Securities broker and dealer
The exception provided for intrastate broker-dealer activity is very narrow. To qualify, all aspects of all transactions must be done within the borders of one state. This means that, without SEC registration, a broker-dealer cannot participate in any transaction executed on a national securities exchange. A broker-dealer that otherwise meets the requirements of the intrastate broker-dealer exemption would not cease to qualify for the intrastate broker-dealer exemption solely because it has a website that may be viewed by out-of-state persons, so long as the broker-dealer takes measures reasonably designed to ensure that its business remains exclusively intrastate.
These measures could include the use of disclaimers clearly indicating that the broker-dealer's business is exclusively intrastate and that the broker-dealer can only act for or with, and provide broker-dealer services to, a person in its state, as long as the broker-dealer does not provide broker-dealer services to persons that indicate they are, or that the broker-dealer has reason to believe are, not within the broker-dealer's state of residence.
These measures are not intended to be exclusive. A broker-dealer could adopt other measures reasonably designed to ensure that it does not provide broker-dealer services to persons that are not within the same state as the broker-dealer.
However, an intermediary's business would not be "exclusively intrastate" if it sold securities or provided any other broker-dealer services to a person that indicates that it is, or that the broker-dealer has reason to believe is, not within the broker-dealer's state of residence.
For additional information regarding the use of the Internet by intrastate broker-dealers, see https: A word about municipal and government securities. There is no intrastate exception from registration for municipal securities dealers or government securities brokers and dealers. A broker-dealer that transacts business only in commercial paper, bankers' acceptances, and commercial bills does not need to register with the SEC under Section 15 b or any other section of the Act.
On the other hand, persons transacting business only in certain "exempted securities," as defined in Section 3 a 12 of the Act, do not have to register under Section 15 b , but may have to register under other provisions of the Act.
For example, some broker-dealers of government securities, which are "exempted securities," must register as government securities brokers or dealers under Section 15C of the Act, as described in Part II. A security sold in a transaction that is exempt from registration under the Securities Act of the " Act" is not necessarily an "exempted security" under the Exchange Act.
For example, a person who sells securities that are exempt from registration under Regulation D of the Act must nevertheless register as a broker-dealer. In other words, "placement agents" are not exempt from broker-dealer registration.
Issuers generally are not "brokers" because they sell securities for their own accounts and not for the accounts of others. Moreover, issuers generally are not "dealers" because they do not buy and sell their securities for their own accounts as part of a regular business.
Issuers whose activities go beyond selling their own securities, however, need to consider whether they would need to register as broker-dealers. This includes issuers that purchase their securities from investors, as well as issuers that effectively operate markets in their own securities or in securities whose features or terms can change or be altered. The so-called issuer's exemption does not apply to the personnel of a company who routinely engage in the business of effecting securities transactions for the company or related companies such as general partners seeking investors in limited partnerships.
The employees and other related persons of an issuer who assist in selling its securities may be "brokers," especially if they are paid for selling these securities and have few other duties. Exchange Act Rule 3a provides that an associated person or employee of an issuer who participates in the sale of the issuer's securities would not have to register as a broker-dealer if that person, at the time of participation: Some issuers offer dividend reinvestment and stock purchase programs.
Under certain conditions, an issuer may purchase and sell its own securities through a dividend reinvestment or stock purchase program without registering as a broker-dealer. These conditions, regarding solicitation, fees and expenses, and handling of participants' funds and securities, are explained in Securities Exchange Act Release No. Although Regulation M 2 replaced Rule 10b-6 and superseded the STA Letter, the staff positions taken in this letter regarding the application of Section 15 a of the Exchange Act remain in effect.
See 17 CFR The SEC generally uses a territorial approach in applying registration requirements to the international operations of broker-dealers. Under this approach, all broker-dealers physically operating within the United States that induce or attempt to induce securities transactions must register with the SEC, even if their activities are directed only to foreign investors outside of the United States. In addition, foreign broker-dealers that, from outside of the United States, induce or attempt to induce securities transactions by any person in the United States, or that use the means or instrumentalities of interstate commerce of the United States for this purpose, also must register.
This includes the use of the internet to offer securities, solicit securities transactions, or advertise investment services to U. Foreign broker-dealers that limit their activities to those permitted under Rule 15a-6 of the Act, however, may be exempt from U. Foreign broker-dealers that wish to rely on this exemption should review Securities Exchange Act Release No.
See also letters re: Securities Activities of U. In addition, in April , the Division of Market Regulation staff issued responses to frequently asked questions concerning Rule 15a-6 in relation to Regulation AC. Regulation AC is discussed in Part V. Broker-dealers that limit their activity to government or municipal securities require specialized registration.
Those that limit their activity to government securities do not have to register as "general-purpose" broker-dealers under Section 15 b of the Act. General-purpose broker-dealers that conduct a government securities business, however, must note this activity on their Form BD.
Form BD is discussed below. All firms that are brokers or dealers in government securities must comply with rules adopted by the Secretary of the Treasury, as well as SEC rules. Firms that limit their securities business to buying and selling municipal securities for their own account municipal securities dealers must register as general-purpose broker-dealers.
If, however, these entities are banks or meet the requirements of the intrastate exemption discussed in Part II. Municipal securities brokers other than banks must register as general-purpose broker-dealers unless they qualify for the intrastate exception.
Firms that run a matched book of repurchase agreements or other stock loans are considered dealers. Because a "book running dealer" holds itself out as willing to buy and sell securities, and is thus engaged in the business of buying and selling securities, it must register as a broker-dealer. Banks, thrifts, and other financial institutions should be aware that the Commission has adopted rules that may affect them.
The GLBA amended the Exchange Act, and banks now have certain targeted exceptions and exemptions from broker-dealer registration. Currently, as a result of Commission rulemaking, banks are undergoing a phase-in period for compliance with the new law. Since October 1, , banks that buy and sell securities must consider whether they are "dealers" under the federal securities laws. The bank exceptions and exemptions only apply to banks, and not to related entities. It is important to note that exceptions applicable to banks under the Exchange Act, as amended by the GLBA, are not applicable to other entities, including bank subsidiaries and affiliates, that are not themselves banks.
As such, subsidiaries and affiliates of banks that engage in broker-dealer activities are required to register as broker-dealers under the Act. Also, banks that act as municipal securities dealers or as government securities brokers or dealers continue to be required to register under the Act. By statute, thrifts savings associations have the same status as banks, and may avail themselves of the same targeted exceptions and exemptions from broker-dealer registration as banks. As with banks, it is important to note that exceptions and exemptions applicable to thrifts are not applicable to other entities, including subsidiaries and affiliates that are not thrifts.
As such, subsidiaries and affiliates of thrifts that engage in broker-dealer activities are required to register as broker-dealers under the Act. The exceptions and exemptions applicable to banks under the Exchange Act do not apply to other kinds of financial institutions, such as credit unions. The SEC staff, however, has permitted certain financial institutions, such as credit unions, to make securities available to their customers without registering as broker-dealers.
This is done through "networking" arrangements, where an affiliated or third-party broker-dealer provides brokerage services for the financial institution's customers, according to conditions stated in no-action letters and NASD Rule Under a networking arrangement, financial institutions can share in the commissions generated by their referred customers, under certain conditions.
The financial institution engaging in such networking must be in strict compliance with applicable law and Commission staff guidance. Chubb Securities Corporation November 24, and NASD Rule applicable to broker-dealers that enter into networking arrangements with banks, thrifts, and credit unions.
The SEC staff has permitted insurance agencies to make insurance products that are also securities such as variable annuities available to their customers without registering as broker-dealers under certain conditions. This again is done through "networking" arrangements, where an affiliated or third-party broker-dealer provides brokerage services for the insurance agency's customers, according to conditions stated in no-action letters.
These arrangements are designed to address the difficulties of dual state and federal laws applicable to the sale of these products. Through networking arrangements, insurance agencies can share in the commissions generated by their referred customers under certain conditions. Insurance agencies engaging in such networking must be in strict compliance with applicable law and Commission staff guidance. Insurance companies should consult the letter re: First of America Brokerage Services, Inc.
Those interested in structuring such an arrangement should contact private counsel or the SEC staff for further information. Notably, insurance networking arrangements are limited to insurance products that are also securities. They do not encompass sales of mutual funds and other securities that do not present the same regulatory difficulties. Lincoln Financial Advisors Corp. The offer of real estate as such, without any collateral arrangements with the seller or others, does not involve the offer of a security.
When the real estate is offered in conjunction with certain services, however, it may constitute an investment contract, and thus, a security.
See generally , Securities Act Release No. There is no general exception from the broker-dealer registration requirements for licensed real estate brokers or agents who engage in the business of effecting transactions in real estate securities. In the past, the Division staff has granted no-action relief from the registration requirements to licensed real estate personnel that engage in limited activities with respect to the sale of condominium units coupled with an offer or agreement to perform or arrange certain rental or other services for the purchaser.
The relief provided in these letters is limited solely to their facts and should not be relied upon for activities relating to sales of other types of real estate securities, including tenants-in-common interests in real property.
Broker-dealers may enter into arrangements to offer services to members of certain non-profit groups, including civic organizations, charities, and educational institutions that rely upon private donations.
These arrangements are subject to certain conditions to ensure that the organizations, or "affinity groups," do not develop a salesman's stake with respect to the sale of securities. If a broker-dealer does not qualify for any of the exceptions or exemptions outlined in the sections above, it must register with the Commission under Section 15 b of the Act.
You also use Form BD to:. Form BD asks questions about the background of the broker-dealer and its principals, controlling persons, and employees. The broker-dealer must meet the statutory requirements to engage in a business that involves high professional standards, and quite often includes the more rigorous responsibilities of a fiduciary.
The only exception is for banks registering as municipal securities dealers, which file Form MSD directly with the SEC and with their appropriate banking regulator. Form BD contains additional filing instructions. Applicants that reside outside the U. Incomplete applications are not considered "filed" and will be returned to the applicant for completion and re-submission. Within 45 days of filing a completed application, the SEC will either grant registration or begin proceedings to determine whether it should deny registration.
The SROs have independent membership application procedures and are not required to act within 45 days of the filing of a completed application. In addition, state registrations may be required. A broker-dealer must comply with relevant state law as well as federal law and applicable SRO rules. Timeframes for registration with individual states may differ from the federal and SRO timeframes.
As such, when deciding to register as a broker-dealer, it is important to plan for the time required for processing Federal, state, and SRO registration or membership applications. Duty to update Form BD. A registered broker-dealer must keep its Form BD current. Thus, it must promptly update its Form BD by filing amendments whenever the information on file becomes inaccurate or incomplete for any reason.
Title 18, Section of the United States Code makes it a criminal offense to use the words "National," "Federal," "United States," "Reserve," or "Deposit Insurance" in the name of a person or organization in the brokerage business, unless otherwise allowed by federal law. Further, a broker-dealer name that is otherwise materially misleading would become subject to scrutiny under Exchange Act Section 10 b , and Rule 10b-5 thereunder, the general antifraud rules, and any other applicable provisions.
Before it begins doing business, a broker-dealer must become a member of an SRO. If a broker-dealer restricts its transactions to the national securities exchanges of which it is a member and meets certain other conditions, it may be required only to be a member of those exchanges.
If a broker-dealer effects securities transactions other than on a national securities exchange of which it is a member, however, including any over-the-counter business, it must become a member of FINRA, unless it qualifies for the exemption in Rule 15b FINRA's webpage at www.
You may also wish to consult the web pages of the individual exchanges for additional information. You may wish to consult the MSRB's website at www. Every registered broker-dealer must be a member of the Securities Investor Protection Corporation, or SIPC, unless its principal business is conducted outside of the United States or consists exclusively of the sale or distribution of investment company shares, variable annuities, or insurance.
Every state has its own requirements for a person conducting business as a broker-dealer within that state. Each state's securities regulator can provide you with information about that state's requirements.
You can obtain contact information for these regulators from the North American Securities Administrators Association, Inc. The Act defines an "associated person" of a broker-dealer as any partner, officer, director, branch manager, or employee of the broker-dealer, any person performing similar functions, or any person controlling, controlled by, or under common control with, the broker-dealer.
A broker-dealer must file a Form U-4 with the applicable SRO for each associated person who will effect transactions in securities when that person is hired or otherwise becomes associated. Form U-4 is used to register individuals and to record these individuals' prior employment and disciplinary history.
An associated person who effects or is involved in effecting securities transactions also must meet qualification requirements. These include passing an SRO securities qualification examination.
Many individuals take the comprehensive "Series 7" exam. If individuals engage only in activities involving sales of particular types of securities, such as municipal securities, direct participation programs limited partnerships or mutual funds, they may wish to take a specialized examination focused on that type of security, instead of the general securities examination. There is also a special exam for assistant representatives, whose activities are limited to accepting unsolicited customer orders for execution by the firm.
Supervisory personnel, and those who engage in specialized activities such as options trading, must take additional exams that cover those areas. These examinations require the Series 7 exam as a prerequisite. You can obtain copies of Form U-4, as well as information on securities qualification examinations, from an SRO. FINRA's website at www. Also note that individual states have their own licensing and registration requirements, so you should consult with the applicable state securities regulators for further information.
If you hold a series license, you must be properly associated with a registered broker-dealer to effect securities transactions.
It is not sufficient merely to hold a series license when engaging in securities business. If you hold a series license and wish to start an independent securities business, or otherwise wish to effect securities transactions outside of an "associated person" relationship, you would first need to register as a broker-dealer.
A successor broker-dealer assumes substantially all of the assets and liabilities, and continues the business, of a registered predecessor broker-dealer. A successor broker-dealer must file a new Form BD or, in special instances, amend the predecessor broker-dealer's Form BD within 30 days after such succession. The filing should indicate that the applicant is a successor. See also, the instructions to Form BD. When a registered broker-dealer stops doing business, it must file a Form BDW http: This form requires the broker-dealer to disclose the amount of any funds or securities it owes customers, and whether it is the subject of any proceedings, unsatisfied judgments, liens, or customer claims.
These disclosures help to ensure that a broker-dealer's business is concluded in an orderly manner and that customers' funds and securities are protected. Form BDW may also be used by a broker-dealer to withdraw from membership with particular SROs, or to withdraw from registration with particular states, without withdrawing all of its registrations and memberships.
The SEC may also cancel a broker-dealer's registration if it finds that the firm is no longer in existence or has ceased doing business as a broker-dealer. Security futures, which are contracts of sale for future delivery of a single security or a narrow-based security index, are regulated as both securities by the SEC and as futures by the Commodity Futures Trading Commission "CFTC".
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. Specifically, firms registered as general purpose broker-dealers under Section 15 b of the Act may "notice" register with the CFTC. Section 15 b 12 of the Act provides a limited exception to this notice registration requirement for certain natural persons who are members of security futures exchanges.
However, futures commission merchants or introducing brokers that conduct a business in securities other than security futures must be registered as general-purpose broker-dealers.
Broker-dealers, like other securities market participants, must comply with the general "antifraud" provisions of the federal securities laws. Broker-dealers must also comply with many requirements that are designed to maintain high industry standards.
We discuss some of these provisions below. The "antifraud" provisions prohibit misstatements or misleading omissions of material facts, and fraudulent or manipulative acts and practices, in connection with the purchase or sale of securities.
Broker-dealers owe their customers a duty of fair dealing. This fundamental duty derives from the Act's antifraud provisions mentioned above.
Under the so-called "shingle" theory, by virtue of engaging in the brokerage profession e. Based on this important representation, the SEC, through interpretive statements and enforcement actions, and the courts, through case law, have set forth over time certain duties for broker-dealers.
These include the duties to execute orders promptly, disclose certain material information i. SRO rules also reflect the importance of fair dealing. These rules generally require broker-dealers to observe high standards of commercial honor and just and equitable principles of trade in conducting their business. The exchanges and the MSRB have similar rules. Broker-dealers generally have an obligation to recommend only those specific investments or overall investment strategies that are suitable for their customers.
The concept of suitability appears in specific SRO rules such as NASD Rule and has been interpreted as an obligation under the antifraud provisions of the federal securities laws. Under suitability requirements, a broker-dealer must have an "adequate and reasonable basis" for any recommendation that it makes. Reasonable basis suitability, or the reasonable basis test, relates to the particular security or strategy recommended. Therefore, the broker-dealer has an obligation to investigate and obtain adequate information about the security it is recommending.
A broker-dealer also has an obligation to determine customer-specific suitability. In particular, a broker-dealer must make recommendations based on a customer's financial situation, needs, and other security holdings. This requirement has been construed to impose a duty of inquiry on broker-dealers to obtain relevant information from customers relating to their financial situations and to keep such information current. SROs consider recommendations to be unsuitable when they are inconsistent with the customer's investment objectives.
The duty of best execution, which also stems from the Act's antifraud provisions, requires a broker-dealer to seek to obtain the most favorable terms available under the circumstances for its customer orders. This applies whether the broker-dealer is acting as agent or as principal. The SRO rules also include a duty of best execution.
For example, FINRA members must use "reasonable diligence" to determine the best market for a security and buy or sell the security in that market, so that the price to the customer is as favorable as possible under prevailing market conditions. A broker-dealer must provide its customers, at or before the completion of a transaction, with certain information, including:.
A broker-dealer may also be obligated under the antifraud provisions of the Act to disclose additional information to the customer at the time of his or her investment decision. Broker-dealers must notify customers purchasing securities on credit about the credit terms and the status of their accounts. A broker-dealer must establish procedures for disclosing this information before it extends credit to a customer for the purchase of securities.
A broker-dealer must give the customer this information at the time the account is opened, and must also provide credit customers with account statements at least quarterly.
A "short sale" is generally a sale of a security that the seller doesn't own or for which the seller delivers borrowed shares. Regulation SHO was adopted in to update short sale regulation in light of numerous market developments since short sale regulation was first adopted in Some of the goals of Regulation SHO include:. Establishing uniform "locate" and "close-out" requirements in order to address problems associated with failures to deliver, including potentially abusive "naked" short selling.
Regulation SHO requires a broker-dealer to have reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due before effecting a short sale order in any equity security.
This "locate" must be made and documented prior to effecting the short sale. Market makers engaged in bona fide market making are exempted from the "locate" requirement. Regulation SHO imposes additional delivery requirements on broker-dealers for securities in which there are a relatively substantial number of extended delivery failures at a registered clearing agency "threshold securities".
For instance, with limited exception, Regulation SHO requires brokers and dealers that are participants of a registered clearing agency to take action to "close-out" failure-to-deliver positions "open fails" in threshold securities that have persisted for 13 consecutive settlement days.
Closing out requires the broker or dealer to purchase securities of like kind and quantity. Until the position is closed out, the broker or dealer and any broker or dealer for which it clears transactions for example, an introducing broker may not effect further short sales in that threshold security without borrowing or entering into a bona fide agreement to borrow the security known as the "pre-borrowing" requirement.
Creating uniform order marking requirements for sales of all equity securities. This means that a broker-dealer must mark orders as "long" or "short.
Regulation M is designed to protect the integrity of the securities trading market as an independent pricing mechanism by governing the activities of underwriters, issuers, selling security holders, and other participants in connection with a securities offering. These rules are aimed at preventing persons having an interest in an offering from influencing the market price for the offered security in order to facilitate a distribution.
The adopting release for Regulation M is available at http: Rule of Regulation M generally prohibits underwriters, broker-dealers and other distribution participants from bidding for, purchasing, or attempting to induce any person to bid for or purchase, any security which is the subject of a distribution until the applicable restricted period has ended.
An offering's "restricted period" begins either one or five business days depending on the trading volume value of the offered security and the public float value of the issuer before the day of the offering's pricing and ends upon completion of the distribution. Rule contains various exceptions that are designed to permit an orderly distribution of securities and limit disruption in the market for the securities being distributed. In addition, the following activities, among others, may be excepted from Rule , if they meet specified conditions:.
Rule of Regulation M prohibits issuers, selling security holders, and their affiliated purchasers from bidding for, purchasing, or attempting to induce any person to bid for or purchase, any security which is the subject of a distribution until after the applicable restricted period. Rule of Regulation M governs passive market making by broker-dealers participating in an offering of a Nasdaq security.
Rule of Regulation M governs stabilization transactions, syndicate short covering activity, and penalty bids. Rule of Regulation M prevents manipulative short sales prior to pricing an offering by prohibiting the purchase of offering securities if a person sold short the security that is the subject of the offering during the Rule restricted period. The rule contains exceptions for bona fide purchases, separate accounts, and investment companies.
Please note that special provisions apply to broker and dealer activity by banks. For more information, please see guidance for Banks and Other Depository Institutions. If you are doing, or may do, any of the activities of a broker or dealer, you should find out if you need to register. If you aren't certain, you may want to review SEC interpretations, consult with your attorney, or ask for our advice. For more information, read our Guide to Broker-Dealer Registration.
You may also want to review the Act and its rules. Securities and Exchange Commission. Broker Dealer Registration Jan. Section 3 4 of the Act defines "broker" broadly as: The term "person" includes entities as well as individuals.