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

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§ 1A:3 BROKER-DEALER REGULATION The SEC has described two scenarios involving accountants where it would deny no-action relief: (i) where a broker-dealer pays securities commissions to its registered representative who is also a CPA and the registered representative must turn those commissions over to an unregistered CPA firm or “voluntarily” turns those commissions over to an unregistered CPA firm, and (ii) where securities commissions are paid to another Registered Broker-Dealer, if that other broker-dealer is owned by an unregistered CPA firm or its partners. 178 [J] Investment Advisers There is no general exemption for investment advisers from federal broker-dealer registration. The SEC staff has addressed the issue of whether registered investment advisers must also register as brokerdealers in a number of specific circumstances. The SEC staff has summarized its approach as follows: the staff has declined to take a no-action position with respect to broker-dealer registration for a registered investment adviser that proposed to assist a broker-dealer with solicitation and receive transaction-related compensation. Moreover, even in the absence of commissions or other transaction-related fees, the staff has declined to take a no-action position regarding the broker-dealer registration of an investment adviser that proposed to locate issuers, solicit new clients, and act as a customers’ agent in structuring or negotiating transactions. 179 § 1A:3 What Is a Dealer? § 1A:3.1 Section 3(a)(5)(A) [A] Generally The term “dealer” is defined in section 3(a)(5)(A) of the Exchange Act as “any person engaged in the business of buying and selling 178. See 1st Global Inc., SEC No-Action Letter (May 7, 2001). 179. InTouch Global, LLC, SEC No-Action Letter (Nov. 14, 1995) (citing PRA Securities Advisers, L.P., SEC Denial of No-Action Request (Mar. 3, 1993) (notwithstanding the fact that PRA would be compensated by an annual fee based on the percentage of assets under management, the staff refused to take no-action position with PRA based on three representations by PRA: (i) PRA would be actively engaged in locating prospective real estate investment trusts (“REITs”) issuers and negotiating the terms of the private placement transaction and the securities on behalf of clients; (ii) PRA would be approaching new clients to interest them in purchasing the REITs; and (iii) a registered broker-dealer would not be involved in effecting these transactions); Boston Advisory Group, SEC Denial of No-Action Request (Oct. 2, 1980)). 1A–44
What Is a Broker-Dealer? § 1A:3.1 securities for such person’s own account through a broker or otherwise.” Section 3(a)(5)(B) explicitly excludes from the “dealer” definition “a person that buys or sells securities for such person’s own account, either individually or in a fiduciary capacity, but not as a part of a regular business.” Hence, whether a person is a “dealer” turns on two factual questions: (i) whether a person is “buying and selling securities for its own account,” and (ii) whether a person is engaged in that activity “as part of a regular business.” 180 As discussed above, before the GLBA was enacted in 1999, banks were excluded from the definitions of both “brokers” and “dealers.” The GLBA amended sections 3(a)(4) and 3(a)(5) and replaced the blanket exclusion for banks with eleven exemptions. 181 The Dodd-Frank Act amends the definition of “dealer” to provide that a dealer in security-based swaps with eligible contract participants is not required to register as a broker-dealer. In addition, it creates a new designation of, and requires registration and regulation of, “security-based swap dealers.” These topics are discussed further in infra section 1A:4.4. [B] Buying and Selling Securities for Own Account To be a dealer, a person has to both buy and sell securities. 182 In contrast, a person is a broker as long as he participates in securities transactions, which can be either purchase or sale, at key points in the chain of distribution. 183 A dealer purchases and sells securities in principal transactions where it either buys securities from customers and takes them into its own inventory or sells securities to customers from its inventory. 184 180. See Definition of Terms in and Specific Exemptions for Banks, Savings Associations, and Savings Banks Under Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934, SEC Release No. 34-47364 (Feb. 13, 2003). 181. See Exchange Act § 3(a)(5)(C). For a detailed discussion on Section 3(a)(5)(C) exemptions, see infra section 1A:7. 182. Letter from Ezra Weiss, Chief Counsel, Division of Market Regulation, to Joseph McCulley (Aug. 2, 1972); Eastside Church of Christ v. Nat’l Plan, Inc., 391 F.2d 357, 361 (5th Cir. 1968). 183. See Exchange Act § 3(a)(4); Mass. Fin. Servs., Inc. v. Sec. Investor Prot. Corp., 411 F. Supp. 411, 415 (D. Mass.), aff’d 545 F.2d 754 (1st Cir. 1976), cert. denied, 431 U.S. 904 (1977); see also SEC v. Nat’l Executive Planners, Ltd., 503 F. Supp. 1066, 1073 (M.D.N.C. 1980); Letter from Catherine McGuire, Chief Counsel, Division of Market Regulation, to Lori Livingston, Transfer Online, Inc. (May 13, 2000). 184. See Proposing Release, Definition of Terms in and Specific Exemptions for Banks, Savings Associations, and Savings Banks Under Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934, SEC Release No. 34-46745 (Oct. 30, 2002). (Broker-Dealer Reg., Rel. #9, 9/10) 1A–45
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