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

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§ 1A:2.6 BROKER-DEALER REGULATION shares purchased under the Plan, Dig-ital proposed to group together on a daily basis all employee orders to sell and forward such orders to a Registered Broker-Dealer for execution. 156 Digital would not receive any compensation for these services and would only perform these services as a convenience for its employees. 157 In another no-action letter, the SEC permitted American Transtech to act as transfer agent to its shareholders in transmitting the shares they wished to sell to a broker-dealer for execution without registering as a broker-dealer itself. 158 The SEC staff has indicated reluctance to grant no-action relief to transfer agents whose proposed services go beyond those that are merely clerical or ministerial in nature and involve the purchase or sale of securities, or maintaining custody or possession of funds or securities at any stage of a securities transaction, 159 and a transfer agent administering stock plans may be obliged to register under section 15(a) if it effects securities transactions, absent an available exemption or exemptive relief. 160 Subject to certain conditions, 161 a bank is not considered a broker or dealer if it effects transactions, as part of its transfer agency activities, in the securities of an issuer as part of any employee pension, retirement, profit-sharing, bonus, or other similar benefits plans, as part of the issuer’s dividend reinvestment plan, or as part of a plan or program for the purchase or sale of that issuer’s shares. 162 In addition, the SEC has, pursuant to its authority under section 15(a)(2) and section 36 of the Exchange Act, provided a limited conditional 156. See id. 157. See id. 158. American Transtech Inc., SEC No-Action Letter (Sept. 22, 1985). 159. See The Stallion Fund, Inc., SEC Denial of No-Action Request (Oct. 13, 1971); see also Letter from Catherine McGuire, Chief Counsel, Division of Market Regulation, to Lori Livingston, Transfer Online, Inc. (May 13, 2000). 160. See Order Exempting CIBC Mellon Trust Company From Broker-Dealer Registration, SEC Release No. 34-60136 (June 18, 2009); Order Exempting Computershare Trust Company of Canada and Computershare Investor Services Inc. From Broker Registration, SEC Release No. 34-53667 (Apr. 18, 2006); Transfer Agents Operating Direct Registration System, SEC Release No. 34-35038 (Dec. 1, 1994). 161. Conditions set forth by section 3(a)(4)(B)(iv) include: (i) the bank does not solicit transactions or provide investment advice with respect to the purchase or sale of securities in connection with the plan or program; and (ii) for dividend reinvestment plans and issuer plans, the bank does not net shareholders’ buy and sell orders, other than for programs for add-lot holders or plans registered with the Commission. See Exchange Act § 3(a)(4)(B)(iv). 162. Id. 1A–40
What Is a Broker-Dealer? § 1A:2.6 exemption to an entity in connection with its administration of stock plans with U.S. resident investors for issuers for which the entity acted as transfer agent, subject to certain conditions including that the entity must maintain its registration as transfer agent with the SEC. 163 [I][4] Research Services A person who provides research services in connection with its brokerage business or receives transaction-based compensation in connection with that research may be required to register as a broker-dealer with the SEC. 164 The SEC has granted no-action relief to research providers who do not participate in securities transactions (other than providing research or information that is deemed to be solicitation) or receive transaction-based compensation. 165 One exception to the requirement that the research services providers cannot receive transaction-based compensation is that the research service providers can receive payments from client commissions through a client commission arrangement qualified under the safe harbor of section 28(e) 166 of the Exchange Act without registering as 163. See Order Exempting CIBC Mellon Trust Company From Broker-Dealer Registration, SEC Release No. 34-60136 (June 18, 2009); Order Exempting Computershare Trust Company of Canada and Computershare Investor Services Inc. From Broker Registration, SEC Release No. 34-53667 (Apr. 18, 2006); Transfer Agents Operating Direct Registration System, SEC Release No. 34-35038 (Dec. 1, 1994). 164. Charles Schwab & Co., Inc., SEC No-Action Letter (Sept. 18, 1997); Citicorp, SEC No-Action Letter (Sept. 14, 1986). 165. Charles Schwab & Co., Inc., SEC No-Action Letter (Sept. 18, 1997). The SEC has also granted no-action relief to other service providers and to investors where there is no involvement by the service provider in effecting securities transactions or transaction-based compensation. See The Investment Archive, LLC, SEC No-Action Letter (May 14, 2010). 166. Section 28(e) establishes a safe harbor that allows money managers to use client funds to purchase “brokerage and research services” for their managed accounts under certain circumstances without breaching their fiduciary duties to clients. This section permits the arrangements where one broker-dealer provides research and other services while another broker-dealer clears or settles the trade, and they share in the client commissions for the transaction. Section 28(e) requires that the brokerdealer receiving commissions for “effecting” transactions must “provide” the brokerage or research services. The SEC has interpreted this section to permit money managers to use client commissions to pay for research produced by a third-party research provider that is not the executing broker-dealer. See Commission Guidance Regarding Client Commission Practices Under Section 28(e) of the Securities Exchange Act of 1934, SEC Release No. 34-54165 (July 18, 2006) [hereinafter Section 28(e) Interpretative Release]. (Broker-Dealer Reg., Rel. #9, 9/10) 1A–41
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What is a Broker-Dealer? - Davis Polk & Wardwell

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