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

What Is a Broker-Dealer? § 1A:7.5
Under Rule 3a5-3, a bank is exempt from the definition of “dealer”
to the extent that, as a conduit lender, 441 it engages in or effects
securities lending transactions, and any securities lending services 442
in connection with such transactions. 443 The exemption applies only
to securities lending transactions with or on behalf of a person that the
bank reasonably believes to be (i) a qualified investor, 444 or (ii) any
employee benefit plan that owns and invests, on a discretionary basis,
not less than $25,000,000 in investments. 445
§ 1A:7.5 Charitable Exemption—Section 3(e)
Exchange Act § 3(e) provides an exemption from the broker-dealer
registration requirements in sections 15(a), 15B(a), and 15C(a) for a
charitable organization, 446 or any person 447 of such a charitable
organization acting within the scope of such person’s employment
or duties with such organization, buys, holds, sells, or trades in
securities for its own account in its capacity as trustee or administrator
of, or otherwise on behalf of or for the account of: (i) such a charitable
organization; (ii) a fund that is excluded from the definition of an
investment company under section 3(c)(10)(B) of the Investment
441. For purposes of this rule, “conduit lender” means a bank that borrows or
loans securities, as principal, for its own account, and contemporaneously
loans or borrows the same securities, as principal, for its own account. A
bank that qualifies under this definition as a conduit lender at the
commencement of a transaction will continue to qualify, notwithstanding
whether (i) the lending or borrowing transaction terminates and so long as
the transaction is replaced within one business day by another lending or
borrowing transaction involving the same securities, and (ii) any substitutions
of collateral occur. See Rule 3a5-3(d).
442. “Securities lending services” means: (i) selecting and negotiating with a
borrower and executing or directing the execution of the loan with the
borrower; (ii) receiving, delivering, or directing the receipt or delivery of
loaned securities; (iii) receiving, delivering, or directing the receipt or
delivery of collateral; (iv) providing mark-to-market, corporate action,
recordkeeping or other services incidental to the administration of the
securities lending transaction; (v) investing, or directing the investment of,
cash collateral; or (vi) indemnifying the lender of securities with respect to
various matters. See Rule 3a5-3(c).
443. Rule 3a5-3; SEC Release No. 34-56502 (Sept. 24, 2007).
444. A “qualified investor” is defined in Exchange Act § 3(a)(54)(A). In part, this
definition encompasses corporations and partnerships with at least
$25 million in investments.
445. Rule 3a5-3; SEC Release No. 34-56502 (Sept. 24, 2007).
446. “Charitable organization” is defined in Section 3(c)(10)(D)(iii) of the
Investment Company Act.
447. Such person includes any trustee, director, officer, employee, or volunteer
of such a charitable organization. See Exchange Act § 3(e)(1).
(Broker-Dealer Reg., Rel. #9, 9/10)
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