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

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