Earlier this week, four Indian brokerage houses entered into settlements with the US Securities and Exchange Commission (SEC) for charges of carrying on brokerages services to institutional investors in the United States (US) without registration under the US Securities Exchange Act of 1934 (the Exchange Act). The SEC’s press release and the orders pertaining to the four brokerages are available here.
SEC’s charge arose on the ground that the brokerages were carrying out activities in the US that required registration under the Exchange Act, unless they were able to avail of exemptions. However, none of this was obtained by the brokerages. As the SEC notes, “Section 15(a) of the Exchange Act generally prohibits a broker or dealer from making use of the mails or any instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of any security without being registered with the [SEC] as a broker-dealer”. SEC charged the brokerages for violation of this provision and the relevant rules.
It is important to consider the type of activities that were carried out by the brokerages, which were said to contravene US securities laws. These include:
- Travel to the US to meet with US investors;
- Contact with US investors through email and telephone calls;
- Transmission of research reports on Indian companies to US investors;
- Purchase and sale of shares on Indian stock exchanges on behalf of US investors;
- Entering into commission sharing agreements with US registered broker-dealers, and soliciting and providing brokerage services through them;
- Organizing and sponsoring investor conferences in the US;
- Participation as a broker in offerings of Indian companies, including initial public offerings, follow-on public offerings and qualified institutional placements (QIPs), which were carried predominantly in India but with some shares being marketed and sold to US investors.
Although the charges were settled by the brokerages without accepting or denying the findings of the SEC, the above discussion provides some guidance as to the type of activities by Indian brokerages that could be called into question by US securities laws.
Of course, the most viable option from a regulatory standpoint would be for brokerages carrying out such activities to register themselves with the SEC. This is particularly relevant given the effects of globalization and the cross-border nature of the securities markets. Several domestic Indian offerings of securities are extensively marketed to overseas investors. Hence, compliance with securities laws in those jurisdictions becomes important from a regulatory perspective. Given that both the substantive laws and enforcement in the US are quite strong, we find instances such as the present charges/settlements, but the same would apply in other leading capital market jurisdictions as well.