What is a Broker-Dealer? - Davis Polk & Wardwell
What is a Broker-Dealer? - Davis Polk & Wardwell
What is a Broker-Dealer? - Davis Polk & Wardwell
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<strong>What</strong> Is a <strong>Broker</strong>-<strong>Dealer</strong>? § 1A:3.2<br />
In contrast, a life insurance company that d<strong>is</strong>tributed fixed and<br />
variable annuity contacts 229 through a separate account was determined<br />
to be both a “broker” and a “dealer” under the Exchange Act. 230<br />
According to the SEC, since the insurance company engaged in the<br />
purchase and sale of its own portfolio securities, planned to make<br />
purchases and sales of securities for the portfolio of the separate account,<br />
and to d<strong>is</strong>tribute the variable annuity interests of which it and the<br />
separate account are co-<strong>is</strong>suers, the insurance company met the definition<br />
of “broker” and “dealer.” 231<br />
However, an <strong>is</strong>suer can avoid broker-dealer reg<strong>is</strong>tration by forming a<br />
wholly owned broker-dealer subsidiary to conduct the securities transactions.<br />
In the case above, if the insurance company forms a wholly owned<br />
subsidiary to engage in the offer and sale of the variable annuity<br />
interests, and if the subsidiary reg<strong>is</strong>ters as a broker-dealer and complies<br />
with all applicable rules and regulations, including the requirement to<br />
direct and superv<strong>is</strong>e all persons engaged directly or indirectly in the offer<br />
and sale of such securities, the insurance company itself should generally<br />
not have to reg<strong>is</strong>ter as a broker-dealer under the Exchange Act. 232<br />
[D] <strong>Dealer</strong>s in OTC Derivatives<br />
Under the Exchange Act, dealers engaged in OTC derivatives<br />
transactions that are securities, such as OTC options on securities,<br />
would, absent the availability of an exemption, generally need to<br />
reg<strong>is</strong>ter under section 15 and fulfill all requirements applicable to<br />
other securities broker-dealers, notwithstanding that such entities<br />
may be regarded as “<strong>is</strong>suers” of the instruments. 233 As noted below,<br />
229. “Variable annuity contracts,” “variable annuity interests” or simply “variable<br />
annuities” have been found to be investment contracts, thus securities<br />
within Section 2(1) of the Securities Act and Section 3(a)(10) of the<br />
Exchange Act. See SEC v. United Benefit Life Ins. Co., 387 U.S. 202<br />
(1967); SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65 (1959);<br />
Tcherepin v. Knight, 389 U.S. 332 (1967); see also D<strong>is</strong>tributions of Variable<br />
Annuities by Insurance Companies <strong>Broker</strong>-<strong>Dealer</strong> Reg<strong>is</strong>tration and Regulation<br />
Problems Under the Securities Exchange Act of 1934, SEC Release<br />
No. 34-8389 (Aug. 29, 1968).<br />
230. See D<strong>is</strong>tributions of Variable Annuities by Insurance Companies <strong>Broker</strong>-<br />
<strong>Dealer</strong> Reg<strong>is</strong>tration and Regulation Problems Under the Securities<br />
Exchange Act of 1934, SEC Release No. 34-8389 (Aug. 29, 1968); see<br />
also National Integrity Life Ins. Co., SEC No-Action Letter (May 1, 1987).<br />
231. See D<strong>is</strong>tributions of Variable Annuities by Insurance Companies <strong>Broker</strong>-<br />
<strong>Dealer</strong> Reg<strong>is</strong>tration and Regulation Problems Under the Securities<br />
Exchange Act of 1934, SEC Release No. 34-8389 (Aug. 29, 1968).<br />
232. See id.<br />
233. See OTC Derivative <strong>Dealer</strong>s, SEC Release No. 34-40594 (Oct. 23, 1998)<br />
[hereinafter OTC Derivative <strong>Dealer</strong>s Adopting Release]; SEC Guide to<br />
<strong>Broker</strong>-<strong>Dealer</strong> Reg<strong>is</strong>tration, supra note 72.<br />
(<strong>Broker</strong>-<strong>Dealer</strong> Reg., Rel. #9, 9/10)<br />
1A–53