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Company Filings More Search Options. The Securities Exchange Act of "Exchange Act" or "Act" governs the way in which the nation's securities markets and its brokers and dealers operate. We have prepared this guide to summarize some of the significant provisions of the Act and its rules.
You will find information about whether you need to register as a broker-dealer and how you can register, as well as the standards of conduct and the financial responsibility rules that broker-dealers must follow. Although this guide highlights certain provisions of the Act and our rules, it is not comprehensive.
Brokers and dealers, and their associated persons, must comply with all applicable requirements, including those of the U. Securities and Exchange Commission "SEC" or "Commission" , as well as the requirements of any self-regulatory organizations to which the brokers and dealers belong, and not just those summarized here.
The SEC staff stands ready to answer your questions and help you comply with our rules. After reading this guide, if you have questions, please feel free to contact the Office of Interpretation and Guidance at e-mail tradingandmarkets sec.
You will find a list of useful phone numbers at the end of this guide, or on the SEC's website at www. You may wish to consult with a private lawyer who is familiar with the federal securities laws, to assure that you comply with all laws and regulations. The SEC staff cannot act as an individual's or broker-dealer's lawyer. While the staff attempts to provide guidance by telephone to individuals who are making inquiries, the guidance is informal and not binding.
Formal guidance may be sought through a written inquiry that is consistent with the SEC's guidelines for no-action, interpretive, and exemptive requests. This section covers the factors that determine whether a person is a broker or dealer. It also describes the types of brokers and dealers that do not have to register with the SEC.
Self-regulatory organizations are described in Part III, below. A note about banks: The Exchange Act also contains special provisions relating to brokerage and dealing activities of banks.
Please see Sections 3 a 4 B and 3 a 5 C and related provisions, and consult with counsel. Bank brokerage activity is addressed in Regulation R, which was adopted jointly by the Commission and the Board of Governors of the Federal Reserve System. See Exchange Act Release No. Sometimes you can easily determine if someone is a broker.
For instance, a person who executes transactions for others on a securities exchange clearly is a broker. However, other situations are less clear. For example, each of the following individuals and businesses may need to register as a broker, depending on a number of factors:. In order to determine whether any of these individuals or any other person or business is a broker, we look at the activities that the person or business actually performs.
You can find analyses of various activities in the decisions of federal courts and our own no-action and interpretive letters. Here are some of the questions that you should ask to determine whether you are acting as a broker:. Unlike a broker, who acts as agent, a dealer acts as principal. Section 3 a 5 A of the Act generally defines a "dealer" as:.
The definition of "dealer" does not include a "trader," that is, a person who buys and sells securities for his or her own account, either individually or in a fiduciary capacity, but not as part of a regular business. Individuals who buy and sell securities for themselves generally are considered traders and not dealers.
Sometimes you can easily tell if someone is a dealer. For example, a firm that advertises publicly that it makes a market in securities is obviously a dealer. Other situations can be less clear. For instance, each of the following individuals and businesses may need to register as a dealer, depending on a number of factors:.
If you are doing, or may do, any of the activities of a broker or dealer, you should find out whether you need to register. Information on the broker-dealer registration process is provided below. If you are not certain, you may want to review SEC interpretations, consult with private counsel, or ask for advice from the SEC's Division of Trading and Markets by calling or by sending an e-mail to tradingandmarkets sec. Please be sure to include your telephone number.
If you will be acting as a "broker" or "dealer," you must not engage in securities business until you are properly registered. If you are already engaged in the business and are not yet registered, you should cease all activities until you are properly registered. For further information, please see Part II. D and Part III, below. Section 15 a 1 of the Act generally makes it unlawful for any broker or dealer to use the mails or any other means of interstate commerce, such as the telephone, facsimiles, or the Internet to "effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security" unless that broker or dealer is registered with the Commission in accordance with Section 15 b of the Act.
There are a few exceptions to this general rule that we discuss below. In addition, we discuss the special registration requirements that apply to broker-dealers of government and municipal securities, including repurchase agreements, below.
We call individuals who work for a registered broker-dealer "associated persons. These individuals may also be called "stock brokers" or "registered representatives. They may also have to register with the self-regulatory organizations of which their employer is a member — for example, the Financial Industry Regulatory Authority, Inc. To the extent that associated persons engage in securities activities outside of the supervision of their broker-dealer, they would have to register separately as broker-dealers.
Part III, below, provides a discussion of how to register as a broker-dealer. We do not differentiate between employees and other associated persons for securities law purposes. Broker-dealers must supervise the securities activities of their personnel regardless of whether they are considered "employees" or "independent contractors" as defined under state law.
See , for example, In the matter of William V. The law also does not permit unregistered entities to receive commission income on behalf of a registered representative. For example, associated persons cannot set up a separate entity to receive commission checks. An unregistered entity that receives commission income in this situation must register as a broker-dealer. Under certain circumstances, unregistered entities may engage in payroll administration services involving broker-dealers.
See , for example, letter re: In those circumstances, the broker-dealer employer generally hires and supervises all aspects of the employees' work and uses the payroll and benefits administrator merely as a means to centralize personnel services.
A broker-dealer that conducts all of its business in one state does not have to register with the SEC. State registration is another matter. See Part III , below. 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.