Rule 15a-6 and the International Marketplace: Time for a New Idea?

Article excerpt


One of the most significant trends in financial services during the last several decades has been the continuing internationalization and interconnection among local securities markets and market intermediaries. Issuers increasingly seek to list their securities in multiple market centers, and major financial services firms have sought to expand their presence on both sides of the Atlantic. The United States has an enormous pool of investment capital available, and U.S. institutional investors understand the need for and advantages of diversification in foreign markets. Thus, U.S. investors have sought greater direct access to the expertise that foreign intermediaries can provide, in terms of both research and execution capabilities. In turn, these foreign intermediaries naturally have sought to exploit that demand.

When institutional investors seek to access foreign market services, they may attempt to do so through U.S. broker-dealers with which they have established relationships. These broker-dealers often have overseas affiliates or maintain relationships with foreign broker-dealers. In these circumstances, U.S.-regulated broker-dealers essentially act as an agent in intermediating transactions between their customers and the foreign counterparties. Alternatively, investors may seek direct access to foreign financial services firms in order to deal with personnel who have more direct experience in foreign markets, limit costs associated with the use of multiple parties, and in certain cases arrange for clearance and settlement of transactions directly with the foreign firm, particularly when the investors maintain foreign accounts for these purposes.

The ability of U.S. investors to deal directly with foreign financial service professionals is heavily impacted by the U.S. legal and regulatory structure. Regulations severely limit the extent and nature of contacts with counterparties that are not themselves regulated as broker-dealers and registered as such with the Securities and Exchange Commission (SEC or "Commission"). Registration, in turn, triggers the application of a myriad of licensing, financial responsibility, business conduct and other standards that exist under federal and state law, and under the rules of the various self-regulatory organizations (SROs). (1) In order to comply with these legal requirements, foreign firms could choose to establish a fully-regulated U.S. affiliate. In many cases, however, foreign intermediaries may not be prepared to establish a U.S. affiliate solely for the purpose of serving the demand within the United States.

Jurisdictions differ substantially in regulating market activity by financial intermediaries. These differences involve, inter alia, rules and legal standards governing the maintenance of adequate capital and the extension of credit, proprietary trading, qualification standards, manipulation of prices, supervisory structures within firms, and business conduct in dealings with customers. There are also wide differences in how regulatory responsibilities are allocated between the governmental and exchange or SRO levels and in the resources devoted to them. (2) In recent years, international regulators have made efforts toward establishing consensus on the fundamental principles that should apply to the regulation of market intermediaries and the implementation of these principles through the auspices of the International Organization of Securities Commissions (IOSCO), among other venues. (3) Because of the complexity of the issues involved, however, it is not realistic to believe that convergence will be achieved in a meaningful way for some years. In the meantime, regulators will have to exclude certain activities from the scope of their direct oversight, or else adjust their rules to regulate them in a different way if they are to facilitate cross-border activity between market intermediaries and investors in a way that meets participants' expectations and preserves national regulatory schemes. …


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