Company Filings More Search Options. The Securities Exchange Act of "Exchange Act" or "Act" governs the way in which the nation's securities markets and its brokers and dealers operate. 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. After reading this guide, if you have questions, please feel free to contact the Office of Interpretation and Guidance at e-mail tradingandmarkets sec. You will find a list of useful phone numbers at the end of this guide, or on the SEC's website at www.

You may wish to consult with a private lawyer who is familiar with the federal securities laws, to assure that you comply with all laws and regulations. The SEC staff cannot act as an individual's or broker-dealer's lawyer.

While the staff attempts to provide guidance by telephone to individuals who are making inquiries, the guidance is informal and not binding. Formal guidance may be sought through a written inquiry that is consistent with the SEC's guidelines for no-action, interpretive, and exemptive requests. 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 4 B and 3 a 5 C and related provisions, and consult with counsel. Aspects of bank dealer activity are discussed in a publication issued by the SEC's Division of Trading and Markets, entitled "Staff Compliance Guide to Banks on Dealer Statutory Exceptions and Rules," which is available on the SEC's website at: 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.

See Exchange Act Release No. 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:. Unlike a broker, who acts as agent, a dealer acts as principal. Section 3 a 5 A of the Act generally defines a "dealer" as:.

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:. 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. If you are not certain, you may want to review SEC interpretations, consult with private counsel, or ask for advice from the SEC's Division of Trading and Markets by calling or by sending an e-mail to tradingandmarkets sec.

Please be sure to include your telephone number.

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.

Securities, Commodities, and Financial Services Sales Agents : Occupational Outlook Handbook: : U.S. Bureau of Labor Statistics

For further information, please see Part II. D and Part III, below. Section 15 a 1 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 also 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.

See , for example, In the matter of William V. Giordano , Securities Exchange Act Release No. 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. See , for example, Wolff Juall Investments, LLC May 17, Under certain circumstances, unregistered entities may engage in payroll administration services involving broker-dealers. See , for example, letter re: 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.

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. 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. A broker-dealer that otherwise meets the requirements of the intrastate broker-dealer exemption would not cease to qualify for the intrastate broker-dealer exemption solely because it has a website that may be viewed by out-of-state persons, so long as the broker-dealer takes measures reasonably designed to ensure that its business remains exclusively intrastate.

These measures could include the use of disclaimers clearly indicating that the broker-dealer's business is exclusively intrastate and that the broker-dealer can only act for or with, and provide broker-dealer services to, a person in its state, as long as the broker-dealer does not provide broker-dealer services to persons that indicate they are, or that the broker-dealer has reason to believe are, not within the broker-dealer's state of residence.

These measures are not intended to be exclusive. A broker-dealer could adopt other measures reasonably designed to ensure that it does not provide broker-dealer services to persons that are not within the same state as the broker-dealer. However, an intermediary's business would not be "exclusively intrastate" if it sold securities or provided any other broker-dealer services to a person that indicates that it is, or that the broker-dealer has reason to believe is, not within the broker-dealer's state of residence.

For additional information regarding the use of the Internet by intrastate broker-dealers, see https: A word about municipal and government securities. There is no intrastate exception from registration for municipal securities dealers or government securities brokers and dealers. 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, 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 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 3a 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: 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.

These conditions, regarding solicitation, fees and expenses, and handling of participants' funds and securities, are explained in Securities Exchange Act Release No.

Although Regulation M 2 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 17 CFR 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.

See Securities Exchange Act Release No. 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.

See also letters re: Securities Activities of U. In addition, in April , the Division of Market Regulation staff issued responses to frequently asked questions concerning Rule 15a-6 in relation to Regulation AC. Regulation AC is discussed in Part V. 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. 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. Prior to the enactment of the "Gramm-Leach-Bliley Act" "GLBA" in , U. 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.

The Division of Trading and Markets has issued a special compliance guide for banks, entitled "Staff Compliance Guide to Banks on Dealer Statutory Exceptions and Rules," which is available on the SEC's website at: The bank exceptions and exemptions only apply to banks, and not to related entities.

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.

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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. This is done through "networking" arrangements, where an affiliated or third-party broker-dealer provides brokerage services for the financial institution's customers, according to conditions stated in no-action letters and NASD Rule Under a networking arrangement, financial institutions can share in the commissions generated by their referred customers, under certain conditions.

The financial institution engaging in such networking must be in strict compliance with applicable law and Commission staff guidance. 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.

This again is done through "networking" arrangements, where an affiliated or third-party broker-dealer provides brokerage services for the insurance agency's customers, according to conditions stated in no-action letters. 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. 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. Lincoln Financial Advisors Corp. 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 generally , Securities Act Release No. 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.

See generally , NASD Notice to Members , http: 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. These arrangements are subject to certain conditions to ensure that the organizations, or "affinity groups," do not develop a salesman's stake with respect to the sale of securities. If a broker-dealer does not qualify for any of the exceptions or exemptions outlined in the sections above, it must register with the Commission under Section 15 b of the Act.

Broker-dealers register by filing an application on Form BD, which you may obtain from the SEC's webpage at http: You also use Form BD to:. Form BD asks questions about the background of the broker-dealer and its principals, controlling persons, and employees.

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 b , and 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. If a broker-dealer effects securities transactions other than on a national securities exchange of which it is a member, however, including any over-the-counter business, it must become a member of FINRA, unless it qualifies for the exemption in Rule 15b FINRA's webpage at www.

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-dealers , and the Federal bank regulators and the SEC in the case of banks. You may wish to consult the MSRB's website at www. Every registered broker-dealer must be a member of the Securities Investor Protection Corporation, or SIPC, unless its principal business is conducted outside of the United States or consists exclusively of the sale or distribution of investment company shares, variable annuities, or insurance.

Each SIPC member must pay an annual fee to SIPC. For further information, contact SIPC, 15th St. Every state has its own requirements for a person conducting business as a broker-dealer within that state.

Each state's securities regulator can provide you with information about that state's requirements. You can obtain contact information for these regulators from the North American Securities Administrators Association, Inc.

NASAA , First Street, NE, Suite , Washington, DC The Act defines an "associated person" of a broker-dealer as any partner, officer, director, branch manager, or 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.

Form U-4 is used to register individuals and to record these individuals' prior employment and disciplinary history. 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.

- Sales Agents, Securities and Commodities

FINRA's website at www. 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. 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.

A successor broker-dealer must file a new Form BD or, in special instances, amend the predecessor broker-dealer's Form BD within 30 days after such succession. The filing should indicate that the applicant is a successor.

See also, the instructions to Form BD. When a registered broker-dealer stops doing business, it must file a Form BDW http: 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.

These disclosures help to ensure that a broker-dealer's business is concluded in an orderly manner and that customers' funds and securities are protected. 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.

The SEC may also cancel a broker-dealer's registration if it finds that the firm is no longer in existence or has ceased doing business as a broker-dealer. 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 12 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 or 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. 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 misleading omissions of material facts, and fraudulent or manipulative acts and practices, in connection with the purchase or sale of securities.

Broker-dealers owe their customers a duty of fair dealing. This fundamental duty derives from the Act's antifraud provisions mentioned above. 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.

For example, FINRA members must comply with NASD's Rules of Fair Practice. 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. In particular, a broker-dealer must make recommendations based on a customer's financial situation, needs, and other security holdings. 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.

SROs consider recommendations to be unsuitable when they are inconsistent with the customer's investment objectives. The duty of best execution, which also stems from the Act's antifraud provisions, requires a broker-dealer to seek to obtain the most favorable terms available under the circumstances for its customer orders. 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.

A "short sale" is generally a sale of a security that the seller doesn't own or for which the seller delivers borrowed shares.

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. 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. Regulation SHO imposes additional delivery requirements on broker-dealers for securities in which there are a relatively substantial number of extended delivery failures at a registered clearing agency "threshold securities".

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 a 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. For further information, please see the adopting release for Regulation SHO, as well as Frequently Asked Questions, Key Points, and other related materials at http: 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. The adopting release for Regulation M is available at http: 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.

An offering's "restricted period" begins either one or five business days depending on the trading volume value of the offered security and the public float value of the issuer before the day of the offering's pricing and ends upon completion of the distribution. 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 , 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 of 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. Regulation AC or Regulation Analyst Certification requires brokers, dealers, and persons associated with brokers or dealers that publish, distribute, or circulate research reports to include in those reports a certification that the views expressed in the report accurately reflect the analyst's personal views.

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. For further information, including investor guidance, SEC releases, and SRO rules, see http: In addition, staff responses to frequently asked questions are available at http: 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 guidance from their exchange regarding these provisions. Section 11 d 1 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 distribution 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 1. However, Exchange Act Rule 11d 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 2 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 Section 11A of the Exchange Act, and consolidates them into a single regulation. For additional details regarding Regulation NMS, see http: 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 specialists and market makers publicly display certain limit orders they receive from customers.

If the limit order is for a price that is better than the specialist's or market maker's quote, the specialist or market maker must publicly display it. The rule benefits investors because the publication of trading interest at prices that improve specialists' and market makers' quotes present investors with improved pricing opportunities.

Regulation ATS 17 CFR 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 under the Exchange Act.

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 system , or 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.

Regulation ATS contains provisions concerning the system's operations, including: 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.

For further information on the operation and regulation of alternative trading systems, see the adopting release for Regulation ATS at http: Most broker-dealers that effect transactions in "penny stocks" have certain enhanced suitability and disclosure obligations to their customers.

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.

Before a broker-dealer that does not qualify for an exemption 9 may effect a solicited transaction in a penny stock for or with the account of a customer it must: The broker-dealer also must wait at least two business days after sending the customer the risk disclosure document and the suitability statement before effecting the transaction. 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 17 CFR Part even if their consumers are non-U.

These notices must be clear and conspicuous, and must accurately reflect the broker-dealer's policies and practices. 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. 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.

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.

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 consumer 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.

Recently proposed amendments which would further strengthen the privacy protections under Regulation S-P are available at http: Broker-dealers offering certain types of accounts and services may also be subject to regulation under the Investment Advisers Act. See Section a 11 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 subject 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.

The purpose of this rule is to require a broker-dealer to have at all times enough liquid assets to promptly satisfy the claims of customers if the broker-dealer goes out of business. 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 12 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. Certain broker-dealers must maintain and preserve certain information regarding those affiliates, subsidiaries and holding companies whose business activities are reasonably likely to have a material impact on their own financial and operating condition including the broker-dealer's net capital, liquidity, or ability to conduct or finance operations. 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. Broker-dealers are subject to examination by the 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 XF-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 SIC , which operates the program for the SEC. A registration form can be obtained from Securities Information Center, P.

Box , Boston, MA For registration and additional information, see the SIC's website at https: 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 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. See also , Securities Exchange Act Release No. Broker-dealers should also consider the impact, if any, that the Electronic Signatures in Global and National Commerce Act commonly known as E-SIGN , Pub. Broker-dealers have broad obligations under the Bank Secrecy Act "BSA" 13 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. Firms must develop and implement a written anti-money laundering compliance program, approved in writing by a member of senior management, which is reasonably designed to achieve and monitor the member's ongoing compliance with the requirements of the BSA and its implementing regulations.

Under this obligation, firms must:. For a compilation of key anti-money laundering laws, rules and guidance applicable to broker-dealers, see Anti-Money Laundering Source Tool http: 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.

See FinCEN Web site http: Broker-dealers have an obligation to comply with the sanctions programs administered by the Department of Treasury's Office of Foreign Assets Control OFAC.

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's sanctions programs are separate and distinct from, and in addition to, the anti-money laundering requirements imposed under the BSA on broker-dealers.

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.

As part of its efforts to implement these programs, OFAC publishes a list of Specially Designated Nationals, which is frequently updated on an as-needed basis. 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.

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. In , NASD 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.

See NASD Rule and NYSE Rule See also , http: Office of Interpretation and Guidance Division of Trading and Markets U. Securities and Exchange Commission F Street, NE Washington, DC e-mail: For additional information about how to obtain official publications of SEC rules and regulations, and for on-line access to SEC rules:.

Superintendent of Documents Government Printing Office Washington, DC www. Securities and Exchange Commission F Street, NE Washington, DC Financial Industry Regulatory Authority Key West Avenue Rockville, MD call center to check on the registration status of a firm or individual www.

New York Stock Exchange, Inc. North American Securities Administrators Association, Inc. Securities Investor Protection Corporation 15th Street, N. Suite Washington, D. We wish to stress that we have published this guide as an introduction to the federal securities laws that apply to brokers and dealers. 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.

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.

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 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 Act. CCH 84, at p. Rule 15g-9 c exempts certain transactions from the requirements of Rule 15g The regulations implementing the Bank Secrecy Act are located at 31 CFR Part A summary of OFAC regulations as they apply to the securities industry can be found at the following link: 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. These may be especially helpful to smaller firms whose OFAC compliance programs are more manual in nature.

Financial Systems, Securities Exchange Act Release No. Business Continuity Planning for Trading Markets, Securities Exchange Act Release No. STAY CONNECTED 1 Twitter 2 Facebook 3 RSS 4 YouTube 5 Flickr 6 LinkedIn 7 Pinterest 8 Email Updates. Securities and Exchange Commission. Guide to Broker-Dealer Registration Oct. Broker-Dealer Trading Systems Penny Stock Rules Privacy of Consumer Financial Information Regulation S-P Investment Adviser Registration Arbitration Financial Responsibility of Broker-Dealers Net Capital Rule Use of Customer Balances Customer Protection Required Books, Records and Reports Risk Assessment Requirements Other Requirements Examinations and Inspections Lost and Stolen Securities Program Fingerprinting Requirement Use of Electronic Media by Broker-Dealers Electronic Signatures Anti-Money Laundering Program Office of Foreign Assets Control Business Continuity Plans Where to Get Further Information I.

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. A broker-dealer may not begin business until: