Broker-Dealer Regulation in a Nutshell
Author:
Hazen, Thomas Lee
Edition:
3rd
Copyright Date:
2017
20 chapters
have results for Securities Regulation in a Nutshell
Preface 2 results
- Significant portions of the first edition of this Nutshell were adapted from Thomas Lee Hazen, Treatise on the Law of Securities Regulation (Thomson-West 4th ed. 2002). Some material was adapted from David L. Ratner & Thomas Lee Hazen, Securities Regulation in a Nutshell (Thomson-West 7th ed. 2002). This third edition of the Nutshell contains reported developments through March 1, 2017.
- The entire field of securities regulation is highly complex. Broker-dealer regulation in particular is filled with complexities and intricacies. This Nutshell is designed to provide an introduction and overview of broker-dealer regulation. The goal is to provide the reader with an understanding of basic concepts and the basic regulatory scheme. I have tried to keep citations to a minimum. The reader may want to consult additional sources for more detailed analysis of the intricacies of broker-dealer regulation (see Further Reading in the Appendix, page 287 infra). Following the Appendix, at page 289, I have included a glossary of some terms that may be helpful in understanding the securities laws and broker-dealer regulations.
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Introduction 3 results
- This Nutshell focuses on what is generally referred to as market regulation and in particular the regulation of securities brokers and dealers. Market regulation has several layers of complex regulation. This regulation encompasses broker-dealer firms and their employees. Market regulation also extends to the stock exchanges and the over the counter markets where trading in publicly traded securities takes place.
- More extensive discussion of the topics covered herein can be found in Thomas Lee Hazen, Hornbook on the Law of Securities Regulation (7th ed. 2016) and Thomas Lee Hazen, Treatise on the Law of Securities Regulation (7th ed. 2016, updated twice a year).
- Broker-dealer regulation addresses both ‘‘front office’’ and ‘‘back office’’ operations of broker-dealer firms (sometimes also referred to as ‘‘upstairs’’ and ‘‘downstairs’’). The front office operations include those aspects of the brokerage firm operations that deal with the customers and the public, such as retail operations and research departments. The back office operations include the record-keeping, accounting, and clearing and settlement responsibilities of brokerage firms.
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Appendix. Further Reading 4 results
- Thomas Lee Hazen, Securities Regulation in a Nutshell (West Academic Publishing 11th ed. 2009)
- Thomas Lee Hazen, Treatise on the Law of Securities Regulation (Thomson Reuters 7th ed. 2016; updated twice a year)
- Thomas Lee Hazen, Hornbook on the Law of Securities Regulation (West Academic Publishing 7th ed. 2016)
- Jerry W. Markham & Thomas L. Hazen, Broker-Dealer Operations Under Securities and Commodities Law: Financial Responsibilities, Credit Regulation, and Customer Protection (Thomson-West 2d ed. 2002; updated annually)
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Chapter 1. The Markets and Self-Regulation 166 results (showing 5 best matches)
- This section is adapted from David L. Ratner & Thomas Lee Hazen, Securities Regulation in a Nutshell
- Portions of this section were adapted from David L. Ratner & Thomas Lee Hazen, Securities Regulation in a Nutshell § 17 (7th ed. 2002) and
- The distinctive features of securities give a distinctive coloration to regulation of transactions in securities, in contrast to the regulation of transactions in other types of goods. Most goods are produced, distributed, and used or consumed; governmental regulation focuses on protecting the ultimate consumer against dangerous articles, misleading advertising, and unfair or non-competitive pricing practices. Securities are different.
- The broker-dealer registration requirements apply only to persons who, as a firm or themselves, engage in broker-dealer activities. Associated persons who work for the registered broker-dealer firm do not have to register as a broker-dealer. The exemption from the broker-dealer registration
- Securities regulation is based on a multi-layered system of self-regulation. The Securities Exchange Act of 1934 (1934 Act) established the Securities and Exchange Commission to regulate the securities markets in various respects. The 1934 Act also empowers the SEC to recognize and oversee self-regulatory organization.
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Chapter 2. Broker-Dealer Definitions and Registration Requirements 159 results (showing 5 best matches)
- A “security-based swap dealer” is defined as a person who (i) holds itself out as a dealer in security-based swaps, or (ii) makes a market in security-based swaps, or (iii) regularly enters into swaps with counterparties as an ordinary course of business for its own account, or (iv) engages in activity commonly known in the trade as a dealer or market maker in security-based swaps. 1934 Act § 3(a)(71) . The full scope of a “major security-based swap participant” was not known until the SEC regulations were adopted but the thrust of the status is a person other than a security-based swap dealer that maintains a substantial (to be defined) non-hedging position in security-based swaps giving rise to substantial counterparty exposure that could impact the economy systemically. Security-based swap dealers and major swap participants that must register under the Exchange Act are made subject to a variety of burdensome duties, including capital and margin requirements, extensive reporting...
- After many years of proposed and temporary rulemaking the SEC and Federal Reserve Board adopted Regulation R to clarify when banking activities will implicate the securities broker-dealer registration requirements. Regulation R embodies what have become known as the “push out” provisions. A bank can “push out” its securities activities to an SEC regulated subsidiary and retain activities in the banking enterprise. Regulation R
- Transactions in municipal securities generally take place in more specialized markets by brokers and dealers dealing exclusively with municipal securities and who are, therefore, exempt from the general broker-dealer regulation and rules of the SEC. There is no organized exchange subject to SEC oversight nor is there NASD nor FINRA coverage
- There continues to be an increasing overlap between the commodities and securities markets. For example, stock index futures have for a long time been traded in the commodities markets subject to the jurisdiction of the Commodity Futures Trading Commission (CFTC). In 2000, Congress enacted the Commodity Futures Modernization Act (CFMA) (
- As mentioned earlier, brokers and dealers who deal solely in exempted securities need not register under 1934 Act § 15 . Municipal securities dealers, who are also exempt from broker-dealer registration, are regulated through the MSRB, but there was no comparable regulation for government securities dealers until 1986. Following the insolvency of a number of government securities dealers, Congress enacted legislation to require the regulation of government securities dealers. Generally, the government securities dealer registration requirements more closely parallel that of broker-dealers than of municipal securities dealers.
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Copyright Page 5 results
- Nutshell Series, In a Nutshell
- The publisher is not engaged in rendering legal or other professional advice, and this publication is not a substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the services of a competent attorney or other professional.
- Printed in the United States of America
- © West, a Thomson business, 2003
- © 2017 LEG, Inc. d/b/a West Academic
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Chapter 5. Manipulative and Deceptive Practices 126 results (showing 5 best matches)
- Regulation SHO provides further that short sellers of equity securities must locate securities to borrow before selling. In 2008, the SEC also adopted Rule 10b–21 that prohibits naked short selling by entering a short sale with the intent not to provide sufficient shares to effect delivery for the short sale. Rule 204 of Regulation SHO, adopted in 2009, sets forth broker-dealer obligations regarding pre-borrowing of securities for short sales and what to do in the case of a failure to deliver the securities for sale.
- The movie “Boiler Room” (New Line Cinema (2000)) accurately depicted many of the tactics used in the perpetration of securities brokers’ high pressure sale frauds. The extreme measures portrayed in that movie were not an exaggeration. In fact, they reflect many of the tactics found in the SEC and NASD decisions. These tactics are not new. In fact, similar overreaching brokerage sales programs were behind the regulation that Congress imposed in 1934. For example, many of these operations “lent a carnival tone to securities marketing.” Joel Seligman, The Transformation of Wall Street 24 (1982). In particular, Congress was concerned with sales contests for brokers, awarding liberal prizes to the brokers and/or offices with the
- Short sales are now governed by Regulation SHO, which replaced 1934 Act Rules 10a–1 and 10b–2, incorporating their terms into the more comprehensive short sale regulations. Regulation SHO provides a quite complex and technical regulation of short sales. Regulation SHO also included a temporary rule embodying a pilot program which established procedures for the SEC to temporarily suspend operation of the “tick test,” as well as any short sale price test of any exchange or FINRA. Following the pilot program, the SEC
- generally prohibits fraudulent, manipulative, and deceptive practices in connection with securities brokerage transactions. Broker-dealers and their employees are also subject to 1934 Act Rule 10b–5 ’s general antifraud proscriptions relating to deceptive conduct in connection with a purchase or sale of a security. The types of specific conduct that are addressed in other rules include market manipulation (§§ 50–52 below), high pressure sales tactics (§ 64 below), deceptive recommendations (§ 55 below), generation of excessive commissions (§ 68 below), unauthorized trading (§ 69 below), improper order executions (§ 43 above), improper extension of credit for securities transactions (§ 26 above), and misuse of customer funds or securities. Beyond these specific activities and specifically identified and prohibited conduct, broker-dealers are held to just and equitable principles of trade. Further, the antifraud and anti-manipulation rules are sufficiently broad to encompass all...
- There was increasing concern over low priced securities that are not marketed through a national exchange or the NASDAQ national market system. Many investors have been injured as a result of high pressure sales techniques in connection with these so-called “penny stocks.” In response, in 1989, the Commission proposed special regulation of penny stocks. Under the proposed rule, cold calls were to be outlawed and sales could not be completed unless the customer had first signed a written agreement. Furthermore, before executing a sale for a customer, a broker would have to determine that the securities were a suitable investment for the customer. The determination of suitability would have to be documented. The proposed rule evidenced the SEC’s position that penny stocks are not suitable for many investors. The penny stock regulations were implemented in 1990 and expanded in 1992. The advent of these regulations was seen as having implications beyond penny stocks insofar as the
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Chapter 3. Exchange Trading and Market Making 51 results (showing 5 best matches)
- A broker-dealer acts as a market-maker for a particular security or securities. Many securities have more than one market-maker. A market-maker for a particular security not traded on a national exchange must enter “bid” and “asked” quotes either in the “pink sheets” or over NASDAQ. The FINRA rules provide that a market maker can qualify as a Primary NASDAQ Market-Maker (“PNMM”). In part because of the potential for abuse resulting from control of the market, NASDAQ stocks must be handled by at least three market makers. The presence of multiple market makers does not eliminate the potential for
- A market-maker’s obligations include the posting of reliable quotations that are not the result of market manipulation. The market-maker is also obligated to honor the quotations that it posts to the market. Accordingly, it violates FINRA (and formerly NASD) rules if a market-maker fails to honor posted quotes. A market-maker is responsible for making “two-way” bids on the securities for which it makes a market. In other words, the market-maker has the responsibility of quoting both a bid price (the price that someone is willing to pay for the security) or an offer wanted (OW), as well as an asked price (the price at which someone is willing to sell the security) or a bid wanted (BW). As such, the market-maker must be willing to stand behind these quotations and advertisements for offers and bids wanted. The market maker thus must be willing and prepared to both buy the stock or sell it as principal, depending upon the demands of the market. Accordingly, the market-maker is frequently
- The SEC adopted Regulation SCI that seeks to increase the regulation of automated trading via, among other things, increased oversight and disclosure.
- The principal function and purpose of a national securities exchange is to provide a marketplace in which member firms, acting as brokers, can purchase and sell securities for the accounts of their customers. The question addressed in 1934 Act § 11 is the extent to which stock exchange members and their firms should be permitted to trade in listed securities for their own accounts, in view of the possibly unfair advantages they may have over public customers when engaged in such trading.
- Where there are multiple market-makers, there is the potential for collusion and price fixing. Price fixing violates the antitrust laws and will result in damages to the customers who are injured as a result of the collusion in pricing. Other collusive or anticompetitive activity among market-makers may also involve violations of the SEC’s manipulation prohibitions. Most conduct of broker-dealers that is regulated by the SEC and the self-regulatory organizations is not subject to antitrust scrutiny. Accordingly, at least one court has held that SEC regulation of market-making activities operates as
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Chapter 7. Arbitration of Broker-Dealer Disputes 46 results (showing 5 best matches)
- At one time, pre-dispute arbitration agreements were unenforceable with regard to claims arising under the federal securities laws. This meant that virtually all claims by customers against their securities brokers were resolved in court or by settlement. In
- As noted above, the FAA plays a prominent role in determining arbitration issues in federal court. But what about the role of state law? Massachusetts announced that, effective January, 1989, broker-dealers doing business in that state must offer customers the option of not signing pre-dispute arbitration agreements; however, that rule has since been struck down by a federal district court. Similar rules requiring that customers be given a choice were endorsed by the North American Securities Administrators Association and have been under consideration in at least sixteen additional states. Rather than invalidating all pre-dispute agreements, the Massachusetts rule provided that upon opening an account, customers must be given the option of not signing the arbitration clause. While an across-the-board ban on arbitration agreements might arguably be preempted by the federal policy favoring arbitration of securities disputes, mandating that customers be given a
- states that agreements to resort to arbitration can be invalidated upon such grounds that exist at law or equity for the revocation of any contract. Thus, a court cannot compel arbitration unless, as a matter of the relevant state law, a valid arbitration agreement exists. In the context of disputes arising out of securities transactions, brokerage customers frequently seek to avoid arbitration clauses by claiming the contracts are unenforceable contracts of adhesion. The basis of
- When dealing with the enforceability of pre-dispute arbitration agreements, there is an unusual mix of state and federal law. In the first instance, as discussed in previous sections, the policy favoring arbitration as embodied in the FAA militates in favor of enforcing pre-dispute arbitration agreements. On the other hand, interpreting the terms of any agreement between customers and securities brokers generally will be a matter of state contract law rather than federal securities or arbitration law. Ordinarily, state contract law will control whether the parties have in fact agreed to submit the controversy to arbitration.
- The interpretation of the contract language is determined as a matter of state rather than federal law. As a matter of the general law of contract interpretation, when the interpretation of a contract is in doubt, courts frequently construe the terms contrary to the interests of the party which drafted the contract. It is likely that this maxim of contract interpretation will carry over to pre-dispute arbitration clauses in securities cases. Ordinarily, contract interpretation issues will be highly factual. In some instances, however, the agreement may be sufficiently clear to support an interpretation as a matter of law.
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Chapter 4. Retail and Other Operations 44 results (showing 5 best matches)
- A mark-down is the sales commission that is deducted from the market price of a security when a customer sells a security. Thus, for example, if the transaction takes place at $5 per share and the broker-dealer charges a 2% mark-down, the customer will receive a total of $4.90 for each share of the security sold, with the broker-dealer firm receiving a 10 cents per share mark-down that generally will be shared with the account executive dealing with the customer. Note that in this context if the customer buys and sells the security at the same market price, there will be a total of 20 cents in brokerage commissions—the 10 cents per share mark-up for the purchase and the 10 cents per share mark-down for the sale. It should also be remembered that in an over-the-counter market as a result of the market-maker’s bid and asked prices, there will be a spread between the bid and the asked price, meaning that a customer wanting to purchase the security will pay a higher price than the...
- The NASD established a “five percent” policy as a guide for determining the fairness of the markup. This is now part of FINRA regulation. See FINRA Conduct Rules 2440
- Even beyond the FINRA and NASD rules, the SEC recognizes a “best execution” obligation on the part of securities brokers. Failure to secure a good execution for the customer can be a deceptive device in violation of the securities laws’ antifraud provisions. Thus, the courts have also recognized that a breach of the broker’s execution obligations can constitute a material representation in violation of the antifraud provisions.
- Recommendations that are induced by compensation violate the broker-dealer’s obligations that generally attach to recommendations. See §§ 54–56 below. In addition, recommendations are subject to the implied representation that brokers will deal fairly and professionally with their customers. Even beyond sales incentives, high pressure brokerage firms may unduly pressure their sales representatives to solicit transactions. The foregoing broker-dealer prohibitions are supplemented by 1933 Act § 17(b) , which declares illegal the recommendation of securities for compensation without disclosing the compensation paid in connection with the making of the recommendation. A recommendation that is bought and paid for in order to promote a security violates the securities laws.
- A riskless transaction occurs when a market-maker simultaneously buys and sells a security or is merely matching customer orders and thus does not
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Glossary 47 results (showing 5 best matches)
- RESTRICTED SECURITIES—A restricted security is one that is subject to transfer restrictions. Restricted securities often result from securities
- SECONDARY OFFERING—A secondary offering occurs when securities are offered as part of a distribution by existing securities holders. In a secondary offering the proceeds of the sale go to the selling shareholders. In contrast, with a primary offering the shares are sold by the issuer and the proceeds go to the company.
- MARKET MAKER—A market maker is a securities dealer that provides firm bid and asked prices for securities. Market makers are regulated by FINRA and originally functioned primarily in the over-the-counter markets but now also make a market for exchange traded securities.
- UNDERWRITER—An underwriter is a broker-dealer or investment banking firm that acts as a wholesaler for a securities distribution. Underwriter status can also result from substantial participation in a securities distribution.
- PUT OPTION—A put option gives the option’s buyer the right to exercise the option by selling the underlying security. The put-option seller must purchase the underlying security at the agreed-on price if the option is exercised on or before the expiration date. If the strike price is
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Chapter 6. Civil Liabilities 37 results (showing 5 best matches)
- impose a self-regulatory structure for broker-dealer regulation under the auspices of FINRA (formerly the NASD) and the national securities exchanges. Many of the applicable regulations are properly classified as customer protection rules. While violations of the applicable regulatory provisions can result in disciplinary sanction by the SEC, NASD (FINRA), or exchange, there is substantial authority against the recognition of an implied right of action in the hands of injured investors against broker-dealers or others merely because they violated self-regulatory organization rules.
- The Supreme Court gave an expansive definition of what constitutes fraud
- What do these developments under the CEA tell us about the securities law issues? First, the policies underlying the commodities and securities laws are sufficiently similar to warrant a strong analogy, at least with regard to the efficacy of implying a private remedy to redress SRO enforcement lapses. Second, the intent of Congress in instituting extensive market regulatory programs under both statutes would also seem to be similar. On the other hand, in 1982 Congress elected to replace the implied remedy under the CEA with an express remedy that finds no counterpart under the securities laws. Arguably, the absence of a parallel
- The courts have been in conflict as to the existence of an implied remedy against exchanges under the 1934 Act. In a relatively early decision in
- A broker-dealer who sells a security in violation of the 1933 Act § 5 ’s registration requirements will be liable in an action for rescission under 1933 Act § 12(a)(1)
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Abbreviations 11 results (showing 5 best matches)
Outline 58 results (showing 5 best matches)
Table of Cases 36 results (showing 5 best matches)
- Bear Stearns Securities Corp., In re
- Carter-Wallace, Inc. Securities Litigation, In re
- VMS Limited Partnership Securities Litigation, In the Matter of
- C.B.S. Employees Federal Credit Union v. Donaldson, Lufkin & Jenrette Securities Corp.
- Coleman & Co. Securities, Inc. v. Giaquinto Family Trust
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Index 8 results (showing 5 best matches)
Table of Statutes 51 results (showing 5 best matches)
- Publication Date: April 28th, 2017
- ISBN: 9781634603393
- Subject: Securities Regulation
- Series: Nutshells
- Type: Overviews
- Description: This title is designed to provide an introduction and overview of broker-dealer regulation in the securities markets. It covers broker-dealer front office and back office issues as well as market regulation generally. It gives you an understanding of basic concepts and the underlying regulatory scheme, providing an explanation of broker-dealer regulation generally, sales practices, analysts' conflicts of interest, civil liabilities, and arbitration. This title also provides an overview of industry self-regulation under FINRA (the Financial Industry Regulatory Authority).