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

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§ 1A:2.6 BROKER-DEALER REGULATION customers under certain conditions. 100 Insurance networking arrangements are limited to insurance products that are also securities. 101 The networking exemption does not apply to arrangements for the sales of mutual funds 102 and other non-insurance securities that do not present the same regulatory difficulties posed by dual state and federal laws applicable to insurance securities. 103 [D] Issuers and Their Associated Persons [D][1] Issuers Issuers generally are not considered “brokers” under the Exchange Act because they sell securities for their own account and not for the account of others. 104 Issuers whose activities go beyond selling their own securities, however, may be required to register as broker-dealers. The SEC staff has stated that such activities could include, among others, issuers purchasing their securities from investors, as well as issuers effectively operating markets in their own securities or in securities whose features or terms can change or be altered. 105 The SEC has also asserted that an issuer that operates a dividend reinvestment and stock purchase plan (DRSPP) 106 may be required to register as a broker-dealer if it induces or attempts to induce the purchase or sale of its securities, receives compensation based on securities transactions, or holds and maintains the funds, securities, and accounts of DRSPP participants. 107 100. See SEC Guide to Broker-Dealer Registration, supra note 72. 101. See id. 102. See The Wolper Ross Corp., SEC No-Action Letter, n.1 (Oct. 16, 1991). 103. See Lincoln Financial Advisors Corp., SEC No-Action Letter (Feb. 20, 1998). 104. The SEC has stated: “[T]he Act has customarily been interpreted not to require the issuer itself to register as either a broker or a dealer; the issuer would not be effecting transactions for the account of others nor, generally, would it be engaged in the business of both buying and selling securities for its own account.” SEC Release No. 34-13195 (Jan. 21, 1977). 105. See SEC Guide to Broker-Dealer Registration, supra note 72. 106. A DRSPP is a program offered by a corporation or closed-end fund that allows participants to accumulate shares of an issuer’s common stock directly from the issuer by reinvesting dividends and, in many cases, by making optional cash payments. See Exemption From Rule 10b-6 For Certain Dividend Reinvestment and Stock Purchase Plans, SEC Release No. 34-35041 (Dec. 1, 1994). 107. For a more detailed discussion of when the issuer operating a DRSPP program will need to register, see Exemption From Rule 10b-6 For Certain Dividend Reinvestment and Stock Purchase Plans, SEC Release No. 34-35041 (Dec. 1, 1994). 1A–26
What Is a Broker-Dealer? § 1A:2.6 [D][2] Associated Persons of Issuers Frequently, issuers sell their own securities through their directors, officers and employees rather than using a Registered Broker-Dealer. Even though the issuer itself usually does not have to register as a broker because it is not selling for the account of others, directors, officers or employees of the issuer, who act on behalf of the issuer in distributing its securities may, depending on the circumstances, be brokers under the Exchange Act. 108 Section 15(a)(1) requires a brokerdealer that is a natural person not associated with a broker-dealer (which is a person other than a natural person) to register with the SEC. 109 Directors, officers or employees of an issuer, therefore, will have to register under section 15 if they are considered to be brokers. Although the determination of whether a director, officer, or employee needs to register under section 15 is fact-specific, courts and the SEC have identified the following factors as relevant: • the director, officer, or employee’s prior securities activities: whether the person is a registered representative of a Registered Broker-Dealer or whether the person has been engaged in a professional capacity in buying and selling securities; • whether the director, officer, or employee was hired to participate in the offering, and whether each has substantial duties other than selling shares; • the method of compensation, whether the person receives, directly or indirectly, compensation based upon success in placing securities or the amount of funds raised through the sale of securities; • the director, officer, or employee’s intention to remain with the issuer after the conclusion of the offering (whether or not the offering is successful) and the likelihood of participation in other offerings by the same or another issuer. 110 108. See SEC Release No. 34-13195 (Jan. 21, 1977). 109. See Exchange Act § 15(a)(1). 110. See Midland-Guardian Co., SEC No-Action Letter (Dec. 27, 1978); North Albuquerque Associates, SEC No-Action Letter (Aug. 18, 1978); China Trade Corp., SEC No-Action Letter (July 24, 1978); ITT Financial Corp., SEC No-Action Letter (July 17, 1978); Scotch Investments, Ltd. No-Action Letter (Oct. 12, 1975); Corporate Investment Co., SEC No-Action Letter (Apr. 20, 1974); Altman Homes, Inc., SEC No-Action Letter (Mar. 2, 1974); Stratford Texas, Inc., SEC No-Action Letter (Nov. 6, 1972); Woodmoor Corp., SEC No-Action Letter (Mar. 5, 1972); Landcom, Inc., SEC No-Action Letter (June 5, 1971); Choice Communities, Inc., SEC No-Action Letter (Dec. 29, 1972); see also SEC v. Bravata, Civil Action (Broker-Dealer Reg., Rel. #9, 9/10) 1A–27
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