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

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§ 1A:4.4 BROKER-DEALER REGULATION (iii) any agreement, contract, or transaction providing for the purchase or sale of one or more securities on a fixed basis; (iv) any agreement, contract, or transaction providing for the purchase or sale of one or more securities on a contingent basis, unless such agreement, contract, or transaction predicates such purchase or sale on the occurrence of a bona fide contingency that might reasonably be expected to affect or be affected by the creditworthiness of a party other than a party to the agreement, contract, or transaction; (v) any note, bond, or evidence of indebtedness that is a security as defined in section 2(a)(1) of the Securities Act of 1933 or section 3(a)(10) of the Securities Exchange Act of 1934; or (vi) any agreement, contract, or transaction that is—(A) based on a security; and (B) entered into directly or through an underwriter (as defined in section 2(a) of the Securities Act of 1933) by the issuer of such security for the purposes of raising capital, unless such agreement, contract, or transaction is entered into to manage a risk associated with capital raising. The CFMA also amended section 15(i) of the Exchange Act, limiting the SEC’s rulemaking and enforcement authority regarding new hybrid products 293 offered by banks. [C] The Dodd-Frank Wall Street Reform and Consumer Protection Act In the wake of the recent financial crisis, 2010 saw the enactment on July 21, 2010 of the Dodd-Frank Act, which adopted sweeping revisions to the securities and banking laws. One significant emphasis of Dodd-Frank is on the regulation of swaps and other over-thecounter derivatives. Among many other changes, the derivatives title (Title VII) of Dodd-Frank effects the following: (i) creates new definitions of (and new regulatory requirements for) “swaps,” “security-based swaps” (SBS), “swap dealers,” “security-based swap dealers” (“SBS dealers”), “major swap participants” (MSPs), “major security-based swap participants” (SBS MSPs), swap execution facilities (SEFs), and security-based swap execution facilities (SBS SEFs); (ii) generally allocates jurisdiction over swaps, swap dealers, SEFs, and MSPs to the CFTC and over SBS, SBS dealers, SBS SEFs, and SBS MSPs to the SEC; 293. “New hybrid product” is defined in Exchange Act § 15(i)(6)(A). 1A–66
(iii) amends the definition of “security” in the Exchange Act to include SBS; (iv) modifies exclusions from regulation of OTC derivatives in section 3A of the Exchange Act; (v) amends the definition of “dealer” in the Exchange Act to exclude dealing activities relating to SBS (other than with non-eligible contract participants (“non-ECPs”)); (vi) creates new mandatory clearing and exchange trading (or SEF/ SBS SEF trading) requirements for swaps and SBS (subject to limited exceptions); (vii) incorporates SBS into the Exchange Act’s beneficial ownership reporting requirements; and (viii) requires that persons holding collateral for cleared SBS be registered as a broker-dealer or SBS dealer. In addition, Dodd-Frank contains a provision, known as the “Volcker Rule,” that bans certain banking entities from proprietary trading and investing in and sponsoring hedge funds and private equity funds, subject to certain exceptions and another provision, known as the “Swaps Pushout Rule.” The Swaps Pushout Rule prohibits certain forms of federal assistance to swap dealers, SBS dealers, MSPs, and SBS MSPs subject to certain exceptions. In general, the derivatives provisions of Dodd-Frank are effective 360 days after the enactment of the Act, or July 16, 2011. 294 It is worth noting, however, that the derivatives title of Dodd-Frank includes a large number of regulatory rulemaking requirements. Where the SEC, CFTC, or other agency is required to promulgate a rule under the derivatives title, such rule is required to be adopted by July 16, 2011, and will become effective the later of July 16, 2011 and sixty days after the final rule is adopted. 295 [C][1] New and Amended Definitions [C][1][a] “Swap,” “SBS” and “Security” The Dodd-Frank derivatives title, as part of its new regime for the supervision of certain OTC derivatives activities, defines a host of key terms and, in addition, alters existing securities law terms in important ways. This title introduces certain key terms with respect to the 294. Dodd-Frank §§ 754 and 774. 295. Id. (Broker-Dealer Reg., Rel. #9, 9/10) What Is a Broker-Dealer? § 1A:4.4 1A–67
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