U.S. SEC Charges Indian Firms with Acting as Unregistered Broker-Dealers

By David Smyth and Christopher Poe, Brooks Pierce

On November 27, 2012, the U.S. Securities and Exchange Commission charged four Indian financial services firms with acting as unregistered broker-dealers in the United States. The firms were accused of providing brokerage services to institutional investors in the United States without registering with the SEC as required by Section 15(a) of the Securities Exchange Act of 1934 ("Exchange Act"). The SEC censured the firms, who paid a combined total of $1.8 million to settle the SEC's charges. These actions are part of a recent spate of activity for the SEC, which treats Section 15(a) seriously and enforces it to ensure that securities brokers satisfy professional standards, have adequate capital, treat their customers fairly and provide accurate disclosures to investors.

In light of these cases, foreign financial services firms that engage with U.S. investors should carefully monitor their compliance actions and determine whether registration with the SEC if necessary.


The four Indian firms were Ambit Capital Private Limited, Edelweiss Financial Services Limited, JM Financial Institutional Securities Private Limited, and Motilal Oswal Securities Limited. According to the SEC orders, the firms were engaged with U.S. investors but were not registered as broker-dealers, in violation of federal securities laws.

What sorts of activities did these firms engage in? They sponsored conferences in the United States, they had employees travel regularly to the U.S. to meet with investors, they traded securities of India-based issuers on behalf of U.S. investors, and they participated in securities offerings from India-based issuers to U.S. investors.

As a result of the orders, Ambit Capital paid disgorgement and prejudgment interest totaling $30,010. Edelweiss paid $568,347, JM Financial paid $443,545, and Motilal Oswal paid $821,594. Each firm agreed to be censured without admitting or denying the charges. SEC Associate Director Scott Friestad noted that "the firms' cooperation with the Commission staff, and their prompt remedial measures, including entering into Rule 15a-6 Chaperoning Agreements with U.S. registered broker-dealers and/or initiating registration with the Commission as a broker-dealer, were important factors in accepting the firms' settlement offers, particularly the Commission's decision not to impose a cease-and-desist order or a penalty."


Section 3(a)(4) of the Exchange Act defines a "broker" as any person "engaged in the business of effecting transactions in securities for the accounts of others." The SEC and U.S. courts interpret this definition broadly. Specifically, this means that any person who participates in a securities transaction at "key points in the chain of distribution" is generally subject to registration requirements. Firms and individuals that receive transaction-related compensation, solicit securities transactions, help an issuer identify potential purchasers, screen potential buyers, make valuations for investors, or negotiate between the issuer and the investor can all fall within this umbrella.

Section 15(a) of the Exchange Act requires all broker-dealers engaged in interstate commerce or the facilities of any national securities exchange to register as such. Rule 15a-6 under the Exchange Act provides some limited exemptions under which unregistered foreign broker-dealers may effect transactions with or for U.S. institutional investors. The SEC held that the Indian firms acted as securities brokers outside the conditions of Rule 15a-6, and their solicitation of and provision of brokerage services to U.S. investors required broker-dealer registration.


Foreign financial services firms that engage with U.S. investors should be extremely cautious during these transactions, and should engage counsel to weigh whether registration as broker-dealers is necessary. It is becoming increasingly clear that the SEC is paying particular attention to these types of cases.

In July 2012, for example, the SEC staff issued a "no-action letter" indicating that it would not recommend enforcement action against a foreign entity that acted as a broker in U.S. markets and had $100 million in total assets, but not $100 million in "financial" assets. The SEC staff found that activity to be within the parameters of the exemption under Rule 15a-6(a)(3).

That letter suggested a bit of lenience from the SEC on this issue. But it followed closely on the heels of another enforcement action from late 2011, when the SEC charged a multinational banking conglomerate, Banco Espirito Santo S.A. ("BES"), for failing to register as a broker-dealer. BES paid nearly $7 million to settle the SEC's charges. Following the BES settlement, Associate Regional Director Sanjay Wadhwa in the SEC's New York Regional Office said, "Foreign entities seeking to provide financial or securities-related services in the U.S. must familiarize themselves with the statutory and regulatory framework in the arena. A failure to do so, as was the case here, can be a costly misstep." The SEC also brought over three dozen cases alleging violations of Section 15(a) against domestic entities and individuals in 2012. The SEC is watching this space closely.

Another aspect of the more recent matters that should not be overlooked is the Indian firms' cooperation with the SEC in the investigation. Here, the firms essentially had to pay back the money they earned from these transactions and were able to escape civil money penalties and cease-and-desist orders entirely. Once subpoenas have been issued, the recipients should consult competent counsel and determine how to respond most effectively. Cooperating with the SEC staff could be the most cost effective way forward.

Smyth 2 121x160David Smyth, Of Counsel
Brooks Pierce, Raleigh Office, 1600 Wells Fargo Capitol Center, 150 Fayetteville Street, Raleigh, North Carolina 27601
T: (919) 573-6218, F: (336) 232-9218
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David Smyth served on the staff of the U.S. Securities and Exchange Commission for six years, ultimately as Assistant Director in the Division of Enforcement. He was instrumental in establishing and managing the Enforcement Division's Office of Market Intelligence, created in the wake of the Bernard Madoff scandal to revamp the SEC's process for receiving and analyzing tips regarding potential violations of the federal securities laws. His practice focuses on financial services litigation and representation in response to government enforcement proceedings by federal and state authorities.

Poe c 121x160Christopher Poe, Associate
Brooks Pierce, Greensboro Office, 2000 Renaissance Plaza, 230 North Elm Street, Greensboro, NC 27401
T: (336) 271-3146; F: (336) 232-9046
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Christopher Poe practices corporate law. He has seen first-hand the interconnectedness of the global economy through travels to Europe, Africa, and South America. Most recently, he and his wife spent a month touring southeast Asia. Christopher is proficient in Spanish and literate in Biblical Hebrew, Classical Greek, and Aramaic.


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