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

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§ 1A:3.2 BROKER-DEALER REGULATION The SEC staff has provided no-action relief regarding hedging activities in government securities, provided that they were conducted with registered government securities broker-dealers. 224 In a no-action letter to Bankers Guarantee Title and Trust Company, the SEC granted no-action relief to the company’s hedging activities in mortgage-related assets based on its representation that the company purchased and sold government securities for its own account and only engaged in transactions with government securities brokers and dealers. 225 In its letter granting no-action relief to Citicorp Homeowner Incorporated regarding its hedging activities, the SEC noted the company’s representation that it would purchase and sell government securities: (i) solely for its own account; (ii) solely for risk management purposes and not for speculation; and (iii) solely in transactions with registered government securities dealers. 226 [C] Issuers Issuers generally are not usually considered “dealers” under the Exchange Act because they do not typically buy and sell securities for their own account. 227 However, under certain circumstances, issuers can be engaged in both purchasing and selling of their securities from and to investors, which could require them to register under the Exchange Act. 228 224. See Bankers Guarantee Title and Trust Co., SEC No-Action Letter (Jan. 22, 1991); see also Citicorp Homeowners, Inc., SEC No-Action Letter (Oct. 7, 1987). 225. See Bankers Guarantee Title and Trust Co., SEC No-Action Letter (Jan. 22, 1991). 226. See Citicorp Homeowners, Inc., SEC No-Action Letter (Oct. 7, 1987). 227. 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). 228. See SEC Guide to Broker-Dealer Registration, supra note 72 (issuers whose activities go beyond selling their own securities need to consider whether they would need to register as broker-dealers. This includes issuers that purchase their securities from investors, as well as issuers that effectively operate markets in their own securities or in securities whose features or terms can change or be altered). 1A–52
What Is a Broker-Dealer? § 1A:3.2 In contrast, a life insurance company that distributed fixed and variable annuity contacts 229 through a separate account was determined to be both a “broker” and a “dealer” under the Exchange Act. 230 According to the SEC, since the insurance company engaged in the purchase and sale of its own portfolio securities, planned to make purchases and sales of securities for the portfolio of the separate account, and to distribute the variable annuity interests of which it and the separate account are co-issuers, the insurance company met the definition of “broker” and “dealer.” 231 However, an issuer can avoid broker-dealer registration by forming a wholly owned broker-dealer subsidiary to conduct the securities transactions. In the case above, if the insurance company forms a wholly owned subsidiary to engage in the offer and sale of the variable annuity interests, and if the subsidiary registers as a broker-dealer and complies with all applicable rules and regulations, including the requirement to direct and supervise all persons engaged directly or indirectly in the offer and sale of such securities, the insurance company itself should generally not have to register as a broker-dealer under the Exchange Act. 232 [D] Dealers in OTC Derivatives Under the Exchange Act, dealers engaged in OTC derivatives transactions that are securities, such as OTC options on securities, would, absent the availability of an exemption, generally need to register under section 15 and fulfill all requirements applicable to other securities broker-dealers, notwithstanding that such entities may be regarded as “issuers” of the instruments. 233 As noted below, 229. “Variable annuity contracts,” “variable annuity interests” or simply “variable annuities” have been found to be investment contracts, thus securities within Section 2(1) of the Securities Act and Section 3(a)(10) of the Exchange Act. See SEC v. United Benefit Life Ins. Co., 387 U.S. 202 (1967); SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65 (1959); Tcherepin v. Knight, 389 U.S. 332 (1967); see also Distributions of Variable Annuities by Insurance Companies Broker-Dealer Registration and Regulation Problems Under the Securities Exchange Act of 1934, SEC Release No. 34-8389 (Aug. 29, 1968). 230. See Distributions of Variable Annuities by Insurance Companies Broker- Dealer Registration and Regulation Problems Under the Securities Exchange Act of 1934, SEC Release No. 34-8389 (Aug. 29, 1968); see also National Integrity Life Ins. Co., SEC No-Action Letter (May 1, 1987). 231. See Distributions of Variable Annuities by Insurance Companies Broker- Dealer Registration and Regulation Problems Under the Securities Exchange Act of 1934, SEC Release No. 34-8389 (Aug. 29, 1968). 232. See id. 233. See OTC Derivative Dealers, SEC Release No. 34-40594 (Oct. 23, 1998) [hereinafter OTC Derivative Dealers Adopting Release]; SEC Guide to Broker-Dealer Registration, supra note 72. (Broker-Dealer Reg., Rel. #9, 9/10) 1A–53
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