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

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§ 1A:8 BROKER-DEALER REGULATION § 1A:8 Doing Business As an Unregistered Broker-Dealer § 1A:8.1 SEC and State Enforcement Absent an exemption, a broker-dealer who engages in securities transactions without proper registration may be subject to enforcement actions by the SEC, relevant state regulators, as well as investor actions for rescission. The SEC and the state regulators have authority to enforce respective federal and state securities laws through administrative proceedings, civil court proceedings, and referrals for criminal prosecutions. Exchange Act § 21(a)(1) grants the SEC the authority to make investigations to detect securities laws violations. 464 Once it determines that there is a violation, the SEC can enter a cease-and-desist order which may, in addition to requiring a person to cease and desist from committing a violation, require such person to comply with a rule upon such terms and within such time as the SEC may specify. 465 The SEC can also impose civil penalties and require accounting and disgorgement. 466 The SEC can also bring an action in court and seek permanent or temporary injunction or a restraining order against an unregistered broker-dealer. 467 In addition to an injunction, the SEC may also seek civil penalties and equitable relief for such violation. 468 In addition, See also SEC Release No. 34-61884 (Apr. 9, 2010) (granting exemptions to the Federal Reserve Bank of New York, Maiden Lane LLC and the Maiden Lane Commercial Mortgage Backed Securities Trust 2008-1 in connection with restructuring of debt instruments acquired by the Federal Reserve Bank of New York when it facilitated the acquisition of the Bear Stearns Companies Inc. by JP Morgan Chase & Co., including permitting receipt of compensation that is calculated by reference to underwriting fees received by other parties to the restructuring). 464. Exchange Act § 21(a)(1). 465. Exchange Act § 21C. See, e.g., In the Matter of CentreInvest, Inc., SEC Release No. 34-60450 (Aug. 5, 2009); In the Matter of Warrior Fund LLC, SEC Release 34-61625 (Mar. 2, 2010). 466. Exchange Act § 21B. 467. Exchange Act § 21(d)(1). See, e.g., SEC v. Martino and CMA Noel, Ltd., 255 F. Supp. 2d 268 (Apr. 2, 2003); SEC v. Dowdell, 2002 U.S. Dist. LEXIS 4522, Fed. Sec. L. Rep. (CCH) 91,728 (Mar. 14, 2002); SEC v. ProVision Operation Systems, Inc., Civil Action Number SACV 07-1139 (SEC Release No. 34-60171); SEC v. Jarrod McMillin, Civil Action Number 07cv2636-REB-MEH (SEC Release No. 34-59263); SEC v. Rabinovich & Associates, L.P., Civil Action Number 07 Civ. 10547 (SEC Release No. 34-59190); SEC v. Viktor Novosselov, Civil Action Number 3:05-CV-951; SEC v. Century Investment Transfer Corp., et al., Fed. Sec. L. Rep. (CCH) 93,232 (Oct. 5, 1971). 468. Exchange Act §§ 21(d)(3) and (5). 1A–106
What Is a Broker-Dealer? § 1A:8.2 the SEC may transmit such evidence of securities laws violations to the Attorney General, who may, in his discretion, institute the necessary criminal proceedings under the Exchange Act. 469 In addition to SEC actions, an unregistered broker-dealer may also be subject to state enforcement actions under respective state blue sky laws. As discussed in section 1A:1, most states have their own registration requirements. Under both the 1956 Uniform Act and the 2002 Uniform Act, as adopted by most states, a state regulator can initiate a civil action in court for a temporary or permanent injunction to enjoin a person’s act in violation of the registration requirement. 470 The state regulator may also, under the 2002 Uniform Act, issue a cease-and-desist order or impose civil penalties on the unregistered broker-dealer. 471 Under the 1956 Uniform Act, the state regulator can refer evidence to the attorney general or appropriate district attorney who may institute criminal proceedings against the unregistered broker-dealer. 472 States have brought numerous enforcement actions against unregistered broker-dealers. 473 In cases where fraud is involved, states have brought criminal charges against such brokerdealers. 474 § 1A:8.2 Private Actions—Exchange Act § 29(b) Exchange Act § 29(b) provides that contracts made in violation of any provision of the Exchange Act or any rule thereunder are “void” (though, in reality, courts treat such contracts as being voidable rather than void ab initio). 475 The Supreme Court has recognized a private 469. Exchange Act § 21(d)(1). 470. 1956 Act § 408; 2002 Act § 603. 471. 2002 Uniform Act § 604. See California Desist and Refrain Order against Markow Tsai on May 15, 1998; Alabama Cease and Desist Order against Markow Tsai on March 3, 2000. 472. 1956 Act § 409. See, e.g., Kahn v. State, 493 N.E.2d 790, 1986 Ind. App. LEXIS 2616 (1986). 473. See, e.g., State of W. Va. v. Fairchild; State of W. Va. v. Roger, 171 W. Va. 137, 298 S.E.2d 110 (Nov. 18, 1982); People of the State of Colo. v. Milne, 690 P.2d 829 (Nov. 5, 1984). 474. See, e.g., State v. Milne, 690 P.2d 829 (Nov. 5, 1984). 475. Exchange Act § 29(b). While the language of the statute provides that such contracts “shall be void,” courts have interpreted the statute to mean that such contracts are void as regards the rights of the violating party and “voidable” at the option of the innocent injured party. See Eastside Church of Christ v. Nat’l Plan, Inc., 391 F.2d 357 (5th Cir.), cert. denied, 393 U.S. 913 (1968); Schneberger v. Wheeler, 859 F.2d 1477, 1481–82 (11th Cir., 1988), cert. denied sub nom. Schneberger v. United States Trust Co. of N.Y., 490 U.S. 1091 (discussing Mills v. Electric Auto-Lite Co. 396 U.S. 375). (Broker-Dealer Reg., Rel. #9, 9/10) 1A–107
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securities, a person has to conduct
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What is a Broker-Dealer? - Davis Polk & Wardwell

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