agencies, affiliates and pension funds;
    (iii) A foreign person temporarily present in the United States, 
with whom the foreign broker or dealer had a bona fide, pre-existing 
relationship before the foreign person entered the United States;
    (iv) Any agency or branch of a U.S. person permanently located 
outside the United States, provided that the transactions occur outside 
the United States;
    (v) U.S. citizens resident outside the United States, provided that 
the transactions occur outside the United States, and that the foreign 
broker or dealer does not direct its selling efforts toward 
identifiable groups of U.S. citizens resident abroad; or
    (vi) Any U.S. person, other than a registered broker or dealer or a 
bank acting pursuant to an exception or exemption from the definition 
of ``broker'' or ``dealer'' in section 3(a)(4)(B), 3(a)(4)(E), or 
3(a)(5)(C) of the Act or the rules thereunder, that acts in a fiduciary 
capacity for an account of a foreign resident client, provided the 
foreign broker or dealer:
    (A) Only effects transactions in securities with or for, or induces 
or attempts to induce the purchase or sale of securities by, the U.S. 
person in the U.S. person's capacity as a fiduciary to an account of a 
foreign resident client; and
    (B) Obtains and maintains a representation from the U.S. person 
that the account is managed in a fiduciary capacity for a foreign 
resident client.
    (5) Familiarization with foreign options exchanges. The foreign 
broker or dealer effects transactions in options on foreign securities 
listed on a foreign options exchange of which it is a member for a 
qualified investor that has not been solicited by the foreign broker or 
dealer, except that:
    (i) A representative of the foreign options exchange located in a 
foreign office or a representative office in the United States may:
    (A) Communicate with persons that the representative of the foreign 
options exchange reasonably believes are qualified investors, including 
through participation in programs and seminars in the United States, 
regarding the foreign options exchange, the options on foreign 
securities traded on the foreign options exchange and, if applicable, 
the foreign options exchange's OTC options processing service;
    (B) Provide persons that the representative of the foreign options 
exchange reasonably believes are qualified investors with a disclosure 
document that provides an overview of the foreign options exchange and 
the options on foreign securities traded on that exchange, including 
the differences from standardized options in the U.S. options market 
and special factors relevant to transactions by U.S. persons in options 
on the foreign options exchange; and
    (C) Make available to persons that the representative of the 
foreign options exchange reasonably believes are qualified investors, 
solely upon request of the investor, a list of participants on the 
foreign options exchange permitted to take orders from the public and 
any registered broker or dealer affiliates of such participants;
    (ii) The foreign broker or dealer may:
    (A) Make available to qualified investors the foreign options 
exchange's OTC options processing service; and
    (B) Provide qualified investors, in response to an unsolicited 
inquiry concerning options on foreign securities traded on the foreign 
options exchange, with a disclosure document that provides an overview 
of the foreign options exchange and the options on foreign securities 
traded on that exchange, including the differences from standardized 
options in the U.S. domestic options market and special factors 
relevant to transactions by U.S. persons in options on that exchange; 
and
    (iii) The foreign exchange may make available to qualified 
investors through the foreign broker or dealer the foreign options 
exchange's OTC options processing service.
    (b) Definitions. When used in this section:
    (1) The term foreign associated person shall mean any natural 
person domiciled outside the United States who is an associated person, 
as defined in section 3(a)(18) of the Act, of the foreign broker or 
dealer and who participates in the solicitation of a qualified investor 
under paragraph (a)(3) of this section.
    (2) The term foreign broker or dealer shall mean any non-U.S. 
resident person (including any U.S. person engaged in business as a 
broker or dealer entirely outside the United States, except as 
otherwise permitted by this section) that is not an office or branch 
of, or a natural person associated with, a registered broker or dealer, 
whose securities activities, if conducted in the United States, would 
be those of a ``broker'' or ``dealer,'' as defined in section 3(a)(4) 
or 3(a)(5) of the Act, and that:
    (i) Solely for purposes of paragraph (a)(3) of this section, is 
regulated for conducting securities activities, including the specific 
activities in which the foreign broker or dealer engages with the 
qualified investor, in a foreign country by a foreign securities 
authority; and
    (ii) Solely for purposes of paragraphs (a)(3)(iii)(A)(1) and 
(a)(4)(vi) of this section, conducts a foreign business.
    (3) The term foreign business shall mean the business of a foreign 
broker or dealer with qualified investors and foreign resident clients 
where at least 85% of the aggregate value of the securities purchased 
or sold in transactions conducted pursuant to both paragraphs (a)(3) 
and (a)(4)(vi) of this section by the foreign broker or dealer

[[Page 39212]]

calculated on a rolling two-year basis is derived from transactions in 
foreign securities, except that the foreign broker or dealer may rely 
on the calculation made for the prior year for the first 60 days of a 
new year.
    (4) The term foreign resident client shall mean:
    (i) Any entity not organized or incorporated under the laws of the 
United States and not engaged in a trade or business in the United 
States for federal income tax purposes;
    (ii) Any natural person not a U.S. resident for federal income tax 
purposes; and
    (iii) Any entity not organized or incorporated under the laws of 
the United States 85 percent or more of whose outstanding voting 
securities are beneficially owned by persons in paragraphs (b)(4)(i) 
and (b)(4)(ii) of this section.
    (5) The term foreign security shall mean:
    (i) An equity security (as defined in 17 CFR 230.405) of a foreign 
private issuer (as defined in 17 CFR 230.405);
    (ii) A debt security (as defined in 17 CFR 230.902) of a foreign 
private issuer (as defined in 17 CFR 230.405);
    (iii) A debt security (as defined in 17 CFR 230.902) issued by an 
issuer organized or incorporated in the United States in connection 
with a distribution conducted solely outside the United States pursuant 
to Regulation S (17 CFR 230.903);
    (iv) A security that is a note, bond, debenture or evidence of 
indebtedness issued or guaranteed by a foreign government (as defined 
in 17 CFR 230.405) that is eligible to be registered with the 
Commission under Schedule B of the Securities Act of 1933; and
    (v) A derivative instrument on a security described in paragraph 
(b)(5)(i), (b)(5)(ii), (b)(5)(iii), or (b)(5)(iv) of this section.
    (6) The term OTC options processing service shall mean a mechanism 
for submitting an options contract on a foreign security that has been 
negotiated and completed in an over-the-counter transaction to a 
foreign options exchange so that the foreign options exchange may 
replace that contract with an equivalent standardized options contract 
that is listed on the foreign options exchange and that has the same 
terms and conditions as the over-the-counter options.
    (7) The term registered broker or dealer shall mean a person that 
is registered with the Commission under section 15(b), 15B(a)(2), or 
15C(a)(2) of the Act.
    (8) The term United States shall mean the United States of America, 
including the States and any territories and other areas subject to its 
jurisdiction.
    (c) Withdrawal of exemption. The Commission, by order after notice 
and opportunity for hearing, may withdraw the exemption provided in 
paragraph (a)(3) of this section with respect to the subsequent 
activities of a foreign broker or dealer or class of foreign brokers or 
dealers conducted from a foreign country, if the Commission finds that 
the laws or regulations of that foreign country have prohibited the 
foreign broker or dealer, or one of a class of foreign brokers or 
dealers, from providing, in response to a request from the Commission, 
information or documents within its possession, custody, or control, 
testimony of foreign associated persons, or assistance in taking the 
evidence of other persons, wherever located, related to activities 
exempted by paragraph (a)(3) of this section.

    Dated: June 27, 2008.

    By the Commission.
Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-15000 Filed 7-7-08; 8:45 am]

BILLING CODE 8010-01-P
