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

More documents

Recommendations

Info

§ 1A:4.4 BROKER-DEALER REGULATION [C][1][c] Broker-Dealer Registration Issues Dodd-Frank also alters the first two paragraphs in the definition of the term “dealer” in the Securities Act and Exchange Act to clarify that a dealer in SBS with ECPs is not required to register as a broker-dealer. In particular, Dodd-Frank adds the following underlined text to the first two paragraphs of the “dealer” definition: (A) In general. The term “dealer” means any person engaged in the business of buying and selling securities (not including security-based swaps, other than security-based swaps with or for persons that are not eligible contract participants) for such person’s own account through a broker or otherwise. (B) Exception for person not engaged in the business of dealing. The term “dealer” does not include a person that buys or sells securities (not including security-based swaps, other than security-based swaps with or for persons that are not eligible contract participants) for such person’s own account, either individually or in a fiduciary capacity, but not as a part of a regular business. 315 No similar change is made to the definition of the term “broker” in the Exchange Act. Therefore, persons who engage in “broker” activities with respect to SBS may need to register as broker-dealers. Since SBS SEFs may perform functions similar to brokers in respect of SBS, this raises the possibility that SBS SEFs could become subject to brokerdealer registration, absent relief. SBS SEFs may also be exchanges or alternative trading systems. [C][2] The Volcker Rule and Swaps Pushout Rule While a full description of Dodd-Frank is beyond the scope of this chapter, it is worth mentioning two provisions of the Act of particular import due to the activities restrictions they impose on financial entities. Section 619 of Dodd-Frank, the so-called “Volcker Rule,” prohibits proprietary trading and sponsoring and investing in hedge funds and private equity funds by an insured depository institution, any company that controls an insured depository institution, a company that is treated as a bank holding company for purposes of section 8 of the International Banking Act and any affiliate or subsidiary of any such entity, subject to exceptions for permitted activities and a transition period. The exact contours of the exceptions will remain unknown for some time. However, the impact of the Volcker Rule and proprietary trading activities in derivatives by affected institutions will likely be significant. 315. Exchange Act § 3(a)(5), as amended by Dodd-Frank § 761(a). 1A–74
What Is a Broker-Dealer? § 1A:4.5 Also, section 716 of Dodd-Frank, the so-called “Swaps Pushout Rule,” prohibits “Federal assistance,” including FDIC insurance and access to the Federal Reserve’s discount window other than as part of broad-based programs, to “swaps entities,” which include SBS dealers and SBS MSPs. Insured depository institution MSPs are not subject to the Swaps Pushout Rule. In addition, insured depository institutions are not subject to the Swaps Pushout Rule if they limit their swaps activities to hedging or mitigating the risk of their activities or to swaps on reference assets permissible for investment by a national bank under 12 U.S.C. § 24 (Seventh). The Swaps Pushout Rule explicitly allows an insured depository institution to have or establish a swaps entity affiliate. Thus, certain activities previously permitted to be conducted in a bank may now need to be conducted in a separate affiliate. This affiliate will likely be required to be separately capitalized. For those activities that are not required to be ceased or pushed out of the bank by virtue of the Volcker Rule and the Swaps Pushout Rule, however, the bank exceptions for identified banking products, as defined in Section 206(b) of the Gramm-Leach-Bliley Act, from the definitions of “broker” and “dealer” (and, therefore, the exemption from broker-dealer registration) remain. 316 § 1A:4.5 Security Futures The CFMA amended the Exchange Act to permit futures on single stocks and expand the definition of “security” to include certain security futures. 317 Both the Commodity Exchange Act and the Exchange Act define a “security future” as “a contract of sale for future delivery of a single security or of a narrow-based security index . . . except an exempted security under section 3(a)(12) of the [Exchange Act]. . . .” 318 The term “security future” includes only futures contracts on a single security (often called single stock futures) or those on a narrow-based security index, and does not include futures contracts on broad-based security indices and exempted securities. 319 A “security futures product” refers to a 316. For certain exceptions from the definitions of “broker” and “dealer” for banks, see infra section 1A:7.4. 317. See Exchange Act §§ 3(a)(10) and 3(a)(11) as amended by section 201 of the CFMA. 318. Exchange Act § 3(a)(55); 7 U.S.C. § 1a(31). Section 1a(31) expressly excludes from the definition of “security future” any agreement, contract, or transaction excluded from this chapter under sections 2(c), 2(d), 2(f), or 2(g) of the CEA (as in effect on December 21, 2000) or sections 27 to 27f of the CEA. 319. CEA § 1a(31). (Broker-Dealer Reg., Rel. #9, 9/10) 1A–75
Page 1 and 2:
Chapter 1A What Is a Broker-Dealer?
Page 3 and 4:
What Is a Broker-Dealer? [C] The Do
Page 5 and 6:
What Is a Broker-Dealer? § 1A:1.1
Page 7 and 8:
Page 9 and 10:
Page 11 and 12:
Exchange Act, which prohibits state
Page 13 and 14:
Page 15 and 16:
Page 17 and 18:
Page 19 and 20:
Page 21 and 22:
Page 23 and 24: What Is a Broker-Dealer? § 1A:2.6
Page 47 and 48: securities, a person has to conduct
Page 55 and 56: the requirements of section 11(a) o
Page 67 and 68: (iii) amends the definition of “s
Page 69 and 70: (vi) any agreement, contract, or tr
Page 71 and 72: SBS markets. In particular, with re
Page 73: What Is a Broker-Dealer? § 1A:4.4
Page 79 and 80: What Is a Broker-Dealer? § 1A:6 Th
Page 93 and 94: (and foreign securities exchanges)
Page 113: What Is a Broker-Dealer? § 1A:8.5
show all

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

Create successful ePaper yourself

Delete template?

Save as template?