Foreign broker-dealers might soon be able to interact with a broader group of U.S. investors, if the Securities and Exchange Commission forges ahead with a rulemaking that would liberalize rules governing interactions between them.

Driven by increasing internationalization of securities markets and advancements in technology and communications, the SEC back in June floated a proposal to loosen a 19-year-old rule that provides conditional exemptions from broker-dealer registration for foreign entities engaged in certain activities involving certain U.S. investors. Comments were due Sept. 8.

Jeffrey Taylor, a partner in the law firm Blank Rome, says the SEC “is finally jumping on the bandwagon of broker-dealer internationalization and has recognized that the current regulatory scheme unfairly excludes foreign broker-dealers from an area of operation where registration in the United States as a broker-dealer would serve minimal utility.”

The proposed amendments to Exchange Act Rule 15a-6 would expand and streamline the conditions under which a foreign broker-dealer could operate in the United States without triggering Exchange Act registration requirements and reporting. Among other things, they would allow foreign broker-dealers to engage in limited activities with a broader group of “qualified investors” with assets of $25 million or more, and to provide more services and research directly to those investors. The proposed changes are also part of a broader SEC effort to allow greater access to U.S. markets, including efforts toward mutual recognition.

The changes, in theory, are good for U.S. “qualified investors” because they’ll facilitate competition in pricing for trade execution and research services, Taylor tells Compliance Week. However, he says U.S. broker-dealers “may struggle to retain clients if they cannot compete with the foreign broker-dealers who would be expected to have reduced compliance and operating costs as a result of being able to operate without having to register federally.”

The SEC staff estimates that roughly 700 foreign broker-dealers would take advantage of the proposed exemptions if adopted.

In an Aug. 13 letter, Liquidnet General Counsel Howard Meyerson called the SEC’s approach “a commendable response to the acceleration of cross-border trading.”

However, he suggests a change in the definition of the term “foreign security.” Under Proposed Exemption A(l), a foreign broker or dealer can be exempted from U.S. registration, subject to certain conditions, including one which requires that 85 percent or more of the aggregate value of its trades be in foreign securities. The SEC’s proposed test for equity securities would look to whether the issuer is a foreign private issuer under Securities Act Rule 405.

Meyerson says it isn’t clear how firms could automate monitoring for compliance with the 85 percent requirement, or whether data for making that determination would be available. “Even if we could make all of these determinations, the process of manually collecting this information for thousands of trades would be burdensome,” he says.

Instead, he suggests an equity security should be characterized as a U.S. or foreign security based on where the security is listed and where trades in the security settle, which would enable brokers to automate monitoring for compliance with the requirement. Meyerson recommends the SEC substitute his proposed test or give broker-dealers a choice between the two.