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

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§ 1A:8.4 BROKER-DEALER REGULATION and seek injunction or restraining order, money penalties or equitable relief. The SEC has filed numerous complaints against controlling persons who aided and abetted violations of Exchange Act § 15(a) and sought injunction or restraining order, disgorgement and prejudgment interest, or civil penalties. 488 Some state laws impose liabilities on controlling persons who materially aid in the acts or transactions constituting violations of the state securities laws. 489 § 1A:8.4 Concerns for Registered Broker-Dealers [A] Compensation Sharing FINRA rules also prohibit FINRA members from engaging in any compensation sharing arrangements with non-members. The form of compensation is not limited to commissions, and can be in the form of concession, discount and allowances. Under NASD Rule 2410, no member shall offer a concession, discount, or other allowances to any person not actually engaged in the investment banking or securities business. 490 NASD Rule 2740 provides the same restrictions in connection with the sale of securities which are part of a fixed price offering. 491 NASD Rule 2420 492 prohibits members from dealing with any non-member broker-dealer except at the same prices, for the same commissions or fees, and on the same terms and conditions as are by such member accorded to the general public. 493 Members are not 488. See, e.g., SEC v. Big Apple Consulting USA, Inc. et al., Civil Action No. 09cv-1963 (M.D. Fla. Nov. 18, 2009); SEC v. FTC Capital Markets, Inc. et al., Civil Action No. 09-cv-4755 (S.D.N.Y. May 20, 2009); SEC v. Clean Care Techs., Inc., et al., 08 CIV 01719 (S.D.N.Y. Feb. 21, 2008); SEC v. American Growth Capital Corp., et al., Civil Action No. 97-5993 (C.D. Cal. Aug. 12, 1997); SEC v. Johnston and Fiduciary Planning, Inc., Civil Action No. 93-73541 DT (E.D. Mich. Aug. 23, 1993); SEC v. Black, 90 Civ. 1988 (E.D.N.Y. June 13, 1990); SEC v. Forma, 85 Civ. 3820 (S.D.N.Y. May 4, 1989). 489. See, e.g., CAL. CORP. CODE § 25403 (2009); CONN. GEN. STAT. § 36b-29 (2008). 490. NASD Rule 2410. 491. NASD Rule 2740. For the definition of “fixed price offering,” see NASD Rule 0120(h). 492. Rule 2420 has been interpreted to apply equally to any Registered Broker- Dealer that is a non-member of the NASD and entities that are not registered, but are required to be registered under the Exchange Act. Rule 2420 does not apply to entities that are not registered and are not required to be registered under the Exchange Act. See FINRA Interpretive Letter to Daniel Schloendorn, Willkie Farr & Gallagher (June 18, 1998). 493. NASD Rule 2420. 1A–110
What Is a Broker-Dealer? § 1A:8.4 allowed to grant selling concession, discount or other allowances to non-members as they are allowed to grant to members. 494 Rule 2420(d) provides restrictions on payments by or to persons that have been suspended or expelled. 495 NASD Rule 2420(b)(2) also prohibits FINRA members from joining with any non-member broker-dealer in any syndicate or group for the distribution of securities. 496 However, Rule 2420(c) allows members to pay concessions and fees to a non-member broker-dealer in a foreign country who is not eligible for membership subject to certain conditions. 497 On December 2, 2009, FINRA proposed for public comment FINRA Rule 2040 which would replace several NASD rules including NASD Rules 2410 and 2420. 498 Proposed Rule 2040 would prohibit members or associated persons from paying or offering to pay, directly or indirectly, any compensation, fees, concessions, discounts, commissions or other allowances to any person that is not registered with the SEC as a broker-dealer but, by reason of receipt of any such payments, would be required to be so registered. The proposed rule would be consistent with FINRA staff interpretations under NASD Rule 2420 and SEC rules and regulations under section 15(a) of the Exchange Act. Under the proposal, persons would look to SEC rules and regulations to determine whether the activities in question require registration as a broker-dealer under section 15(a) of the Exchange Act. [B] Participating in Syndicates with Unregistered Persons FINRA prohibits its members from participating in underwriting syndicates with unregistered persons. FINRA Rule 5110(f)(2)(L) forbids FINRA members from participating in underwriting syndicates with unregistered persons hired by the issuer primarily to assist in the public distributions of non-underwritten offerings except associated persons of the issuer who are exempt from broker-dealer registration under Rule 3a4-1 and applicable state law. 499 494. NASD Rule 2420(b)(1). 495. NASD Rule 2420, IM-2420-1(d). 496. NASD Rule 2420(b)(2). 497. NASD Rule 2420(c). 498. See Regulatory Notice 09-69, supra note 459. 499. FINRA Rule 5110(f)(2)(L). This limitation should not be read to prohibit certain otherwise permissible syndicate activities, such as participating in underwriting syndicates with foreign persons that are not FINRA members, subject to conditions. See NASD Rules 2740(c) and 2420(c). (Broker-Dealer Reg., Rel. #9, 9/10) 1A–111
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Chapter 1A What Is a Broker-Dealer?
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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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