Regulation of Broker-dealers - Introduction
Here is the definition of abroker-dealer, directly from the Uniform Securities Act: "broker-dealer" means a person engaged in the business of effecting transactions in securities for the account of others or for the person's own account. The term does not include:
- An agent;
- An issuer;
A bank or savings institution if its activities as a broker-dealer are limited to those specified as:
- Banking institution organized under the laws of the United States
- A savings institution, trust company, credit union, or a depository institutio
Those registered under the Securities Exchange Act of 1934, or not required to register because of such
- An international banking institution; or
- A person excluded by rule adopted or order issued under the USA.
Summary of Definition
A broker-dealer is ANY person OR entity that acts in the business of securities transactions either for its own account, or for others. If the person/entity enacting securities transactions has a physical address (office, or any established place of business) where he/she conducts these activities, then the person/entity is a broker-dealer. If the person in question only trades principal accounts (the person's own account), he or she is still a broker-dealer.
It is vitally important to know that, for present purposes, the term "person" can mean either an individual or an entity like a corporation, partnership, broker-dealer or investment advisor.
The term broker-dealer does not include the following:
"An institutional investor"; or another broker-dealer
"A nonaffiliated federal covered investment adviser with investments under management in excess of $100,000,000", with signed discretionary authority
A "bona fide" pre-existing customer from another state that only effects transactions with financial institutions, banks, institutional investors or issuers
A "bona fide" pre-existing customer that now resides in the same state as the transaction, but didn't when the initial relationship was established if:
- See Fourth bullet point above.
- The customer files an application for registration within 45 days of the first transaction, or
A person that does not effect another transaction 75 days after the application is filed.
A person that does not have more than 3 customers in 12 months, beyond issuers of securities, those defined in the fifth bullet point above, and/or those registered under the Securities Exchange Act of 1934, or not required to be registered because of such.
A person that deals (and is recognized as a dealer) in Federal and/or FIDC securities.
- "Transactions by a Canadian or a foreign broker-dealer with a person from Canada or other foreign jurisdiction who is resident in a state ... effective only if the administrator adopts a rule or order."
Summary of Exclusions
Broker-dealers, or persons with no physical address in the state, doing business with another broker-dealer or financial institution that does have a physical address are generally excluded from registration.
- Persons that have less than 3 customers (not including issuers and "bona fide" exempt pre-existing customers) are generally excluded from registration.
Exam Tips and Tricks
Series 66 Exam Flash Card - Broker-dealer
Go down this list of items when trying to determine if a person/entity is a broker-dealer requiring registration: Is the legal person/entity effecting securities transactions (excluding financial institutions, pensions, trusts) either in agency or principal capacity? If yes, the entity/person must register.
Does the person/entity have a physical address in the state in which it is effecting transactions? If yes, the entity/person must register with the Administrator.
Is the person/entity located out of state, with no address within the state where the transactions are effected, and is the person/entity conducting business solely with issuers, broker-dealers, federally regulated financial institutions, and/or pre-existing customers who are vacationing in the state? If yes, the entity/person in question does not have to register with the Administrator.
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