International Securities Regulation

The U.S. Attorney’s Office for the Southern District of New York has announced that its prosecutors will not be significantly impacted by a recent appellate court decision concluding that Morrison’s proscription against extraterritoriality applies also in the criminal context.

In United States v. Vilar, the United States Court of Appeals for the Second Circuit ruled that the U.S. Supreme Court’s Morrison decision limited the extraterritorial Securities Exchange Act of 1934 Section 10(b) and applied it to criminal as well as civil cases.

The USAO has indicated it will continue its prosecutions since many also effect domestic concerns.

Usually, we spend a fair amount of time advising our American broker-dealer clients, who do business overseas, that they have to follow the rules of those countries as well.  However, the “shoe” may sometimes be on the other “foot.”  See

Recently, a foreign broker-dealer was forced to pay a 9 figure judgment to resolve an action brought by the SEC.  This foreign broker-dealer solicited and serviced thousands of American clients and made 8 figures in annual revenue over a 5 year period.  However, a slight detail was ignored.  The foreign broker-dealer never bothered to register as an American broker-dealer or investment adviser.

Sadly, some will never learn especially in this case where it seemed the foreign br0ker-dealer could have easily become registered.  In any event, this is a good example of what happens when you believe you can avoid the rules if you do not speak the “language.”

A German company sought the Staff’s assurance that it does not have to register as a broker-dealer if it is retained outside the U.S. by non-U.S. clients in connection with certain M&A transactions, initiates contact directly with potential U.S. targets, and engages in additional activities regarding the U.S. targets.

The M&A transactions may involve the proposed acquisition or disposal of operations of a company or division of a company, the proposed acquisition or sale of a company or division through an equity securities transaction, or the proposed acquisition or sale of a company or division through a combination asset and securities transaction.  Any U.S. target approached by the company on behalf of a non-U.S. client would fall within the meaning of the term “major U.S. institutional investor” as defined in Securities Exchange Act of 1934 Act Rule 15a-6(b)(4).  For any transaction with a U.S. target, the company will not represent or advise the U.S. target and will not receive, acquire or hold funds or securities.

This no action letter is consistent with the Staff’s previous pronouncements concerning its jurisdiction.

The Staff of the Securities and Exchange Commission Division of Trading and Markets issued advice on Securities Exchange Act of 1934 Rule 15a-6, involving registration exemptions for foreign broker-dealers.  See

In particular, Rule 15a-6 activities include when broker-dealers

  • effect unsolicited securities transactions; 
  • provide research reports to major U.S. institutional investors, and effect transactions in the subject securities with or for those investors; 
  • solicit and effect transactions with or for U.S. institutional investors or major U.S. institutional investors through another broker-dealer; and 
  • solicit and effect transactions with or for registered broker-dealers, and in a broker or dealer capacity for others.

The Staff stated that Rule 15a-6 facilitates access and provides operational guidance, and addressed a variety of topics including, among other things, presence in the United States; global employee stock option plans, confirmations and account statement for unsolicited transactions on behalf of a U.S. investor; and the distribution of research to major U.S. institutional investors, among other topics. 

In short, this is a complicated area for foreign broker-dealers, who should consider U.S. counsel prior to undertaking these operations.

Alas, the Dodd-Frank whistleblower protections cover informants overseas.

The United States Court of Appeals for the Fifth Circuit, recently, held that the Dodd-Frank whistleblower protections cover informants that report to the SEC information about FCPA violations.  The court, citing that the plain language of the act, indicated that such individuals were covered.  This is an intriguing development given the recent issues relating to extraterritorial jurisdiction that the United States Supreme Court has even considered.

As such, companies must be aware of these issues going forward and consider the proper precautions.

Companies that acquire or invest in offshore entities or in entities that conduct business overseas may inherit FCPA risks.

Clearly, the DOJ and the SEC are viewing these transactions and the resulting combinations with a jaundiced eye.  These regulators, most likely, will begin investigations, and, possibly, commence actions.  In fact, there have been recent FCPA actions that would fall under this category.

Consequently, acquirers must identify potential FCPA problems during the due diligence process so as to avoid these predicaments.  If identified, the acquiring company may be able to restructure the transaction to avoid assuming that liability.  Possibly, the parties may also submit an FCPA “opinion procedure request” to the DOJ seeking ways to mitigate the potential liability.

Essentially, it is critical that the due diligence process uncover these problems, and the parties address them before the closing.

In light of the Urban decision, the SEC has indicated it intends on expounding on its views of failure to supervise for legal and securities personnel.

Although several of the federal securities laws indicate the SEC has the authority to bring actions for failing to supervise or detect securities law violations, there has been no true definitive standard.  The SEC counters that most of the cases brought clearly indicate such failure, and should serve as guides to professionals.  However, the SEC does not appear ready to craft a universal standard.

Alas, with no real case on the horizon, legal and securities compliance personnel will continue to move about in the dark with no apparent direction from the SEC.

Over the course of many years, I have been questioned by American BDs as to their responsibilities for sales to people outside the United States.  My response has always been that they are required to obtain an opinion from counsel in those jurisdictions before proceeding.  Most likely, those foreign jurisdictions may have registration requirements before conducting business in their countries. 

Now, the shoe is on the other foot.  We are now seeing non-US issuers selling certain fund interests into the United States.  Those persons, who are selling those securities into the United States, may require SEC registration as well as the requirement to implement compliance program before moving forward.  Further, certain states, such as California, will have various requirements requiring each of these sellers to follow, some of them may not appear at first blush, like California’s lobbyist rules.  If the selling issuer does not comply with these items, it opens itself up to potential liability.   

Thus, we strongly recommend that non-US issuers contact American counsel before selling product into the United States.

Although it has been somewhat circumspect, the SEC seems to be stalling on a move towards adopting the international accounting standards of International Financial Reporting Standards (“IFRS”).  Such an approach has left the Europeans in a tizzy!!

The United States has an interesting history with international accounting standards.  The SEC and the American accounting industry has in many respects attempted to avoid such a move.   There has notably been a good deal of frustration from outside of the United States as to the refusal by the SEC to issue a decision on the incorporation of IFRS.

Thus, the international community is looking for a more positive step from the SEC on these standards.  Maybe, the new year will bring such a decision.

In a speech by SEC Commissioner Elisse B. Walter, the SEC, apparently, is indicating a significant shift in its view of cross-border cooperation. 

Over many years, the SEC has been viewed as the nearly primary global regulator of the securities markets.  Although this sentiment is not always shared by our brethren overseas, it has been, frankly, a fact. 

However, Commissioner Walter’s speech indicates that the SEC is shifting this perspective in noting that it has enforcement sharing agreements with more than 80 jurisdictions and that it regularly shares information across borders.  Although these sharing agreements are not new, the juxtaposition of them with the SEC’s work across borders presents a new format.  Essentially, Commissioner Walter was arguing that the SEC has rejected the belief it should solely act as a regulatory sovereign, embracing cooperation on many different levels across many different jurisdictions. 

In sum, the SEC’s approach seems to be that regulators should be connected and open in an effective manner.  Thus, this interconnection would be permit for a hightened regulation and ability to ensure continuing efforts to monitor the markets.