Unlocking Access to U.S. Capital Markets: Understanding SEC Rule 15a-6 and Chaperoning

Written By Steven Charest

Introduction

SEC Rule 15a-6, the “chaperoning rule”, provides an exemption for foreign “brokers or dealers” and other financial institutions[1] who wish to interact with U.S. institutional investors without registering as a U.S. broker-dealer with the U.S. Securities and Exchange Commission (SEC).

As we’ll discuss, the principle underlying the exemption is the oversight of the foreign financial institution’s U.S. activities by an SEC-registered broker-dealer that is qualified to act as a “chaperone”. In the sections below, we review the key provisions of Rule 15a-6, focusing on the ways in which chaperone services are provided by firms such as Enclave Capital.

What is Chaperoning under Rule 15a-6?

The term “chaperoning” refers to an arrangement where a U.S. broker-dealer oversees the solicitation of U.S. institutional investors[2] by a foreign financial institution for the purpose of engaging in securities investments or transactions. The primary benefit of chaperoning to the foreign financial institution is that registration with the SEC is not required, thereby avoiding the enormous allocation of resources to U.S. broker-dealer compliance.

Can any U.S. Broker-Dealer Provide Chaperoning Services?

A U.S. broker-dealer typically must be authorized to act as a chaperone through its membership agreement with the Financial Industry Regulatory Authority (FINRA). Among the qualifications necessary for designation as a chaperone is the requirement that the U.S. broker-dealer maintain a minimum net capital that is many times greater than the capital required for broker-dealers that engage solely in investment banking.

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[1] “Foreign broker or dealer” includes any non-U.S. resident person (with some exceptions) whose securities activities, if conducted in the U.S., would constitute broker-dealer activities under U.S. securities laws. The term includes entities who are not regulated in their local jurisdiction, but would be subject to regulation in the U.S. if those activities took place in the U.S.

[2] “U.S. institutional investor” means a registered investment company; 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; 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).

What Services does a Chaperoning Broker Provide?

Chaperoning brokers differ as to the scope of the services they provide, but Rule 15a-6 generally requires that the U.S. broker-dealer:

  • Maintain books and records relating to investments and transactions by U.S. persons;

  • “Effect” securities transactions, which means overseeing the execution and settlement of those transactions;

  • Issue confirmations and statements (which the foreign financial institution may prepare and deliver on behalf of the U.S. broker-dealer);

  • Extend or arrange for credit; and

  • Receive, deliver and safeguard customer funds and securities.

As a result of its world-class compliance and regulatory expertise, Enclave Capital provides additional services to foreign financial institutions, including the review of offerings in the U.S. to help ensure they comply with all applicable U.S. securities laws, rules and regulations.

What Chaperoning Services Apply to Communications with U.S. investors?

If a foreign financial institution wishes to solicit a U.S. Institutional Investor that owns or manages assets equal to or less than $100 million, the chaperoning broker is required to participate in all communications between the foreign financial institution and the investor, including phone calls, emails and in-person visits.[3]

If, instead, the solicitation is of a U.S. Institutional Investor that owns or manages over $100 million in assets, which qualifies it as a “major U.S. institutional investor” or “MUSII” [4], chaperoning of phone calls and emails is not required, and each representative of the foreign financial institution may visit MUSII’s in the U.S. for up to thirty (30) days per calendar year without chaperoning. While communications with a MUSII generally do not require chaperoning, the recordkeeping, confirmation and other requirements of Rule 15a-6(a)(3) continue to apply.

As a practical matter, it is much less common for a foreign financial institution to solicit U.S. Institutional Investors that do not qualify as MUSII’s since the types of entities that qualify are limited (see fn. 2 above). Notably missing from the list are U.S. investment advisers that that do not qualify as MUSII’s and that, therefore, cannot be solicited even with chaperoning.

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[3] This chaperoning requirement does not apply to phone calls or emails that are made outside of New York Stock Exchange hours (9:30 am to 4:00 pm New York City time).

[4] “Major U.S. institutional investor” means a U.S. institutional investor with assets, or assets under management, in excess of $100 million, or a registered investment adviser with assets under management in excess of $100 million. In its “Nine Firms” no-action letter, the SEC expanded the definition of Major U.S. institutional investor to include “any entity, including any investment adviser (whether or not registered under the Investment Advisers Act), that owns or controls (or, in the case of an investment adviser, has under management) in excess of $100 million in aggregate financial assets,” subject to certain limitations set forth in the letter. Financial assets include securities of unaffiliated issuers, cash, money market instruments, futures and other derivative instruments.

Can a Foreign Financial Institution Execute Unsolicited Transactions without a Chaperoning Broker?

Yes, Rule 15a-6(a)(1) permits a foreign financial institution to effect transactions with or for institutions that have not been solicited by the foreign financial institution. Importantly, however, the SEC takes a very broad view of the term solicitation, deeming it to include “any affirmative effort by a broker or dealer intended to induce transactional business for the broker-dealer or its affiliates.[5]

Can a Foreign Financial Institution Distribute Research into the U.S. without a Chaperoning Broker?

Rule 15a-6(a)(2) permits a foreign financial institution to deliver research to MUSII’s and effect transaction in the securities described in the research without the involvement of a U.S. broker-dealer as long as:

  • The research report does not recommend the use of the foreign financial institution to effect trades in any security.

  • The foreign financial institution does not initiate contact to follow-up on the research reports, or otherwise attempt to induce securities transactions by those investors.

  • The foreign financial institution does not provide research pursuant to any express or implied understanding that the major U.S. institutional investors receiving the research will direct commission income to the foreign financial institution (i.e., no soft dollar arrangements).

If the above conditions are met, the foreign financial institution may effect trades in securities discussed in the research or other securities at the request of MUSII’s receiving the report. If, however, the foreign financial institution has a chaperoning relationship with an SEC registered broker-dealer, all resulting trades must be effected through that registered broker-dealer pursuant to the provisions of Rule 15a-6(a)(3).

What Activities are Permitted under Rule 15a-6(a)(3)?

Rule 15a-6(a)(3) is the section of the Rule most often relied upon by foreign financial institutions that intend to solicit U.S. investors for securities transactions. It permits a foreign financial institution to induce or attempt to induce transactions in any securities by U.S. institutional investors or major U.S. institutional investors if, among other things:

  • The foreign financial institution effects any resulting transactions through a U.S. broker-dealer in the manner prescribed by the Rule.

  • The U.S. broker-dealer:

    • effects all aspects of the transaction (other than negotiation of the terms, which may occur between the investors and the foreign financial institution (through its sales personnel)), although the U.S. broker-dealer may delegate to the foreign financial institution the physical execution of foreign securities trades in foreign markets or on foreign exchanges;

    • issues confirmations and statements to customers;

    • extends margin or arrange for credit where necessary; receive, deliver and safeguard customer funds and securities;

    • complies with applicable U.S. net capital and recordkeeping requirements; and

    • maintains books and records relating to the transactions.

  • The foreign financial institution does not engage in any soft dollar arrangements with a U.S. investor.

Unlike Rule 15a-6(a)(2), Rule 15a-6(a)(3) allows a foreign financial institution to follow up on research that it distributes, a major benefit, as long as any resulting transactions are chaperoned.

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[5] In the Adopting Release for Rule 15a-6 (https://www.sec.gov/files/rules/final/34-27017.pdf), the SEC provides examples of conduct that it would consider to be solicitation by a foreign financial institution, including:

* Telephone calls from a broker-dealer to a customer encouraging use of the broker-dealer to effect transactions;

* Advertising directed into the U.S. of one's function as a broker or a market maker; and

* Recommending the purchase or sale of particular securities, with the anticipation that the customer will execute the recommended trade through the broker-dealer.

When Should a Foreign Financial Institution Consider Entering into a Chaperoning Arrangement?

A foreign financial institution whose representatives intend to call, email or conduct personal visits into the U.S. for marketing securities transactions to U.S. persons should consider whether a chaperoning arrangement should be implemented. These activities ordinarily would require registration as a U.S. broker-dealer, and the failure to register can subject the foreign financial institution to significant penalties, fines and sanctions.

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Enclave Capital is the premier chaperoning firm in the U.S. We bring almost 20 years of chaperoning experience and a deep understanding of U.S. securities rules and regulations to provide comprehensive chaperoning services to our foreign financial institution partners.


Steven Charest