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

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§ 1A:2.6 BROKER-DEALER REGULATION Any system exercising self-regulatory powers, such as regulating its members’ or subscribers’ conduct when engaged in activities outside of that trading system, must register as an exchange or be operated by a national securities association. In addition, the SEC can effectively require a dominant alternative trading system to register as a national securities exchange if it finds in a particular case that it is necessary or appropriate in the public interest or consistent with the protection of investors. 133 Security-based swap execution facilities, a concept introduced in the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank” or the “Dodd-Frank Act”), 134 are discussed in infra section 1A:4.4. [G] Payroll Processing Services The SEC has granted no-action relief to companies (“service companies”) that proposed to provide “professional employer organization services,” commonly known as “employee leasing services,” on behalf of, and under the control of, Registered Broker-Dealers. 135 The services provided to broker-dealer clients usually consist of payroll processing services, human resources consulting, employee benefits services which include provision of various types of insurance 136 to employees of its broker-dealer clients. Although the employees placed on the service company’s payrolls are employees of the service company for purpose of applicable employment laws, they are associated persons 137 of the broker-dealers for purposes of the 133. See Rule 3a1-1(b). 134. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203 (2010). 135. See ADP TotalSource, Inc., SEC No-Action Letter (Dec. 4, 2007); eEmployers Solutions, Inc., SEC No-Action Letter (Dec. 3, 2007); TriNet Group, Inc., SEC No-Action Letter (Feb. 17, 2006); R & H Management, L.L.C., SEC No-Action Letter (Apr. 25, 2005); Headway Corporate Staff Administration, SEC No-Action Letter (Aug. 30, 2002); EPIX Holdings Corp., SEC No-Action Letter (Apr. 2, 2001); Staff Management, Inc., SEC No-Action Letter (Apr. 27, 2000); T.T.C. Illinois, SEC No-Action Letter (Feb. 1, 1999); The Cura Group, Inc., SEC No-Action Letter (Feb. 1, 1999); EMPOWER, Inc., SEC No-Action Letter (Feb. 1, 1999); Action Staffing, Inc., SEC No-Action Letter (June 7, 1989). 136. The insurance products to be provided cannot be “securities” as defined under the federal securities laws. 137. A broker-dealer’s supervisory responsibilities under the federal securities laws, including Section 15(b) and Section 20(a) of the Exchange Act, are not affected by whether the broker-dealer treats its representatives as “employees” or as “independent contractors” for other purposes. See Letter from Douglas Scarff, Director, Division of Market Regulation, SEC, to Gordon S. Macklin, President, National Association of Securities Dealers, Inc. (June 18, 1982), reprinted in [1982-83 Transfer Binder] Fed. Sec. L. 1A–34
What Is a Broker-Dealer? § 1A:2.6 securities laws and these broker-dealers maintain direction and control over them. In the no-action letters granted by the SEC staff, when providing payroll processing services for any one of its broker-dealer clients, the service company is permitted to receive payment from the brokerdealer for salaries, wages and commissions, which the company will then pay to personnel of the broker-dealers. The service company will impose an administrative fee for its services. This fee is usually a flat, pre-determined fee based on the number of employees serviced. The fee may not be based on a percentage of payroll, nor on brokerage commissions earned by either the employees of the broker-dealer or the broker-dealer itself. The SEC staff has imposed two conditions for granting no-action relief to service companies that provide employee leasing services without registering as broker-dealers: (i) the service companies must have no discretion concerning the amount or frequency of the salary, wage, commission or bonus payments to employees of the brokerdealers who have been placed on the service companies’ payrolls, 138 and (ii) the service companies’ broker-dealer clients must have sole and exclusive discretion and control over the day-to-day professional activities of all of their employees. 139 The staff has refused to grant no-action relief when the service company had some control over the employees’ compensation and the potential to interfere with and unduly influence the employment relationship between the registered representatives and the broker-dealer. 140 The SEC staff articulated the policy considerations behind its positions in its letter to Investacorp Group: Rep. (CCH) 77,303. The broker-dealer is responsible for supervising the representatives’ securities activities regardless of the representatives’ status under state law. See, e.g., In the Matter of William V. Giordano, SEC Release No. 34-36742 (Jan. 19, 1996). 138. The SEC recognizes that the service companies will require that all compensation be paid in a timely manner as required by law. 139. See ADP TotalSource, Inc., SEC No-Action Letter (Dec. 4, 2007); eEmployers Solutions, Inc., SEC No-Action Letter (Dec. 3, 2007); Investacorp Group, Inc., Investacorp, Inc., SEC No-Action Letter (Sept. 26, 2003); Action Staffing, Inc., SEC No-Action Letter (June 7, 1989). Often, the company that provides payroll processing services to a broker-dealer is not a subsidiary or an affiliate with the broker-dealer. See, e.g., eEmployers Solutions, Inc., SEC No-Action Letter (Dec. 3, 2007); Action Staffing, Inc., SEC No-Action Letter (June 7, 1989). A subsidiary or affiliate of a registered broker-dealer does not have to register unless it engages in the broker-dealer activity of its registered parent or affiliate. 140. See Herbruck, Alder & Co., SEC Denial of No-Action Request (May 3, 2002). (Broker-Dealer Reg., Rel. #9, 9/10) 1A–35
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