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The SEC’s Territorial Approach

November 05, 2015

Panelists: ROBERT CORNISH, JOHN TISHLER, JOHN LEO,
Moderator: KURT REUSS

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Robert Cornish
w/ Phillips Lytle

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John Tishler
w/ Sheppard Mullin

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John Leo
w/ Primary Capital

John Leo: I’m seeing more and more Agents open up offices in the US. I personally know and have met with a handful of agents who have offices in New York. What’s the implication of these agents now having rep offices in the US?

Robert Cornish: I’m not exactly sure how these people are being compensated or what they’re doing. Suffice it to say, if they are engaged in the offer of placing of securities and they’re doing it for compensation, i.e. transaction-based, then there are issues. If the securities are Reg S exempt, the sales activities going on in the United States are certainly not conducive to claiming a Reg S exemption.

If you’re claiming Reg S, it’s probably a good idea to claim Reg D as well, simply because that gives you a fallback position in the event that you do have marketing activity going on within the US.

John Tishler: I agree. In theory, the SEC could use a means of interstate commerce test to decide who needs to be subject to broker dealer regulation. By that standard, anybody who ever sent an email to the United States would be subject to broker dealer regulation.

The SEC’s approach to determining broker dealer regulation is what’s called a territorial approach, which they adopted in the late 1980s. Under a “territorial approach,” the SEC looks to see whether people are physically present in the United States while they’re conducting activity that would require broker dealer regulation. 

If there are brokers in London who are operating in London, the fact that they might make a telephone call to the United States, doesn’t mean they should be subject to US regulation. If that person flies from London to New York and sits in a New York office and conducts business however, then, under the “territorial approach,” he is subject to the SEC’s regulation. 

The rules on this are not clear. The SEC will say they use this territorial approach, but then they have not publicly given any guidance as to what constitutes a physical presence in the United States, with regards to conducting broker dealer activity. That’s just a big unknown. 

I do know a lot of the agents or reps with offices in the United States who act as a kind of concierge for their investors, who help with their investors’ move to the United States. They help them find housing, get settled into schools and things like that. They’ll say, “Hey, we’re not doing any broker dealer activity in the United States. We’re just helping our clients who happen to be here.”

Regarding John Leo’s statement that he, a broker dealer in the United States, is meeting with agents in their New York office raises a red flag in my mind. If the argument is that they’re just finding housing, unless they were looking for a new flat for you (John) in New York City, it begs the question “why were they meeting with a broker dealer in New York City”? It’s very fact based and there is an area of potential exposure within the industry because a lot of agents come to the United States to do various things.

There’s widespread belief that it’s okay to come to the United States to perform due diligence on a project. That belief is based on language in Regulation S that says that it is okay. Now, that language is not contained in the broker dealer rules but a number of lawyers have gotten comfortable that if it’s in Regulation S, we should be able to apply it.

I’m not aware of the SEC ever concurring or not concurring for that matter, with that position However, a lot of people believe it. And then there’s a whole range of other activities that people do. 

It is certainly something that we advise our clients to be concerned about because as we know, the SEC will go after, not only people that they think should be registered as broker dealers but aren’t, but the people who pay people who should be registered broker dealers, who aren’t. It is a concern for our regional centers and project clients as well as for people who are intermediaries.

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