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

What Is a Broker-Dealer? § 1A:6
The determination of whether a broker-dealer is engaged in an
exclusively intrastate business turns principally on the location and
residence of the broker-dealer’s customers, including the issuer of any
securities being distributed. 337 The issuer must be a resident of and
doing business within the state of the broker-dealer’s own residence,
where the offer and sale of the securities are to take place. 338
The Securities Act also contains an intrastate exemption from
that Act’s registration requirements and the application of this exemption
is sometimes considered by the Division of Trading and
Markets staff in interpreting the Exchange Act’s Intrastate Exemption.
Section 3(a)(11) 339 of the Securities Act and Rule 147 340 promulgated
under it provide guidance in ascertaining when the issuer is deemed to
be a “resident” of and “doing business” within a state. 341 Also, all of
the persons being offered and sold securities must be residents of
and located within the same state. 342 Rule 147 also aids in
determining the residence of offerees and purchasers. 343
Exchange Act defines “interstate commerce” to include “the intrastate use”
of “an interstate instrumentality.” Thus, section 15(c) applies to
broker-dealers operating under the “exclusively intrastate” exemption of
section 15(a).
337. See Don Chamberlin, SEC No-Action Letter (Aug. 10, 1979); Heritage
Homes and Investment of Palo Alto, SEC No-Action Letter (Aug. 10, 1979).
338. See CMS Financial Group, Inc., SEC Denial of No-Action Letter (Apr. 2,
1990); Heritage Homes and Investment of Palo Alto, SEC No-Action
Letter (Aug. 10, 1979); Don Chamberlin, SEC No-Action Letter
(Aug. 10, 1979); In the Matter of Professional Investors, Inc., SEC Release
No. 5315, 37 S.E.C. 173 (May 25, 1956).
339. Securities Act § 3(a). A security is exempted from registration under section 5
of the Securities Act if it “is a part of an issue offered and sold only to persons
resident within a single State or Territory, where the issuer of such security is
a person resident and doing business within or, if a corporation, incorporated
by and doing business within, such State or Territory.”
340. See Rule 147(c).
341. See Heritage Homes and Investment of Palo Alto, SEC No-Action Letter
(Aug. 10, 1979); Don Chamberlin, SEC No-Action Letter (Aug. 10, 1979).
While the Intrastate Exemption in section 3(a)(11) of the Securities Act
and Rule 147 aid in determining the meaning of intrastate activity, it is not
the sole basis for determining the meaning of “exclusively intrastate” as it
appears in section 15(a) of the Exchange Act. See Legacy Motors, Inc., SEC
No-Action Letter (July 31, 1991). Also, the fact that an issuer chooses not
to rely on the Interstate Exemption provided by section 3(a)(11) of the
Securities Act does not preclude a person from claiming the Intrastate
Exemption under the Exchange Act if the person is qualified under the
Exchange Act “Intrastate Exemption.” See Corporate Investment Co., SEC
No-Action Letter (July 17, 1974).
342. See Arizona Property Investors, Ltd. (Nov. 17, 1979); Don Chamberlin,
SEC No-Action Letter (Aug. 10, 1979); Allied Real Estate Securities, Inc.,
SEC Denial of No-Action Letter (Jan. 15, 1977); In the Matter of Capital
Funds, Inc., Admin Proc. File No. 8-10968 (Sept. 19, 1963).
343. See Securities Act Rule 147(d).
(Broker-Dealer Reg., Rel. #9, 9/10)
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