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

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§ 1A:5 BROKER-DEALER REGULATION security future or any put, call, straddle, option, or privilege on any security future. 320 Under the regulatory framework established by the CFMA, futures contracts on exempted securities or on broad-based security indices 321 are subject to the sole jurisdiction of the CFTC, and security futures (including futures contracts on individual securities or narrow-based security indices) are jointly regulated by the CFTC and the SEC. 322 Broker-dealers who transact security futures must register with both the SEC and the CFTC. 323 § 1A:5 Exempted Securities § 1A:5.1 Generally “Exempted securities” under the Exchange Act, as defined in section 3(a)(12), include, among others, government securities and municipal securities. 324 However, section 3(a)(12)(B)(ii) provides that for purposes of section 15 of the Exchange Act, which requires registration of “brokers” and “dealers,” municipal securities are not “exempted securities.” Broker-dealers transacting exclusively in exempted securities are exempted from some provisions of the Exchange Act, but they are still subject to the anti-fraud and anti-manipulation provisions of the Exchange Act. 325 320. See Exchange Act § 3(a)(56); CEA § 1a(32). 321. The term “broad-based security index” is not defined in either the CEA or the Exchange Act. The term refers to a security index that is not a narrowbased security index. See SEC Release No. 34-44288 n.8 (May 10, 2001). 322. See id. 323. Federal law permits firms already registered with either the SEC or the CFTC to register with the other agency, for the limited purpose of trading security futures, by filing a notice. SEC Guide to Broker-Dealer Registration, supra note 72; see CEA § 6f(a)(2); Exchange Act § 15(b)(11); Rule 15b11-1; SEC Release No. 34-44731 (Aug. 21, 2001); SEC Release No. 34-44730 (effective Aug. 27, 2001); 66 Fed. Reg. 43,080 (Aug. 17, 2001). 324. See Exchange Act § 3(a)(12). Exempted securities under the Exchange Act should not be confused with those exempted securities under the Securities Act. “Exempted securities” under the Securities Act are defined in Securities Act § 3(a). Brokers or dealers who engage exclusively in transactions with respect to securities exempted from registration under the Securities Act that are not also exempted securities under the Exchange Act would be required to register as such under Section 15 of the Exchange Act, absent some applicable exemption. See O. Wertheim, SEC Denial of No-Action Letter (Feb. 12, 1973). 325. See, e.g., Exchange Act §§ 15(c)(1) and (2), 10(b). Anti-fraud provisions under Exchange Act § 9(a), however, do not apply to exempted securities. See Exchange Act § 9(f). 1A–76
What Is a Broker-Dealer? § 1A:5.3 § 1A:5.2 Government Securities [A] Definition Section 3(a)(42) of the Exchange Act defines “government securities” to include securities which are direct obligations of, or obligations guaranteed as to principal or interest by, the United States and/or by other federal government entities among others. [B] Regulation of Government Securities Brokers and Dealers “Government securities broker” and “government securities dealer” are defined in Exchange Act §§ 3(a)(43) and 3(a)(44), respectively. Brokers and Dealers that engage exclusively in government securities transactions are not subject to the registration requirement under section 15. 326 However, since 1986, government securities brokers and dealers, other than Registered Broker-Dealers, are subject to requirements under section 15C, which requires government securities brokers and dealers to register with the SEC and comply with other requirements set forth under section 15C. 327 § 1A:5.3 Municipal Securities [A] Definition Section 3(a)(29) of the Exchange Act defines “municipal securities” to include securities which are direct obligations of, or obligations guaranteed as to principal or interest by, a State or any political subdivision thereof, or any agency or instrumentality of a State or any political subdivision thereof, or any municipal corporate instrumentality of one or more States, among others. As noted above, municipal securities are not “exempted securities” for the purposes of section 15. 328 [B] Regulation of Municipal Securities Dealers “Municipal securities dealer” and “municipal securities broker” are defined in Exchange Act §§ 3(a)(30) and 3(a)(31), respectively. However, as noted above, “municipal securities” are not exempted securities for the purpose of section 15. 329 Section 15B requires that 326. Exchange Act § 15(a)(1). 327. See Exchange Act § 15C. Section 15C was inserted into the Exchange Act by the Government Securities Act of 1986; Pub. L. No. 99-571, 100 Stat. 3208 (1986). 328. Exchange Act § 3(a)(12)(B). 329. Prior to the Securities Reform Act of 1975, municipal securities were exempted securities for the purposes of section 15, and were exempted from the registration requirement of that section. (Broker-Dealer Reg., Rel. #9, 9/10) 1A–77
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