What is a Broker-Dealer? - Davis Polk & Wardwell

§ 1A:7.4 BROKER-DEALER REGULATION
Under Rule 3a5-2, a bank is not considered a dealer when, in a
riskless principal transaction, it:
(i) purchases an eligible security 435 from an issuer or a brokerdealer
and sells that security in compliance with the requirements
of Rule 903 of Regulation S to a purchaser 436 who is not
in the United States;
(ii) purchases from a person who is not a U.S. person (as
defined in Regulation S) an eligible security after its initial
sale with a reasonable belief that the eligible security was
initially sold outside of the United States within the meaning
of and in compliance with the requirements of Rule 903 of
Regulation S, and resells that security to a purchaser who
is not in the United States or to a registered broker or
dealer; 437 or
(iii) purchases from a registered broker or dealer an eligible security
after its initial sale with a reasonable belief that the eligible
security was initially sold outside of the United States within
the meaning of and in compliance with the requirements of
Rule 903 of Regulation S, and resells that security to a
purchaser who is not in the United States. 438
[C][4] Bank Securities Lending—Rule 3a5-3
Rule 772 of Regulation R exempts from the definition of “broker”
banks engaging in certain bank lending activities, as agents. 439
Rule 3a5-3 provides an exemption from the definition of “dealer”
for banks engaging in certain securities lending transactions, as
conduit lenders. 440
435. “Eligible security” is defined in Rule 3a5-2(b)(2) as a security that (i) is not
being sold from the inventory of the bank or an affiliate of the bank; and
(ii) is not being underwritten by the bank or an affiliate of the bank on a
firm-commitment basis, unless the bank acquired the security from an
unaffiliated distributor that did not purchase the security from the bank or
an affiliate of the bank. The definition of “eligible security” in Rule 3a5-2
is the same as that in Rule 771 of Regulation R.
436. For the purposes of Rule 3a5-2, a “purchaser” is a person who purchases an
eligible security and who is not a U.S. person under Rule 902(k).
437. See Rule 3a5-2(a)(2).
438. See Rule 3a5-2(a)(3).
439. See Rule 772; SEC Release No. 34-56501, at 127 (Sept. 24, 2007).
440. See Exemptions for Banks Under Section 3(a)(5) of the Securities Exchange
Act of 1934 and Related Rules, SEC Release No. 34-56502, at 12 (Sept. 24,
2007).
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