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Broker trader relationship

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broker trader relationship

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. While the relationship attempts to provide guidance by telephone to individuals who are trader inquiries, the guidance is informal and not binding. Most "brokers" and "dealers" must register with the SEC and join a "self-regulatory organization," or SRO. 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 B and 3 a 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. 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: A "yes" answer to any of these questions indicates that you may need to register as a broker. Unlike a broker, who acts as agent, a dealer acts as principal. Section 3 a A of the Act generally defines a "dealer" as: any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise. 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: A "yes" answer to any of these questions indicates that you may need to register as a dealer. 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. Please be sure to include your telephone number. Note: 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 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 relationship 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. Seefor example, In the matter of William V. GiordanoSecurities Exchange Act Release No January 19, 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. Seefor example, Wolff Juall Investments, LLC May 17, Under certain circumstances, unregistered entities may engage in payroll administration services involving broker-dealers. Seefor example, letter re: ADP TotalSource, Inc. A broker-dealer that conducts all of its business in one state does not have to broker 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 or Nasdaq. Also, information posted on the Internet that is accessible by persons in another state would be considered an interstate offer of securities or investment services that would require Federal broker-dealer registration. A word about municipal and government securities. There is no intrastate exception from registration for municipal securities dealers or government securities brokers and dealers. On the other hand, persons broker business only in certain "exempted securities," as defined in Section 3 a of the Act, do not have to register under Section 15 bbut 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 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. 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. Although Regulation M 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 CFR c and Securities Exchange Act Release No December 20,62 FR 520, n January 3, 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 effective August 15,54 FRto determine whether they meet the conditions of Rule 15a See also letters re: Securities Activities of U. Regulation AC is discussed in Part Trader. 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. Note: Banks, thrifts, and other financial institutions should be aware that the Commission has adopted rules that may affect them. See Regulation R, Securities Exchange Act Release No Sept. Prior to the enactment broker the "Gramm-Leach-Bliley Act" "GLBA" inU. 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. 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. For further information, See the "Staff Compliance Guide to Banks on Dealer Statutory Exceptions and Rules," noted above. 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. Credit Unions and Financial Institution "Networking" Arrangements. 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. The financial institution engaging in such networking must be in strict compliance with applicable law and Commission staff guidance. Seefor example, letter re: 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. 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. September 28, 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. See letter re: Lincoln Financial Advisors Corp. February 20, 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 generallySecurities Act Release No Jan. 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. 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. To apply for registration, you must file one executed copy of Form BD through the Central Registration Depository "CRD"which is operated by FINRA. 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. The SEC does not charge a filing fee, but the SROs and the states may. 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. An SEC registration may be granted with the condition that SRO membership must be obtained. 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 band 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. SROs assist the SEC in regulating the activities of broker-dealers. FINRA and the national securities exchanges are all SROs. 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. You may also wish to consult the web pages of the individual exchanges for additional information. Firms that engage in transactions in municipal securities must also comply with the rules of the Municipal Securities Rulemaking Board, or MSRB. The MSRB is an SRO that makes rules governing transactions in municipal securities, but, unlike other SROs, it does not enforce compliance with its rules. Compliance with MSRB rules is monitored and enforced by FINRA and the SEC in the case of broker-dealersand the Federal bank regulators and the SEC in the case of banks. Each SIPC member must pay an annual fee to SIPC. Every state has its own requirements for a person conducting business as a broker-dealer within that state. 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, broker 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. 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. 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. Note: 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. The filing should indicate that the applicant is a successor. See also, the instructions to Form BD. 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. In most cases, a broker-dealer must also file a final FOCUS report. 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. Form BDW is not considered "filed" unless it is deemed complete by the SEC and the SRO that reviews the filing. 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". As a result, firms that conduct business in security futures must be registered with both the SEC and the 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. Likewise, futures commission merchants and introducing brokers registered with the CFTC may notice register with the SEC. Section 15 b 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 relationship introducing brokers that conduct a business in securities other than security futures must be registered as general-purpose broker-dealers. For more information on this topic, See Exchange Act Release No effective August 27,66 FRand 66 FR effective September 17, 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 relationship omissions of material facts, and fraudulent or manipulative acts and practices, in connection with the purchase or sale of securities While these provisions are very broad, the Commission has adopted rules, issued interpretations, and brought enforcement actions that define some of the activities we consider manipulative, deceptive, fraudulent, or otherwise unlawful Broker-dealers must conduct their activities so as to avoid these kinds of practices. Broker-dealers owe their customers a duty of fair dealing. 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. 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. 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. Regulation SHO was adopted in to update short sale regulation in light of numerous market developments since short sale regulation was first adopted in Compliance with Regulation SHO began on January 3, 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. Locate Requirement: 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. 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 trader 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. 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. 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 101, 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 trader 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. For frequently asked questions about Regulation M, see Staff Legal Bulletin No. The SEC and the courts interpret Section 10 b and Rule 10b-5 under the Act to bar the use by any person of material non-public information in the purchase or sale of securities, whenever that use violates a duty of trust and confidence owed to a third party. Section 15 f of the Act specifically requires broker-dealers to have and enforce written policies and procedures reasonably designed to prevent their employees from misusing material non-public information. Because employees in the investment banking operations of broker-dealers frequently have access to material non-public information, firms need to create procedures designed to limit the flow of this information so that their employees cannot use the information in the trading of securities. Broker-dealers can use these information barriers as a defense to a claim of insider trading. Such procedures typically include: NASD Rule provides that "no person associated with a member shall participate in any manner in a private securities transaction" except in accordance with the provisions of the rule. To the extent that any such transactions are permitted under the rule, prior to participating in any private securities transaction, the associated person must provide written notice to the member firm as described in the rule. If compensation is involved, the member firm must approve or disapprove the proposed transaction, record it in its books and records, and supervise the transaction as if it were executed on behalf of the member firm. Other conditions may also apply. In addition, private securities transactions of an associated person may be subject to an analysis under Exchange Act Section 10 b and Rule 10b-5, as well as the broker-dealer supervisory provisions of Section 15 f described in Part V. The report must also disclose whether the analyst received compensation for the views expressed in the report. If the analyst has received related compensation, the broker, dealer, or associated person must disclose its amount, source, and purpose. Regulation AC applies to all brokers and dealers, as well as to those persons associated with a broker or dealer that fall within the definition of "covered person. In addition to Commission rules, analyst conduct is governed by SRO rules, such as NASD Rule and NYSE Rule The SRO rules impose restrictions on analyst compensation, personal trading activities, and involvement in investment banking activities. The SRO rules also include disclosure requirements for research reports and public appearances. Broker-dealers that are members of national securities exchanges are subject to additional regulations regarding transactions they effect on exchanges. For example, except under certain conditions, they generally cannot effect transactions on exchanges for their own accounts, the accounts of their associated persons, or accounts that they or their associated persons manage. Exceptions from this general rule include transactions by market makers, transactions routed through other members, and transactions that yield to other orders. Exchange members may wish to seek relationship from their exchange regarding these provisions. Section 11 d of the Act generally prohibits a broker-dealer that participates in the distribution of a new issue of securities from extending credit to customers in connection with the new issue during the relationship period and for 30 days thereafter. Sales by a broker-dealer of mutual fund shares and variable insurance product units are deemed to constitute participation in the distribution of a new issue. Therefore, purchase of mutual fund shares or variable product units using credit extended or arranged by the broker-dealer during the distribution period is a violation of Section 11 d However, Exchange Act Rule 11d1-2 permits a broker-dealer to extend credit to a customer on newly sold mutual fund shares and variable insurance product units after the customer has owned the shares or units for 30 days. Section 11 d of the Act requires a broker-dealer to disclose in writing, at or before the completion of each transaction with a customer, whether the broker-dealer is acting in the capacity of broker or dealer with regard to the transaction. Regulation NMS addresses four interrelated topics that are designed to modernize the regulatory structure of the U. Regulation NMS also updates and streamlines the existing Exchange Act rules governing the national market system previously adopted under Trader 11A of the Exchange Act, and consolidates them into a single regulation. Broker-dealers that are exchange specialists or Nasdaq market makers must comply with particular rules regarding publishing quotes and handling customer orders. These two types of broker-dealers have special functions in the securities markets, particularly because they trade for their own accounts while also handling orders for customers. These rules, which include the "Quote Rule" and the "Limit Order Display Rule," increase the information that is publicly available concerning the prices at which investors may buy and sell exchange-listed and Nasdaq National Market System securities. The Quote Rule requires specialists and market makers to provide quotation information to their self-regulatory organization for dissemination to the public. The quote information that the specialist or market maker provides must reflect the best prices at which he is willing to trade the lowest price the dealer will accept from a customer to sell the securities and the highest price the dealer will pay a customer to purchase the securities. A specialist or market maker may still trade at better prices in certain private trading systems, called electronic communications networks, or "ECNs," without publishing an improved quote. This is true only when the ECN itself publishes the improved prices and makes those prices available to the investing public. Thus, the Quote Rule ensures that the public has access to the best prices at which specialists and market makers are willing to trade even if those prices are in private trading systems. Limit orders are orders to buy or sell securities at a specified price. The Limit Order Display Rule requires that broker and market makers publicly display certain limit orders they receive from customers. Regulation ATS CFR et seq. For purposes of the regulation, an alternative trading system or ATS is any organization, association, person, group of persons, or system that constitutes, maintains, or provides a marketplace or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as defined in Rule 3b-16 under the Exchange Act. See CFR Further, for purposes of the regulation, an ATS may not set rules governing the conduct of subscribers other than with respect to the use of the particular trading systemor discipline subscribers other than by exclusion from trading. To the extent that an ATS or the sponsoring broker-dealer seeks to establish conduct or disciplinary rules, the entity may be required to register as a national securities exchange or obtain a Commission exemption from exchange registration based on limited trading volume. In order to acquire the status of an ATS, a firm must first be registered as a broker-dealer, and it must file an initial operation report with respect to the trading system on Form ATS at least 20 days before commencing operation. The initial operation report must be accurate and kept current. The Commission does not issue approval orders for Form ATS filings; however, the Form ATS is not considered filed unless it complies with all applicable requirements under the Regulation. An ATS must file with the Division of Trading and Markets quarterly reports regarding its operations on Form ATS-R. An ATS must also comply with any applicable SRO rules and with state laws relating to alternative trading systems and relating to the offer or sale of securities or the registration or regulation of persons or entities effecting securities transactions. Finally, an ATS may not use in its name the word "exchange," or terms similar to the word "exchange," such as the term "stock market. Most broker-dealers that effect transactions in "penny stocks" have certain enhanced suitability and disclosure obligations to their customers A penny stock is generally defined as any equity security other than a security that: a is an NMS stock See Rule b listed on a "grandfathered" national securities exchange, b is an NMS stock listed on a national securities exchange or an automated quotation system sponsored by a registered national securities association including Nasdaq that satisfies certain minimum quantitative listing standards, c has a transaction price of five dollars or more, d is issued by a registered investment company or by the Options Clearing Corporation, e trader a listed security futures product, or f is a security whose issuer has met certain net tangible assets or average revenues See Rule 3a Penny stocks include the equity securities of private companies with no active trading market if they do not qualify for one of the exclusions from the definition of penny stock. In addition, Exchange Act Rules 15g-3 through 15g-6 generally require a broker-dealer to give each penny stock customer: Broker-dealers, including foreign broker-dealers registered with the Commission and unregistered broker-dealers in the United States, must comply with Regulation S-P, See CFR Part even if their consumers are non-U. See CFR, and Before disclosing nonpublic personal information about a consumer to a nonaffiliated third party, a broker-dealer must first give a consumer an opt-out notice and a reasonable opportunity to opt out of the disclosure. See CFR and There are exceptions from these notice and opt-out requirements for disclosures to other financial institutions under joint marketing agreements and to certain service providers. See CFR There also are exceptions for disclosures made for purposes such as maintaining or servicing accounts, and disclosures made with the consent or at the direction of a consumer, or for purposes such as protecting against fraud, reporting to consumer reporting agencies, and providing information to law enforcement agencies. See CFR and In addition, it includes a safeguards rule that requires a broker-dealer to adopt written policies and procedures for administrative, technical, and physical safeguards to protect customer records and information. Further, it includes a disposal rule that requires a broker-dealer other than a broker-dealer registered by notice with the Commission to engage solely in transactions in securities futures that maintains or possesses trader report information for a business purpose to take reasonable measures to protect against unauthorized access to or use of the information in connection with its disposal. Broker-dealers offering certain types of accounts and services may also be subject to regulation under the Investment Advisers Act An investment adviser is defined as a person who receives compensation for providing advice about securities as part of a regular business See Section a of the Investment Advisers Act. In general, a broker-dealer whose performance of advisory services is "solely incidental" to the conduct of its business as a broker-dealer and that receives no "special compensation" is excepted from the definition of investment adviser. Thus, for example, a broker-dealer that provides advice and offers fee-based accounts i. Finally, under the same proposed rule, a broker-dealer that is registered under the Exchange Act and registered under the Investment Advisers Act would be an investment adviser solely with respect to those accounts for which it provides services that broker the broker-dealer to the Investment Advisers Act. Pursuant to the rules of self-regulatory organizations, broker-dealers are required to arbitrate disputes with their customers, if the customer chooses to arbitrate. Under this rule, broker-dealers must maintain minimum net capital levels based upon the type of securities activities they conduct and based on certain financial ratios. Broker-dealers that do not clear and carry customer accounts can operate with lower levels of net capital. This rule protects customer funds and securities held by broker-dealers. Under the rule, a broker-dealer must have possession or control of all fully-paid or excess margin securities held for the account of customers, and determine daily that it is in compliance with this requirement. The broker-dealer must also make periodic computations to determine how much money it is holding that is either customer money or obtained from the use of customer securities. If this amount exceeds the amount that it is owed by customers or by other broker-dealers relating to customer transactions, the broker-dealer must deposit the excess into a special reserve bank account for the exclusive benefit of customers. This rule thus prevents a broker-dealer from using customer funds to finance its business. Broker-dealers must make and keep current books and records detailing, among other things, securities transactions, money balances, and securities positions. They also must keep records for required periods and furnish copies of those records to the SEC on request. These records include e-mail. Broker-dealers also must file with the SEC periodic reports, including quarterly and annual financial statements. The annual statements generally must be certified by an independent public accountant. In addition, broker-dealers must notify the SEC and the appropriate SRO regarding net capital, recordkeeping, and other operational problems, and in some cases file reports regarding those problems, within certain time periods. This gives us and the SROs early warning of these problems. Broker-dealers must also file a quarterly summary of this information. This information is designed to permit the SEC to assess the impact these entities may have on the broker-dealer. In addition to the provisions discussed above, broker-dealers must comply with other requirements. These include: Broker-dealers are subject to examination by relationship SEC and the SROs. The appropriate SRO generally inspects newly-registered broker-dealers for compliance with applicable financial responsibility rules within six months of registration, and for compliance with all other regulatory requirements within twelve months of registration. A broker-dealer must permit the SEC to inspect its books and records at any reasonable time. In general, all broker-dealers must register in the lost and stolen securities program. The limited exceptions include broker-dealers that effect securities transactions exclusively on the floor of a national securities exchange solely for other exchange members and do not receive or hold customer securities, and broker-dealers whose business does not involve handling securities certificates. Broker-dealers must report losses, thefts, and instances of counterfeiting of securities certificates on Form X-17F-1A, and, in some cases, broker-dealers must make inquiries regarding securities certificates coming into their possession. Broker-dealers must file these reports and inquiries with the Securities Information Center SICwhich operates the program for the SEC. A registration form can be obtained from Securities Information Center, P. Generally, every partner, officer, director, or employee of a broker-dealer must be fingerprinted and submit his or her fingerprints to the U. This requirement does not apply, however, to broker-dealers that sell only certain securities that are not ordinarily evidenced by certificates such as mutual funds and variable annuities or to persons who do not sell securities, have access to securities, money or original books and records, and do not supervise persons engaged in such activities. A broker-dealer claiming an exemption must comply with the notice requirements of Rule 17f-2. Broker-dealers may obtain fingerprint cards from their SRO and should submit completed fingerprint cards to the SRO for forwarding to the FBI on behalf of the Attorney General. Broker-dealers should also trader the impact, if any, that the Electronic Signatures in Global and National Commerce Act commonly known as E-SIGNPub. Broker-dealers have broad obligations under the Bank Secrecy Act "BSA" to guard against money laundering and terrorist financing through their firms. The BSA, its implementing regulations, and Rule 17a-8 under the Exchange Act require broker-dealers to file reports or retain records relating to suspicious transactions, customer identity, large cash transactions, cross-border currency movement, foreign bank accounts and wire transfers, among other things. The BSA, as amended by the USA PATRIOT Act, as well as SRO rules e. In addition, the Financial Crimes Enforcement Network "FinCEN"the division within the Department of the Treasury that administers the BSA, provides useful information for helping financial institutions, including broker-dealers, meet their BSA obligations. OFAC administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in activities related to the proliferation of weapons of mass destruction OFAC acts under Presidential wartime and relationship emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and freeze foreign assets under US jurisdiction. OFAC programs are also strict liability programs — there are no safe harbors and no de minimis standards, although having a comprehensive compliance program in place could act as a mitigating factor in any enforcement action. OFAC publishes regulations implementing each of its programs, which include trade restrictions and asset blockings against particular countries and parties tied to terrorism, narcotics trafficking, proliferation of weapons of mass destruction, as well as a number of programs targeting members of certain foreign jurisdictions. OFAC has stated that it will take into account the adequacy of your OFAC compliance program when it evaluates whether to impose a penalty if an OFAC violation occurs. To guard against engaging in OFAC prohibited transactions, you should generally follow a best practice of "screening against" the OFAC lists Consistent with this best practice, you should take care to screen all new accounts, existing accounts, customers and relationships against the OFAC lists, including any updates to the lists. This screening should include originators or recipients of wire and securities transfers The Commission, Federal Reserve Board, and Comptroller of the Currency published an interagency White Paper emphasizing the importance of core clearing and settlement organizations and establishing guidelines for their capacity and ability to restore operations within a short time of a wide-scale disruption Separately, the Commission also published a Policy Statement urging the organized securities markets to improve their business continuity arrangements, and encouraging SRO-operated markets and electronic communications networks, or ECNs to establish plans to enable the restoration of trading no later than the business day following a wide-scale disruption. InNASD and the NYSE adopted rules requiring every member to establish and maintain a business continuity plan, with elements as specified in the rules, and to provide the respective SROs with emergency contact information. Office of Interpretation and Guidance Division of Trading and Markets U. It only highlights and summarizes certain provisions, and does not relieve anyone from complying with all applicable regulatory requirements. You should not rely on this guide without referring to the actual statutes, rules, regulations, and interpretations The Division of Trading and Markets was known as the Division of Market Regulation from August 7,until November 14, The treatment of dividend or interest reinvestment and stock purchase plans is addressed in Rule c of Regulation M. A Section 9 a prohibits particular manipulative practices regarding securities registered on a national securities exchange. Section 10 b is a broad "catch-all" provision that prohibits the use of "any manipulative or deceptive device or contrivance" in connection with the purchase or sale of any security. Sections 15 c and 15 c apply to the over-the-counter markets. Broker-dealers are neither required broker disclose the precise amount of these payments nor any formula that would allow a customer to calculate this amount. Nevertheless, Rule 10b-10 is not a safe harbor from the anti-fraud provisions. Recent enforcement actions have indicated that failures to disclose the nature and extent of the conflict of interest may violate Section 17 broker of the Act. CCH 84,520 at p. Rule 15g-9 c exempts certain transactions from the requirements of Rule 15g See Certain Broker-Dealers Deemed Not To Be Investment Advisers, Exchange Act Release No April 12, Rules 17a-2, 17a-7, 17a-8, 17a-10 and 17a-13 contain additional recordkeeping and reporting requirements that apply to broker-dealers When a broker-dealer is a member of more than one SRO, the SEC designates the SRO responsible for examining such broker-dealer for compliance with financial responsibility rules the "designated examining authority" The Currency and Foreign Transactions Reporting Act of commonly referred to as the "Bank Secrecy Act" is codified at 31 U. Cet seq. Although that manual is written for the banking community, it provides information which may be useful to broker-dealers See also FinCEN Interpretive Release No "Unitary Filing of Suspicious Activity and Blocking Reports," 69 Fed. Securities and Exchange Commission Company Filings More Search Options Skip to Main Content U. 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 CAUTION — MAKE SURE YOU FOLLOW ALL LAWS AND RULES Although this guide highlights certain provisions of the Act and our rules, it is not comprehensive. 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. D and Part III, below Note: Banks, thrifts, and other financial institutions should be aware that the Commission has adopted rules that may affect them. Further, a broker-dealer name that is otherwise materially misleading would become subject to scrutiny under Exchange Act Section 10 band Rule 10b-5 thereunder, the general antifraud rules, and any other applicable provisions Note: If you hold a series license, you must be properly associated with a registered broker-dealer to effect securities transactions. 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 We wish to stress that we have published this guide as an introduction to the federal securities laws that apply to brokers and dealers. broker trader relationship

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