[Federal Register: July 8, 2008 (Volume 73, Number 131)]
[Proposed Rules]
[Page 39181-39212]
[DOCID:fr08jy08-33]

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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

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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<EMAIL_ADDRESS>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<PHONE_NUMBER>, 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

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

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\

(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.
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    (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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    (xi) Any corporation, company, or partnership that owns and invests
on a

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

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.
---------------------------------------------------------------------------

    \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

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).

---------------------------------------------------------------------------

    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

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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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

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\
---------------------------------------------------------------------------

    \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

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

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

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.
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    \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).
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    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).
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    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).
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    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

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.
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    \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).
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    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\
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    \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).
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    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.
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    \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).
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    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\
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    \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).
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    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

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