Regulation of Broker-Dealers: Actions, Qualifiers, & Exemptions

Understanding and complying with securities laws and registration requirements is a concern shared by almost all persons involved in the issuance of securities. The Securities and Exchange Commission (SEC), the agency in the United States responsible for enforcing federal security laws, has long held that all activities that could fall within the scope of a broker or dealer, as provided by the Securities Exchange Act of 1934 (the “34 Act”), shall follow formal registration requirements. “Brokers”, defined by the 34 Act to mean any person engaged in the business of effecting transactions in securities for the account of others, and “dealers”, defined by the 34 Act to mean any person engaged in the business of buying and selling securities (not including security based swaps, other than security-based swaps with or for persons that are not eligible contract participants) for such persons own account through a broker or otherwise, are two common roles involved in the transaction of securities. (see Sec. 3(a)(4)(A) and Sec. 3(a)(5)(A) of the 34 Act, respectively).

As required by federal security law, individuals who act as either a broker or dealer are required to register with the SEC, generally. Specifically, Section 15(a)(1) of the 34 Act makes it unlawful for any broker or dealer to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security, unless the broker or dealer registers with the SEC, as provided by Section 15(b) of the 34 Act, or otherwise satisfies an exemption to the registration requirement.

Rule 3a4-1 to the 34 Act provides an exemption for persons who engage in the transaction of securities. This Rule explains associated persons of an issuer shall be exempted from the broker-dealer requirements, because issuers are not brokers as issuers sell securities for their own accounts and not on the accounts of others. Furthermore, issuers are not dealers because they do not transact securities on their own account as part of their regular business.

Additionally, “associated person of an issuer” is broadly defined, and includes any natural person who is an officer, partner, director, or employee of the issuer; a corporate general partner of a limited partnership that is the issuer; a company or partnership that controls, is controlled by, or is under common control with, “[t]he issuer; or an investment adviser registered under the Investment Advisers Act of 1940 to an investment company registered under the Investment Company Act of 1940 which is the issuer.” (see Rule 3a4-1(c)).

In addition to exempting issuers and the associated persons of an issuer, Rule 3a4-1 also exempts an associated person (or their employee) from the broker-dealer registration requirements if that person: (1) is not subject to a “statutory disqualification,” as defined by Section 3(a)(39) of the 34 Act; (2) is not compensated by payment of commissions or other remuneration based directly or indirectly on securities transactions; (3) is not an associated person of a broker or dealer; and (4) limits its sales activities as set forth in Rule 3a4-1.

Transacting securities, as with any investment, is inherently risky, and requires a great deal of resources to create, evaluate, and execute transactions. With these challenges, the SEC has provided clear regulations and exemptions to registration requirements. Together, these provisions protect the integrity of the market, while making transacting these assets easier. Knowing federal and state securities laws will help businesses and investors optimize their performance, while acting consistent with the aspirations and objectives of regulatory agencies.  Disclaimer:
The information contained in this post is for general information and educational purposes only. The application and impact of laws can vary widely based on the specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions or inaccuracies in information contained in this publication. Accordingly, the information on this post is provided with the understanding that the author and publishers are not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. Before making any decision or taking any action, you should consult a professional.

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