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The article was originally posted in December Naturally, this is not a substitute for the advice of an experience securities attorney. No overview can provide the specific advice that is required to comply with the complex set of rules, regulations and interpretations that govern the operation of a brokerage firm, or any securities related business. 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 will be discussed in a separate publication. 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, one must review the activities that the person or business actually performs.
You can find analyses of various activities in the decisions of federal courts and in SEC no-action and interpretive letters. We also have a number of articles at SECLaw. The SEC suggests the following 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. 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. Please be sure to include your telephone number. You are also welcome to consult with our office , by telephone or by email to info beamlaw.
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. There are a few exceptions to this general rule that are addressed below. There are also special registration requirements that apply to broker-dealers of government and municipal securities, including repurchase agreements, below. See , for example, In the matter of William V.
Another common misconception is the use of a corporation by an associated person to operate a branch office. This arrangement is not a legitimate structure, as the rules and regulations do not allow unregistered entities to receive commission income on behalf of a registered representative.
An unregistered entity that receives commission income in this situation must register as a broker-dealer. See , for example, letter re: Birchtree Financial Services, Inc. However, unregistered entities may provide administrative services to broker-dealers and associated persons, and may be compensated for that service. Associated persons and broker-dealers considering such arrangements are advised to do so with counsel.
The matters involve not only the securities laws, which are complex enough, but state and federal tax issues as well. 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 exemption 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 or Nasdaq. Also, information posted on the Internet that is accessible by persons in another state would be considered an interstate offer of securities or investment services that would require Federal broker-dealer registration. A word about municipal and government securities. There is no intrastate exception from registration for municipal securities dealers or government securities brokers and dealers.
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. 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. 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.
Although Regulation M 1 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. Foreign broker-dealers that wish to rely on this exemption should review Securities Exchange Act Release No.
See also letters re: Securities Activities of U. In addition, in April , the Division of Market Regulation staff issued responses to frequently asked questions concerning Rule 15a-6 in relation to Regulation AC. Regulation AC is discussed in Part V. Broker-dealers that limit their activity to government or municipal securities require specialized registration. General-purpose broker-dealers that conduct a government securities business, however, must note this activity on their Forms BD.
Form BD is discussed below. All firms that are brokers or dealers in government securities must comply with rules adopted by the Secretary of the Treasury, as well as SEC rules. Firms that limit their securities business to buying and selling municipal securities for their own account municipal securities dealers must register as general-purpose broker-dealers.
If, however, these entities are banks or meet the requirements of the intrastate exemption discussed in Part II. Municipal securities brokers must register as general-purpose broker-dealers. Firms that run a matched book of repurchase agreements or other stock loans are considered dealers.
Banks, thrifts, and other financial institutions should be aware that the Commission has proposed changes to rules that may affect them. The GLBA amended the Exchange Act, and banks now have certain targeted exceptions and exemptions from broker-dealer registration. Currently, as a result of Commission rulemaking, banks are undergoing a phase-in period for compliance with the new law. The bank exemptions only apply to banks, and not to related entities.
It is important to note that exemptions applicable to banks under the Exchange Act, as amended by the GLBA, are not applicable to other entities, including bank subsidiaries and affiliates, that are not themselves banks.
As such, subsidiaries and affiliates of banks that engage in broker-dealer activities are required to register as broker-dealers under the Act. Also, banks that act as municipal securities dealers or as government securities brokers or dealers continue to be required to register under the Act. The SEC has granted thrifts savings associations the same status as banks through its rules. As such, thrifts now have certain targeted exceptions and exemptions from broker-dealer registration.
As with banks, it is important to note that exemptions applicable to thrifts are not applicable to other entities, including subsidiaries and affiliates that are not thrifts. As such, subsidiaries and affiliates of thrifts that engage in broker-dealer activities are required to register as broker-dealers under the Act.
The exemptions applicable to banks under the Exchange Act and thrifts under Commission rules do not apply to other kinds of financial institutions, such as credit unions. The SEC staff, however, has permitted certain financial institutions, such as credit unions, to make securities products available to their customers without registering as broker-dealers.
Under a networking arrangement, financial institutions can share in the commissions generated by their referred customers, under certain conditions. The financial institution engaging in such networking must be in strict compliance with applicable law and Commission staff guidance.
Chubb Securities Corporation November 24, and NASD Rule applicable to broker-dealers that enter into networking arrangements with banks, thrifts, and credit unions. The SEC staff has permitted insurance agencies to make insurance products that are also securities such as variable annuities available to their customers without registering as broker-dealers under certain conditions.
These arrangements are designed to address the difficulties of dual state and federal laws applicable to the sale of these products. Through networking arrangements, insurance agencies can share in the commissions generated by their referred customers under certain conditions. Insurance agencies engaging in such networking must be in strict compliance with applicable law and Commission staff guidance.
Insurance companies should consult the letter re: First of America Brokerage Services, Inc. Those interested in structuring such an arrangement should contact private counsel or the SEC staff for further information.