Foreign Countries Have Their Own Securities Regs, and You Have to Comply With Them Too.
Financial professionals who are looking to solicit foreign investors have more to consider than the United States securities laws. Just like the United States has an interest in protecting its citizens who invest in the markets, other countries have the same interest. And, just like the United States and its various states, those foreign regulations apply regardless of whether the broker is physically located in the country.
During 1998, the Financial Services Authority (FSA) in the United Kingdom (U.K.) detected an increase in the frequency with which National Association of Securities Dealers, Inc. member firms were soliciting U.K. citizens. The largest area of concern is the United Kingdom, which, during 1998 and 1999 witnessed a significant increase in US brokers soliciting business with English citizens.
However, England has its own investment rules and regulations, similar to the rules which exist in the United States. For example, any person who carries on investment business in the U.K. must be authorized or exempt under the Financial Services Act of 1986 (the Act). Investment business includes dealing and arranging deals in investments and giving investment advice.
“Investments” include stocks, shares, and derivatives. Sound like the United States rules, but there is one difference – under the UK rules, persons who operate from outside the U.K. are “overseas persons” under the Act and enjoy the benefit of an exclusion from the need for authorization under the Financial Services Act. However, that exclusion is available only if such “overseas persons” carry on their business in such a way that they do not breach the provisions of Section 56 of the FSA (unsolicited or cold calls) and Section 57 of the FSA (investment advertisements).
Cold Calls – Section 56 of the FSA prohibits cold calling by providing that no person make an unsolicited call in an attempt to make an investment agreement with a person in the U.K. Brokers need to keep in mind that this restriction applies to United States brokers, even though you could make the same call in the United States.
While a broker cannot make an uninvited call, the FSA regulations do provide exemptions from this general rule. Under its regulations, the FSA permits an “overseas person” to make an unsolicited call to (1) “existing customers,” defined as persons with whom the overseas person has an existing customer relationship that was established while the customer was resident outside the U.K.; and (2) “non-private customers,” or business investors, such as government or public authorities, corporations, or partnerships with substantial assets and trustees of trusts holding substantial assets.
Investment Advertisements – The second area of concern are advertisements for investments. Section 57 of the FSA prohibits an overseas person, making an investment advertisement in the U.K. unless its contents have been approved by an authorized person under the Act. An investment advertisement includes any advertisement containing information calculated to lead directly or indirectly to a person entering into an investment.
Foreign advertisements are treated as issued in the U.K. if they are directed to persons in the U.K. or made available to them other than through a newspaper or other journal that is published and circulates mainly outside of the U.K.
By prohibiting cold calling and advertisements, the UK is attempting to limit the amount of impersonal solicitation of investments to its individual citizens, while at the same time permitting the solicitation of more sophisticated, “non-private” investors.
The UK takes the violation of these provisions quite seriously. While violations of the FSA and its regulations involve criminal and civil penalties, the FSA also provides that the investment transaction which was produced by a violation of the FSA may be unenforceable against the UK citizen, in effect giving the UK investor a put on the underlying securities.
While there are certainly a number of issues regarding enforcement of a UK regulation against a US broker-dealer, the NASD has not hesitated in the past to enforce rules that are not its own, and given the increasing frequency of violations of the cold calling rules by US broker-dealers, we can expect to see more NASD attempts to curb the abuses.
In fact, in 1998, the NASD issued a Notice to Members regarding the cold calling rules of the UK (See NTM 98-91), and again issued a reminder, in NTM 00-02 of the requirement of compliance with the securities laws of foreign jurisdictions. A footnote in NTM 00-02 contains the ominous reminder that violation of such rules may result in a violation of NASD rules.
While the NASD has not specified a rule violation for violation of a foreign country’s rules, one does not have to have too active an imagine to foresee the NASD bringing an enforcement action alleging that the violation of a foreign country’s rules was “inconsistent with the just and equitable principles of trade”, and therefore a violation of NASD Rule 2110.
It will be interesting to see how such an enforcement action works out, since the NASD does not have any authority to enforce the rules of a foreign jurisdiction. However, assuming that my readers do not wish to be a test case, it makes much more sense to review your policies and practices for dealing with foreign clients.
Mark J. Astarita, Esq., is a partner in the law firm of Sallah Astarita & Cox, LLC, with offices in New York and New Jersey. He represents represents financial professionals and firms in litigation, arbitration and regulatory matters across the country.. He can be reached at firstname.lastname@example.org, or at The Securities Law Home Page, https://seclaw.com or at his personal professional page, Securities Lawyer.
Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.
Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.