Foreign financial institutions face complex and often unexpected US registration requirements when conducting securities activities involving US persons, and failure to comply can result in significant penalties. Kathy Rocklen of FTI Consulting outlines when non-US banks, brokerage firms and investment managers must register as US broker-dealers or investment advisers, explaining how activities like distributing research, sponsoring conferences or even sending emails to US investors can trigger registration obligations unless firms qualify for exemptions like Rule 15a-6’s chaperoning arrangement.
As the compliance landscape evolves for financial institutions, non-US banks, brokerage firms and investment managers must pay special attention to US regulations. These regulations can often be complex and challenging to navigate, but failure to comply may result in significant penalties and disruption to business. Depending on the nature of its US activities, a foreign firm may need to register as a US broker-dealer or investment adviser, unless an exemption is available.
There are a broad range of securities activities that may trigger the US broker-dealer registration requirements. All broker-dealers physically operating within the United States that solicit or effect securities transactions are required to register. Except in compliance with SEC Rule 15a-6 discussed below, registration is also required for foreign broker-dealers that, from outside the US, solicit or effect securities transactions for any person in the U.S. Solicitation is viewed broadly to include any effort to induce transactional business, whether it’s telephone calls, emails, advertisements or websites directed to US persons encouraging the use of the foreign firm to effect transactions. Solicitation also includes distributing research, sponsoring conferences in the US or traveling to the US to meet with investors. The conduct of investment banking or M&A transactions involving contacts with US persons may also subject a foreign firm to registration.
Similar to the regulatory structure governing brokerage activities, a foreign investment adviser that either has a place of business in the US, or a certain level of regulatory assets under management attributable to US clients and investors may be required to register, unless it complies with an SEC exemption. Depending on the scope of its activities, a foreign firm may be required to register as both a broker-dealer and an investment adviser.
Exemption from broker-dealer registration: Rule 15a-6
Foreign firms wishing to conduct brokerage activities with US institutional investors may do so by complying with the requirements for the exemption provided by SEC Rule 15a-6. Among the rule’s permissible activities is the provision of research to any US institutional entity with $100 million of financial assets, or assets under management, provided the foreign firm does not initiate follow-up contact with those investors, except under a chaperoning agreement and adheres to certain other limitations.
To engage in direct contacts with US institutional investors, foreign firms may enter into a “chaperoning” arrangement with a US registered broker-dealer intermediary. This is typically a written agreement between the parties. Many foreign firms establish and register a US affiliate for this purpose, although some firms engage a third-party chaperoning broker.
Provided it’s permitted under the chaperoning arrangement, foreign firms can telephone and communicate electronically with major US institutional investors directly. Their qualified employees can also make up to 30 unchaperoned visits with major US institutional investors yearly. The chaperoning broker must participate in all communications and visits with certain other institutional investors. The rule is not available for transactions with retail US investors.
Under the rule, the chaperoning broker must “effect” all resulting transactions, both for US institutional investors and major US institutional investors. The foreign firm may negotiate the terms of transactions and execute, clear and settle trades in foreign securities in foreign markets. However, the investor must become a customer of the US chaperoning broker. Among other things, this means that the US chaperoning broker must issue the confirmations and statements, extend any margin, receive, deliver and safeguard any customer funds or securities, comply with US net capital and recordkeeping requirements, and maintain those records in a US office.
The chaperoning broker must also conduct due diligence on the background and disciplinary history of each employee of the foreign firm that proposes having contacts with US investors. Both the foreign firm and its qualified employees also must provide the chaperoning broker with a written consent to service of process for any civil action before the SEC or any US self-regulatory organization.
Exemptions from investment adviser registration
Non-US advisers that advise US persons on investing in securities, have US investors in their funds, manage fund vehicles established in the US or have a presence in the US should consider whether their US activities may require investment adviser registration. Some foreign broker-dealers, such as those who wish to receive hard dollar payments for research, may also be subject to US investment adviser registration. Large investment advisers, with more than $100 million of regulatory assets under management (RAUM) register with and are regulated primarily by the SEC. Generally, smaller advisers are regulated by state securities regulators.
There are several potentially applicable exemptions from investment adviser registration. An adviser is exempt as a “private fund adviser” if its only clients are private funds with total RAUM of less than $150 million. A foreign adviser with its principal office outside the US can qualify under this exemption if it does not manage any separate managed accounts for U.S. persons and if the private funds it manages from the US in aggregate have less than $150 million RAUM. Private fund advisers must file certain information with the SEC.
An investment adviser with no place of business in the US may qualify for the “foreign private adviser” exemption if it has, in total, fewer than 15 clients and private fund investors in the US and it manages less than $25 million in aggregate RAUM for those US clients and investors. There is also a venture capital fund exemption for advisers solely to venture capital funds.
Consequences of noncompliance
Failure to operate under an applicable exemption or to register, if required, can have significant adverse consequences. In one example, four India-based firms that traded with US investors in the primary and secondary markets were all charged with registration failures, although they were unaware of the US regulatory requirements. Their cooperation and prompt remediation, however, facilitated relatively favorable SEC settlements. But in another example, a Swiss bank that solicited, established and maintained brokerage and advisory accounts for US clients, despite receiving guidance on cross-border activities, faced far stiffer penalties. State securities regulators may also pursue disciplinary actions, and aggrieved investors may seek rescission.
Kathy H. Rocklen, a senior adviser at FTI Consulting, is a corporate and securities attorney and strategic consultant with four decades of experience advising on broker-dealer regulatory compliance and enterprise risk management. She has led high-profile engagements for major US and foreign financial institutions, offering trusted legal counsel and crisis management support. 
