What is a Broker-Dealer? - Davis Polk & Wardwell
What is a Broker-Dealer? - Davis Polk & Wardwell What is a Broker-Dealer? - Davis Polk & Wardwell
§ 1A:7.4 BROKER-DEALER REGULATION [B] Bank Brokerage Activities [B][1] Section 3(a)(4)(B) Section 3(a)(4)(B) provides that a bank will not be considered to be a broker if it engages in the following activities, including: (i) third-party brokerage arrangements; (ii) trust activities; (iii) permissible securities transactions; (iv) certain stock purchase plans; (v) sweep accounts transactions; (vi) affiliate transactions; (vii) private securities offerings; (viii) safekeeping and custody activities; (ix) transactions in identified banking products as defined in section 206 of the GLBA; 408 and (x) transactions in municipal securities. 409 408. For purposes of Exchange Act §§ 3(a)(4) and (5), the term “identified banking product” means: (i) a deposit account, savings account, certificate of deposit, or other deposit instrument issued by a bank; (ii) a banker’s acceptance; (iii) a letter of credit issued or loan made by a bank; (iv) a debit account at a bank arising from a credit card or similar arrangement; (v) a participation in a loan which the bank or an affiliate of the bank (other than a broker or dealer) funds, participates in, or owns that is sold—(A) to qualified investors; or (B) to other persons that—(1) have the opportunity to review and assess any material information, including information regarding the borrower’s creditworthiness; and (2) based on such factors as financial sophistication, net worth, and knowledge and experience in financial matters, have the capacity to evaluate the information available, as determined under generally applicable banking standards or guidelines; or (vi) any swap agreement, including credit and equity swaps, except that an equity swap that is sold directly to any person other than a qualified investor (as defined in section 3(a)(54) of the Exchange Act) shall not be treated as an indentified banking product. Pub. L. 106-102, title II, § 206, Nov. 12, 1999, 113 Stat. 1393; 15 U.S.C.A. § 78c note. Section 206(b) of the GLBA defines “swap agreement” for purposes of section 206(a)(6) to include any individually negotiated contract, agreement, warrant, note, or option that is based, in whole or in part, on the value of, any interest in, or any quantitative measure or the occurrence of any event relating to, one or more commodities, securities, currencies, interest or other rates, indices, or other assets, but does not include any other identified banking product, as defined in sections 206(a)(1) through (5). This definition allows banks to engage in a broad range of derivative activities without registering as broker-dealers. 409. Exchange Act § 3(a)(4)(B)(i) to (x). 1A–94
What Is a Broker-Dealer? § 1A:7.4 Section 3(a)(4)(B)(xi) provides a de minimis exception from brokerdealer registration for a bank that effects, other than in transactions referred to in (i) through (x) above, not more than 500 transactions in securities in any calendar year, and if such transactions are not effected by an employee of the bank who is also an employee of a broker or dealer. 410 The availability of these exemptions is subject to various conditions. [B][2] Regulation R On September 24, 2007, the SEC and the Board of Governors of the Federal Reserve System jointly adopted Regulation R, which among other things, provides interpretive guidance for the exemptions provided for banks listed in section 3(a)(4). 411 Regulation R addresses four major types of exempted activities: (i) third-party networking arrangements; (ii) trust and fiduciary activities; (iii) sweep account transactions; and (iv) safekeeping and custody activities. 412 [B][3] Networking Arrangements The “push-out” provisions permit banks to enter into arrangements with Registered Broker-Dealers, under which the broker-dealers offer brokerage services on or off the premises of the bank (“networking arrangements”) if certain conditions are met. 413 One such condition is that unregistered bank employees may not receive “incentive compensation” for brokerage transactions, except that such employees may receive a nominal one-time cash referral fee of a fixed dollar amount that is not contingent on whether the referral results in a transaction. 414 The GLBA does not, however, define the key terms “incentive compensation,” “nominal” or “contingent.” Regulation R provides definitions for these and other terms used in the statute, and contains an exemption from the statutory definition of a “broker” for bank employee referrals involving “institutional customers” or “high 410. This joint rulemaking was required by the Financial Services Regulatory Relief Act of 2006. See SEC Release 34-56501 (Sept. 24, 2007). 411. Regulation R Adopting Release, supra note 87. Regulation R uses the same definition of “bank” as that in Exchange Act § 3(a)(6), which includes U.S. branches and agencies of foreign banks. 412. Rules 700, 721, 740 and 760; see Regulation R Adopting Release, supra note 87, at 10. 413. See Exchange Act § 3(a)(4)(B)(i). 414. See Exchange Act § 3(a)(4)(B)(i)(VI). (Broker-Dealer Reg., Rel. #9, 9/10) 1A–95
- Page 43 and 44: What Is a Broker-Dealer? § 1A:2.6
- Page 45 and 46: What Is a Broker-Dealer? § 1A:3.1
- Page 47 and 48: securities, a person has to conduct
- Page 49 and 50: What Is a Broker-Dealer? § 1A:3.2
- Page 51 and 52: What Is a Broker-Dealer? § 1A:3.2
- Page 53 and 54: What Is a Broker-Dealer? § 1A:3.2
- Page 55 and 56: the requirements of section 11(a) o
- Page 57 and 58: What Is a Broker-Dealer? § 1A:4.2
- Page 59 and 60: What Is a Broker-Dealer? § 1A:4.2
- Page 61 and 62: What Is a Broker-Dealer? § 1A:4.3
- Page 63 and 64: What Is a Broker-Dealer? § 1A:4.4
- Page 65 and 66: What Is a Broker-Dealer? § 1A:4.4
- 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 and 74: What Is a Broker-Dealer? § 1A:4.4
- Page 75 and 76: What Is a Broker-Dealer? § 1A:4.5
- Page 77 and 78: What Is a Broker-Dealer? § 1A:5.3
- Page 79 and 80: What Is a Broker-Dealer? § 1A:6 Th
- Page 81 and 82: What Is a Broker-Dealer? § 1A:7.2
- Page 83 and 84: What Is a Broker-Dealer? § 1A:7.2
- Page 85 and 86: What Is a Broker-Dealer? § 1A:7.2
- Page 87 and 88: What Is a Broker-Dealer? § 1A:7.2
- Page 89 and 90: What Is a Broker-Dealer? § 1A:7.2
- Page 91 and 92: What Is a Broker-Dealer? § 1A:7.2
- Page 93: (and foreign securities exchanges)
- Page 97 and 98: What Is a Broker-Dealer? § 1A:7.4
- Page 99 and 100: What Is a Broker-Dealer? § 1A:7.4
- Page 101 and 102: What Is a Broker-Dealer? § 1A:7.5
- Page 103 and 104: What Is a Broker-Dealer? § 1A:7.6
- Page 105 and 106: What Is a Broker-Dealer? § 1A:7.8
- Page 107 and 108: What Is a Broker-Dealer? § 1A:8.2
- Page 109 and 110: What Is a Broker-Dealer? § 1A:8.3
- Page 111 and 112: What Is a Broker-Dealer? § 1A:8.4
- Page 113: What Is a Broker-Dealer? § 1A:8.5
§ 1A:7.4 BROKER-DEALER REGULATION<br />
[B] Bank <strong>Broker</strong>age Activities<br />
[B][1] Section 3(a)(4)(B)<br />
Section 3(a)(4)(B) provides that a bank will not be considered to be a<br />
broker if it engages in the following activities, including:<br />
(i) third-party brokerage arrangements;<br />
(ii) trust activities;<br />
(iii) perm<strong>is</strong>sible securities transactions;<br />
(iv) certain stock purchase plans;<br />
(v) sweep accounts transactions;<br />
(vi) affiliate transactions;<br />
(vii) private securities offerings;<br />
(viii) safekeeping and custody activities;<br />
(ix) transactions in identified banking products as defined in<br />
section 206 of the GLBA; 408 and<br />
(x) transactions in municipal securities. 409<br />
408. For purposes of Exchange Act §§ 3(a)(4) and (5), the term “identified banking<br />
product” means: (i) a deposit account, savings account, certificate of deposit,<br />
or other deposit instrument <strong>is</strong>sued by a bank; (ii) a banker’s acceptance; (iii) a<br />
letter of credit <strong>is</strong>sued or loan made by a bank; (iv) a debit account at a bank<br />
ar<strong>is</strong>ing from a credit card or similar arrangement; (v) a participation in a loan<br />
which the bank or an affiliate of the bank (other than a broker or dealer)<br />
funds, participates in, or owns that <strong>is</strong> sold—(A) to qualified investors; or<br />
(B) to other persons that—(1) have the opportunity to review and assess any<br />
material information, including information regarding the borrower’s creditworthiness;<br />
and (2) based on such factors as financial soph<strong>is</strong>tication, net<br />
worth, and knowledge and experience in financial matters, have the capacity<br />
to evaluate the information available, as determined under generally applicable<br />
banking standards or guidelines; or (vi) any swap agreement, including<br />
credit and equity swaps, except that an equity swap that <strong>is</strong> sold directly to any<br />
person other than a qualified investor (as defined in section 3(a)(54) of the<br />
Exchange Act) shall not be treated as an indentified banking product. Pub. L.<br />
106-102, title II, § 206, Nov. 12, 1999, 113 Stat. 1393; 15 U.S.C.A. § 78c<br />
note. Section 206(b) of the GLBA defines “swap agreement” for purposes of<br />
section 206(a)(6) to include any individually negotiated contract, agreement,<br />
warrant, note, or option that <strong>is</strong> based, in whole or in part, on the value of, any<br />
interest in, or any quantitative measure or the occurrence of any event<br />
relating to, one or more commodities, securities, currencies, interest or other<br />
rates, indices, or other assets, but does not include any other identified<br />
banking product, as defined in sections 206(a)(1) through (5). Th<strong>is</strong> definition<br />
allows banks to engage in a broad range of derivative activities without<br />
reg<strong>is</strong>tering as broker-dealers.<br />
409. Exchange Act § 3(a)(4)(B)(i) to (x).<br />
1A–94
Change language