What is a Broker-Dealer? - Davis Polk & Wardwell
What is a Broker-Dealer? - Davis Polk & Wardwell
What is a Broker-Dealer? - Davis Polk & Wardwell
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§ 1A:2.6 BROKER-DEALER REGULATION<br />
The exception for networking arrangements in section 3(a)(4)(B)(i)<br />
sets out nine conditions. 94 The conditions are designed to ensure that<br />
bank employees (other than associated persons of a broker-dealer who<br />
are qualified pursuant to the rules of an SRO) do not perform<br />
brokerage service (other than clerical or min<strong>is</strong>terial functions) and<br />
that consumers of the bank understand that the brokerage services are<br />
performed by the broker-dealer, not the bank. 95 One of the conditions<br />
prohibits a bank employee that refers a customer to a broker-dealer<br />
from receiving “incentive compensation” for a securities brokerage<br />
transaction other than a “nominal” one-time cash fee for making the<br />
credit unions, to make similar networking arrangements with affiliated or<br />
third-party broker-dealers to make securities available to their customers<br />
without reg<strong>is</strong>tering as broker-dealers. See SEC Guide to <strong>Broker</strong>-<strong>Dealer</strong><br />
Reg<strong>is</strong>tration, supra note 72.<br />
94. These conditions include: (i) such broker or dealer <strong>is</strong> clearly identified as<br />
the person performing the brokerage services; (ii) the broker or dealer<br />
performs brokerage services in an area that <strong>is</strong> clearly marked and, to the<br />
extent practicable, physically separate from the routine deposit-taking<br />
activities of the bank; (iii) any materials used by the bank to advert<strong>is</strong>e or<br />
promote generally the availability of brokerage services under the arrangement<br />
clearly indicate that the brokerage services are being provided by the<br />
broker or dealer and not by the bank; (iv) any materials used by the bank to<br />
advert<strong>is</strong>e or promote generally the availability of brokerage services under<br />
the arrangement are in compliance with the federal securities laws before<br />
d<strong>is</strong>tribution; (v) bank employees (other than associated persons of a broker<br />
or dealer who are qualified pursuant to the rules of self-regulatory<br />
organization) perform only clerical or min<strong>is</strong>terial functions in connection<br />
with brokerage transactions including scheduling appointments with the<br />
associated persons of a broker or dealer, except that bank employees may<br />
forward customer funds or securities and may describe in general terms the<br />
types of investment vehicles available from the bank and the broker or<br />
dealer under the arrangement; (vi) bank employees do not receive incentive<br />
compensation for any brokerage transaction unless such employees are<br />
associated persons of a broker or dealer and are qualified pursuant to the<br />
rules of a self-regulatory organization, except that the bank employees may<br />
receive compensation for the referral of any customer if the compensation<br />
<strong>is</strong> a nominal one-time cash fee of a fixed dollar amount and the payment of<br />
the fee <strong>is</strong> not contingent on whether the referral results in a transaction;<br />
(vii) such services are provided by the broker or dealer on the bas<strong>is</strong> that all<br />
customers that receive any services are fully d<strong>is</strong>closed to the broker or<br />
dealer; (viii) the bank does not carry a securities account of the customer<br />
(with exceptions); and (ix) the bank, broker, or dealer informs each<br />
customer that the brokerage services are provided by the broker or dealer<br />
and not by the bank and that the securities are not deposits or other<br />
obligations of the bank, are not guaranteed by the bank, and are not<br />
insured by the Federal Deposit Insurance Corporation. See Exchange Act<br />
§ 3(a)(4)(B)(i).<br />
95. See SEC Release No. 34-56501 (Sept. 24, 2007).<br />
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