Broker Vs. Dealer

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JavaScript is turned off in your web browser. Turn it on to take full advantage of this site, then refresh the page. SEC Chair Mary Jo White outlined a broad market structure proposal that would require high-frequency traders to register with the SEC as dealers and that could signal the end of the dealer-trader distinction.

In a June 5 speech, Mary Jo White, Chair of the Securities and Exchange Commission SECoutlined a broad proposal to address market structure issues in broker trader dealer of the increase in electronic and off-exchange trading in recent years. This LawFlash provides an overview of the dealer-trader distinction as well as some of the issues that the SEC will have to consider when bringing high-frequency traders within its regulatory umbrella.

By way of background, section 15 a of the Securities Exchange Act of Exchange Act generally makes it unlawful for any broker or dealer to make use of the mails or any means or instrumentality of interstate commerce to effect any transactions in, or to induce or attempt broker trader dealer induce the purchase or sale of, any security unless 1 such broker broker trader dealer dealer is registered with the SEC; 2 in the case of a natural person, is an associated person of a registered broker-dealer; or 3 satisfies the conditions of an exemption or safe harbor.

The dealer-trader distinction is an analytical framework that has been in place since at leastwhen Louis Loss first published his seminal treatise on the securities laws. The SEC further elaborated that dealers generally are persons who normally have regular clientele, hold themselves out as broker trader dealer to buy and sell securities at a regular place of business, have a regular turnover of inventory or participate in the distribution of new issuesand generally transact a substantial portion of their business with investors or, in the case of dealers who are market makers, principally trade with other professionals.

As we see it, the SEC could face at least three issues in adopting rules or interpretive guidance to bring high-frequency traders within the Dealer Definition: The most immediate challenge the SEC will likely face is in defining high-frequency trading and distinguishing broker trader dealer trading from other types of broker trader dealer and proprietary trading.

In this connection, the SEC may seek to build on the framework outlined in a concept release regarding the structure of the U. In addition, the SEC could seek to bring high-frequency traders within the Dealer Definition by leveraging its statement in the Concept Release that high-frequency traders, in some instances, have replaced the role traditionally played by market makers. Regardless of the vehicle that the SEC uses to bring high-frequency traders within the Dealer Definition, the SEC will likely have to address the continued validity of the dealer-trader distinction.

This is especially the case because high-frequency traders are not the only persons who rely on the dealer-trader distinction to avoid having to register as dealers with the SEC. Hedge funds, for example, may use strategies that involve frequently buying and selling securities, but they are not separately required to register as dealers. The SEC will have to consider whether it can justify the costs associated with requiring high-frequency traders to register against whatever benefits, real or perceived, such registration would yield.

For example, the SEC could impose additional obligations on the registered broker-dealers that provide high-frequency traders with access to the market, much like the SEC did by adopting Exchange Act Rule 15c Further, to the extent that the SEC seeks to justify requiring that high-frequency traders or at least those that trade via off-exchange venues also become members of FINRA, the SEC may have to explain why FINRA registration would be consequential, considering that high-frequency traders generally do not have customers and FINRA rules are, in broker trader dealer respects, geared to protect the customers of a broker-dealer.

SEC, where the U. Court of Appeals for the D. If high-frequency traders are required to register as dealers, the other registrants carrying or financing their accounts or providing them with market access may broker trader dealer from their ability to allocate roles and responsibilities to the high-frequency traders by agreements and under existing regulations governing clearing and other inter-dealer relationships.

We will continue to broker trader dealer developments in this area closely. If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:. San Francisco Joseph E.

Broker trader dealer section 3 a 5 C of the Exchange Act, additional exceptions broker trader dealer the Dealer Definition are available to banks as that term is defined in Section 3 a 6 that engage in certain enumerated activities. These exceptions are further codified as Exchange Act Rules 3a, 3a, and 3a See Louis Loss, Securities Regulation 1st ed. In addition to the factors listed in the Proposal, with respect to dealer broker trader dealer in the context of the Government Securities Act of GSAthe Broker trader dealer staff also identified the following factors: See Exchange Act Release No.

Registration of Brokers and Dealers Under Section 15 a of the Securities Exchange Act of By way of background, section 15 a of the Securities Exchange Act of Exchange Act generally makes it unlawful for any broker or dealer to make use of the mails or any means or instrumentality of interstate commerce to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security unless 1 such broker or dealer is registered with the SEC; 2 in the case of a natural person, is an associated person of a registered broker-dealer; or 3 satisfies the conditions of an exemption or safe harbor.

The Dealer-Trader Distinction The dealer-trader distinction is an analytical framework that has been in place since at leastwhen Louis Loss first published his seminal treatise on the securities laws. Defining High-Frequency Trading The most immediate challenge the SEC will likely face is in defining high-frequency trading and distinguishing such trading from other types of algorithmic and proprietary trading.

Contacts If you have broker trader dealer questions or would like more information on the issues discussed in this LawFlash, please contact any broker trader dealer the following Morgan Lewis lawyers: Stone Chicago Michael M.

Philipp New York Ben A. Indek Miami Ivan P. Harris San Francisco Joseph E.

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Company Filings More Search Options. The Securities Exchange Act of "Exchange Act" or "Act" governs the way in which the nation's securities markets and its brokers and dealers operate. We have prepared this guide to summarize some of the significant provisions of the Act and its rules. You will find information about whether you need to register as a broker-dealer and how you can register, as well as the standards of conduct and the financial responsibility rules that broker-dealers must follow.

Although this guide highlights certain provisions of the Act and our rules, it is not comprehensive. Brokers and dealers, and their associated persons, must comply with all applicable requirements, including those of the U.

Securities and Exchange Commission "SEC" or "Commission" , as well as the requirements of any self-regulatory organizations to which the brokers and dealers belong, and not just those summarized here. The SEC staff stands ready to answer your questions and help you comply with our rules. After reading this guide, if you have questions, please feel free to contact the Office of Interpretation and Guidance at e-mail tradingandmarkets sec. You will find a list of useful phone numbers at the end of this guide, or on the SEC's website at www.

You may wish to consult with a private lawyer who is familiar with the federal securities laws, to assure that you comply with all laws and regulations. The SEC staff cannot act as an individual's or broker-dealer's lawyer. While the staff attempts to provide guidance by telephone to individuals who are making inquiries, the guidance is informal and not binding. Formal guidance may be sought through a written inquiry that is consistent with the SEC's guidelines for no-action, interpretive, and exemptive requests.

This section covers the factors that determine whether a person is a broker or dealer. It also describes the types of brokers and dealers that do not have to register with the SEC. Self-regulatory organizations are described in Part III, below. A note about banks: The Exchange Act also contains special provisions relating to brokerage and dealing activities of banks. Please see Sections 3 a 4 B and 3 a 5 C and related provisions, and consult with counsel.

Bank brokerage activity is addressed in Regulation R, which was adopted jointly by the Commission and the Board of Governors of the Federal Reserve System. See Exchange Act Release No. Sometimes you can easily determine if someone is a broker. For instance, a person who executes transactions for others on a securities exchange clearly is a broker. However, other situations are less clear. For example, each of the following individuals and businesses may need to register as a broker, depending on a number of factors:.

In order to determine whether any of these individuals or any other person or business is a broker, we look at the activities that the person or business actually performs.

You can find analyses of various activities in the decisions of federal courts and our own no-action and interpretive letters. Here are some of the questions that you should ask to determine whether you are acting as a broker:. Unlike a broker, who acts as agent, a dealer acts as principal. Section 3 a 5 A of the Act generally defines a "dealer" as:. The definition of "dealer" does not include a "trader," that is, a person who buys and sells securities for his or her own account, either individually or in a fiduciary capacity, but not as part of a regular business.

Individuals who buy and sell securities for themselves generally are considered traders and not dealers. Sometimes you can easily tell if someone is a dealer. For example, a firm that advertises publicly that it makes a market in securities is obviously a dealer. Other situations can be less clear. For instance, each of the following individuals and businesses may need to register as a dealer, depending on a number of factors:. If you are doing, or may do, any of the activities of a broker or dealer, you should find out whether you need to register.

Information on the broker-dealer registration process is provided below. If you are not certain, you may want to review SEC interpretations, consult with private counsel, or ask for advice from the SEC's Division of Trading and Markets by calling or by sending an e-mail to tradingandmarkets sec.

Please be sure to include your telephone number. If you will be acting as a "broker" or "dealer," you must not engage in securities business until you are properly registered.

If you are already engaged in the business and are not yet registered, you should cease all activities until you are properly registered. For further information, please see Part II.

D and Part III, below. Section 15 a 1 of the Act generally makes it unlawful for any broker or dealer to use the mails or any other means of interstate commerce, such as the telephone, facsimiles, or the Internet to "effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security" unless that broker or dealer is registered with the Commission in accordance with Section 15 b of the Act.

There are a few exceptions to this general rule that we discuss below. In addition, we discuss the special registration requirements that apply to broker-dealers of government and municipal securities, including repurchase agreements, below. We call individuals who work for a registered broker-dealer "associated persons.

These individuals may also be called "stock brokers" or "registered representatives. They may also have to register with the self-regulatory organizations of which their employer is a member — for example, the Financial Industry Regulatory Authority, Inc.

To the extent that associated persons engage in securities activities outside of the supervision of their broker-dealer, they would have to register separately as broker-dealers. Part III, below, provides a discussion of how to register as a broker-dealer.

We do not differentiate between employees and other associated persons for securities law purposes. Broker-dealers must supervise the securities activities of their personnel regardless of whether they are considered "employees" or "independent contractors" as defined under state law. See , for example, In the matter of William V. The law also does not permit unregistered entities to receive commission income on behalf of a registered representative. For example, associated persons cannot set up a separate entity to receive commission checks.

An unregistered entity that receives commission income in this situation must register as a broker-dealer. Under certain circumstances, unregistered entities may engage in payroll administration services involving broker-dealers. See , for example, letter re: In those circumstances, the broker-dealer employer generally hires and supervises all aspects of the employees' work and uses the payroll and benefits administrator merely as a means to centralize personnel services. A broker-dealer that conducts all of its business in one state does not have to register with the SEC.

State registration is another matter. See Part III , below. The exception provided for intrastate broker-dealer activity is very narrow. To qualify, all aspects of all transactions must be done within the borders of one state.

This means that, without SEC registration, a broker-dealer cannot participate in any transaction executed on a national securities exchange.

A broker-dealer that otherwise meets the requirements of the intrastate broker-dealer exemption would not cease to qualify for the intrastate broker-dealer exemption solely because it has a website that may be viewed by out-of-state persons, so long as the broker-dealer takes measures reasonably designed to ensure that its business remains exclusively intrastate.

These measures could include the use of disclaimers clearly indicating that the broker-dealer's business is exclusively intrastate and that the broker-dealer can only act for or with, and provide broker-dealer services to, a person in its state, as long as the broker-dealer does not provide broker-dealer services to persons that indicate they are, or that the broker-dealer has reason to believe are, not within the broker-dealer's state of residence.

These measures are not intended to be exclusive. A broker-dealer could adopt other measures reasonably designed to ensure that it does not provide broker-dealer services to persons that are not within the same state as the broker-dealer. However, an intermediary's business would not be "exclusively intrastate" if it sold securities or provided any other broker-dealer services to a person that indicates that it is, or that the broker-dealer has reason to believe is, not within the broker-dealer's state of residence.

For additional information regarding the use of the Internet by intrastate broker-dealers, see https: A word about municipal and government securities. There is no intrastate exception from registration for municipal securities dealers or government securities brokers and dealers. A broker-dealer that transacts business only in commercial paper, bankers' acceptances, and commercial bills does not need to register with the SEC under Section 15 b or any other section of the Act.

On the other hand, persons transacting business only in certain "exempted securities," as defined in Section 3 a 12 of the Act, do not have to register under Section 15 b , but may have to register under other provisions of the Act.

For example, some broker-dealers of government securities, which are "exempted securities," must register as government securities brokers or dealers under Section 15C of the Act, as described in Part II. A security sold in a transaction that is exempt from registration under the Securities Act of the " Act" is not necessarily an "exempted security" under the Exchange Act.

For example, a person who sells securities that are exempt from registration under Regulation D of the Act must nevertheless register as a broker-dealer. In other words, "placement agents" are not exempt from broker-dealer registration. Issuers generally are not "brokers" because they sell securities for their own accounts and not for the accounts of others.

Moreover, issuers generally are not "dealers" because they do not buy and sell their securities for their own accounts as part of a regular business. Issuers whose activities go beyond selling their own securities, however, need to consider whether they would need to register as broker-dealers. This includes issuers that purchase their securities from investors, as well as issuers that effectively operate markets in their own securities or in securities whose features or terms can change or be altered.

The so-called issuer's exemption does not apply to the personnel of a company who routinely engage in the business of effecting securities transactions for the company or related companies such as general partners seeking investors in limited partnerships. The employees and other related persons of an issuer who assist in selling its securities may be "brokers," especially if they are paid for selling these securities and have few other duties.

Exchange Act Rule 3a provides that an associated person or employee of an issuer who participates in the sale of the issuer's securities would not have to register as a broker-dealer if that person, at the time of participation: Some issuers offer dividend reinvestment and stock purchase programs. Under certain conditions, an issuer may purchase and sell its own securities through a dividend reinvestment or stock purchase program without registering as a broker-dealer.

These conditions, regarding solicitation, fees and expenses, and handling of participants' funds and securities, are explained in Securities Exchange Act Release No. Although Regulation M 2 replaced Rule 10b-6 and superseded the STA Letter, the staff positions taken in this letter regarding the application of Section 15 a of the Exchange Act remain in effect. See 17 CFR The SEC generally uses a territorial approach in applying registration requirements to the international operations of broker-dealers.

Under this approach, all broker-dealers physically operating within the United States that induce or attempt to induce securities transactions must register with the SEC, even if their activities are directed only to foreign investors outside of the United States. In addition, foreign broker-dealers that, from outside of the United States, induce or attempt to induce securities transactions by any person in the United States, or that use the means or instrumentalities of interstate commerce of the United States for this purpose, also must register.

This includes the use of the internet to offer securities, solicit securities transactions, or advertise investment services to U. Foreign broker-dealers that limit their activities to those permitted under Rule 15a-6 of the Act, however, may be exempt from U.