Opinion ID: 1228674
Heading Depth: 1
Heading Rank: 4

Heading: foreign financial institutions

Text: (3a) UFITEC next contends foreign financial institutions are not subject to the margin requirement. There is no provision in the act, or in regulation T, expressly exempting foreign financial institutions. Although section 30(b) of the act exempts security business carried on outside the United States, it is an exemption for foreign activity  not for foreign institutions carrying on regulated domestic activity. Section 30(b) of the act provides: The provisions of this chapter or of any rule or regulation thereunder shall not apply to any person insofar as he transacts a business in securities without the jurisdiction of the United States, unless he transacts such business in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate to prevent the evasion of this Title. (Italics added; 15 U.S.C. § 78dd(b).) The exemption then is determined by the activity's location rather than by the actor's nationality. The exemption is not a blanket one for foreign brokers and dealers but only for a person insofar as he transacts a business in securities outside United States jurisdictional limits. The federal courts have considered the exemption in a number of contexts and it is difficult to fully reconcile some of the decisions. However, the instant situation is a relatively clear one. The improper conduct occurred within the United States. This is contrasted to improper conduct occurring elsewhere but with related activity occurring in the United States. Thus, in Roth v. Fund of Funds, Ltd. (2d Cir.1968) 405 F.2d 421, 422, a Canadian corporation with offices in Switzerland was not exempt from the insider trading restrictions when it made profits on the purchase and sale of securities on the New York Stock Exchange. Similarly, in United States v. Weisscredit Banca Com. E D'Invest. (S.D.N.Y. 1971) 325 F. Supp. 1384, 1392-1393, involving regulation T, the Swiss bank's motion to dismiss indictment on the ground of exemption was denied when the indictment alleged that the Swiss bank was engaged in the transaction of business in securities within the United States. Other cases have gone even further, holding the act applicable to foreign firms when some of their acts occurred in the United States but much of the regulated conduct occurred outside the country. ( Securities & Exch. Comm. v. United Financial Group, Inc., supra, 474 F.2d 354, 357-358; Leasco Data Processing Equipment Corp. v. Maxwell (2d Cir.1972) 468 F.2d 1326, 1333-1337; Schoenbaum v. Firstbrook (2d Cir.1968) 405 F.2d 200, 207-209.) Even the principal case relied upon by UFITEC reflects that in determining whether the section 30 exemption applies, we look not to the nationality of the lender but to the activity in the United States. In Kook v. Crang (S.D.N.Y. 1960) 182 F. Supp. 388, 390-391, an American citizen purchased Canadian securities on margin through a Toronto broker. He personally delivered his first purchase check to Toronto and the checks for the second purchase and five margin calls were mailed from the United States. The Canadian broker was registered with the Securities Exchange Commission, maintaining a branch office in New York, but the office did not deal with individual investors. The transaction complied with the Toronto Stock Exchange margin requirement but not with regulation T. While holding that regulation T was not applicable, the court indicated the investor could have recovered if he could show some act done within the United States either in furtherance of the direct or indirect extension of credit or in furtherance of the direct or indirect maintenance of credit. (182 F. Supp. at p. 391.) The genesis of this venture lies in Los Angeles, California. UFITEC entered the lending transaction here and the security account was maintained here. Section 7 of the act and regulation T regulate the extension of credit, the very acts UFITEC engaged in within the United States. Application of regulation T to the instant transaction is consistent with the policies established by the act and regulation T. The objectives of Congress by imposing control on margin transactions include protecting unsophisticated investors against improvident speculation on credit, and preventing excessive credit causing untoward fluctuations on the market. (See 15 U.S.C. § 78b.) Obviously, the unsophisticated investor suffers the same loss whether his lender is a national or a foreigner. The untoward fluctuations of the market due to lender financing include prices of stock being forced up excessively by speculative purchases financed by loans. When the stock commences to drop, some speculators are then unable to meet margin calls with the result that lenders will sell the stock without consideration of the investment's merit. This results in forcing the price of the stock down, possibly inducing panic selling as occurred in 1929. However, when the borrower must furnish 80 percent  rather than 20 percent  of the price of the stock from his own funds, the risk of excessive appreciation and margin calls is greatly reduced. Obviously, the risks of excessive appreciation due to margin loans, and of excessive depreciation due to margin calls, is the same whether the funds are loaned by a national or by a foreign lender. UFITEC also relies upon statements by members of Congress and governmental press releases to the effect that prior to 1969 foreign firms were not subject to margin requirements. The statements were made in connection with legislative and administrative proposals to make the margin requirements, which theretofore restricted only lenders, restrict borrowers, so that the transaction could be regulated even though the lender was not subject to United States jurisdiction. The statements are not helpful to UFITEC. Section 7 of the act applied only to brokers and dealers engaged in the security business (15 U.S.C. § 78c(a)(4), (5)), thus foreign firms who were not brokers or dealers were not covered. In addition, foreign transactions were exempt under section 30. Thus, Americans could secure credit abroad without meeting the margin requirements. The statements did not specify that all foreigners were exempt from the margin requirements and should not be understood as so providing. Pointing out that regulation U, dealing with bank loans, and regulation G, governing margin lenders other than banks, brokers, and dealers, were interpreted as not applying to foreign institutions ( Metro-Goldwyn-Mayer, Inc. v. Transamerica Corporation (S.D.N.Y. 1969) 303 F. Supp. 1354, 1358), UFITEC urges regulation T should likewise be interpreted not to apply to foreign institutions. However, interpretation of regulations U and G excluding foreign institutions was based on the language used in those regulations ( id. ) and no comparable language appears in regulation T. No substantial reason has been offered why foreign brokers and dealers engaged in business in the United States should be permitted to engage in transactions prohibited to American brokers and dealers.