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

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§ 1A:2.6 BROKER-DEALER REGULATION (iii) all transactions would be effected only by direct contact between the bulletin board participants. 126 The SEC identified several activities by the sponsors of bulletin boards that could require them to register as broker-dealers. The activities include: (i) the publication of quotations; (ii) active solicitation of investors (for example, by targeting potential investors with direct mailings and follow-up email); (iii) involvement in negotiations or other discussions with buyers and sellers; (iv) providing advice to issuers for their offering materials or investment advice with respect to any particular security; (v) involvement in any way with the execution, settlement, or clearance of transactions, including preparing or sending transaction confirmations (other than providing the functionality of order transmission); (vi) matching buyers and sellers either by matching the list of interested buyers with the list of interested sellers or through a bid and ask process that allows interested buyers to bid on the listed interest; (vii) handling of customer funds or securities; (viii) screening counterparties for creditworthiness or extension of credit in connection with the transactions; (ix) receipt of transaction-related compensation; and (x) exercising discretion over the bulletin board website and having its name on the website. 127 [F] ATSs and Securities Exchanges As the bulletin board letters show, the roles of a broker and an exchange can blur. The SEC has sought to distinguish these roles. 126. See Portland Brewing Co., SEC No-Action Letter (Dec. 14, 1999); Flamemaster Corp., SEC No-Action Letter (Oct. 29, 1996); PerfectData Corp., SEC No-Action Letter (Aug. 5, 1996); Real Goods Trading Corp., SEC No- Action Letter (June 24, 1996). 127. See GlobalTec Solutions, LLP, SEC No-Action Letter (Dec. 28, 2005); Swiss American Securities, Inc., Streetline, Inc., SEC No-Action Letter (May 28, 2002); Oil-N-Gas, Inc., Section No-Action Letter (June 8, 2000); Letter from Catherine McGuire, Chief Counsel, Division of Market Regulation, to Lori Livingston, Transfer Online, Inc. (May 13, 2000); King & Spalding, SEC No-Action Letter (Nov. 17, 1992). 1A–32
What Is a Broker-Dealer? § 1A:2.6 Section 3(a)(1) of the Exchange Act defines the term “exchange” as “any organization, association, or group of persons, whether incorporated or unincorporated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as that term is generally understood, and includes the market place and the market facilities maintained by such exchange.” 128 Exchange Act Rule 3b-16(a) interprets the section 3(a)(1) definition to mean any organization, association, or group of persons that: (i) brings together the orders of multiple buyers and sellers; and (ii) uses established, non-discretionary methods (whether by providing a trading facility or by setting rules) under which such orders interact with each other, and the buyers and sellers entering such orders agree to the terms of a trade. 129 Rule 3b-16(b) expressly excludes the following systems from the meaning of “exchange”: (i) systems that merely route orders to other facilities for execution; (ii) systems operated by a single registered market maker to display its own bids and offers and the limit orders of its customers, and to execute trades against such orders; and (iii) systems that allow persons to enter orders for execution against the bids and offers of a single dealer. 130 Absent an exemption, an exchange must register as a national securities exchange pursuant to section 6 and section 19(a) of the Exchange Act. In 1998, the SEC adopted Regulation ATS, which allows alternative trading systems (ATSs) to choose whether to register as national securities exchanges or to register as broker-dealers and comply with additional requirements of Regulation ATS depending on their activities and trading volume. 131 An “alternative trading system” means any organization, association, person, group of persons, or system (i) that constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange within the meaning of Rule 3b-16 under the Exchange Act, and (ii) that does not set rules governing the conduct of subscribers other than the conduct of such subscribers’ trading on such organization, association, person, group of persons, or system; or discipline subscribers other than by exclusion from trading. 132 128. See Exchange Act § 3(a)(1). 129. Rule 3b-16(a). 130. Rule 3b-16(b). 131. See Regulation of Exchanges and Alternative Trading Systems, SEC Release No. 34-40760 (Dec. 8, 1998). 132. Regulation ATS, Rule 300(a). (Broker-Dealer Reg., Rel. #9, 9/10) 1A–33
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