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USA SEC Guide to Broker-Dealer Registration and Regulation

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I. Introduction

The Securities Exchange Act of 1934, often referred to as the “Exchange Act” or “Act,” is the cornerstone of securities market regulation in the United States. This comprehensive Usa Sec Guide is designed to provide a clear overview of key provisions within the Act and its associated rules, specifically for broker-dealers operating within the U.S. securities markets. It serves as an essential resource for understanding broker-dealer operations, registration processes, conduct standards, and financial responsibilities mandated by the SEC.

Important Disclaimer: Compliance with All Regulations is Mandatory

This guide is intended to highlight significant aspects of the Exchange Act and related SEC rules, but it is not exhaustive. Broker-dealers and their associated personnel are legally obligated to adhere to all pertinent regulations. This includes rules set forth by the U.S. Securities and Exchange Commission (SEC), as well as regulations from any Self-Regulatory Organizations (SROs) they are members of. The information provided here should not be considered a substitute for a complete understanding of all applicable laws and rules.

For further assistance and clarification, the SEC staff is available to answer your questions and offer guidance on compliance matters. Please contact the Office of Interpretation and Guidance at (202) 551-5777 or via email at [email protected]. Additionally, you can reach out to the SEC Regional Office in your area. Contact details are listed at the end of this guide and on the SEC website: www.sec.gov/contact.shtml.

It is highly recommended that you seek advice from a legal professional specializing in federal securities laws to ensure full compliance with all regulations. Note that SEC staff cannot provide legal representation to individuals or broker-dealers. While the staff can offer informal guidance over the phone, this advice is non-binding. For formal interpretations or exemptions, inquiries must be submitted in writing, following SEC guidelines for no-action, interpretive, and exemptive requests.

II. Registration Requirements for Broker-Dealers

A crucial aspect of operating as a broker or dealer in the U.S. securities market is registration. Most entities engaged in these activities must register with the SEC and become members of an SRO. This section of our USA SEC guide clarifies who is defined as a broker or dealer and outlines exemptions from SEC registration. Further details on Self-Regulatory Organizations are available in Part III.

Note on Banks: The Exchange Act includes specific clauses pertaining to banks’ brokerage and dealing activities. Refer to Sections 3(a)(4)(B) and 3(a)(5)(C) of the Act and consult legal counsel for detailed information. The SEC’s Division of Trading and Markets offers a helpful publication, “Staff Compliance Guide to Banks on Dealer Statutory Exceptions and Rules,” available on the SEC website: http://www.sec.gov/divisions/marketreg/bankdealerguide.htm. Bank brokerage activities are covered under Regulation R, jointly adopted by the SEC and the Federal Reserve System Board of Governors. See Exchange Act Release No. 56501 (September 24, 2007) http://www.sec.gov/rules/final/2007/34-56501.pdf.

A. Definition of a “Broker”

Section 3(a)(4)(A) of the Exchange Act provides a broad definition of a “broker” as:

any person engaged in the business of effecting transactions in securities for the account of others.

While some cases are clear-cut (e.g., executing trades on a securities exchange), others require closer examination. Entities and individuals in the following roles may need broker registration, depending on specific factors:

  • Finders and Business Brokers: Those who:
    • Connect investors with broker-dealers, investment companies, or securities intermediaries and share commissions.
    • Find investment banking clients for broker-dealers.
    • Locate investors for securities issuers, even in a consulting role.
    • Engage in or find investors for venture capital or angel financing, including private placements.
    • Facilitate mergers and acquisitions involving securities.
  • Investment Advisers and Financial Consultants: Depending on their transaction-related activities.
  • Foreign Broker-Dealers: Those unable to meet the criteria of Rule 15a-6 (discussed later).
  • Platform Operators: Entities operating electronic or other platforms for securities trading.
  • Real Estate Investment Marketers: Individuals marketing real estate interests that qualify as securities, like tenancy-in-common interests.
  • Placement Agents: Those involved in private placements of securities.
  • Insurance and Investment Product Marketers: Entities marketing or facilitating transactions in insurance products that are securities, such as variable annuities.
  • Transaction-Based Fee Collectors: Individuals effecting securities transactions for others for a fee, even among family or friends.
  • Broker-Dealer Support Services: Entities providing support services to registered broker-dealers.
  • Independent Contractors: Individuals acting as independent contractors but not as “associated persons” of a broker-dealer.

To determine broker status, assess the actual activities performed. SEC and court decisions, along with SEC no-action letters, offer detailed analyses. Key questions to consider include:

  • Do you participate in key stages of securities transactions (solicitation, negotiation, execution)?
  • Is your compensation tied to transaction outcomes or size? Do you receive transaction-based compensation like trailing commissions or 12b-1 fees?
  • Are you engaged in the business of facilitating securities transactions?
  • Do you handle client securities or funds in connection with transactions?

Affirmative answers to these questions suggest potential broker registration requirements.

B. Definition of a “Dealer”

Unlike brokers who act as agents, dealers operate as principals. Section 3(a)(5)(A) of the Act defines a “dealer” as:

any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise.

This definition excludes “traders” who buy and sell for their own account, not as part of a regular business. Individuals trading for personal or fiduciary accounts are generally considered traders, not dealers.

Clear examples of dealers include firms publicly advertising market-making in securities. However, dealer status can be less obvious. The following may require dealer registration based on specific factors:

  • Market Makers: Those who present themselves as continuously willing to buy and sell specific securities.
  • Repurchase Agreement Book Runners: Entities running a matched book of repurchase agreements.
  • Security Issuers/Originators: Those who issue or originate securities they also buy and sell.

Key questions to assess dealer status include:

  • Do you advertise as being in the business of buying and selling securities?
  • Do you conduct business with the public (retail or institutional)?
  • Do you make markets or quote prices for both buying and selling securities?
  • Do you participate in selling groups or underwrite securities?
  • Do you offer investor services like handling funds/securities, extending credit, or giving investment advice?
  • Do you write derivative contracts that are considered securities?

Answering “yes” to these questions indicates potential dealer registration requirements.

C. Determining if Registration is Necessary

If you are involved in activities that could classify you as a broker or dealer, it’s crucial to determine your registration obligations. This USA SEC guide provides information on the broker-dealer registration process below. If uncertainty persists, review SEC interpretations, consult legal counsel, or seek guidance from the SEC’s Division of Trading and Markets at (202) 551-5777 or [email protected] (include your phone number in email inquiries).

Important Note: Operating as a broker or dealer mandates prior registration. If currently operating without registration, cease all activities until proper registration is completed. Refer to Part II.D and Part III for further details.

D. General Requirement for SEC Registration

Section 15(a)(1) of the Exchange Act generally prohibits brokers and dealers from using mail or interstate commerce (including phone, fax, internet) to “effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security” unless SEC registered under Section 15(b) of the Act. Exceptions to this rule and special requirements for government and municipal securities dealers are discussed below.

1. “Associated Persons” of Broker-Dealers

Individuals working for registered broker-dealers are termed “associated persons,” whether employees, independent contractors, or otherwise affiliated. These individuals, sometimes called “stock brokers” or “registered representatives,” typically do not need separate SEC registration. However, they must be supervised by a registered broker-dealer and may need registration with SROs like FINRA or national securities exchanges. Engaging in securities activities outside broker-dealer supervision necessitates individual broker-dealer registration. Part III provides registration details.

Securities law does not differentiate between employees and other associated persons. Broker-dealers must supervise all personnel’s securities activities, regardless of state law classifications as “employees” or “independent contractors.” See, In the matter of William V. Giordano, Securities Exchange Act Release No. 36742 (January 19, 1996).

Unregistered entities cannot receive commission income on behalf of registered representatives. Setting up a separate entity for commission checks is prohibited; such entities must register as broker-dealers. See, Wolff Juall Investments, LLC (May 17, 2005). Payroll administration services by unregistered entities for broker-dealers are permissible under specific conditions, where the broker-dealer employer controls and supervises all employee work, and the payroll administrator merely handles personnel services. See, ADP TotalSource, Inc. (December 4, 2007).

2. Intrastate Broker-Dealers

An extremely narrow exemption exists for broker-dealers operating exclusively within one state. All transaction aspects must occur within that state’s borders. This prohibits participation in transactions on national securities exchanges without SEC registration.

An intrastate broker-dealer with a website accessible out-of-state can maintain exemption if reasonable measures are in place to ensure intrastate business exclusivity. These measures include disclaimers stating intrastate business focus and service limitations to residents of their state. Services must not be provided to individuals indicating or reasonably believed to be outside the broker-dealer’s state.

These measures are not exhaustive, and other reasonable approaches to ensure intrastate business are acceptable. However, providing services to out-of-state individuals negates the “exclusively intrastate” condition.

For further information on internet use by intrastate broker-dealers, see https://www.sec.gov/rules/final/2016/33-10238.pdf.

Note on municipal and government securities: No intrastate registration exemption exists for municipal securities dealers or government securities brokers and dealers.

3. Broker-Dealers Limited to Excluded and Exempted Securities

Registration is not required for broker-dealers transacting solely in commercial paper, bankers’ acceptances, and commercial bills. However, those dealing only in “exempted securities” as defined in Section 3(a)(12) of the Act are exempt from Section 15(b) registration, but may require registration under other Act provisions. For example, government securities broker-dealers, dealing in “exempted securities,” may need to register as government securities brokers or dealers under Section 15C of the Act, detailed in Part II.E.

4. Registration Requirement for Selling Unregistered Securities, Including Private Placements

Exemption from registration under the Securities Act of 1933 does not automatically mean a security is an “exempted security” under the Exchange Act. Selling securities exempt under Regulation D of the 1933 Act still necessitates broker-dealer registration. “Placement agents” are not exempt from broker-dealer registration.

5. Issuer’s “Exemption” and Associated Persons (Rule 3a4-1)

Issuers selling their own securities are generally not considered “brokers” or “dealers.” However, issuers engaging in activities beyond selling their own securities, like purchasing them back from investors or operating markets in their securities, may need broker-dealer registration. The issuer’s exemption does not extend to company personnel routinely involved in securities transactions for the company or related entities. Employees paid for selling securities with limited other duties may be classified as “brokers.”

Exchange Act Rule 3a4-1 provides conditions under which an associated person of an issuer selling the issuer’s securities is not required to register as a broker-dealer. These conditions include: (1) not being subject to statutory disqualification; (2) not being commission-compensated; (3) not being an associated person of a broker or dealer; and (4) limiting sales activities as specified in the rule.

Issuers offering dividend reinvestment and stock purchase programs may, under certain conditions, buy and sell their own securities through these programs without broker-dealer registration. These conditions relate to solicitation, fees, and handling participant funds and securities, detailed in Securities Exchange Act Release No. 35041 (December 1, 1994), 59 FR 63393 (“1994 STA Letter”). While Regulation M superseded the 1994 STA Letter in some respects, its staff positions on Exchange Act Section 15(a) application remain valid. See 17 CFR 242.102(c) and Securities Exchange Act Release No. 38067 (December 20, 1996), 62 FR 520, 532 n.100 (January 3, 1997).

6. Foreign Broker-Dealer Exemption (Rule 15a-6)

The SEC generally applies a territorial approach to international broker-dealer operations. Broker-dealers operating within the U.S. inducing securities transactions must register, even if targeting only foreign investors. Foreign broker-dealers outside the U.S. inducing transactions by U.S. persons or using U.S. interstate commerce means must also register. This includes using the internet to offer securities or solicit services to U.S. persons. See Securities Exchange Act Release No. 39779 (March 23, 1998) http://www.sec.gov/rules/interp/33-7516.htm.

However, foreign broker-dealers limiting activities to Rule 15a-6 conditions may be exempt from U.S. broker-dealer registration. Review Securities Exchange Act Release No. 27017 (effective August 15, 1989), 54 FR 30013, to assess Rule 15a-6 eligibility. See also letters re: Securities Activities of U.S.-Affiliated Foreign Dealers (April 9 and April 28, 1997). For Rule 15a-6 FAQs related to Regulation AC, see http://www.sec.gov/divisions/marketreg/mregacfaq0803.htm#partb. (Regulation AC is discussed in Part V.B.)

E. Government and Municipal Securities Brokers and Dealers

Specialized registration applies to broker-dealers dealing exclusively in government or municipal securities. Government securities-only firms are exempt from “general-purpose” broker-dealer registration under Section 15(b). General-purpose broker-dealers engaging in government securities business must indicate this on Form BD. All government securities brokers and dealers must comply with rules from the Treasury Secretary and SEC rules.

Municipal securities dealers buying and selling for their own account must register as general-purpose broker-dealers, unless they are banks or qualify for the intrastate exemption (Part II.D.2). In those cases, they register as municipal securities dealers. Municipal securities brokers (excluding banks) must register as general-purpose broker-dealers unless they qualify for the intrastate exception.

Firms running matched books of repurchase agreements or stock loans are considered dealers and must register as broker-dealers.

F. Special Rules for Banks and Similar Financial Institutions

Important Note: Banks, thrifts, and other financial institutions are subject to specific SEC rules. See Regulation R, Securities Exchange Act Release No. 34-56501 (Sept. 24, 2007), 72 FR 56514 (Oct. 3, 2007), www.sec.gov/rules/final/2007/34-56501.pdf and Securities Exchange Act Release No. 34-56502 (Sept. 24, 2007) 72 FR 56562 (Oct. 3, 2007), www.sec.gov/rules/final/2007/34-56502.pdf.

Banks: The Gramm-Leach-Bliley Act (GLBA) of 1999 amended the Exchange Act, introducing targeted exceptions and exemptions for banks from broker-dealer definitions and registration. Banks buying and selling securities must assess dealer status under federal securities laws since October 1, 2003. The SEC’s Division of Trading and Markets provides a “Staff Compliance Guide to Banks on Dealer Statutory Exceptions and Rules” at: http://www.sec.gov/divisions/marketreg/bankdealerguide.htm. Regulation R addresses bank brokerage activity. See Exchange Act Release No. 56501 (September 24, 2007) (http://www.sec.gov/rules/final/2007/34-56501.pdf).

Bank exceptions and exemptions are bank-specific. They do not extend to bank subsidiaries or affiliates. Subsidiaries and affiliates engaging in broker-dealer activities must register as broker-dealers. Banks acting as municipal securities dealers or government securities brokers/dealers still require registration under the Act.

Thrifts: Savings associations (thrifts) have the same status as banks, enjoying the same broker-dealer registration exceptions and exemptions. (See “Staff Compliance Guide to Banks on Dealer Statutory Exceptions and Rules.”) Similar to banks, thrift exceptions and exemptions are not applicable to non-thrift subsidiaries or affiliates. These entities must register as broker-dealers if engaging in such activities.

Credit Unions and Financial Institution “Networking”: Bank exceptions do not apply to other financial institutions like credit unions. However, the SEC permits certain financial institutions, including credit unions, to offer securities through “networking” arrangements without broker-dealer registration. Affiliated or third-party broker-dealers provide brokerage services to the institution’s customers under conditions outlined in SEC no-action letters and NASD Rule 2350.

Networking arrangements allow financial institutions to share commissions from referred customers under specific conditions. Strict compliance with laws and SEC guidance is mandatory. See, Chubb Securities Corporation (November 24, 1993) and NASD Rule 2350 for networking with banks, thrifts, and credit unions.

G. Insurance Agency Networking

Insurance agencies can offer insurance-based securities (like variable annuities) through networking arrangements without broker-dealer registration, under SEC-specified conditions. Affiliated or third-party broker-dealers provide brokerage services, addressing state and federal regulatory complexities. Insurance agencies can share commissions under these arrangements, requiring strict adherence to law and SEC guidance. Insurance companies should consult First of America Brokerage Services, Inc. (September 28, 1995). For structuring such arrangements, consult legal counsel or SEC staff.

Insurance networking arrangements are limited to insurance products that are also securities, excluding mutual funds and other securities without similar regulatory challenges. See Lincoln Financial Advisors Corp. (February 20, 1998).

H. Real Estate Securities and Real Estate Brokers/Agents

Offering real estate alone is not a securities offer. However, real estate combined with services may constitute an investment contract and thus, a security. See Securities Act Release No. 5347 (Jan. 4, 1973) for guidelines on real estate development offers and sales.

No general broker-dealer registration exemption exists for licensed real estate brokers/agents dealing in real estate securities. Past SEC no-action relief for licensed real estate personnel was limited to specific condominium unit sales with rental/service arrangements. This relief is fact-specific and not applicable to other real estate securities, including tenants-in-common interests. See NASD Notice to Members 05-18, http://www.finra.org/sites/default/files/NoticeDocument/p013455.pdf (tenants-in-common interests).

I. Broker-Dealer Relationships with Affinity Groups

Broker-dealers may partner with non-profit groups like civic organizations, charities, and educational institutions to offer services to members. Conditions apply to ensure these “affinity groups” do not develop a salesman’s stake in securities sales. See, Attkisson, Carter & Akers (June 23, 1998).

III. Broker-Dealer Registration Process

A broker-dealer cannot commence business until:

  • Form BD is properly filed and SEC registration is granted.
  • Membership in an SRO is secured.
  • SIPC membership (Securities Investor Protection Corporation) is obtained.
  • All applicable state requirements are met.
  • “Associated persons” fulfill qualification requirements.

A. Form BD

Broker-dealers not qualifying for exemptions must register with the SEC under Section 15(b) of the Act. Registration is initiated by filing Form BD, available from the SEC website: https://www.sec.gov/files/formbd.pdf or SEC Publications Office at (202) 551-4040. Form BD is also used for:

  • SRO membership application (FINRA, exchanges).
  • Notifying government securities activities.
  • Applying for state broker-dealer registration.

Form BD collects information about the broker-dealer, principals, controlling persons, and employees. Applicants must meet statutory standards for businesses demanding high professional and fiduciary responsibilities.

File one executed Form BD copy through the Central Registration Depository (CRD), operated by FINRA. (Banks registering as municipal securities dealers file Form MSD directly with the SEC and banking regulator.) Form BD instructions provide filing details. The SEC has no filing fee, but SROs and states may. Non-U.S. applicants must appoint the SEC as agent for service of process using a standard form. Incomplete applications are returned and not considered “filed.”

The SEC grants registration or initiates denial proceedings within 45 days of a complete application. SEC registration may be conditional upon SRO membership. SROs have separate membership processes with no 45-day timeframe. State registrations may also be necessary. Broker-dealers must comply with federal, state, and SRO rules. State registration timelines may vary. Plan for sufficient time for federal, state, and SRO registration/membership processing.

Form BD Update Duty: Registered broker-dealers must maintain current Form BD filings by promptly amending it for any inaccurate or incomplete information.

Prohibited Broker-Dealer Names: U.S. Code Title 18, Section 709 prohibits using “National,” “Federal,” “United States,” “Reserve,” or “Deposit Insurance” in broker-dealer names unless federally authorized. Misleading names can face scrutiny under Exchange Act Section 10(b), Rule 10b-5 (antifraud), and other provisions.

B. SRO Membership (Section 15(b)(8) and Rule 15b9-1)

Broker-dealers must join an SRO before commencing business. SROs, like FINRA and national securities exchanges, assist the SEC in regulating broker-dealer activities. Firms limiting transactions to exchanges they are members of, and meeting specific conditions, may only need exchange membership. Otherwise, FINRA membership is mandatory for over-the-counter business and transactions outside member exchanges, unless exempted by Rule 15b9-1. FINRA membership details are on their website: www.finra.org. Consult individual exchange websites for more information.

Municipal securities transaction firms must also comply with Municipal Securities Rulemaking Board (MSRB) rules. The MSRB sets rules for municipal securities transactions but does not enforce them. FINRA and the SEC enforce MSRB rules for broker-dealers; federal bank regulators and the SEC enforce them for banks. MSRB information is available at www.msrb.org or by calling (703) 797-6600.

C. SIPC Membership

Every registered broker-dealer must be a Securities Investor Protection Corporation (SIPC) member, unless their primary business is outside the U.S. or exclusively involves investment company shares, variable annuities, or insurance sales. SIPC members pay annual fees. SIPC insures customer cash and securities up to $500,000 (cash claims limited to $100,000) in case of member liquidation. Contact SIPC at 805 15th St., NW, Suite 800, Washington, DC 20005, (202) 371-8300, fax: (202) 371-6728, or visit www.sipc.org.

D. State Requirements

Each state has broker-dealer business requirements. State securities regulators provide state-specific information. Contact details are available from the North American Securities Administrators Association, Inc. (NASAA), 750 First Street, NE, Suite 1140, Washington, DC 20002, (202) 737-0900, or www.nasaa.org.

E. Associated Persons (Section 3(a)(18); Rule 15b7-1)

An “associated person” of a broker-dealer includes partners, officers, directors, branch managers, employees, those performing similar functions, or those controlling, controlled by, or under common control with the broker-dealer. Broker-dealers must file Form U-4 with the relevant SRO for each associated person effecting securities transactions upon hiring or association. Form U-4 registers individuals and records employment and disciplinary history.

Associated persons involved in securities transactions must meet qualification requirements, including passing SRO securities exams. The “Series 7” exam is common. Specialized exams exist for those dealing only in specific securities (municipal securities, limited partnerships, mutual funds). Assistant representatives with limited roles have specific exams. Supervisors and specialized personnel (options trading) require additional exams, often needing Series 7 as a prerequisite.

Form U-4 and securities exam information are available from SROs. FINRA’s website www.finra.org provides licensing details. States also have licensing and registration requirements; consult state securities regulators for details.

Important Note: Holding a series license alone is insufficient for effecting securities transactions. Association with a registered broker-dealer is required. Independent securities business or transactions outside an “associated person” relationship necessitates broker-dealer registration.

F. Successor Broker-Dealer Registration (Rules 15b1-3, 15Ba2-4, and 15Ca2-3)

A successor broker-dealer, assuming a predecessor’s assets, liabilities, and business, must file a new Form BD (or amend the predecessor’s in specific cases) within 30 days, indicating successor status. See Securities Exchange Act Release No. 31661 (December 28, 1992), 58 FR 7, http://www.sec.gov/rules/interp/1992/34-31661.pdf and Form BD instructions (/files/formbd.pdf).

G. Withdrawal from Registration (Rule 15b6-1); Cancellation of Registration

Broker-dealers ceasing business must file Form BDW (https://www.sec.gov/files/formbdw.pdf) to withdraw SEC, state, and SRO registrations. Form BDW requires disclosure of customer liabilities and any proceedings, judgments, liens, or claims, ensuring orderly business conclusion and customer fund/security protection. Final FOCUS report filing is often required. Form BDW can also be used for partial withdrawals from specific SROs or states.

Form BDW is “filed” when deemed complete by the SEC and reviewing SRO. The SEC can also cancel registration for firms no longer in existence or ceasing broker-dealer business.

IV. Security Futures

Security futures, contracts for future delivery of a single security or narrow-based security index, are regulated as securities by the SEC and futures by the Commodity Futures Trading Commission (CFTC). Firms dealing in security futures must register with both. Federal law allows firms registered with either agency to “notice” register with the other for security futures trading only. General-purpose broker-dealers (Section 15(b) Act) can notice register with the CFTC. Futures commission merchants and introducing brokers (CFTC registered) can notice register with the SEC. (Section 15(b)(12) Act has limited exceptions for exchange members). However, futures commission merchants or introducing brokers dealing in securities beyond security futures must register as general-purpose broker-dealers. For details, see Exchange Act Release No. 44730 (effective August 27, 2001), 66 FR 45138, and 66 FR 43080 (effective September 17, 2001).

V. Conduct Regulation of Broker-Dealers

Broker-dealers, like all securities market participants, must adhere to general antifraud provisions in federal securities laws and industry-standard regulations. This USA SEC guide outlines key conduct regulations.

A. Antifraud Provisions (Sections 9(a), 10(b), and 15(c)(1) and (2))

Antifraud provisions prohibit misstatements, misleading omissions of material facts, and manipulative/fraudulent practices in securities purchase or sale.3 While broad, SEC rules, interpretations, and enforcement actions define unlawful activities.4 Broker-dealers must operate to avoid such practices.

1. Duty of Fair Dealing

Broker-dealers owe customers a duty of fair dealing, stemming from antifraud provisions. The “shingle” theory implies that by operating as a broker-dealer, a firm represents fair dealing consistent with professional standards. SEC interpretations, enforcement, and court cases have established broker-dealer duties: prompt order execution, material information disclosure, reasonable pricing, and conflict of interest disclosure.

SRO rules also emphasize fair dealing. FINRA members must comply with NASD Rules of Fair Practice, requiring high commercial honor and equitable trade principles. Exchanges and the MSRB have similar rules.

2. Suitability Requirements

Broker-dealers must recommend suitable investments and strategies for customers. Suitability is in SRO rules like NASD Rule 2310 and is implied under antifraud provisions. Recommendations must have an “adequate and reasonable basis,” requiring broker-dealers to investigate and obtain sufficient information on recommended securities.

Customer-specific suitability is also required, basing recommendations on a customer’s financial situation, needs, and holdings. Broker-dealers have a duty to inquire and update customer financial information. SROs deem recommendations unsuitable if inconsistent with customer investment objectives.

3. Duty of Best Execution

Best execution, also from antifraud provisions, mandates broker-dealers to seek the most favorable terms for customer orders, acting as agent or principal.

SRO rules also include best execution duties. FINRA members must use “reasonable diligence” to determine the best market and execute trades there for the most favorable price for customers under market conditions.

4. Customer Confirmation Rule (Rule 10b-10 and MSRB rule G-15)

Broker-dealers must provide transaction confirmations to customers at or before transaction completion, including:

  • Date, time, security identity, price, and share quantity.
  • Capacity (agent/principal) and compensation (commission, payment for order flow for agency trades; mark-up disclosure for principal trades).
  • Source and amount of third-party remuneration.6
  • Other general and transaction-specific information (e.g., SIPC membership status, yield for debt securities).

Additional disclosures may be required under antifraud provisions at the investment decision point.

5. Disclosure of Credit Terms (Rule 10b-16)

Broker-dealers extending credit for securities purchases must notify customers of credit terms and account status. Procedures for disclosure are mandatory before extending credit. Information must be provided when the account opens and quarterly account statements must be sent to credit customers.

6. Restrictions on Short Sales (Regulation SHO)

“Short sales” involve selling securities not owned by the seller or delivered via borrowed shares. Regulation SHO (2004) updated short sale rules to address market developments since 1938. Compliance began January 3, 2005. Goals include:

  • Uniform “locate” and “close-out” requirements to address delivery failures and abusive “naked” short selling.
    • Locate Requirement: Broker-dealers must have reasonable grounds to believe securities can be borrowed for delivery before executing short sale orders in equity securities. Documentation is required pre-trade. Market makers in bona fide market making are exempt.
    • “Close-out” Requirement: Regulation SHO imposes delivery requirements for securities with substantial extended delivery failures (“threshold securities”). Brokers/dealers in registered clearing agencies must “close-out” failure-to-deliver positions in threshold securities persisting for 13 settlement days. Close-out requires purchasing securities of like kind and quantity. Until closed out, further short sales in that security are prohibited without borrowing or a bona fide borrowing agreement (“pre-borrowing”).
  • Uniform order marking for all equity security sales. Orders must be marked “long” or “short.”

For further information, see Regulation SHO adopting release and related materials at http://www.sec.gov/spotlight/shortsales.htm.

7. Trading During an Offering (Regulation M)

Regulation M protects securities market integrity as an independent pricing mechanism by regulating underwriters, issuers, selling security holders, and offering participants. Rules prevent price manipulation to facilitate distributions. Adopting release: http://www.sec.gov/rules/final/34-38067.txt.

Rule 101 of Regulation M restricts underwriters, broker-dealers, and distribution participants from bidding for or purchasing securities in distribution until the restricted period ends. The “restricted period” starts one or five business days before pricing (based on trading volume and issuer float) and ends upon distribution completion.

Rule 101 has exceptions for orderly distributions and market disruption limitation, e.g., underwriters can trade actively-traded securities of larger issuers (ADTV ≥ $1 million, public float ≥ $150 million). Other exceptions include:

  • Research report dissemination.
  • Unsolicited purchases.
  • Basket purchases (≥ 20 securities).
  • Option/warrant/right/convertible security exercises.
  • Transactions < 2% ADTV.
  • Transactions in securities sold to “qualified institutional buyers.”

Rule 102 of Regulation M prohibits issuers, selling security holders, and affiliates from bidding for or purchasing securities in distribution during the restricted period.

Rule 103 of Regulation M governs passive market making by broker-dealers in Nasdaq security offerings.

Rule 104 of Regulation M governs stabilization, syndicate short covering, and penalty bids.

Rule 105 of Regulation M prevents manipulative short sales before offering pricing, prohibiting offering security purchases if the security was sold short during the Rule 105 restricted period. Exceptions exist for bona fide purchases, separate accounts, and investment companies.

Regulation M FAQs are in Staff Legal Bulletin No. 9: http://www.sec.gov/interps/legal/mrslb9.htm.

8. Restrictions on Insider Trading

Section 10(b) and Rule 10b-5 of the Act prohibit using material non-public information in securities trading when violating a duty of trust and confidence. Section 15(f) Act requires broker-dealers to have written policies to prevent employee misuse of material non-public information. Information barriers are a defense against insider trading claims, typically including:

  • Employee training on restrictions.
  • Employee trading limits.
  • Physical barriers.
  • Department isolation.
  • Investment bank proprietary trading limitations.7

9. Restrictions on Private Securities Transactions

NASD Rule 3040 governs “private securities transactions” by associated persons. Prior written notice to the member firm is required for permitted transactions. If compensation is involved, firm approval, record-keeping, and supervision are mandatory. Private securities transactions may also be subject to Exchange Act Section 10(b) and Rule 10b-5, Section 15(f) and 15(b)(4)(E) (supervisory provisions), and other relevant regulations.

B. Analysts and Regulation AC

Regulation AC (Analyst Certification) mandates that research reports from brokers, dealers, and associated persons include analyst certifications. Analysts must certify that report views accurately reflect personal views and disclose compensation related to those views. If compensation exists, its amount, source, and purpose must be disclosed. Regulation AC applies to all brokers, dealers, and “covered persons.” Broker-dealers must also record analyst certifications for public appearances.

Analyst conduct is also governed by SRO rules like NASD Rule 2711 and NYSE Rule 472, restricting compensation, personal trading, and investment banking involvement, and requiring disclosures in reports and public appearances.

Further information, including investor guidance, SEC releases, and SRO rules, is at http://www.sec.gov/divisions/marketreg/securitiesanalysts.htm. FAQs: http://www.sec.gov/divisions/marketreg/mregacfaq0803.htm.

C. Trading by Members of Exchanges, Brokers and Dealers (Section 11(a))

Exchange member broker-dealers face additional regulations on exchange transactions. Generally, they cannot effect transactions on exchanges for their own accounts, associated persons’ accounts, or managed accounts, except under specific conditions. Exceptions include market maker transactions, routed transactions, and yield-to-other-orders transactions. Exchange members should seek exchange-specific guidance.

D. Extending Credit on New Issues; Disclosure of Capacity as Broker or Dealer (Section 11(d))

Section 11(d)(1) Act restricts broker-dealers participating in new securities issue distributions from extending credit to customers for those issues during distribution and 30 days after. Mutual fund share and variable insurance product sales are considered new issue distribution participation. Credit-financed purchases of these products during distribution violate Section 11(d)(1). Rule 11d1-2 allows credit extension on newly sold mutual fund shares and variable product units after 30 days of customer ownership.

Section 11(d)(2) Act requires written disclosure of broker-dealer capacity (broker or dealer) to customers at or before transaction completion.

E. Regulation NMS

Regulation NMS modernizes U.S. equity market regulation in four areas: (1) order protection, (2) intermarket access, (3) sub-penny pricing, and (4) market data.

  1. “Order Protection Rule”: Trading centers must have policies to prevent trades at prices inferior to protected quotations from other centers (subject to exceptions). Protected quotations must be immediately and automatically accessible.
  2. “Access Rule”: Requires fair, non-discriminatory quotation access, access fee limits, and SRO rules against members displaying locked or crossed automated quotations.
  3. “Sub-Penny Rule”: Prohibits pricing increments smaller than a penny for orders, quotes, or indications of interest, except for prices under $1.00 per share.
  4. “Market Data Rules”: Updates market information consolidation, distribution, and display requirements, and amends joint industry plan formulas for revenue allocation and governance participation.

Regulation NMS consolidates and updates Exchange Act rules for the national market system under Section 11A.

Details on Regulation NMS: http://www.sec.gov/rules/final/34-51808fr.pdf and http://www.sec.gov/spotlight/regnms.htm.

F. Order Execution Obligations (Rules 602-604 of Regulation NMS)

Exchange specialists and Nasdaq market makers must comply with rules on quote publication and customer order handling. These broker-dealer types have special market roles, trading for their accounts and handling customer orders. The “Quote Rule” and “Limit Order Display Rule” enhance public price information for exchange-listed and Nasdaq securities.

The Quote Rule mandates specialists and market makers to provide quotation information to SROs for public dissemination, reflecting best willing-to-trade prices. Better prices in private trading systems (ECNs) are permissible without quote improvement if the ECN publishes and makes prices publicly available. This ensures public access to best prices, even in private systems.

The Limit Order Display Rule requires specialists and market makers to publicly display customer limit orders better than their quotes. This benefits investors by publishing improved pricing interest.

G. Regulation ATS: Broker-Dealer Trading Systems

Regulation ATS (17 CFR 242.300 et seq.) allows broker-dealers to operate automated trading platforms (ATS) without exchange registration under Section 6 Act or exempt exchange status under Section 5 Act. An ATS is any system providing a marketplace or facilities for securities purchasers and sellers, performing exchange-like functions as defined in Rule 3b-16 Exchange Act. See 17 CFR 242.300. ATS cannot set subscriber conduct rules (beyond system use) or discipline subscribers beyond trading exclusion. Conduct/disciplinary rules may necessitate exchange registration or SEC exemption based on limited trading volume.

ATS status requires broker-dealer registration and filing Form ATS at least 20 days before operation. Form ATS must be accurate and current. SEC approval orders are not issued; compliance with Regulation is required for filing validity. Regulation ATS covers system operations: fair access, fees, order display/execution, system capacity/integrity/security, record-keeping/reporting, and confidential trading information procedures.

ATS must file quarterly reports on Form ATS-R. ATS must also comply with SRO rules and state laws relating to ATS, securities sales, and registration/regulation of entities effecting securities transactions.

ATS names cannot include “exchange” or similar terms like “stock market.” See 17 CFR 242.301. Further information: Regulation ATS adopting release http://www.sec.gov/rules/final/34-40760.txt.

H. Penny Stock Rules (Rules 15g-2 through 15g-9, Schedule 15G)

Broker-dealers transacting in “penny stocks” have enhanced suitability and disclosure obligations.8 A penny stock is generally any equity security not meeting specific criteria, including NMS stocks on grandfathered or standards-meeting exchanges, stocks priced at $5 or more, registered investment company or Options Clearing Corporation issues, listed security futures products, or securities from issuers meeting net tangible asset or average revenue criteria (See Rule 3a51-1). Penny stocks include private company equity securities without active markets if not meeting exclusions.

Before effecting solicited penny stock transactions, non-exempt broker-dealers must: (1) provide a risk disclosure document (Schedule 15G) and receive signed acknowledgement (See Rule 15g-2); (2) approve customer accounts for penny stock trading, provide a suitability statement, and receive a signed copy; (3) receive written customer agreement to the transaction (See Rule 15g-9). Broker-dealers must wait two business days after sending risk disclosure and suitability statements before executing trades. Rules 15g-3 through 15g-6 require providing penny stock customers:

  • Market quotation information and bid/offer prices where applicable.
  • Aggregate broker-dealer compensation.
  • Aggregate cash compensation to associated persons communicating with the customer about the transaction (excluding clerical/ministerial staff).
  • Monthly account statements showing penny stock market value.

I. Privacy of Consumer Financial Information (Regulation S-P)

Broker-dealers, including foreign registered and U.S. unregistered entities, must comply with Regulation S-P (17 CFR Part 248), even for non-U.S. consumers or activities through non-U.S. offices.

Regulation SP requires providing customers with initial, annual, and revised privacy notices detailing broker-dealer privacy policies and practices. Notices must be clear, conspicuous, and accurate (See 17 CFR 248.4, 248.5, 248.6, 248.8). Before disclosing nonpublic personal information to nonaffiliated third parties, opt-out notices and reasonable opt-out opportunities are mandatory (See 17 CFR 248.7, 248.10). Exceptions exist for disclosures to financial institutions under joint marketing and certain service providers (See 17 CFR 248.13), and for account maintenance, consumer consent, fraud protection, reporting to agencies, and law enforcement information (See 17 CFR 248.14, 248.15).

Regulation SP limits information re-disclosure/reuse and account number sharing with nonaffiliated third parties for telemarketing, direct mail, and email marketing (See 17 CFR 248.11, 248.12). Safeguards rules mandate written policies and procedures for administrative, technical, and physical safeguards to protect customer records (See 17 CFR 248.30(a)). Disposal rules require reasonable measures against unauthorized access to or use of consumer report information during disposal for broker-dealers (excluding security futures-only notice registrants) (See 17 CFR 248.30(b)).

Proposed amendments to strengthen Regulation S-P privacy protections are at http://www.sec.gov/rules/proposed/2008/34-57427.pdf.

J. Investment Adviser Registration

Broker-dealers offering specific account types and services may also be subject to the Investment Advisers Act.10 Investment advisers receive compensation for securities advice as a regular business (See Section 202(a)(11) Investment Advisers Act). Broker-dealers providing advisory services “solely incidental” to broker-dealer business without “special compensation” are exempt from the investment adviser definition. However, fee-based accounts (asset-based or fixed fees, not commissions) require advisory account treatment as asset-based fees are “special compensation.” Proposed rules would require advisory account treatment for discretionary accounts (unless temporary/limited discretion) and accounts with separate advisory service fees or contracts (http://www.sec.gov/rules/proposed/2007/ia-2652.pdf). Dually registered broker-dealers under Exchange Act and Investment Advisers Act are investment advisers only for accounts requiring Advisers Act compliance under these proposed rules.

VI. Arbitration

SRO rules mandate broker-dealers to arbitrate customer disputes if customers choose arbitration. See e.g., NASD Code of Arbitration Procedure for Customer Disputes, Rule 12200; American Stock Exchange, Rule 600; Chicago Board of Options Exchange, Rule 18.1.

VII. Financial Responsibility of Broker-Dealers

Broker-dealers must meet financial responsibility requirements, including:

  • Maintaining minimum liquid asset amounts (net capital).
  • Safeguarding customer funds and securities.
  • Maintaining accurate books and records.

A. Net Capital Rule (Rule 15c3-1)

This rule ensures broker-dealers maintain liquid assets to promptly satisfy customer claims if they cease business. Minimum net capital levels are based on security activity types and financial ratios. Clearing and carrying customer accounts generally requires net capital of the greater of $250,000 or two percent of aggregate debit items. Non-clearing, non-carrying broker-dealers can operate with lower capital levels.

B. Use of Customer Balances (Rule 15c3-2)

Broker-dealers using customer free credit balances must establish procedures to inform customers:

  • Amount owed to customers.
  • Funds are not segregated and may be used in the broker-dealer’s business.
  • Funds are payable on customer demand.

C. Customer Protection Rule (Rule 15c3-3)

This rule protects customer funds and securities. Broker-dealers must possess or control fully-paid or excess margin securities held for customers and verify daily compliance. Periodic computations are required to determine customer money or money from customer securities use. Excess amounts over customer or inter-broker-dealer debts must be deposited in a special reserve bank account for customer benefit, preventing customer fund use for business financing.

D. Required Books, Records, and Reports (Rules 17a-3, 17a-4, 17a-5, 17a-11)11

Broker-dealers must maintain current books and records detailing securities transactions, money balances, and security positions, retaining records for required periods and providing copies to the SEC upon request (including emails). Periodic reports, including quarterly and annual financial statements (annually certified by independent accountants), must be filed with the SEC. Broker-dealers must also notify the SEC and relevant SRO12 of net capital, recordkeeping, and operational problems, and in some cases file reports, providing early warnings.

E. Risk Assessment Requirements (Rules 17h-1T and 17h-2T)

Certain broker-dealers must maintain and preserve information on affiliates, subsidiaries, and holding companies whose business activities could materially impact their financial/operating condition (net capital, liquidity, operations financing). Quarterly summaries of this information must be filed, allowing SEC assessment of entity impact.

VIII. Other Requirements

Broker-dealers must also comply with:

  • SEC and SRO examinations.
  • Lost and stolen securities program participation.
  • Fingerprinting requirements.
  • Affiliate information maintenance and reporting.
  • Electronic media guidelines for information delivery.
  • Anti-money laundering program maintenance.

A. Examinations and Inspections (Rules 15b2-2 and 17d-1)

Broker-dealers are subject to SEC and SRO examinations. SROs typically inspect new broker-dealers for financial responsibility rule compliance within six months and overall regulatory compliance within twelve months of registration. Broker-dealers must allow SEC book and record inspections at any reasonable time.

B. Lost and Stolen Securities Program (Rule 17f-1)

Most broker-dealers must register in the lost and stolen securities program, with limited exceptions (floor brokers for exchange members only, firms not handling securities certificates). Losses, thefts, and counterfeiting of certificates must be reported on Form X-17F-1A. Inquiries regarding incoming certificates are required in some cases. Reports and inquiries are filed with the Securities Information Center (SIC). Registration forms are available from SIC, P.O. Box 55151, Boston, MA 02205-5151. Website: https://www.secic.com.

C. Fingerprinting Requirement (Rule 17f-2)

Partners, officers, directors, and employees of broker-dealers generally must be fingerprinted and submitted to the U.S. Attorney General. Exemptions exist for firms selling only non-certificate securities (mutual funds, variable annuities) or for personnel without securities/funds/records access or supervisory roles. Exempt firms must notify per Rule 17f-2. Fingerprint cards are available from SROs, and completed cards should be submitted to SROs for FBI forwarding.

D. Use of Electronic Media by Broker-Dealers

SEC interpretive releases address electronic media use for customer information delivery, considering:

  • Customer notice and access.
  • Delivery evidence.
  • Reasonable security precautions for personal financial information.

See Securities Exchange Act Release No. 37182 (May 15, 1996), 61 FR 24644. See also, Securities Exchange Act Release No. 39779 (March 23, 1998), 63 FR 14806 (http://www.sec.gov/rules/interp/33-7516.htm).

E. Electronic Signatures (E-SIGN)

Broker-dealers should consider the Electronic Signatures in Global and National Commerce Act (E-SIGN), Pub. L. No. 106-229, 114 Stat. 464 (2000) [15 U.S.C. §7001], impact on electronic information delivery to customers.

F. Anti-Money Laundering Program

Broker-dealers have Bank Secrecy Act (BSA)13 obligations against money laundering and terrorist financing. BSA, regulations, and Exchange Act Rule 17a-8 require reports/records for suspicious transactions, customer identity, large cash transactions, cross-border currency, foreign accounts, wire transfers, etc.

BSA, USA PATRIOT Act amendments, and SRO rules (NASD Rule 3011, NYSE Rule 445) mandate anti-money laundering compliance programs. Written programs, senior management approved, must be reasonably designed for BSA compliance, including:

  • Policies/procedures to detect and report suspicious transactions.
  • Policies/procedures/controls for BSA compliance.
  • Independent compliance testing by personnel or qualified outside parties.
  • Designated individual(s) for program implementation and SRO notification of changes.
  • Ongoing personnel training.

Key anti-money laundering laws, rules, and guidance compilation: Anti-Money Laundering Source Tool http://www.sec.gov/about/offices/ocie/amlsourcetool.htm; FINRA Anti-Money Laundering Issue Center http://www.finra.org/RulesRegulation/IssueCenter/Anti-MoneyLaundering/index.htm. Financial Crimes Enforcement Network (FinCEN) website (http://fincen.gov/) offers helpful information.

G. Office of Foreign Assets Control

Broker-dealers must comply with Office of Foreign Assets Control (OFAC) sanctions programs. OFAC enforces economic/trade sanctions based on U.S. foreign policy against targeted countries, terrorists, narcotics traffickers, and weapons proliferators.14 OFAC uses presidential powers and legislation to control transactions and freeze assets.

OFAC sanctions are distinct from BSA anti-money laundering rules.15 OFAC programs apply to all U.S. persons and business lines, and are strict liability programs without safe harbors or de minimis standards (comprehensive compliance programs may mitigate penalties). OFAC regulations implement programs with trade restrictions and asset blockings against countries and parties linked to terrorism, narcotics, weapons proliferation, etc. OFAC publishes a frequently updated Specially Designated Nationals (SDN) list.16 OFAC regulations generally require:

  • Blocking accounts and property of specified entities/individuals.
  • Prohibiting/rejecting unlicensed trade/financial transactions with specified entities/individuals.
  • Reporting blockings/rejections to OFAC within ten days and annually.17

OFAC civil penalties can exceed $1,000,000 per violation. OFAC considers compliance program adequacy when assessing penalties. Best practice: “screening against” OFAC lists.18 Screen new/existing accounts, customers, and relationships against OFAC lists, including updates, and include wire/securities transfer originators/recipients.19

H. Business Continuity Planning

The SEC, Federal Reserve Board, and Comptroller of the Currency published an interagency White Paper emphasizing core clearing and settlement organization resilience, setting guidelines for rapid operational restoration after disruptions.20 The SEC also published a Policy Statement urging securities markets to improve business continuity, encouraging SRO-operated markets and ECNs to plan for trading restoration by the business day after disruptions.21

In 2004, NASD and NYSE adopted rules requiring members to have business continuity plans with specified elements and provide SROs with emergency contact information. See NASD Rule 3510 and NYSE Rule 446. See also, http://www.sec.gov/rules/sro/nasd/34-49537.pdf.

IX. Where to Get Further Information

For general broker-dealer registration and regulation questions:

Office of Interpretation and Guidance
Division of Trading and Markets
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
(202) 551-5777
e-mail: [email protected]

For SEC rules and regulations publications and online access:

Superintendent of Documents
Government Printing Office
Washington, DC 20402-9325
www.gpo.gov

For SEC forms and recent releases, see www.sec.gov, or contact:

Publications Section
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
(202) 551-4040

Other useful contacts:

SEC website: www.sec.gov (SEC offices contact numbers: http://www.sec.gov/contact/addresses.htm).

Financial Industry Regulatory Authority
9509 Key West Avenue
Rockville, MD 20850
(301) 590-6500 (call center)
(800) 289-9999 (registration status check)
www.finra.org

New York Stock Exchange, Inc.
20 Broad Street
New York, NY 10005
(212) 656-3000
www.nyse.com

North American Securities Administrators Association, Inc.
750 First Street, NE, Suite 1140
Washington, DC 20002
(202) 737-0900
www.nasaa.org

Municipal Securities Rulemaking Board
>1900 Duke Street, Suite 600
Alexandria, VA 22314
(703) 797-6600
www.msrb.org

Securities Investor Protection Corporation
805 15th Street, N.W. Suite 800
Washington, D.C. 20005-2215
(202)371-8300
www.sipc.org
e-mail: [email protected]

Disclaimer: This guide is an introductory summary of federal securities laws for brokers and dealers. It highlights and summarizes certain provisions and does not replace the need for compliance with all regulatory requirements. Do not rely solely on this guide; refer to actual statutes, rules, regulations, and interpretations.

Endnotes

1 The Division of Trading and Markets was known as the Division of Market Regulation from August 7, 1972, until November 14, 2007.

2 The treatment of dividend (or interest) reinvestment and stock purchase plans is addressed in Rule 102(c) of Regulation M. (See Part V.A.7.)

3 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)(1) and 15(c)(2) apply to the over-the-counter markets. Section 15(c)(1) prohibits broker-dealers from effecting transactions in, or inducing the purchase or sale of, any security by means of “any manipulative, deceptive or other fraudulent device,” and Section 15(c)(2) prohibits a broker-dealer from making fictitious quotes.

4 These include Rules 10b-1 through 10b-18, 15c1-1 through 15c1-9, 15c2-1 through 15c2-11, and Regulation M.

5 In addition, Rule 11Ac1-3 requires broker-dealers to inform their customers, upon opening a new account and annually thereafter, of their policies regarding payment for order flow and for determining where to route a customer’s order.

6 The purpose of this disclosure is to inform the customer of the nature and extent of a broker-dealer’s conflict of interest. Broker-dealers are neither required to 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(a)(2) of the 1933 Act. See Edward D. Jones & Co., L.P., Securities Exchange Act Release No. 50910 (Dec. 22, 2004); Morgan Stanley DW, Inc., Securities Exchange Act Release No. 48789 (Nov. 17, 2003).

7 SEC, Report by Division of Market Regulation, Broker-Dealer Policies and Procedures Designed to Segment the Flow and Prevent the Misuse of Material Non-Public Information, [1989-1990 Transfer Binder] Fed. Sec. L. Rep. (CCH) 84,520 at p. 80, 620-25 (March, 1990).

8 Rule 15g-1(a)(1) establishes a transaction exemption for brokers or dealers whose commission equivalents, mark-ups, and mark-downs from transactions in penny stocks during each of the immediately preceding three months and during eleven or more of the preceding twelve months, or during the immediately preceding six months, did not exceed five percent of its total commissions, commission equivalents, mark-ups, and mark-downs from transactions in securities during those months.

9 Exemptions from the requirements of Exchange Act Rules 15g-2 through 15g-6 are provided for non-recommended transactions, broker-dealers doing a minimal business in penny stocks, trades with institutional investors, and private placements. See Rule 15g-1. Rule 15g-9(c) exempts certain transactions from the requirements of Rule 15g-9.

10 See Certain Broker-Dealers Deemed Not To Be Investment Advisers, Exchange Act Release No. 51523 (April 12, 2005).

11 Rules 17a-2, 17a-7, 17a-8, 17a-10 and 17a-13 contain additional recordkeeping and reporting requirements that apply to broker-dealers.

12 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”).

13 The Currency and Foreign Transactions Reporting Act of 1970 (commonly referred to as the “Bank Secrecy Act”) is codified at 31 U.S.C. 5311, et seq. The regulations implementing the Bank Secrecy Act are located at 31 CFR Part 103.

14 A list of countries subject to OFAC sanctions, as well as a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted counties (collectively called Specially Designated Nationals (SDNs)), is available on the OFAC website: www.treas.gov/ofac.

A summary of OFAC regulations as they apply to the securities industry can be found at the following link: www.treas.gov/offices/enforcement/ofac/regulations/t11facsc.pdf

See also Federal Financial Institutions Examination Council Bank Secrecy Act/Anti-Money Laundering Examination Manual (“FFIEC Manual”), at pages 137-145 (8/24/2007). The FFIEC Manual contains an entire section outlining best practices for OFAC Compliance, including risk matrices. Although that manual is written for the banking community, it provides information which may be useful to broker-dealers.

15 See also FinCEN Interpretive Release No. 2004-02 “Unitary Filing of Suspicious Activity and Blocking Reports,” 69 Fed. Reg. 76847 (Dec. 23, 2004).

16 OFAC offers a RISS feed service as well as an email notice system which pushes out digital information about its programs, including updates to its SDN List. See www.treas.gov/ofac. These may be especially helpful to smaller firms whose OFAC compliance programs are more manual in nature.

17 You will find forms for blocking and rejection reports on OFAC’s website using the following links:

Voluntary blocking report: www.treas.gov/offices/enforcement/ofac/legal/forms/e_blockreport1.pdf.

Annual blocking report: www.treas.gov/offices/enforcement/ofac/legal/forms/td902250.pdf.

Voluntary rejection report: www.treas.gov/offices/enforcement/ofac/legal/forms/e_recjectreport1.pdf

18 The Financial Industry Regulatory Authority (FINRA) offers a tool that assists firms to search for names on OFAC lists: http://apps.finra.org/RulesRegulation/OFAC/1/Default.aspx.

19 See also FFIEC Manual at 140 (“[t]he extent to which the bank includes account parties other than accountholders (e.g., beneficiaries, guarantors, principals, beneficial owners, nominee shareholders, directors, signatories, and powers of attorney) in the initial OFAC review during the account opening process, and during subsequent database reviews of existing accounts, will depend on the bank’s risk profile and available technology.”).

20 Interagency Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial Systems, Securities Exchange Act Release No. 47638 (April 7, 2003), 68 FR 17809 (April 11, 2003), http://www.sec.gov/news/studies/34-47638.htm.

21 Policy Statement: Business Continuity Planning for Trading Markets, Securities Exchange Act Release No. 48545 (September 25, 2003), 68 FR 56656 (October 1, 2003), http://www.sec.gov/rules/policy/34-48545.htm.

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