# Swiss American Securities Inc. and Streetline, Inc.: No

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

Swiss American Securities Inc. and Streetline, Inc.: No-Action Letter dated May 28, 2002

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May 28, 2002
Mark Dorsey
Fried, Frank, Harris, Shriver & Jacobson
1001
Pennsylvania Avenue, NW, Suite 800
Washington, DC 20004-2505
Re: Swiss American Securities, Inc. and Streetline, Inc.
Dear Mr. Dorsey:
In your letter dated May 28, 2002, on behalf of Swiss American
Securities, Inc. ("SASI"), you have asked for assurances that the staff of
the Division of Market Regulation ("Division") will not recommend
enforcement action to the Securities and Exchange Commission
("Commission") under Section 15(a) of the Securities Exchange Act of 1934
("Exchange Act") if SASI or its affiliate Streetline, Inc. ("Streetline")
engage in certain Internet-related activities without Streetline
registering as a broker-dealer in accordance with Section 15(b) of the
Exchange Act.
We understand the facts to be as follows: SASI is a registered U.S.
broker-dealer that does much of its business with foreign financial
institutions. SASI seeks to market Internet-based financial services to
those foreign financial institutions, and to enter into agreements with
the foreign financial institutions by which SASI would make website
services available to the foreign financial institutions. In return, the
foreign financial institutions would agree to route all orders for U.S.
securities placed by their customers through the websites to SASI for
execution. The foreign financial institutions would route all orders for
non-U.S. securities in accordance with the foreign financial institutions'
internal procedures, or to other entities as designated by the foreign
financial institutions. The foreign financial institutions would use the
websites to offer financial services to their customers, but the foreign
financial institutions would not provide access to any customer who is a
U.S. resident unless the foreign financial institution is registered as a
broker-dealer with the Commission. In all events, the foreign financial
institutions that are not registered as broker-dealers with the Commission
would be required to represent that they have implemented policies "to
prevent the triggering of U.S. broker-dealer registration requirements in
connection with the use of the web site."
SASI would contract with Streetline to develop, customize and host the
websites. The website services that would be made available to the foreign
financial institutions could include order entry capability for the
foreign financial institutions' customers, and capabilities for
determining account information, conducting research and receiving alerts,
as well as other services. Each foreign financial institution would
determine which capabilities to include on its particular web site.
SASI would pay Streetline an initial fee to develop and customize each
foreign financial institution's website, along with a regular periodic fee
to maintain and host the website (directly or through a third party). SASI
also would pay Streetline a per-order messaging fee - presently expected
to be $1 per order - to establish and maintain the linkages that
communicate orders to SASI.
SASI would charge the foreign financial institutions a commission for
executing orders, plus website development and maintenance fees that would
be based on the development and maintenance fees that SASI pays
Streetline.
Although the foreign financial institutions would route all orders for
U.S. securities that are placed on the websites to SASI, the websites
would not identify either Streetline or SASI. Furthermore, as you state in
your letter, "Streetline would play a passive role with respect to the
securities activities of the foreign financial institution and its
customers." Also, "Streetline will not take part in the financial services
offered by the foreign financial institution (other than providing
software and providing or arranging for maintenance of the website)
including the opening, maintenance, administration or closing of brokerage
accounts, or the solicitation of trades." In addition, Streetline would
not provide assistance in resolving problems, discrepancies or disputes
involving brokerage accounts or related securities transactions, and would
not answer questions or engage in negotiations involving brokerage
accounts or related securities transactions. Moreover, Streetline would
not recommend or endorse specific securities to the foreign financial
institutions' customers, and the foreign financial institutions' customers
would not be able to contact Streetline through the site.
SASI would exercise control over Streetline in developing and
maintaining the websites, and SASI would assume full responsibility for
the operation of the websites and for Streetline's compliance with
applicable federal securities laws. SASI would treat the foreign financial
institutions as its customers with respect to all aspects of the websites
(except to the extent that the foreign financial institutions are excluded
from the definition of "customer" by the federal securities laws or
self-regulatory organization rules), including any work done by
Streetline. SASI would be responsible for all marketing related to the
agreements and for negotiating the agreements with the foreign financial
institutions, and Streetline would not engage in any marketing or
negotiate the agreements. SASI would be the contracting party with the
foreign financial institutions for the agreements, while Streetline would
not be a party to those agreements. SASI would have the right to terminate
its contracts with Streetline. Streetline would not exercise any
discretion over the websites, and Streetline's participation in developing
and maintaining the websites would be limited to providing software and
systems technology and maintaining the proper technical functioning and
hosting of the websites. Streetline would not hold the foreign financial
institutions' customers' funds or securities, be involved in the clearance
and settlement of securities transactions, or extend credit or arrange for
the extension of credit to any customer. See Prescient Markets,
Inc. (publicly available April 2, 2001).
In addition, SASI's election to use Streetline would not relieve SASI
of its responsibilities under the federal securities laws, including any
applicable standards regarding order handling capacity. With regard to
consumer financial information related to the Agreements, Streetline would
be governed by all financial privacy obligations applicable to SASI under
Title V of the Gramm-Leach-Bliley Act and under the Fair Credit Reporting
Act (in addition to any similar obligations that may be directly
applicable to Streetline). Moreover, for purposes of examination at any
time or from time to time during business hours by the Commission, its
designees, or representatives, any self-regulatory organization of which
SASI is a member, or any state securities regulator having jurisdiction
over SASI, all facilities, technology, and books and records of Streetline
shall be the facilities, technology and books and records of SASI.
Response of the Division of Market Regulation
On the basis of the facts presented and your representations, the
Division will not recommend enforcement action to the Commission under
Section 15(a) of the Exchange Act if SASI and Streetline engage in the
activities discussed in your letter without Streetline registering with
the Commission as a broker-dealer. In taking this position, the Division
notes that the proposed arrangements contain safeguards that should
prevent Streetline from being in a position where it could solicit
securities transactions, directly or indirectly.
SASI, a registered broker-dealer, will be solely responsible for
marketing the Internet services, negotiating with the foreign financial
institutions, and entering into contracts with the foreign financial
institutions. The foreign financial institutions will pay only SASI for
the Internet-based financial services. Streetline will have no role in
marketing the services or negotiating agreements. Streetline will not be a
party to any agreements with the foreign financial institutions, and SASI
will be able to replace Streetline. Also, the websites will make no
mention of Streetline or SASI.
Although Streetline will perform limited, non-discretionary functions
in configuring and maintaining financial service websites for the foreign
financial institutions, Streetline will perform that work only in its
capacity as a contractor for SASI. SASI will be responsible for all the
work that Streetline performs. Streetline's activities will be highly
circumscribed, in that Streetline would not exercise any discretion over
the websites, and its participation would be limited to providing software
and systems technology and maintaining proper technical functioning and
website hosting. Streetline will not open, maintain, administer or close
brokerage accounts, or provide assistance in resolving problems,
discrepancies or disputes related to brokerage accounts.
In essence, Streetline should be invisible to the ultimate users of the
websites and will be restricted to operating on behalf of SASI when
performing technical functions.
To date, the Division has issued only one letter granting no-action
relief for an Internet-related service that would be paid per-order fees
without registering as a broker-dealer. In the Division's letter regarding
Charles Schwab & Co. (November 27, 1996), the Division granted
no-action relief to broad-based Internet service providers that would not
specifically direct their operations toward the securities industry, and
that would take a passive role toward the interaction between brokerages
and their customers, other than routing messages. Those Internet service
providers could receive a nominal flat fee for each order transmitted. The
proposed activities of SASI and Streetline go beyond the activities
contemplated by the Schwab letter - Streetline would not provide
broad-based services, but instead would direct its activities toward the
securities industry; Streetline would not passively link customers with
broker-dealers, but instead would help provide order-handling services;
and Streetline's $1 per-order compensation is more than "nominal."
The Division nonetheless believes that under these circumstances,
Streetline may receive per-order fees without registering as a
broker-dealer because of the many safeguards that should prevent
Streetline from being in a position where it could solicit transactions in
securities. In other words, this no-action relief would not apply if:
Streetline participated in marketing the services or in negotiating the
agreements between SASI and the foreign financial institutions; Streetline
was a party to the contracts between SASI and the foreign financial
institutions; Streetline exercised discretion over the websites;
Streetline's name or brand name appeared anywhere on those websites; or
SASI failed to exercise control over Streetline's development and
maintenance of the websites.
The Division also notes that because of Streetline's defined role,
Streetline will not be in a position to engage in broker-dealer
activities. For example, Streetline will not hold itself out as a
broker-dealer, provide information or advice related to securities
transactions to the customers of the foreign financial institutions, match
orders, make decisions about routing orders, facilitate the clearance and
settlement of executed trades, prepare or send transaction confirmations,
screen counterparties for creditworthiness, or hold funds or securities.
The positions expressed above are based solely on the facts presented
and the representations made to the Division in your letter, and any
different facts or conditions may require a different response.
Furthermore, this response only expresses the Division's position on
enforcement action and does not purport to express any legal conclusions
on the questions presented.
This letter addresses only the registration status of Streetline, and
no other issues. For example, this letter does not address the question of
what are SASI's obligations under the securities laws arising from SASI's
assistance with the operation of the websites of the foreign financial
institutions. This letter also does not address status of the foreign
financial institutions under the federal securities laws.
Sincerely,
Catherine McGuire
Chief Counsel

Incoming Letter

May 28, 2002
202-639-7173
Securities Exchange Act of 1934
Section
15
VIA FEDERAL EXPRESS
Catherine McGuire, Esq.
Chief Counsel and Associate Director

Division of Market Regulation
U.S. Securities and Exchange
Commission
450 Fifth Street, N.W.
Washington D.C. 20549
Re: Streetline, Inc.
Dear Ms. McGuire:
This letter requests that the staff of the Securities and Exchange
Commission (the "Staff") advise our client, Swiss American Securities Inc.
("SASI"), a registered broker-dealer, that the Staff will not recommend
any enforcement action under Section 15(a) of the Securities Exchange Act
of 1934 ("Exchange Act") against SASI or its affiliate, Streetline, Inc.
("Streetline"), if SASI and Streetline engage in the activities described
below and Streetline does not register as a broker-dealer under Section
15(b) of the Exchange Act.
SASI is a registered broker-dealer and a member of the National
Association of Securities Dealers, Inc., and a member organization of the
New York Stock Exchange, Inc. and various regional U.S. securities
exchanges. Streetline is wholly-owned by SASI's parent company. A
significant portion of the business conducted by SASI involves SASI's
execution of trades in U.S. securities for foreign financial institutions
that place orders with SASI, both for their own account and for the
accounts of the foreign financial institutions' customers. 1 SASI has historically serviced these orders and
communicated them to the market place by telephone, facsimile, the Society
for Worldwide Interbank Financial Telecommunications ("SWIFT") or other
electronic communication systems operated by third party vendors such as
Automatic Data Processing, Inc. ("ADP") and Reuters "InterTrade Direct".
SASI pays a per order message fee for utilizing the communication devices
of SWIFT, ADP, and InterTrade Direct to communicate orders between SASI
and its customers as well as between SASI and market centers.
In order to maintain the competitiveness of the securities brokerage
services it provides to its foreign financial institution clients and to
enable those clients to more efficiently handle orders from their
customers, SASI intends to offer foreign financial institutions the
ability to provide their customers with the significant price and
convenience advantages that are associated with accessing an Internet site
to place orders for securities transactions. Internet communication
represents the most widely accessible electronic medium for transmitting
securities orders and as a result, SASI anticipates that it will be the
medium of choice in the next millennium. In connection therewith, SASI
proposes to enter into order flow agreements with its foreign financial
institution clients pursuant to which SASI will make web site services
available to the foreign financial institution through its affiliate,
Streetline, and the foreign financial institution will agree to direct all
on-line orders for U.S. securities to SASI for execution.
SASI's web site development and hosting services will be marketed by
SASI and offered to foreign financial institutions that enter into an
order flow agreement with SASI (the "Agreement"). Pursuant to the
Agreement, the foreign financial institution will route all orders for
U.S. securities that are placed by the foreign financial institution's
customers through the web site to SASI for execution, and the foreign
financial institution will route all orders for non-U.S. securities that
are placed by the foreign financial institution's customers through the
web site in accordance with its internal procedures for non-U.S.
securities, or to another entity as designated by the foreign financial
institution (including possibly an affiliate of SASI) for execution.
Orders routed to SASI will be executed in an omnibus account maintained by
SASI in the name of the foreign financial institution. Each foreign
financial institution will be required to represent in the Agreement that
it will comply with all laws, rules and regulations applicable to it in
connection with the Agreement in each jurisdiction in which it offers the
web services, including any disclosure obligation(s) regarding its order
flow arrangement with SASI.
Pursuant to the Agreement, the foreign financial institution will pay
to SASI an up-front fee to cover the start up expenses associated with the
development and customization of the foreign financial institution's web
site and a monthly maintenance fee for the maintenance and hosting of the
site. The amount of these two fees will be based on the amount that
Streetline charges to SASI for the development, maintenance and hosting of
the web site. SASI will also charge the foreign financial institution a
commission for executing orders that are placed through the web site and
routed to SASI for execution.
SASI, in turn, will contract with its affiliate, Streetline, to provide
the actual web site development, maintenance and hosting services.
Streetline, using software available in the market, will develop and
customize web sites for the foreign financial institution that will allow
the foreign financial institution to offer various services to its
customers through the Internet. Streetline also will provide hosting
services for the foreign financial institution's web site either directly
or through a third party, which may or may not be affiliated with
Streetline. Pursuant to the terms of the contract between SASI and
Streetline, SASI will pay Streetline an up-front fee for the development
and customization of the foreign financial institution's web site and a
regular periodic maintenance fee for the maintenance and hosting of the
site. In addition, SASI will pay Streetline a fee for establishing and
maintaining a communications linkage in order to allow orders placed
through the web site to be electronically transmitted to SASI for
execution. This messaging fee will be the same type of fee that SASI
currently pays to third party vendors to electronically transmit orders
between SASI and its customers and between SASI and U.S. market centers -
a flat per order messaging fee for each order communicated to SASI through
the linkage, regardless of the size of the order or whether the order
results in an executed trade. 2
The proposed web sites to be developed by Streetline will have the
following possible capabilities or functions:

A Customized Home Page - This page will identify the foreign
financial institution, its products and services.
FAQS and Customer Tutorials - This function will address fundamental
questions regarding on-line trading, and provide an on-line interactive
demonstration to educate the customer on the use of the Internet trading
function.
Market Data - The site will make available quotes, news and other
market data with respect to U.S. and foreign securities, which will be
obtained from third party vendors.
Research - The site will be capable of making available to customers
research reports, if any, prepared by the foreign financial institution,
as well as research prepared by third parties, including SASI.
Alert/Monitoring - This capability will allow a user to input various
criteria (e.g., price movement, news release) for a limited number of
securities and receive notification by e-mail, pager or voice if and
when the selected criteria are triggered.
Order Execution and Status - This capability will allow a foreign
financial institution's customer to place orders for securities for
their account at the respective institution and to monitor the status of
their orders (e.g., open, filled, canceled).
Account Information - This function will allow a foreign financial
institution's customer to access information regarding his or her
account at the institution (e.g., cash and securities positions).
Customer Service Functions - This function will allow the foreign
financial institutions to better communicate with their customers by
e-mail, bulletin boards and on-line seminars. 3

A foreign financial institution's web site may include all, or only
some, of the capabilities or functions described above. The capabilities
or functions actually included on each web site will be determined by the
foreign financial institution in its sole discretion and the foreign
financial institution will be responsible for the accuracy of all
materials that appear on the web site. Neither Streetline nor SASI will be
identified on the web site. Streetline will not handle any of the foreign
financial institutions' customer's securities or funds and Streetline will
not extend credit or arrange for the extension of credit to any such
customer.
Streetline will play a passive role with respect to the securities
activities of the foreign financial institution and its customers.
Streetline will not take part in the financial services offered by the
foreign financial institution (other than by providing the software for
the web site and providing or arranging for maintenance and hosting of the
web site) including the opening, maintenance, administration or closing of
brokerage accounts, or the solicitation of trades. Nor will Streetline
provide assistance in resolving problems, discrepancies or disputes
involving brokerage accounts or related securities transactions.
Streetline will not answer questions or engage in negotiations involving
brokerage accounts or related securities transactions and Streetline will
not recommend or endorse specific securities to the foreign financial
institution's customers. In addition, customers of the foreign financial
institution will not be able to contact Streetline through the site.
At least initially, SASI expects that no foreign financial institution
will make its site available to the general public. Rather, the site will
be password protected, and will only be available to customers of the
foreign financial institution who have been provided with a password by
the institution. Pursuant to the terms of the Agreement, unless registered
as a broker-dealer with the SEC, the foreign financial institution will
not provide access (i.e., will not provide a password) to any customer who
is a U.S. resident. In all events, foreign financial institutions that are
not U.S. registered broker-dealers will be required to represent to SASI
that they have implemented policies and procedures that reasonably could
be expected to prevent the triggering of U.S. broker-dealer registration
requirements in connection with the use of the web site.
We believe that the anticipated operations of Streetline follow the
principles set out in prior no-action letters (e.g., Quick America
Corporation (pub. avail. June 28, 1993); Evare, LLC (pub. avail. November
30, 1998); Charles Schwab & Co., Inc. (pub. avail. November 27,
1996)). In that regard, Streetline: (i) will not hold or have access to
any foreign financial institution's customer's funds or securities; (ii)
will not recommend or endorse specific securities to such customers; (iii)
will not become involved with the financial services provided by the
foreign financial institution to its customers (other than through the web
site software and hosting services). Although Streetline will conduct the
ministerial task of programming the foreign financial institution's web
site to route orders for U.S. securities to SASI for execution, and, if
directed to do so by the foreign financial institution, will program the
web site to route orders for non-U.S. securities to an entity other than
the foreign financial institution (including possibly an affiliate of
Streetline), such programming will not reflect an order routing decision
or recommendation of Streetline. Rather, it will reflect the foreign
financial institution's decision about where to route its order flow.
We also believe that the anticipated operations of Streetline follow
the principles set out in Prescient Markets, Inc. (pub. avail. April 2,
2001). In that regard: (i) SASI will exercise control over
Streetline's development and maintenance of the sites; (ii) SASI will
assume full responsibility for the operation of the sites, including,
among other things, Streetline's compliance with applicable federal
securities laws; (iii) SASI will treat the foreign financial
institutions as its customers with respect to all aspects of the
sites, 4 including any work by Streetline;
(iv) SASI will be responsible for all marketing related to the
Agreements and for negotiating the terms of the Agreements - Streetline
will not engage in any marketing related to the Agreements nor will it
negotiate the terms of the Agreements; (v) SASI will contract with
the foreign financial institutions - Streetline will not be a party to the
Agreements and SASI will have the right to terminate its contracts with
Streetline; (vi) Streetline will not exercise any discretion over the
sites - Streetline's participation in developing and maintaining the sites
will be limited to providing software and systems technology, and
maintaining the proper technical functioning and hosting of the sites;
(vii) Streetline will not be involved in the clearance and settlement
of transactions; (viii) electing to use Streetline will not relieve
SASI of its responsibilities under the federal securities laws, the rules
thereunder or any other applicable legal requirements, including any
applicable standards regarding order handling capacity.
With regard to consumer financial information related to the
Agreements, Streetline will be governed by all financial privacy
obligations applicable to SASI under Title V of the Gramm - Leach - Bliley
Act and under the Fair Credit Reporting Act (in addition to any similar
obligations that may be directly applicable to Streetline). Finally, for
purposes of examinations at any time or from time to time during business
hours by the Securities and Exchange Commission, its designees or
representatives, any self regulatory organization of which SASI is a
member, or any state securities regulator having jurisdiction over SASI,
all facilities, technology, and books and records of Streetline shall be
the facilities, technology, and books and records of SASI.
* * *
If you have any comments or questions relating to this request, or wish
to discuss this matter further, please contact the undersigned at (202)
639-7173.
Sincerely,
Mark Dorsey
________________________

1
Such orders are executed in an omnibus account maintained by
SASI in the name of the foreign financial institution.

2
In this regard, Streetline presently expects to charge $1 per
order.

3
Other web site capabilities or functions may be offered to
foreign financial institutions at a later date, such as the ability
to pay on-line for security purchases. If this capability is added,
Streetline will not have custody of the funds or securities of the
customers of any foreign financial institution.

4
To the extent the federal securities laws and rules of self
regulatory organizations exclude the foreign financial institutions
from the definition of "customer", the foreign financial
institutions will continue to be excluded from those
definitions.

http://www.sec.gov/divisions/marketreg/mr-noaction/swissamer052802.htm

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Modified:
02/10/2005

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3A0c340e6228451f0a. Public record. Not legal advice.