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June 30, 2015

No-Action Letter Regarding Definition of "Ready Market" with Regard to Foreign Equity Securities Pursuant to SEC Rule 15c3-1(c)(11)(i)

Currently, under Securities and Exchange Commission Rule 15c3-1 (the Net Capital Rule), broker-dealers may treat equity securities of a foreign issuer that are listed on the FTSE World Index as having a ready market. A ready market is relevant because the Net Capital Rule requires a broker-dealer to deduct 100% of the carrying value of securities it holds in its proprietary account for which there is no ready market. See SEC Rule 15c3-1(c)(2)(vii). Because its members were interested in expanding the criteria for recognizing foreign equity securities as having a ready market, FINRA requested no-action relief from the SEC to treat certain additional foreign equity securities as having a ready market under paragraph (c)(11) of the Net Capital Rule.

The SEC granted no-action relief on November 28, stating that it would not recommend enforcement action if a broker-dealer treats an equity security of a foreign issuer as having a ready market under paragraph (c)(11) of the Net Capital Rule (and subject to the haircuts under paragraph (c)(2)(vi)(J)), if the following conditions are met:

  1. The security is listed for trading on a foreign securities exchange located within a country that is recognized on the FTSE World Index, when the security has been trading on that exchange for at least the previous 90 days; 
     
  2. Daily quotations for both bid and ask or last sale prices for the security provided by the foreign securities exchange on which the security is traded are continuously available to broker-dealers in the United States through an electronic quotation system; 
     
  3. The median daily trading volume (calculated over the preceding 20-business-day period) of the foreign equity security on the foreign securities exchange on which the security is traded is either at least 100,000 shares or $500,000; and
  4. The aggregate unrestricted market capitalization in shares 
    of such security exceeds $500 million over each of the preceding 10 business days.

Additionally, any foreign equity security that ceases to meet one or more of the eligibility requirements will continue to be considered to have a “ready market” for purposes of paragraph (c)(11) for five business days from the date such foreign equity security ceases to meet the requirements. After the end of the five-business-day period, the security will be considered to have a “ready market” only if and when it again meets all of the eligibility requirements.

Click here for the No-Action letter.

©2015 Katten Muchin Rosenman LLP

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About this Author

Janet M. Angstadt, Securities Lawyer, Katten Muchin
Partner

Janet M. Angstadt is the head of Katten's Chicago Financial Services practice. She focuses her practice on broker-dealer and exchange compliance issues and advises companies on matters regarding compliance with the regulations of the US Securities and Exchange Commission (SEC) and self-regulatory organizations (SROs).

Janet represents clients in a wide range of legal and regulatory matters, including mergers and acquisitions, SRO investigations, compliance issues related to registrations, sales practice, short sales, Regulation NMS, market-making and options and equities order...

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