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

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§ 1A:1.2 BROKER-DEALER REGULATION safeguards to investors. 8 The Exchange Act’s regulatory scheme is designed to ensure that all Registered Broker-Dealers and their associated persons satisfy professional standards, have adequate capital, treat their customers fairly, and provide adequate disclosures to investors. 9 Section 15(a)(1) compels registration of most broker-dealers by prohibiting the use by any broker or dealer of the mails or any means or instrumentality of interstate commerce to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security (other than an exempted security or commercial paper, bankers’ acceptances, or commercial bills) unless such broker or dealer is registered with the SEC in accordance with the Exchange Act. 10 The registration requirement extends not just to entities, but also to natural persons (other than natural persons who are associated with a broker-dealer). 11 Sections 1A:2 and 1A:3 below discuss the definitions of “broker” and “dealer.” Section 1A:4 below discusses the definition of “security” for purposes of the Exchange Act’s registration requirements, and, section 1A:5 discusses “exempted securities.” Section 1A:6 explores the extent to which broker-dealers engaged in purely intra-state activities enjoy an exemption from federal registration requirements, and section 1A:7 discusses various other exemptions (including for banks and foreign broker-dealers), and the SEC’s exemptive authority with respect to broker-dealer registration generally. § 1A:1.2 Consequences of Registration Once registered, a Registered Broker-Dealer is subject to numerous compliance requirements and obligations under the Exchange Act, as well as rules and regulations promulgated thereunder. The compliance requirements include: meeting certain standards of operational capability and standards of training, experience, competence, and other qualifications established by the SEC; 12 becoming a member of a 8. See Persons Deemed Not To Be Brokers, SEC Release No. 34-20943 (May 9, 1984) [hereinafter Rule 3a4-1 Proposing Release]. 9. Id.; Eastside Church of Christ v. Nat’l Plan Inc., 391 F.2d 357, 382 (5th Cir. 1968). 10. See Exchange Act § 15(a)(1). 11. “Person associated with a broker or dealer” is defined in Exchange Act § 3(a)(18). 12. Exchange Act § 15(b)(7); Rule 15b7-1. References in this chapter to “Rules” shall be to rules and regulations of the SEC under the Exchange Act, unless otherwise specified. 1A–6
What Is a Broker-Dealer? § 1A:1.2 self-regulatory organization; 13 being subject to investigations, 14 inspections, 15 and disciplinary actions 16 by the SEC; complying with minimum net capital requirements, 17 customer protection rules, 18 specific record keeping, financial compliance, and financial reporting requirements. 19 Registered Broker-Dealers are also subject to the general anti-fraud and anti-manipulation provisions of the federal securities laws and implementing rules, as well as specific antifraud requirements. 20 Registered Broker-Dealers must also establish, maintain, and enforce policies and procedures reasonably designed to prevent insider trading, 21 and comply with rules limiting extensions of securities-related credit to customers under certain circumstances. 22 Registered Broker-Dealers are also subject to anti-money laundering regulations 23 and many other requirements and obligations under the securities laws, rules, and regulations thereunder. One of the most important requirements for broker-dealers, however, may be the obligation to be a member of an SRO, which includes national securities exchanges and registered securities associations. A broker-dealer must join the Financial Industry Regulatory Authority (FINRA), 24 unless it: (i) is a member of a national securities exchange; (ii) carries no customer accounts; and 13. Exchange Act § 15(b)(8). 14. Exchange Act § 21. 15. Exchange Act § 15(b)(2)(C); Rules 15b2-2, 17d-1. 16. Exchange Act § 15(b)(4), (5) and (6). 17. Exchange Act § 15(c)(3); Rules 15c3-1, 15c3-3 and 17a-11. 18. See Rules 15c3-3, 15c3-2, and 8c-1. 19. See Rules 17a-3, 17a-4, 17a-5, and 17a-11. 20. See Securities Act of 1933, § 17(a); Exchange Act §§ 9(a), 10(b), and 15(c)(1) and (2). As noted in Subsection C below, these requirements also apply to unregistered broker-dealers. 21. Exchange Act § 15(f). 22. Exchange Act § 11(d); Regulation Tof the Board of Governors of the Federal Reserve System. 23. Broker-dealers have broad obligations under the Bank Secrecy Act (BSA) to guard against money laundering and terrorist financing. Rule 17a-8 requires broker-dealers subject to the Currency and Foreign Transactions Reporting Act of 1970 to comply with certain reporting and recordkeeping requirements; SRO rules (e.g., NASD Rule 3011 and Incorporated NYSE Rule 445) also require broker-dealers to establish anti-money-laundering compliance programs. 24. The Financial Industry Regulatory Authority (FINRA) was renamed from the National Association of Securities Dealers, Inc. (NASD) in July 2007, in order to reflect the combination of the NASD’s regulatory arm with that of the New York Stock Exchange (NYSE). (Broker-Dealer Reg., Rel. #9, 9/10) 1A–7
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(iii) amends the definition of “s
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SBS markets. In particular, with re
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(and foreign securities exchanges)
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What is a Broker-Dealer? - Davis Polk & Wardwell

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