Section 15(a)(1) of the Securities Exchange Act of 1934, as amended, (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 in accordance with Section 15(b) of the Act. There are a few exceptions to this general rule that we discuss below. The actual definition of BROKER and DEALER is fact specific and complicated. Generally, a broker-dealer may not begin business until:

  • It has properly filed a Form BD, and the SEC has granted its registration;
  • It has become a member of a Self-Regulatory Organization (“SRO”);
  • It has become a member of SIPC, the Securities Investor Protection Corporation;
  • It complies with all applicable state requirements; and
  • Its “associated persons” have satisfied applicable qualification and registration requirements.

“Associated Persons” of a Broker-Dealer

The SEC calls individuals who work for a registered broker-dealer “associated persons.” This is the case whether such individuals are employees, independent contractors, or are otherwise working with a broker-dealer. These individuals may also be called “stock brokers” or “registered representatives.” Although associated persons usually do not have to register separately with the SEC, they must be properly supervised by a currently registered broker-dealer.

They may also have to register with the SROs of which their employer is a member — for example, the Financial Industry Regulatory Authority, Inc. (“FINRA”) (f/k/a the National Association of Securities Dealers, Inc. (“NASD”)) or a national securities exchange. 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.

The SEC does 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.

The law also does not permit unregistered entities to receive commission income on behalf of a registered representative. For example, associated persons cannot set up a separate entity to receive commission checks. An unregistered entity that receives commission income in this situation must register as a broker-dealer. Under certain circumstances, unregistered entities may engage in payroll administration services involving broker-dealers. In those circumstances, the broker-dealer employer generally hires and supervises all aspects of the employees’ work and uses the payroll and benefits administrator merely as a means to centralize personnel services.

Intrastate Broker-Dealers

A broker-dealer that conducts all of its business in one state does not have to register with the SEC. State registration is another matter. 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.

Broker-Dealers that Limit their Business to Excluded and Exempted Securities

A broker-dealer that transacts business only in commercial paper, bankers’ acceptances, and commercial bills does not need to register with the SEC under Section 15(b) or any other section of the Act. On the other hand, persons transacting business only in certain “exempted securities,” as defined in Section 3(a)(12) of the Act, do not have to register under Section 15(b), but may have to register under other provisions of the Act.

For example, some broker-dealers of government securities, which are “exempted securities,” must register as government securities brokers or dealers under Section 15C of the Act.

Broker-Dealers Must Register Before Selling Unregistered Securities – Including Private Placements (or Regulation D offerings)

A security sold in a transaction that is exempt from registration under the Securities Act of 1933 (the “1933 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 1933 Act must nevertheless register as a broker-dealer. In other words, “placement agents” are not exempt from broker-dealer registration.

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

Issuers generally are not “brokers” because they sell securities for their own accounts and not for the accounts of others. Moreover, issuers generally are not “dealers” because they do not buy and sell their securities for their own accounts as part of a regular business. Issuers whose activities go beyond selling their own securities, however, need to consider whether they would need to register as broker-dealers.

This includes issuers that purchase their securities from investors, as well as issuers that effectively operate markets in their own securities or in securities whose features or terms can change or be altered. The so-called issuer’s exemption does not apply to the personnel of a company who routinely engage in the business of effecting securities transactions for the company or related companies (such as general partners seeking investors in limited partnerships). The employees and other related persons of an issuer who assist in selling its securities may be “brokers,” especially if they are paid for selling these securities and have few other duties.

Exchange Act Rule 3a4-1 provides that an associated person (or employee) of an issuer who participates in the sale of the issuer’s securities would not have to register as a broker-dealer if that person, at the time of participation: (1) is not subject to a “statutory disqualification,” as defined in Section 3(a)(39) of the 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 the rule.

Consult with The Spencer Law Firm to assure that you comply with all laws and regulations. This is a very complicated area of the law and virtually all broker dealers have experienced securities counsel to guide them through this process. The Spencer Law Firm is adept at the following:

  • Instructing clients in navigating this arena, including instructing registered investment advisers and broker/dealers on registration, risk assessment, reporting and regulatory issues conducted by FINRA, the SEC and various state agencies, and audits performed by FINRA, the SEC and various state agencies ongoing industry
  • Preparing supervisory procedures and compliance systems to meet complex regulatory requirements
  • Drafting contracts and agreements for full service and boutique broker/dealers and investment advisers
  • Representing clients with respect to product offerings and reviews of offering documents including private offering memorandums, selling agreements, underwriter agreements, market maker agreements, escrow account agreements and placing agent agreements
  • Oversight and representation of clients in the private placement of funds
  • Developing a multi company strategy to build up a flow of private funds into large scale business projects

Please contact us today at our toll-free number, (888) 237-4529, for a consultation that can answer your questions related to registration of broker dealers and brokers.