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

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§ 1A:7.2 BROKER-DEALER REGULATION (i) a Registered Broker-Dealer, whether acting as principal or agent; (ii) a U.S. bank (including a licensed branch or agency of a non-U.S. bank) acting pursuant to specified exemptions from the Exchange Act’s broker-dealer registration requirements that apply to bank securities activities; (iii) the United Nations and certain other organizations and their pension funds; (iv) foreign persons temporarily present in the United States, subject to conditions; (v) non-U.S. branches or agencies of U.S. persons outside the United States, provided that transactions occur outside the U.S.; and (vi) with certain exceptions, U.S. citizens resident outside the United States. 393 For purposes of both the broker-dealer registration provisions of the Exchange Act and Rule 15a-6, persons resident in the United States are among the persons deemed to be U.S. persons. A U.S. resident fiduciary, therefore, is considered to be a U.S. person for these purposes, regardless of the residence of the owners of the underlying accounts. Thus, absent the no-action relief discussed below, when a foreign broker-dealer—such as a U.S.-affiliated foreign broker-dealer— solicits discretionary or similar accounts of non-U.S. persons held by a U.S. resident fiduciary (including a U.S. registered investment adviser), it must either register with the SEC or effect such transactions in accordance with Rule 15a-6(a)(3). 394 The SEC, in a 1996 no-action letter, permitted U.S.-affiliated foreign broker-dealers to effect transactions in foreign securities 395 393. The exemption includes U.S. citizens resident outside the United States, provided that the foreign broker-dealer does not direct its selling efforts toward identifiable groups of U.S. citizens resident abroad. All transactions must occur outside the United States. See Rule 15a-6(a)(4) and Rule 15a-6 Adopting Release, supra note 28, at 97. 394. See Letter re: Regulation S Transactions during Distributions of Foreign Securities to Qualified Institutional Buyers (Feb. 22, 1994). This position does not apply to a U.S. registered broker or dealer or a bank acting in a broker or dealer capacity as permitted by U.S. law. See Rule 15a-6(a)(4). 395. The letter defines a “foreign security” as (i) a security issued by an issuer not organized or incorporated under the laws of the United States when the transaction in such security is not effected on a U.S. exchange or through the Nasdaq system, or (ii) a debt security (including a convertible debt security) issued by an issuer organized or incorporated in the 1A–90
What Is a Broker-Dealer? § 1A:7.2 with U.S. resident fiduciaries 396 for “offshore clients” 397 without the U.S.-affiliated foreign broker-dealers either registering as brokerdealers or effecting the transactions under Rule 15a-6, provided that: (i) the U.S.-affiliated foreign broker-dealers will obtain written assurance from the U.S. resident fiduciary that the account is managed for an “offshore client”; (ii) transactions with U.S. resident fiduciaries for offshore clients, other than transactions in foreign securities, will be effected in compliance with the requirements of either section 15(a) of the Exchange Act or Rule 15a-6 thereunder; and (iii) transactions effected with U.S. resident fiduciaries, other than transactions for offshore clients, will be effected in compliance with the requirements of either section 15(a) of the Exchange Act or Rule 15a-6 thereunder. 398 [C] Other Cross-Border Issues In 2000, the SEC published guidance on the use of electric media by issuers of all types, including operating companies, investment United States in connection with a distribution conducted outside the United States. For proposes of this definition, the status of OTC derivatives that are securities would be determined by reference to the underlying instrument. A distribution would not be considered to be conducted “outside the United States” if it involved a registration statement filed under the Securities Act, but may be considered conducted outside the United States, notwithstanding U.S. sales pursuant to Section 4(2) of the Securities Act or a resale exemption from the Securities Act registration requirement, including the exemption provided by Rule 144A. See Cleary, Gottlieb, Steen & Hamilton, SEC No-Action Letter (Jan. 30, 1996) [hereinafter Offshore Client Letter]. 396. A “U.S. resident fiduciary” cannot be a registered broker-dealer or a bank acting in a broker-dealer capacity within the meaning of Rule 15a-6(a)(4)(i). A U.S. resident fiduciary may, but need not, be (i) affiliated with a U.S. or foreign broker-dealer, or (ii) registered under the Investment Advisers Act. See Offshore Client Letter, supra note 395. 397. “Offshore client” is defined in the letter as (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 U.S. federal income tax purposes, (ii) any natural person who is neither a U.S. citizen nor a U.S. resident, (iii) a natural person who is a U.S. citizen residing in a foreign country who (1) has $500,000 or more under the management of the U.S. resident fiduciary or (2) has, together with the person’s spouse, a net worth in excess of one million dollars, or (iv) an entity not organized or incorporated under the laws of the United States substantially all of the outstanding voting securities of which are beneficially owned by the foregoing persons. See Offshore Client Letter, supra note 395. 398. See Offshore Client Letter, supra note 395. (Broker-Dealer Reg., Rel. #9, 9/10) 1A–91
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