What is a Broker-Dealer? - Davis Polk & Wardwell

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§ 1A:7.2 BROKER-DEALER REGULATION Broker-Dealer (an “(a)(3) Arrangement”). 386 Under an (a)(3) Arrangement, the Registered Broker-Dealer is responsible for all aspects of “effecting” transactions with U.S. investors other than the negotiation of terms and (in the case of foreign securities) execution. The Registered Broker-Dealer must: (i) issue all required confirmations in compliance with Rule 10b-10 and periodic account statements to the U.S. institutional investor or the major U.S. institutional investor; (ii) extend or arrange for the extension of any credit to investors in connection with the purchase of securities; (iii) maintain records in accordance with U.S. requirements, including those required by Exchange Act Rules 17a-3 and 17a-4; (iv) take all required capital charges in compliance of Exchange Act Rule 15c3-1; (v) receive, deliver and safeguard funds and securities in connection with the transactions in compliance with Exchange Act Rule 15c3-3; 387 (vi) review trades executed by the foreign broker-dealer for indications of possible violations of the federal securities laws; 388 and management) in excess of $100 million in aggregate financial assets (i.e., cash, money-market instruments, securities of unaffiliated issuers, futures and options on futures and other derivative instruments). See Nine Firms Letter, supra note 382. 386. The registered broker-dealer who acts as an intermediary does not have to be affiliated with the foreign broker-dealer through ownership or control. See Rule 15a-6 Adopting Release, supra note 28, at 57. 387. The SEC, permits direct settlement of transactions between foreign brokerdealers acting in reliance on Rule 15a-6(a)(3) and U.S. institutional investors, provided: (i) the transactions involve foreign securities or U.S. government securities; (ii) the foreign broker-dealer agrees to make available to the U.S. broker-dealer responsible for intermediating the transaction all clearance and settlement information; (iii) the foreign brokerdealer is not acting as a custodian of the funds or securities of the U.S. investor; and (iv) the foreign broker-dealer is not in default to any counterparty on any material financial market transaction (which is not defined in the letter). See Nine Firms Letter, supra note 382. 388. This requirement is not explicit in Rule 15a-6, but it is expressed in the Rule 15a-6 Adopting Release, supra note 28. 1A–88
What Is a Broker-Dealer? § 1A:7.2 (vii) obtain consents to service of process from the foreign brokerdealer and its foreign associated persons 389 who participate in the solicitation of U.S. investors under Rule 15a-6(a)(3) and procure certain other information and ensure that such persons are not subject to “statutory disqualifications.” 390 Rule 15a-6(a)(3) requires that all activities of the foreign brokerdealer be conducted from outside the United States (though it permits U.S. visits up to thirty days per year, subject to certain conditions), and that certain contacts between personnel of the foreign broker-dealer and U.S. investors be “chaperoned” by associated persons of a Registered Broker-Dealer. 391 In addition, the foreign broker-dealer must provide the SEC (upon request or pursuant to agreements between the SEC and the foreign securities authority) with any information or documents within its possession, subject to exceptions. 392 [B][5] Rule 15a-6(a)(4) Rule 15a-6(a)(4) allows foreign broker-dealers to solicit and otherwise deal with certain persons without the involvement of a Registered Broker-Dealer. These persons include: 389. Rule 15a-6 Adopting Release, supra note 28, at 87; “Foreign associated person” is defined in Rule 15a-6(b)(2) to mean “any natural person domiciled outside the United States who is an associated person, as defined in Section 3(a)(18) of the [Exchange] Act, of the foreign broker or dealer, and who participates in the solicitation of a U.S. institutional investor or a major U.S. institutional investor under paragraph (a)(3) of this section.” Rule 15a-6(b)(2). 390. Rule 15a-6(a)(3)(ii). 391. Associated persons of the registered broker-dealer must participate in (“chaperone”) all oral communications between the foreign broker-dealer and the U.S. institutional investor. Communications with a major U.S. institutional investor do not have to be chaperoned. In 1997, the SEC liberalized the “chaperoning” requirements by granting no-action relief that would permit foreign associated persons of a U.S.-affiliated foreign broker-dealer, without the participation of an associated person of a registered broker-dealer, to (i) engage in oral communications from outside the U.S. with U.S institutional investors (that do not qualify as major U.S. institutional investors) where such communications take place outside of the trading hours of the New York Stock Exchange, as long as the foreign associated persons do not accept orders to effect transactions other than those involving foreign securities, and (ii) have in-person contacts during visits to the United States with major U.S. institutional investors (as such definition is expanded by the letter), so long as the number of days on which such in-person contacts occur does not exceed 30 per year and the foreign associated persons engaged in such in-person contacts do not accept orders to effect securities transactions while in the United States. See Nine Firms Letter, supra note 382. 392. Rule 15a-6(a)(3)(i)(B). (Broker-Dealer Reg., Rel. #9, 9/10) 1A–89
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