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Broker Dealer Registration Requirements

SEC Withdraws Statement On Broker Dealer Custody Of Digital Asset Securities

On May 15, 2025, the SEC Division of Trading and Markets and Office and FINRA’s Office of General Counsel withdrew their joint statement on broker dealer custody of digital asset securities.  The original joint statement had been issued on July 8, 2019 (see HERE).  This original statement has oft been thought of as the reason that broker dealers have not (could not) adopt any broad ranging policies or procedures related to digital assets.

The withdrawal of the joint statement, together with the slew of other recent activity from the SEC related to digital assets, (see HERE for example) is an important step towards more widespread adoption of digital asset trading, allowing retail investors to aggregate their investments with their trusted broker dealer advisors.

Refresher On Original Joint Statement/Concerns

Broker-dealers that hold funds and securities must comply with Exchange Act Rule 15c3-3 (the “Customer Protection Rule”), which generally requires the broker to maintain physical possession or control over

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May 27, 2025

Court Strikes Down Recent Changes To Definition Of A Dealer

In a big win for hedge funds and the crypto industry, on November 21, 2024, a Texas federal judge overturned the recent SEC rule that expanded the definition of “dealer” under the Exchange Act.  For a review of the final rule see HERE.

The amendments were intended to require certain proprietary or principal traders and liquidity providers to register as either a dealer or government securities dealer as applicable.  The rules amended Exchange Act Rules 5a5-4 and 3a44-2 to enhance the definition of “as part of a regular business” in Sections 3(a)(5) and 3(a)(44) of the Exchange Act.

In a legal challenge, the Crypto Freedom Alliance of Texas and Blockchain Association sued the SEC claiming that the rule amendments radically expanded the definition of a “dealer” in a way that could encompass digital asset industry participants (and hedge funds) that do not engage in any conduct resembling “dealing” as that term has ever been

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December 10, 2024

Supreme Court Strikes Down Chevron Deference

In June 2024, the U.S. Supreme Court struck down a decades old judicial precedent that provided guidance as to when judges could defer to a federal agencies’ interpretation of a law.  The original precedent derived from the 1984 case Chevron v. Natural Resources Defense Council, which gave deference to federal agencies’ interpretations of a law over the judicial system.  Although Chevron applied to all federal agencies, in light of a slew of recent litigation by and against the SEC related to rule making and interpretations (for example related to who is a “dealer” – see HERE) I decided to cover it in a blog.

Chevron v. Natural Resources Defense Council

Chevron v. Natural Resources Defense Council (“Chevron”) held that a government agency must conform to any clear legislative statements when interpreting and applying a law, but courts will give the agency deference in ambiguous situations if its interpretation is reasonable.  In other words, if

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September 3, 2024

Commissioner Uyeda’s Statement On Dealer Litigation

On August 19, 2024, SEC Commissioner Mark T. Uyeda published a statement regarding one of the numerous defendants in SEC initiated enforcement proceedings claiming unlicensed dealer activity.  The statement resonates with the sentiments of most of my colleagues, peers and clients.

Background

In November 2017 the SEC shocked the industry when it filed an action against Microcap Equity Group, LLC and its principal alleging that its investing activity required licensing as a dealer under Section 15(a) of the Exchange Act.  Since that time, the SEC has filed numerous additional cases with the sole allegation being that the investor acted as an unregistered dealer.  In each case, the investor entity purchased convertible promissory notes from micro-cap OTC Markets issuers (or other existing note holders), which, after the applicable Rule 144 holding period, were converted into shares of common stock and sold on the open market.  As the securities were generally low priced, the conversions resulted in large quantities of additional

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August 27, 2024

SEC Adopts Changes To The Definition Of A “Dealer”

Two years after proposing rule changes (see HERE) the SEC has adopted final new rules amending the definition of a “dealer” under the Exchange Act.  Although the rule change comes after years of a continuous stream of litigation against small-cap and penny stock convertible debt lenders, the new rules specifically fail to provide regulatory clarity to this sector of the marketplace.

The amendments are intended to require certain proprietary or principal traders and liquidity providers to register as either a dealer or government securities dealer as applicable.  The rules amend Exchange Act Rules 5a5-4 and 3a44-2 to enhance the definition of “as part of a regular business” in Sections 3(a)(5) and 3(a)(44) of the Exchange Act.  The enhancement, however, is as to large proprietary traders and government securities dealers, leaving small cap traders to continue with rule making through judicial precedence.

Background

Although the amended rules are not limited to participants in the U.S. Treasury markets,

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May 14, 2024

FINRA Approves OTC Markets To Trade Digital Securities

As the SEC continues its onslaught against the crypto industry, including the filing of high-profile actions against Binance, which operates the largest crypto asset trading platform in the world, and Coinbase, a multi-billion-dollar crypto trading platform, FINRA has quietly approved OTC Markets to provide trading services for digital asset securities.

OTC Markets announced the approval in early May but don’t expect any activity in the near future.  Concurrent with announcing the approval, OTC Markets CEO, R. Cromwell Coulson, stated:

“We also recently received FINRA approval to permit digital asset securities to be traded by broker-dealers on OTC Link ATS. This approval furthers our mission of operating regulated markets for broker-dealers and issuers of securities. While it will be some time until the regulatory framework and infrastructure develop, we believe our markets are well-positioned to be part of new trading, data, and disclosure solutions for these securities.”

OTC Markets is clearly putting itself in a position to

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June 27, 2023

SEC To Shorten Settlement Cycle

On February 15, 2023, the SEC adopted final rules shortening the standard settlement cycle from two business days (T+2) to one business day (T+1).  A shorter settlement cycle will reduce the credit, market and liquidity risks in securities transactions.  The SEC previously shorted the standard cycle from three days (T+3) to T+2 in 2017 (see HERE) and at that time, and in speeches and rule making agendas since then, has consistently indicated efforts to move to T+1.

In addition to shortening the standard settlement cycle, the new rules also shorten the standard settlement cycle for firm commitment offerings priced after 4:30 p.m. from four business days (T+4) to T+2.   However, the rules do allow for underwriters and issuers to agree to an alternative settlement date, which is helpful in completing the numerous closing documents and processing steps that occur between the pricing and closing of deals.

The final rules will improve the processing of institutional trades by requiring

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May 23, 2023

SEC Proposes Rules Related To Securities Lending Market

In November 2021, the SEC proposed new Exchange Act Rule 10c-1, which would require lenders of securities to provide the material terms of securities lending transactions to a registered national securities association (RNSA), such as FINRA.  FINRA would then make the information publicly available.  The proposed rules are part of an initiative by the SEC and FINRA to increase public access to information on short positions and borrowing related to short positions.

Although the rule would definitely provide an improved level of transparency to market participants regarding short positions, it will also add a significant compliance burden to broker dealers and clearing agencies.

Consistent with recent SEC proposals, the comment period was only open for 30 days following publication in the federal registrar and as such comments closed January 7, 2022.

Background

Securities lending is the market practice by which securities are transferred temporarily from one party, a securities lender, to another, a securities borrower, for a fee.  Most

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March 1, 2022

SEC Denies Expert Market – For Now

As the compliance date for the new 15c2-11 rules looms near, on August 2, 2021, in a very short statement, the SEC shot down any near-term hope for an OTC Markets operated “expert market.”  The SEC short statement indicated that a review of the proposed exemptive order that would allow the expert market is not on its agenda in the short term.  The SEC continued that “[A]ccordingly, on September 28, 2021, the compliance date for the amendments to Rule 15c2-11, we expect that broker-dealers will no longer be able to publish proprietary quotations for the securities of any issuer for which there is no current and publicly available information, unless an existing exception to Rule 15c2-11 applies.”

The statement acts as a great segue for a review as to just what those exceptions may be.  In addition, this blog will discuss the OTC Markets proposed expert market and finish with a broader refresher on the new 211 rules including the

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August 17, 2021

Digital Asset Securities – Progress For Broker Dealers

In December 2020, the SEC issued a statement and request for comment regarding the custody of digital asset securities by broker-dealers.  The Statement and request for comment sets forth suggestions for complying with the Customer Protection Rule and lists certain requirements that a broker-dealer could comply with to ensure that it would not be subject to an enforcement proceeding for violation of the Customer Protection Rule.

Two months later, in February 2021, the SEC Division of Examinations issued a risk alert focused on digital asset securities.  These statements were the first hitting head on the topic of digital asset custody since an August 2019 joint statement by the SEC and FINRA on the custody of digital assets (see HERE) and October 2019 joint statement by the SEC, FinCEN and the CFTC (see HERE).

The SEC and FINRA have been discussing issues of custody related to tokens and digital assets for years.  For example, issues surrounding the custody

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August 3, 2021

Finders – Part 3

Following the SEC’s proposed conditional exemption for finders (see HERE), I’ve been writing a series of blogs on the topic of finders.  New York recently proposed, then failed to adopt a new finder’s regulatory regime.  California and Texas remain the only two states with such allowing finders for intra-state offerings.   Also, a question that has arisen several times recently is whether an unregistered person can assist a U.S. company in capital raising transactions outside the U.S. under Regulation S, which I addressed in the second blog in this series (see HERE).  This blog will discuss the New York, California and Texas rules.

New York

On December 1, 2020, the state of New York adopted an overhaul to some of its securities laws including modernizing registration and filing requirements with the Investor Protection Bureau and the Office of the Attorney General.  Although the proposed rules would have adopted a new definition of “finder” and required licensing and examinations

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March 16, 2021

SEC Proposed Conditional Exemption For Finders

Over the years I have written many times about exemptions to the broker-dealer registration requirements for entities and individuals that assist companies in fundraising and related services (see, for example: HERE). Finally, after years of advocating for SEC guidance on the topic, the SEC has proposed a conditional exemption for finders assisting small businesses in capital raising.  The proposed exemption will allow for the use of finders to assist small businesses in raising capital from accredited investors.

In its press release announcing the proposal, SEC Chair Clayton acknowledged the need for guidance, stating, “[T]here has been significant uncertainty for years, however, about finders’ regulatory status, leading to many calls for Commission action, including from small business advocates, SEC advisory committees and the Department of the Treasury.  If adopted, the proposed relief will bring clarity to finders’ regulatory status in a tailored manner that addresses the capital formation needs of certain smaller issuers while preserving investor protections.”

Separately, New York

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November 17, 2020

SEC Fall 2018 Regulatory Agenda

In October 2018, the SEC posted its latest version of its semiannual regulatory agenda and plans for rulemaking with the U.S. Office of Information and Regulatory Affairs. The Office of Information and Regulatory Affairs, which is an executive office of the President, publishes a Unified Agenda of Regulatory and Deregulatory Actions (“Agenda”) with actions that 60 departments, administrative agencies and commissions plan to issue in the near and long term.  The Agenda is published twice a year.

Like the Spring 2018 Agenda, the fall Agenda is broken down by (i) “Prerule Stage”; (ii) Proposed Rule Stage; (iii) Final Rule Stage; and (iv) Long-term Actions. The Proposed and Final Rule Stages are intended to be completed within the next 12 months and Long-term Actions are anything beyond that. The number of items to be completed in a 12-month time frame has jumped up with 36 items compared to 21 on the spring list.

Interestingly, following President Trump’s recent call to eliminate

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November 27, 2018

The Payment Of Finders’ Fees- An Ongoing Discussion

Introduction

As a recurring topic, I discuss exemptions to the broker-dealer registration requirements for entities and individuals that assist companies in fundraising and related services. I have previously discussed the no-action-letter-based exemption for M&A brokers, the exemptions for websites restricted to accredited investors and for crowdfunding portals as part of the JOBS Act and the statutory exemption from the broker-dealer registration requirements found in Securities Exchange Act Rule 3a4-1, including for officers, directors and key employees of an issuer. I have also previously published a blog on the American Bar Association’s recommendations for the codification of an exemption from the broker-dealer registration requirements for private placement finders. I’ve included links to each of these prior articles in the conclusion to this blog.

A related topic with a parallel analysis is the use of finders for investors and investor groups, an activity which has become prevalent in today’s marketplace. In that case the investor group utilizes the services

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July 5, 2017

Florida Broker-Dealer Registration Exemption For M&A Brokers

Following the SEC’s lead, effective July 1, 2016, Florida has passed a statutory exemption from the broker-dealer registration requirements for entities effecting securities transactions in connection with the sale of equity control in private operating businesses (“M&A Broker”). As discussed further below, the new Florida statute, together with the SEC M&A Broker exemption, may have paved the way for Florida residents to act as an M&A broker in reverse or forward merger transactions involving OTCQX-traded public companies without broker-dealer registration.

Florida has historically had stringent broker-dealer registration requirements in connection with the offer and sale of securities. Moreover, Florida does not always mirror the federal registration requirements or exemptions. For example, see my blog HERE detailing some state blue sky concerns when dealing with Florida, including the lack of an issuer exemption from the broker-dealer registration requirements for public offerings.

However, in a move helpful to merger and acquisition (M&A) transactions in the state, Florida has now passed an M&A

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October 25, 2016

FINRA Proposes New Category Of Broker-Dealer For “Capital Acquisition Brokers”

In December, 2015, FINRA proposed rules for a whole new category of broker-dealer, called “Capital Acquisition Brokers” (“CABs”), which limit their business to corporate financing transactions. In February 2014 FINRA sought comment on the proposal, which at the time referred to a CAB as a limited corporate financing broker (LCFB). Following many comments that the LCFB rules did not have a significant impact on the regulatory burden for full member firms, the new rules modify the original LCFB proposal in more than just name. The new rules will take effect upon approval by the SEC and are currently open to public comments.

A CAB will generally be a broker-dealer that engages in M&A transactions, raising funds through private placements and evaluating strategic alternatives and that collects transaction based compensation for such activities. A CAB will not handle customer funds or securities, manage customer accounts or engage in market making or proprietary trading.

As with all FINRA rules, the proposed

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January 26, 2016

Finders- The Facts Related To Broker-Dealer Registration Requirements

Introduction

As a recurring topic, I discuss exemptions to the broker-dealer registration requirements for entities and individuals that assist companies in fundraising and related services.  I have previously discussed the no-action-letter-based exemption for M&A brokers, the exemptions for websites restricted to accredited investors and for crowdfunding portals as part of the JOBS Act and the statutory exemption from the broker-dealer registration requirements found in Securities Exchange Act Rule 3a4-1, including for officers, directors and key employees of an issuer.  I have also previously published a blog on the American Bar Association’s recommendations for the codification of an exemption from the broker-dealer registration requirements for private placement finders.   I’ve included links to each of these prior articles in the conclusion to this blog. 

A related topic with a parallel analysis is the use of finders for investors and investor groups, an activity which has become prevalent in today’s marketplace.  In that case the investor group utilizes the services of a finder

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August 25, 2015

SEC Proposes Broadening Of Broker-Dealer Registration Rules To Include Proprietary And High-Frequency Traders

On March 25, 2015, the SEC proposed rule amendments to require high-frequency and off-exchange traders to become members of FINRA.  The amendments would increase regulatory oversight over these traders.

Over the years many active cross-market proprietary trading firms have emerged, many of which engage in high-frequency trading.  These firms generally rely on the broad proprietary trading exemption in rule 15b9-1 to forgo membership with, and therefore regulatory oversight by, FINRA.  The rule change is specifically designed to require these high-frequency traders to become members of FINRA and submit to its review and oversight. 

The proposed rule change amends Rule 15b9-1 of the Securities Exchange Act of 1934, as amended (“Exchange Act”) to narrow a current exemption from FINRA membership if the broker is a member of a national securities exchange, carries no customer accounts and has annual gross income of no more than $1,000 derived from sources other than the exchange to which they are a member.  Currently, income

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May 12, 2015

SEC Sanctions BITCOIN Exchange Operator-A Case Study In Basic Registration And Exemption Requirements

ABA Journal’s 10th Annual Blawg 100

——————————————————————————————————

On December 8, 2014, the SEC settled charges against a creative, but ill informed, entrepreneur for acting as an unlicensed broker-dealer and for violations of Section 5 of the Securities Act of 1933, as amended.  Ethan Burnside and his company, BTC Trading Corp., operated two online enterprises, BTC Virtual Stock Exchange and LTC-Global Virtual Stock Exchange, that traded securities using virtual currencies, bitcoin or litecoin.  Neither of these exchanges were registered as broker-dealers or stock exchanges.  In addition, Burnside and his company conducted separate transactions in which he offered investors the opportunity to use virtual currencies to buy or sell shares in the LTC-Global exchange itself and a separate litecoin mining venture he owned and operated.  These offerings were not registered with the SEC as required under the federal securities laws.

According to the SEC release on the matter, “the exchanges provided account holders the ability to use bitcoin or litecoin to buy,

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December 16, 2014

Exemption to Broker-Dealer Registration Requirements for Officers, Directors and Key Employees

The topic of using unlicensed persons to assist in fundraising activities is discussed almost daily in the small and microcap community.  For many years the SEC has maintained a staunch view that any and all activities that could fall within the broker-dealer registration requirements set forth in Section 15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), require registration. See also the SEC Guide to Broker-Dealer Registration on the SEC website.

In my blog on February 18th, 2014  I talked about the new no-action-letter-based exemption for M&A brokers, the exemptions for websites restricted to accredited investors and for crowdfunding portals as part of the JOBS Act.   In this blog, I am focusing on the statutory exemption from the broker-dealer registration requirements found in Securities Exchange Act Rule 3a4-1, including for officers, directors and key employees of an issuer.

Exchange Act Rule 3a4-1  – Persons Associated with an Issuer that are not Required to be Licensed as

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May 20, 2014

The SEC Establishes Key Exemption to the Broker-Dealer Registration Requirements for M&A Brokers

On January 31, 2014, the SEC Division of Trading and Markets issued a no-action letter in favor of entities effecting securities transactions in connection with the sale of equity control of private operating businesses (“M&A Broker”).  The SEC stated that it would not require broker-dealer registration for M&A Brokers arranging for the sale of private businesses, in accordance with the facts and circumstances set forth in the no action letter, as described below.

For many years the SEC has maintained a staunch view that any and all activities that could fall within the broker-dealer registration requirements set forth in Section 15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), require registration. See also the SEC Guide to Broker-Dealer Registration (2008) on the SEC website.

In accordance with the SEC Guide to Broker-Dealer Registration, providing any of the following services may require the individual or entity to be registered as a broker-dealer:

  • “finders,” “business brokers,” and
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February 18, 2014

Will FINRA Rule Changes Related to Private Placement Further Deter Broker Dealers From Placing the Securities of Small Businesses?

On August 19, 2013, FINRA published Regulatory Notice 13-26 about the updated Private Placement Form that firms must file with FINRA when acting as a placement agent for the private placement of securities.  A copy of the form is included with the regulatory notice at www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p325359.pdf.  The Form went effective on July 1, 2013.  FINRA has also updated the FAQs relating to the Private Placement Form.  The updated Private Placement Form has six new questions:

  • Is this a contingency offering?
  • Does the issuer have
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September 3, 2013

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