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

More documents

Recommendations

Info

§ 1A:2.6 BROKER-DEALER REGULATION The exception for networking arrangements in section 3(a)(4)(B)(i) sets out nine conditions. 94 The conditions are designed to ensure that bank employees (other than associated persons of a broker-dealer who are qualified pursuant to the rules of an SRO) do not perform brokerage service (other than clerical or ministerial functions) and that consumers of the bank understand that the brokerage services are performed by the broker-dealer, not the bank. 95 One of the conditions prohibits a bank employee that refers a customer to a broker-dealer from receiving “incentive compensation” for a securities brokerage transaction other than a “nominal” one-time cash fee for making the credit unions, to make similar networking arrangements with affiliated or third-party broker-dealers to make securities available to their customers without registering as broker-dealers. See SEC Guide to Broker-Dealer Registration, supra note 72. 94. These conditions include: (i) such broker or dealer is clearly identified as the person performing the brokerage services; (ii) the broker or dealer performs brokerage services in an area that is clearly marked and, to the extent practicable, physically separate from the routine deposit-taking activities of the bank; (iii) any materials used by the bank to advertise or promote generally the availability of brokerage services under the arrangement clearly indicate that the brokerage services are being provided by the broker or dealer and not by the bank; (iv) any materials used by the bank to advertise or promote generally the availability of brokerage services under the arrangement are in compliance with the federal securities laws before distribution; (v) bank employees (other than associated persons of a broker or dealer who are qualified pursuant to the rules of self-regulatory organization) perform only clerical or ministerial functions in connection with brokerage transactions including scheduling appointments with the associated persons of a broker or dealer, except that bank employees may forward customer funds or securities and may describe in general terms the types of investment vehicles available from the bank and the broker or dealer under the arrangement; (vi) bank employees do not receive incentive compensation for any brokerage transaction unless such employees are associated persons of a broker or dealer and are qualified pursuant to the rules of a self-regulatory organization, except that the bank employees may receive compensation for the referral of any customer if the compensation is a nominal one-time cash fee of a fixed dollar amount and the payment of the fee is not contingent on whether the referral results in a transaction; (vii) such services are provided by the broker or dealer on the basis that all customers that receive any services are fully disclosed to the broker or dealer; (viii) the bank does not carry a securities account of the customer (with exceptions); and (ix) the bank, broker, or dealer informs each customer that the brokerage services are provided by the broker or dealer and not by the bank and that the securities are not deposits or other obligations of the bank, are not guaranteed by the bank, and are not insured by the Federal Deposit Insurance Corporation. See Exchange Act § 3(a)(4)(B)(i). 95. See SEC Release No. 34-56501 (Sept. 24, 2007). 1A–24
What Is a Broker-Dealer? § 1A:2.6 referral that is not contingent on whether the referral results in a securities transaction. 96 [C][2] Insurance The SEC has, through no-action letters, permitted networking arrangements between Registered Broker-Dealers and insurance agencies in connection with the offer and sale of insurance securities. Under such arrangements, a third-party broker-dealer or affiliated broker-dealer of the insurance company or agency can provide insurance products that are also securities (such as variable annuities) and share commission from the sale of those products. 97 This exemption was designed to respond to the unique nature of insurance securities and address the difficulties posed by insurance and securities laws applicable to the sale of these products. 98 In granting no-action relief, the SEC staff has emphasized that the Registered Broker-Dealer must control, supervise, and assume responsibility for all securities activities in connection with the sale of such insurance products. 99 Through networking arrangements, insurance companies and agencies can share in the commissions generated by their referred 96. See Exchange Act § 3(a)(4)(B)(i). Rule 700 of Regulation R includes four different alternatives for satisfying the requirement that a referral fee be “nominal.” In addition, Rule 701 of Regulation R, permits a bank to pay an employee a contingent referral fee of more than a nominal amount for referring to a broker-dealer an institutional customer or high net-worth customer under the networking arrangement, provided that the bank meets the other requirements under section 3(a)(4)(B)(i). The exemption is subject to certain conditions designed to ensure that institutional and high net-worth customers receive appropriate investor protections and have the information to understand the financial interest of the bank employee so they can make informed choices. 97. See SEC Guide to Broker-Dealer Registration, supra note 72. 98. Insurance securities such as variable annuity contracts and variable life insurance policies are subject to state insurance law requirements regarding the licensing and payment of insurance commissions. The laws of most states prohibit the payment of insurance commissions to entities not licensed to sell insurance in those states. In addition, the laws of many states prohibit non-domestic corporations or corporations not primarily engaged in the business of insurance from being licensed to sell insurance within those states. See Lincoln Financial Advisors Corp., SEC No-Action Letter (Feb. 20, 1998); First America Brokerage Service, Inc., SEC No-Action Letter (Aug. 18, 1993); SEC Guide to Broker-Dealer Registration, supra note 72. 99. See First of America Brokerage Services, Inc., SEC No-Action Letter (Sept. 28, 1995); FIMCO Securities Group, Inc., SEC No-Action Letter (July 16, 1993); Delta First Financial, Inc., SEC No-Action Letter (Sept. 21, 1992); Investment Centers of America, Inc., SEC No-Action Letter (June 5, 1992). (Broker-Dealer Reg., Rel. #9, 9/10) 1A–25
Page 1 and 2: Chapter 1A What Is a Broker-Dealer?
Page 3 and 4: What Is a Broker-Dealer? [C] The Do
Page 5 and 6: What Is a Broker-Dealer? § 1A:1.1
Page 11 and 12: Exchange Act, which prohibits state
Page 23: What Is a Broker-Dealer? § 1A:2.6
Page 47 and 48: securities, a person has to conduct
Page 55 and 56: the requirements of section 11(a) o
Page 67 and 68: (iii) amends the definition of “s
Page 69 and 70: (vi) any agreement, contract, or tr
Page 71 and 72: SBS markets. In particular, with re
Page 75 and 76:
What Is a Broker-Dealer? § 1A:4.5
Page 77 and 78:
Page 79 and 80:
What Is a Broker-Dealer? § 1A:6 Th
Page 81 and 82:
Page 83 and 84:
Page 85 and 86:
Page 87 and 88:
Page 89 and 90:
Page 91 and 92:
Page 93 and 94:
(and foreign securities exchanges)
Page 95 and 96:
Page 97 and 98:
Page 99 and 100:
Page 101 and 102:
Page 103 and 104:
Page 105 and 106:
Page 107 and 108:
Page 109 and 110:
Page 111 and 112:
Page 113:
show all

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

Create successful ePaper yourself

Delete template?

Save as template?