Dealers registration

Foreign Broker-Dealers in the U.S.: Full Registration or Rule 15a-6 Chaperone Services?

Navigating the U.S. securities market requires an understanding of regulatory requirements, particularly for entities involved in the brokering and dealing of securities.

The process of registering as a broker-dealer in the United States is complex, involving stringent compliance with federal, state, and self-regulatory organization (SRO) guidelines. This registration is crucial for maintaining market integrity and investor protection, ensuring that all participants operate within the bounds of the law.

However, for foreign financial institutions, engaging with U.S. institutional investors can be particularly challenging due to the need for SEC registration.

SEC Rule 15a-6, commonly known as the "Foreign Broker-Dealer Chaperoning Rule," offers a solution. This rule allows foreign financial institutions to operate in the U.S. market under specific conditions without full registration, provided they utilize a licensed U.S. broker-dealer as a chaperone.

So should you register as a broker-dealer in the U.S. or use SEC rule 15a-6 chaperoning?

By examining the requirements, activities triggering registration, potential risks, available exemptions, and the benefits of chaperone services, we will provide a detailed guide to help you decide the best approach for your business.

Understanding Broker-Dealer Registration

To navigate the U.S. securities market, it is important to understand the definition and roles of brokers and dealers under the Securities Exchange Act of 1934, along with the registration requirements involved.

Definition and Roles of Brokers and Dealers

Under the Securities Exchange Act of 1934, the terms "broker" and "dealer" have specific definitions that determine their roles and obligations in the securities market:

  • Definition of Broker (Section 3(a)(4)(A)): A broker is any person or entity engaged in the business of effecting transactions in securities for the account of others. Brokers facilitate the buying and selling of securities on behalf of clients, earning commissions or fees for their services.
  • Definition of Dealer (Section 3(a)(5)(A)): A dealer is any person or entity engaged in the business of buying and selling securities for their own account, either through a broker or otherwise. Dealers typically engage in principal trading, where they buy and sell securities from their own inventory.

Broker-Dealer Registration Requirements

Registering as a broker-dealer involves several regulatory steps to ensure compliance with federal and state laws, as well as self-regulatory organization (SRO) requirements.

SEC Registration (Section 15(a)(1) of the Exchange Act)

Any broker or dealer who uses the mail or any other means of U.S. interstate commerce to facilitate transactions in securities, or to promote the buying or selling of securities, is required to register with the SEC.

Any broker or dealer using the mails or any means or instrumentality of U.S. interstate commerce to effect transactions in, or to induce the purchase or sale of, any security must register with the SEC. This is a critical first step for any entity engaging in securities transactions in the U.S.

Self-Regulatory Organization (SRO) Membership

In addition to SEC registration, broker-dealers must become members of an SRO. The Financial Industry Regulatory Authority (FINRA) is the primary SRO for U.S. broker-dealers. Membership in FINRA involves adherence to its rules and regulations, which are designed to protect investors and maintain market integrity.

State Registration Requirements

Each U.S. state and territory has its own registration requirements for broker-dealers operating within its jurisdiction. For example, in the state of Utah, the Utah Uniform Securities Act outlines specific licensing requirements for broker-dealers and their personnel. Compliance with each state's regulations is essential for legally conducting securities business across multiple jurisdictions.

Registration for Associated Persons of Broker-Dealers

Certain associated persons, such as representatives and principals of a broker-dealer, must also register with FINRA and potentially other SROs. Additionally, they may need to register as agents or salespersons under state securities laws. 

Broker Dealers

Net Capital Requirements

The minimum net capital requirements for registering a broker-dealer in the US are set in the SEC’s Rule 15c3-1. Net capital requirements can range from $5,000 to many millions of dollars.

Anti-Money Laundering (AML) Program

Broker-dealers are required to implement an AML Program including customer identification, monitoring of transactions, and reporting of suspicious activities to prevent financial crimes.

For a more complete list of registration requirements, please see our article titled Broker-Dealer Registration Requirements in the US: A Step-by-Step Guide to Registering a Broker-Dealer Firm.

Activities and Compensation Structures Triggering Broker-Dealer Registration

Understanding the specific activities and compensation structures that trigger broker-dealer registration is essential for compliance with U.S. securities regulations. The SEC and courts use a "facts-and-circumstances" approach to determine whether an entity or individual must register as a broker-dealer.

Certain activities can trigger the need for broker-dealer registration. Engaging in any of the following actions, particularly in combination, often requires compliance with broker-dealer regulations:

  • Structuring securities transactions
  • Identifying potential investors
  • Soliciting securities transactions
  • Screening participants for creditworthiness
  • Negotiating terms
  • Providing investment advice
  • Taking orders or executing transactions
  • Handling customer securities or funds

Importance of Transaction-Based Compensation

The type of compensation received can also be a significant indicator of broker status. Transaction-based compensation is a hallmark of broker activity and generally requires registration.

Payments contingent on the value or completion of a securities transaction, such as commissions or success fees. This form of compensation is a strong indicator of broker activity and usually mandates registration. For example:

  • Commissions: Receiving a percentage of the transaction value as a fee for facilitating the trade.
  • Success Fees: Payments contingent on the successful completion of a securities offering or transaction.
  • Indirect Transaction-Based Compensation: Even flat fees or salaries can be considered transaction-based if they fluctuate with the volume or value of transactions.

The SEC scrutinizes the economics of compensation arrangements to determine if compensation is transaction-based. For instance, a flat fee periodically recalculated based on transaction volumes may still be viewed as transaction-based compensation.

The SEC has denied no-action relief in cases where individuals performed broker-like activities without direct transaction-based compensation. For example, an investment adviser proposing to solicit clients and negotiate terms for private placements without receiving transaction-based compensation was still considered a broker by the SEC.

Risks of Operating as an Unregistered Broker-Dealer

Engaging in broker-dealer activities without proper registration can lead to severe legal and financial repercussions. Understanding these risks is essential for any entity or individual involved in the securities market to ensure compliance and avoid significant penalties.

Potential Regulatory Actions

  • Cease-and-Desist Orders: The SEC or state regulators can issue cease-and-desist orders to immediately halt unregistered broker-dealer activities. These orders are designed to prevent further violations and can lead to permanent injunctions.
  • Court Injunctions: Courts may issue injunctions to prohibit unregistered activities, enforce compliance, and address any ongoing violations. Such injunctions are legally binding and can significantly disrupt business operations.
  • Civil Penalties: Unregistered broker-dealers may face substantial civil fines and disgorgement of profits obtained through illegal activities. These financial penalties can be substantial and impact the overall financial health of the firm.
  • Criminal Liabilities: In severe cases, individuals may be subject to criminal prosecution, which can result in imprisonment and additional fines. Criminal charges can arise from intentional violations of securities laws and fraudulent activities.
  • Investor Rescission Rights: Investors involved in transactions facilitated by unregistered broker-dealers may have the right to rescind their investments. This means they can demand a return of their investment funds, potentially leading to significant financial liabilities for the unregistered broker-dealer.
  • Financial Liabilities: Beyond rescission rights, unregistered broker-dealers may be liable for additional damages claimed by investors, including losses incurred due to the lack of proper regulatory oversight and protection.
  • Regulatory Actions and Public Records: Operating as an unregistered broker-dealer can severely damage a firm’s reputation. Regulatory actions and legal penalties become public records, which can erode trust and deter potential clients or partners from engaging with the firm in the future.
  • Loss of Client Confidence: The negative publicity associated with regulatory actions can lead to a loss of client confidence and result in the termination of existing business relationships. Rebuilding trust in the financial market can be a long and challenging process.
  • State-Specific Fines and Penalties: Each state has its own set of regulations and penalties for unregistered broker-dealer activities, which can add to the financial burden of non-compliance. These fines can be cumulative, leading to significant financial outlays for firms operating across multiple jurisdictions.
  • State Injunctions: State regulators can issue injunctions to stop unregistered activities within their jurisdiction, further complicating business operations and compliance efforts. Firms must navigate varying state requirements to ensure full compliance.
  • Control Persons: Section 20 of the Exchange Act holds control persons—those with significant influence over the operations of the unregistered broker-dealer—liable for violations, provided they cannot prove they acted in good faith and did not directly or indirectly induce the violations.
  • Aiders and Abettors: Individuals or entities that knowingly assist in the unregistered broker-dealer’s violations may also be held liable. This can include business partners, associates, and even external advisors who facilitate or endorse non-compliant activities.

Exemptions from Broker-Dealer Registration

Operating as a broker-dealer requires strict compliance with registration requirements, but there are specific exemptions available that can allow entities to conduct certain activities without full registration.

These exemptions are crucial for entities looking to engage in securities transactions while avoiding the extensive process of broker-dealer registration.

Below, we explore key exemptions:

  • Issuer Exemption
  • M&A Broker Exemption
  • Foreign Broker-Dealer Exemption

Exemption 1. Issuer Exemption

The Issuer Exemption, under SEC Rule 3a4-1, allows associated persons of an issuer to avoid broker registration under certain conditions. This exemption is premised on the idea that issuers selling their own securities are not acting as brokers for others.

To qualify for this exemption, the following conditions must be met:

  1. No Statutory Disqualification: The associated person must not be subject to any statutory disqualification as defined in Section 3(a)(39) of the Exchange Act.
  2. No Transaction-Based Compensation: The person cannot be compensated by the payment of commissions or other remuneration based either directly or indirectly on transactions in securities.
  3. Not an Associated Person of a Broker-Dealer: The individual must not be associated with a registered broker-dealer.
  4. Meets any of the

The Issuer Exemption applies in three specific scenarios:

  1. Restricted Sales: The person can sell securities to financial firms, in connection with reorganizations, or under employee benefit plans.
  2. Limited Sales: The person must primarily perform substantial duties for the issuer other than selling securities, should not have been a broker or dealer within the last year, and cannot participate in the sale of securities more than once every 12 months.
  3. Passive Sales: The individual can only respond to unsolicited requests from potential investors or perform administrative work involved in securities transactions.

Exemption 2. M&A Broker Exemption

The M&A Broker Exemption (effective as of March 29, 2023) allows brokers who facilitate mergers and acquisitions of privately held companies to avoid full broker-dealer registration under the following conditions.

  1. Eligibility of Privately Held Companies: The company involved must have no class of securities registered under Section 12 of the Exchange Act and meet specific revenue or EBITDA thresholds.
  2. Control and Management Involvement: After the transaction, the buyer must control the company and be actively involved in its management.
  3. Financial Statements: Buyers must have reasonable access to the company’s financial statements before completing the transaction.

Disqualification Scenarios

M&A brokers are disqualified from relying on this exemption if they have been barred or suspended from association with a broker-dealer by the SEC, any state, or any self-regulatory organization.

Excluded Activities

M&A brokers cannot receive, hold, or transmit funds or securities in connection with the transaction, engage in public offerings, deal with shell companies (except business combination-related shells), provide financing for the transaction, or represent both buyer and seller without written consent from both parties.

Exemption 3. Foreign Broker-Dealer Exemption

Foreign broker-dealers may also be exempt from U.S. registration requirements if they meet certain conditions under Rule 15a-6 of the Exchange Act.

The 15a-6 rule permits foreign broker-dealers to engage in limited activities with U.S. clients without registering, provided they comply with the following guidelines.

  • Limited U.S. Business: The foreign broker-dealer must limit its securities business with U.S. clients to certain specified activities, such as unsolicited transactions.
  • Intermediary Requirement: When dealing with institutional investors or major U.S. institutional investors, transactions must be effected through a registered U.S. broker-dealer acting as an intermediary. (If you want to learn more about this, get in touch with us).
  • Research Distribution: The foreign broker-dealer can distribute research reports to major U.S. institutional investors under certain conditions, including that the reports are not used to solicit transactions.
  • Compliance with U.S. Regulations: The foreign broker-dealer must comply with applicable U.S. regulations, including maintaining records and providing the SEC with access to those records upon request.

Understanding and utilizing these exemptions can provide significant flexibility for entities involved in securities transactions without the burden of full broker-dealer registration. For more detailed explanations on these exemptions, see our article titled Exemptions to Broker-Dealer Registration: Issuer, M&A Broker, and 15a-6 Chaperone Explained.

Broker Registration

Introduction to SEC Rule 15a-6 Chaperone Services

What is 15a-6?

SEC Rule 15a-6 is a regulation under the Securities Exchange Act of 1934 that delineates the conditions under which non-U.S. broker-dealers can engage with U.S. institutional investors without registering as a broker-dealer in the United States.

The primary objective of Rule 15a-6 is to facilitate cross-border securities transactions while ensuring robust investor protection and maintaining market integrity.

SEC Rule 15a-6 allows foreign broker-dealers to operate within the U.S. market under specific circumstances without the need for full SEC registration. Instead, they can partner with a licensed U.S. broker-dealer, known as a "chaperone," who oversees and facilitates these transactions in compliance with U.S. securities laws.

This regulatory framework aims to balance the global nature of financial markets with the SEC's mandate to protect U.S. investors and uphold market standards.

Conditions for Foreign Broker-Dealers to Engage with U.S. Investors

Rule 15a-6 sets forth several conditions under which non-U.S. broker-dealers can interact with U.S. institutional investors:

  • Unsolicited Transactions: Foreign broker-dealers can engage in transactions initiated by U.S. investors without solicitation.
  • Specific Transactions with Qualified Institutional Buyers (QIBs): They can conduct business with certain qualified institutional buyers and major U.S. institutional investors, provided these transactions are intermediated by a registered U.S. broker-dealer.
  • Distribution of Research Reports: Foreign broker-dealers are allowed to distribute research reports to major U.S. institutional investors under specific conditions, ensuring these reports are not used to solicit transactions.
  • Intermediary Requirement: When dealing with U.S. institutional investors, transactions must be effected through a registered U.S. broker-dealer acting as an intermediary, who ensures compliance with U.S. regulations.

Role and Responsibilities of a 15a-6 Chaperone

A 15a-6 chaperone, also known as a chaperoning broker, serves as the intermediary between non-U.S. financial institutions and U.S. institutional investors.

The chaperone's primary responsibilities include:

Regulatory Compliance

Ensuring all transactions comply with U.S. securities laws and SEC regulations. This involves supervising the execution of trades, maintaining detailed records, and adhering to reporting requirements to ensure transparency and accountability.

Facilitating Transactions

Acting as a bridge, the chaperone enables foreign financial institutions to offer their investment products and services to U.S. institutional investors smoothly. This involves providing the necessary oversight to ensure that all activities are conducted within the legal framework.

Expert Guidance

A reputable 15a-6 chaperone possesses deep expertise in regulatory compliance and cross-border finance. They offer comprehensive support and guidance, helping foreign financial institutions navigate the complexities of the U.S. financial market, including understanding regulatory nuances and mitigating potential risks.

Risk Management

By ensuring adherence to regulatory standards, chaperones help mitigate the potential risks associated with cross-border transactions. This includes safeguarding both the foreign broker-dealers and U.S. investors involved in these transactions from legal and financial repercussions.

 

Broker-Dealer Registration Requirements: Special Situations

Finders

A "finder" is an individual who helps connect potential buyers and sellers of securities, typically for a fee.

Unlike brokers, finders operate in a more limited capacity and do not engage in activities that would require them to register as brokers under the Securities Exchange Act of 1934.

Their primary role is introductory, facilitating initial contact between parties without getting involved in the negotiation or execution of transactions.

In 2020, the SEC proposed a conditional exemption allowing natural persons to engage in certain capital-raising activities for accredited investors without needing to register as brokers. This proposal delineates two tiers of finders, each with specific permitted activities and limitations:

  • Tier I Finders:
    • Limited to providing contact information of potential investors for a single capital-raising transaction by a single issuer within a 12-month period.
    • Prohibited from having any direct contact with potential investors regarding the issuer.

 

  • Tier II Finders:
    • Allowed to provide contact information, identify and screen investors, distribute issuer materials, discuss issuer information (without offering investment advice), and arrange meetings.
    • Required to provide certain disclosures to investors, including the nature of their relationship with the issuer, compensation details, and any potential conflicts of interest.
    • Prohibited from engaging in activities such as negotiating terms, handling funds, or advising on the valuation or financial merits of the investment.

Both Tier I and Tier II finders can receive transaction-based compensation under the proposed exemption, provided they adhere to specific conditions, such as only working with issuers not subject to regular SEC reporting requirements and ensuring investors are accredited.

Private Placement Agents: Registration Requirements

Private placement agents, who facilitate the sale of securities in private offerings, generally need to register as brokers under the Exchange Act and comply with state securities laws. Simply engaging in transactions exempt under the Securities Act does not exempt them from broker-dealer registration requirements.

Due diligence is critical when engaging a private placement agent. This involves ensuring that the agent is properly registered and in compliance with all relevant regulatory requirements. Legal counsel should review placement agent agreements for compliance with both the Securities Act and the Exchange Act, including broker-dealer registration considerations.

Broker-Dealer Registration vs 15a-6 Chaperone Services

When deciding whether to register as a full broker-dealer in the U.S. or to use 15a-6 chaperone services, there are several critical factors to consider: cost and time, regulatory burden, flexibility, and market access.

Full Broker-Dealer Registration15a-6 Chaperone Services
Cost and Time ConsiderationsSignificant Investment: Registering as a full broker-dealer requires a substantial financial commitment. Costs include legal fees, compliance costs, and the expenses associated with ongoing regulatory requirements.

Time-Consuming Process: The registration process is lengthy, often taking several months to complete. It involves extensive paperwork, background checks, and the establishment of comprehensive compliance systems.

Cost-Effective: Using 15a-6 chaperone services is generally more cost-effective. The chaperoning broker handles much of the compliance burden, reducing the need for extensive internal resources.

Quicker Access: Leveraging a 15a-6 chaperone allows faster entry into the U.S. market. The setup time is considerably shorter compared to full registration, enabling quicker commencement of business activities.

Regulatory BurdenComprehensive Compliance Requirements: Full registration necessitates adherence to a wide range of regulatory requirements, including SEC rules, FINRA regulations, and state securities laws.

Internal Compliance Infrastructure: Firms must develop and maintain robust internal compliance programs, including regular audits, reporting, and training.

Simplified Compliance: The chaperoning broker assumes much of the regulatory responsibility, ensuring that transactions comply with U.S. securities laws.

Reduced Internal Burden: By utilizing a chaperone, foreign firms can focus on their core business activities while relying on the chaperone’s expertise for regulatory compliance.

Flexibility and Market AccessGreater Control: Full registration provides foreign firms with greater control over their operations and direct access to the U.S. market.

Broader Range of Activities: Registered broker-dealers can engage in a wider range of activities without the limitations imposed by the chaperone arrangement.

Easier Market Entry: Chaperone services offer a streamlined path to entering the U.S. market, particularly for firms looking to engage with institutional investors without the complexities of full registration.

Shared Responsibilities: The chaperone model involves shared regulatory responsibilities, with the U.S. broker-dealer ensuring compliance and facilitating transactions.

 

Choosing between full broker-dealer registration and using 15a-6 chaperone services depends on the specific goals and resources of the foreign financial institution.

Full registration offers greater control and a broader scope of activities but requires a significant investment in time and resources. In contrast, 15a-6 chaperone services provide a cost-effective, efficient way to access the U.S. market with reduced regulatory burdens.

15a-6 chaperone services: Marco Polo Exchange (MPX)

Marco Polo Exchange (MPX) leverages 15a-6 chaperone services to facilitate efficient, compliant access to U.S. markets for foreign financial institutions. By examining MPX’s approach and success stories, we can better understand the practical benefits of using chaperone services over full broker-dealer registration.

MPX is the largest provider of 15a-6 chaperone services in the United States. We provide foreign financial institutions with a complete suite of services designed to ensure compliance with SEC regulations while enabling smooth cross-border transactions. This includes regulatory oversight, transaction facilitation, expert guidance, and risk management.

Benefits of Using MPX’s Chaperone Services

  • SEC 15a-6 Regulatory Compliance: MPX ensures that all transactions meet the stringent requirements of U.S. securities laws, providing peace of mind to foreign financial institutions. Their deep expertise in regulatory compliance and cross-border finance helps FFIs navigate the complexities of the U.S. financial market efficiently.
  • Operational Efficiency: By leveraging MPX’s infrastructure and expertise, foreign broker-dealers can streamline their operations. MPX’s tech-enabled approach not only automates many compliance processes but also reduces the administrative burden on foreign firms, allowing them to focus on their core business activities.
  • Access to U.S. Markets: Non-U.S. broker-dealers can engage with U.S. institutional investors without the need for full SEC registration. This facilitates quicker and more cost-effective market entry, providing foreign firms with valuable opportunities for growth and expansion.
  • Risk Management: Through rigorous adherence to regulatory standards, MPX helps mitigate the potential risks associated with cross-border transactions. This safeguards both the foreign broker-dealers and U.S. investors involved in these transactions.

MPX Passport

A standout feature of MPX is its Reg-Tech enabled platform, MPX Passport. This innovative platform integrates advanced technology to automate compliance checks, monitor transactions in real time, and ensure adherence to U.S. securities laws. The MPX Passport streamlines operations and enhances security, offering a higher level of transparency and efficiency.

Marco Polo Securities, Inc.

MPX provides chaperoning services through its U.S. broker-dealer affiliate, Marco Polo Securities, Inc. This entity is licensed by the SEC to offer chaperoning services, ensuring all transactions facilitated by MPX comply with U.S. regulations.

MPX Client Success Stories

Efficient Market Entry

Several of MPX’s clients have successfully entered the U.S. market using their chaperone services. For instance, a European asset manager utilized MPX Passport to seamlessly comply with SEC regulations, enabling them to quickly establish a presence in the U.S. and begin engaging with institutional investors.

Enhanced Compliance and Efficiency

A major Asian investment firm reported significant improvements in compliance and operational efficiency after partnering with MPX. The firm highlighted the benefits of MPX’s automated compliance checks and real-time transaction monitoring, which not only ensured regulatory adherence but also streamlined their internal processes.

Scalable Solutions for Growth

MPX has helped numerous clients scale their operations in the U.S. market. A mid-sized Latin American brokerage firm expanded its U.S. client base rapidly by leveraging MPX’s chaperone services, highlighting the scalable nature of the solutions provided by MPX.


rule 15a-6 chaperone

Exemptions to Broker-Dealer Registration: Issuer, M&A Broker, and 15a-6 Chaperone Explained

The Securities Exchange Act of 1934 (“Exchange Act”) specifies numerous definitions and requirements for broker-dealers in the United States. It classifies a “broker” as anyone making security transactions on behalf of others and “dealer” as any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise.

In certain circumstances, firms or people can be exempted from having to register as a broker dealer. This blog post will explore the most important exemptions that exist.

Broker-Dealer Registration Requirements

There are multiple factors to consider and forms to go through to register as a broker-dealer

Who needs to register as a broker-dealer?

When defining whether a person or a firm is acting as a broker, the U.S. Securities and Exchange Commission (“SEC”) applies a facts-and-circumstances analysis. They look at multiple factors, including: 

  • Assisting an issuer in structuring securities transactions
  • Identifying potential investors for a securities offering
  • Soliciting securities transactions (including advertising/marketing)
  • Screening potential participants in a transaction for creditworthiness
  • Negotiating between the issuer and the investor(s)
  • Making valuations as to the merits of an investment or giving advice
  • Taking “orders” or facilitating the execution of a securities transaction
  • Handling customer funds or securities.

Compensation Structures

Compensation that the person or firm receives from soliciting investors also plays an important role.

Receiving commissions, fees, or other forms of compensation tied to the success or completion of securities transactions is a strong indicator of broker activity. Indeed, compensation factors are among the most critical when it comes to classifying a person or a firm as a broker-dealer.

There are multiple factors related to a firm receiving a payment as transaction-based compensation, such as the size or completion of any securities transaction, commission, or success fee.

There may be occurrences when a person or firm does not receive transaction-based compensation, but can still be considered a “broker” due to their activities related to securities transactions, such as soliciting clients, negotiating on behalf of clients, etc.

Risks and Consequences for Unregistered Brokers

Engaging in broker activity without a broker-dealer license can cause serious consequences, ranging from reputational harm to criminal liabilities and harsh sanctions. The SEC can block the ability to enforce contracts and the companies may even face criminal prosecution under state and federal law.

Section 20 of the Exchange Act imposes liabilities on “control” persons, subject to a good faith defense, as well as persons who aid and abet anyone in violation of the Exchange Act. The securities laws of some states have similar liability provisions.

Exemptions to Broker-Dealer Registration

There are several exemptions to registering as a broker-dealer:

1. Issuer Exemption

Issuers generally don’t qualify as either brokers or dealers, and hence under specific circumstances are exempt from the broker-dealer registration requirement. They are generally not considered brokers because they don’t sell securities for other firms, and they are generally not considered dealers because while they do sell their own securities, they do not do so as part of their day-to-day business. 

SEC Rule 3a4-1: The Issuer Exemption

SEC Rule 3a4-1 outlines specific conditions under which an associated person of an issuer can be exempt from broker-dealer registration under the Exchange Act. To qualify for this exemption, the person must meet several criteria:

  • No Statutory Disqualification: The person must not have committed certain "bad actor" events as defined in Section 3(a)(39) of the Exchange Act, which includes specific disqualifying misconduct.
  • No Transaction-Based Compensation: The person must not receive compensation that is contingent on the transaction's success, such as commissions or bonuses based on the amount of funds raised.
  • No Association with a Broker-Dealer: The person must not be associated with a broker-dealer, such as being a registered representative engaged in sales activities outside the supervision of the broker-dealer.
  • Meeting One of Three Alternative Arrangements: Additionally, the associated person must satisfy the conditions of one of the following three exemptions:
    • First Exemption (Restricted Sales): The associated person may engage in sales to certain financial institutions, sell securities that are exempt from registration under specific sections of the Securities Act of 1933 (Sections 3(a)(7), 3(a)(9), or 3(a)(10)), conduct sales in connection with reorganizations, or sell securities as part of an employee benefit plan.
    • Second Exemption (Limited Sales): The associated person must primarily perform substantial duties for or on behalf of the issuer other than selling securities and has not been a broker or dealer, or an associated person of a broker-dealer, within the past twelve months; neither did he participate in the sale of securities for any issuer more than once every 12 months.
    • Third Exemption (Passive Sales): The associated person may only engage in passive sales activities, which include responding to unsolicited requests by prospective investors or performing clerical or ministerial work related to effecting any transaction.

Limitations and Additional Requirements

While SEC Rule 3a4-1 provides an exemption from broker-dealer registration under the Exchange Act, associated persons of an issuer must also consider whether they need to register under applicable state securities laws. State regulations can vary, and compliance with these laws is essential to ensure lawful operation in different jurisdictions.

mpx passport

2. M&A Broker Exemption

On March 29, 2023, a new federal exemption became effective under the Exchange Act (Section 15(b)(13)) for brokers facilitating merger and acquisition (M&A) transactions involving certain privately held companies. This M&A Broker Exemption codifies principles from the SEC's 2014 "M&A Broker" no-action letter but includes limitations on the size of the company involved in the transaction.

Federal and State Regulations

The M&A Broker Exemption does not preempt state broker-dealer registration requirements. M&A brokers must still comply with state securities laws, assessing whether they qualify for any exclusions or exemptions under those laws.

Definition of an M&A Broker

An M&A broker is a broker, including any associated persons, involved in effecting securities transactions related to the transfer of ownership of an eligible privately held company. This can involve various activities such as purchase, sale, exchange, issuance, repurchase, redemption, or business combinations involving securities or assets of the company.

Conditions for the Exemption

  • Control and Management: Upon transaction completion, any acquiring party must control the company and be active in its management. Control is presumed if the buyer can vote or sell 25% or more of a class of voting securities or, in partnerships or LLCs, has the right to 25% or more of the capital upon dissolution.
  • Access to Financial Information: Any person offered securities in exchange for assets must receive access to recent fiscal year-end financial statements and other relevant financial information before finalizing the transaction.
  • Eligible Privately Held Company: A privately held company with no registered securities under Section 12 of the Exchange Act and no requirement to file periodic reports under Section 15(d). In the fiscal year preceding the engagement of the M&A broker, the company must have less than $25 million in EBITDA or less than $250 million in gross revenues. These thresholds will adjust for inflation every five years.

Excluded Activities

  • Custody of Funds or Securities: M&A brokers cannot directly or indirectly handle the funds or securities exchanged in the transaction.
  • Public Offerings: M&A brokers cannot engage in public offerings of any securities registered under Section 12 or subject to Section 15(d) reporting.
  • Shell Companies: Transactions involving shell companies are generally excluded unless they are business combination-related shell companies.
  • Providing Financing: Brokers cannot provide financing for the transaction or assist in obtaining financing without complying with applicable laws and disclosing any compensation.
  • Dual Representation: Brokers must disclose and obtain consent if representing both buyer and seller.
  • Passive Buyers: Transactions involving passive buyers are not allowed.
  • Binding Parties: Brokers cannot bind parties to the transaction.

Disqualification

Brokers (including officers, directors, or employees) barred or suspended by the SEC, any state, or SRO from association with a broker-dealer cannot rely on this exemption.

rule 15a-6 chaperone

3. 15a-6 chaperone 

Foreign broker dealers have an exemption from registering as a broker-dealer provided they work with a chaperone service under SEC Rule 15a-6. Such services provide an opportunity to save time and money by employing a licensed US chaperone. Marco Polo Exchange (MPX) is a leading provider of 15a-6 rule service and has experience serving over 100 clients from 50 countries via its revolutionary product called MPX Passport.

What is 15a-6?

Rule 15a-6 of the Exchange Act provides conditional exemptions from broker-dealer registration for foreign broker-dealers that engage in certain specified activities involving U.S. investors. These activities include:

  1. Unsolicited Transactions: Foreign broker-dealers can effect unsolicited securities transactions with U.S. investors. This means that the transaction must be initiated by the U.S. investor, not solicited by the foreign broker-dealer.
     
  2. Research Reports: They can provide research reports to major U.S. institutional investors (“MUSSIs”) and effect transactions in the subject securities with or for those investors. The research reports must comply with certain SEC requirements. Providing research reports to major U.S. institutional investors, and effecting transactions in the subject securities with or for those investors;
     
  3. Chaperoned Transactions: Foreign broker-dealers can solicit and effect transactions with or for U.S. institutional investors or major U.S. institutional investors (“MUSIIs”) if the transactions are conducted through a registered U.S. broker-dealer acting as a “chaperone.” The chaperone must ensure compliance with SEC regulations and take responsibility for certain activities of the foreign broker-dealer.
     
  4. Transactions with Certain Entities: Soliciting and effecting transactions with or for registered broker-dealers, banks acting in a broker or dealer capacity, certain international organizations, foreign persons temporarily present in the U.S., U.S. citizens resident abroad, and foreign branches and agencies of U.S. persons.

MPX facilitates the chaperoning process for foreign broker-dealers through our technology platform, MPX Passport. This platform provides real-time tracking, compliance management, and data insights. The chaperoning is provided by Marco Polo Securities, Inc., the U.S. broker-dealer affiliate of MPX. 


mpx passport

Broker-Dealer Registration Requirements in the US: A Step-by-Step Guide to Registering a Broker-Dealer Firm

Broker-dealer firms are, simply put, what make the financial industry go ‘round.

Their services power the global economy by facilitating capital flow, enhancing liquidity, promoting price discovery, and providing market access for investors.

The United States capital markets are the deepest, most dynamic, and most liquid in the world. The US equity markets alone have a market cap of 52 trillion dollars, or 61% of the global total as of February 2024, according to Visual Capitalist. Not surprisingly, having a US broker dealer license can be a valuable asset

The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) regulate broker-dealers in the US. The broker-dealer registration process can seem daunting at first but the consequences of engaging in broker-dealer activity without the requisite licenses can result in legal trouble with the regulatory authorities

This blog post will provide a general guide to broker dealer registration in the US, depict the services and benefits of a broker-dealer and introduce the broker dealer chaperoning service for foreign financial institutions. Note, however, that this is not to be construed as legal advice, and that firms should consult with an attorney regarding their specific situation. 

But first, 

What is a Broker Dealer in the US?

A US broker-dealer is a financial institution that is licensed to buy and sell securities on behalf of clients (as a broker) and for their own account (as a dealer). The term combines two key functions within the securities industry: 

  • Broker: Acts as an agent for clients in executing buy or sell orders. Brokers earn a commission or fee for this service. Their primary role is to facilitate transactions between buyers and sellers in the financial markets. 
  • Dealer: Acts as a principal, buying and selling securities for their own account. Dealers make a profit from the spread between the bid (buy) and ask (sell) prices. They may also hold an inventory of securities to facilitate trading and provide liquidity in the market. 

Broker-dealer functions and services

Broker-dealers execute trades, provide liquidity, and offer a wide array of services to investors.

Beyond transaction execution, broker-dealers offer advisory services, providing investment recommendations, financial planning, and portfolio management. They also underwrite new issues of securities, lend funds for margin trading, and offer custodial services.

Additionally, many broker-dealers provide online trading platforms, research and analysis, and educational resources to empower investors with the tools and knowledge needed for informed decision-making. 

Who needs to be registered as a broker-dealer?

Anyone engaged in the business of buying or selling securities for themselves or others must be registered as a broker-dealer.

This requirement applies to individuals or firms that execute trades on behalf of clients, facilitate securities transactions, or act as intermediaries in the trading process. Registration is mandatory for entities participating in underwriting new securities issues, market making, and providing investment advice in conjunction with securities transactions. This includes traditional brokerage firms, independent financial advisors, and even trading platforms. It is essential for individuals and companies engaged in transaction-based compensation to understand the complex rules regarding broker-dealer registration with the SEC.

15a-6 chaperone exemption

Broker-dealer registration requirements

To become a registered broker-dealer in the United States, firms and individuals must comply with specific regulatory requirements, which include:

  • Exchange Act Registration: Section 15(a)(1) of the Exchange Act mandates that any broker or dealer using the mail or any other method of U.S. interstate commerce (such as telephone, email, or website) to effect transactions or to solicit the purchase or sale of securities must register with the SEC.
  • Self-Regulatory Organization (SRO) Membership: Besides SEC registration under the Exchange Act, broker-dealers are required to join an SRO. The Financial Industry Regulatory Authority, Inc. (FINRA) serves as the primary SRO for U.S. broker-dealers.
  • State Registration: Every U.S. state and territory has its own registration requirements for individuals conducting securities business as broker-dealers or on behalf of broker-dealers within their jurisdiction. For instance, Utah’s broker-dealer and related personnel licensing requirements are detailed in Sections 61-1-3(1) and (2) of the Utah Uniform Securities Act.
  • Associated Persons of Broker-Dealers: Certain "associated persons" of a broker-dealer must register as "representatives" and/or "principals" with FINRA (and possibly other SROs) and as "agents" or "salespersons" under state securities laws.
  • Net capital requirements: you’ll need to meet minimum net capital requirements set by the SEC and FINRA, which, depending on your specific business, could range. The minimum net capital requirements for registering a broker-dealer in the US are set by the SEC’s Rule 15c3-1. Net capital requirements can range from $5,000 to many millions. Services of a consultant that can help with FINRA registration are somewhere in the range of $40,000 to $60,000
  • Written Supervisory Procedures (WSP): Broker-dealers must establish comprehensive Written Supervisory Procedures to ensure all activities comply with regulatory standards and are properly supervised.
  • Anti-Money Laundering (AML) Program: Broker-dealers are required to implement an Anti-Money Laundering Program that includes customer identification, monitoring of transactions, and reporting of suspicious activities to prevent financial crimes.
  • Business Continuity Plan (BCP): A Business Continuity Plan must be in place for broker-dealers to ensure that critical business operations can continue during and after significant disruptions.
  • Employee Trading Policy: Broker-dealers need an Employee Trading Policy to regulate the personal trading activities of their employees, preventing conflicts of interest and ensuring compliance with securities laws.
  • Beneficiaries: Broker-dealers must disclose detailed information about all direct and indirect owners and beneficiaries to ensure transparency and compliance with regulatory requirements.
  • Organizational Structure: Broker-dealers are required to document their organizational structure, detailing the roles, responsibilities, and hierarchy within the firm to support effective governance and regulatory compliance.

US broker dealer registration can take several months or up to a year, although the exact duration can vary depending on the complexity of the application and the responsiveness of the regulatory authorities.  An example of a timeline can be found in this Medium article

A good first step is to put together a business plan including executive bios and proposed activities. Focus mainly on the technical business lines from a regulatory standpoint, the customer onboarding process, external partnerships, and the flow of customer securities and funds. This can be used as a blueprint to help prepare the other materials for your application. 

Broker-dealer registration: Application forms

  • Form BD: This is the primary application form that must be submitted to the SEC for broker-dealer registration. It requires detailed information about the firm’s business, ownership, and regulatory history.
  • Form U4: This form is used to register associated persons (representatives and principals) with FINRA and other SROs. It collects information about the individual’s background, including employment and disciplinary history.
  • FINRA New Member Application (NMA): In addition to the SEC’s Form BD, firms seeking FINRA membership must complete the NMA, which involves a comprehensive review process including a detailed business plan, supervisory procedures, and financial statements.
  • Form BR: This form is used to register branch offices of the broker-dealer with FINRA and relevant state securities regulators. It provides information about the locations and operations of the branch offices.
  • State-Specific Registration Forms: Individual states may have additional forms or specific requirements for broker-dealer registration. These forms vary by state and must be completed to comply with local regulations.
  • Form ADV (if applicable): If the broker-dealer also provides investment advisory services, they may need to register as an investment adviser and submit Form ADV to the SEC or state securities regulators.

FINRA exams for getting a broker-dealer license

To obtain a broker-dealer license, firms must ensure they have at least two General Securities Principals and one Financial and Operations Principal (FINOP), unless they are a sole proprietorship, in which case only one General Securities Principal is required.

To qualify as a General Securities Principal, individuals must pass the Series 24 exam, which has prerequisites including the Securities Industry Essentials (SIE) exam and the Series 7 exam.

The Series 27 exam qualifies individuals to oversee the financial and operational responsibilities of the broker-dealer.

Additionally, depending on the firm's business activities and roles, other exams may be necessary. To sit for any of these exams, except the SIE, candidates must be sponsored by a broker-dealer. Preparing for these exams requires substantial study time, and while the exams themselves are not particularly engaging, they are a crucial part of the licensing process. Many new firms start with the required Series 24 principals and often outsource their Series 27 responsibilities.

Chief Compliance Officer (CCO)

FINRA requires every broker-dealer to designate a Chief Compliance Officer (CCO). The CCO is tasked with developing, implementing, and overseeing the broker-dealer’s compliance program to ensure adherence to all regulatory requirements. 

Financial and Operations Principal (FINOP)

FINRA also requires broker-dealers to choose a Financial and Operations Principal (FINOP). The FINOP is responsible for managing the financial and operational aspects of the broker-dealer’s business, ensuring regulatory capital requirements are met and accurate financial records are maintained. 

Record retention

Under SEC Rule 17a-4, broker-dealers are required to retain various types of records, such as emails, trading records, customer account information, and financial documents, for specified periods, ranging from several years to the life of the firm. Retained data must be stored in Write Once Read Many (WORM) format and must be accessible by a Designated Third Party (D3P) that can provide it to FINRA upon request. 

Broker dealer registration costs

Registering as a broker-dealer involves fees that firms must consider as part of the application process. Readers are encouraged to go to FINRA’s website for updates on costs. Below is an overview of the fees associated with broker-dealer registration:

  • Membership Fees: New member application fees range from $7,500 to $55,000, depending on the size of the applicant firm and its intended activities. Additional surcharges may apply for firms engaging in clearing and carrying activities, mergers, material changes, ownership changes, transfers of assets, and acquisitions.
  • General Registration Fees: Registration fees for initial Form U4 filings and amendments are $125 per filing. Additional fees may apply for disclosure processing, late disclosures, terminations, and late terminations.
  • Branch Office Registration Fees: Branch office initial registration fees and system processing fees are $75 each per branch office.
  • Qualification Exam Fees: Fees for qualification examinations vary depending on the exam, but range from $60 to $350, and are listed separately by FINRA.
  • Renewal Fees: Renewal fees for broker-dealers encompass annual renewal fees for firm, individual and branches and are calculated based on several factors which are detailed on FINRA’s website.

The Membership Interview and Technology Demo

The Membership Interview is a crucial step in the broker-dealer registration application process, conducted by FINRA to evaluate the applicant firm's preparedness to operate in the securities industry in the US.

During this interview, FINRA reviews the firm's business plan, supervisory procedures, compliance programs, financial condition, and the qualifications of its principals and associated persons.

As part of the Membership Interview, the firm must also conduct a Technology Demo, demonstrating its technological systems and platforms for executing trades, managing customer accounts, monitoring compliance, and safeguarding data.

This comprehensive assessment ensures that the firm meets all regulatory requirements and is equipped to maintain operational integrity and protect investor interests.

broker-dealer chaperoning

Broker-dealer registration exemption for foreign institutions

Did you know that there is a way for foreign firms to avoid the whole broker-dealer registration process altogether?

Under SEC Rule 15a-6, you can hire a licensed US chaperone that will allow your financial institution to operate in the States without registering as a broker-dealer, all while still being compliant with the SEC and FINRA. Employing an experienced 15a-6 chaperone can safeguard your firm from potential legal issues you may encounter in the US. Not only that, but you will have access to expert guidance on how to navigate the intricacies of the US capital markets.

Introducing MPX’s Broker-Dealer Chaperoning Services

If you wish to navigate the registration process with trustworthy guidance, you can hire the professional services of Marco Polo Exchange (MPX). With over 100 clients from 50 countries, this technology company is at the forefront of transforming regulatory compliance and market access within the financial sector and will answer every question your firm may have about engaging in broker-dealer activities inside the US financial market.

MPX has streamlined the 15a-6 chaperoning process through our state-of-the-art platform, MPX Passport.

Passport enables foreign financial institutions to quickly and easily remain compliant by providing comprehensive regulatory and back-office solutions that ensure a smooth, compliant, and efficient experience. Passport is provided for foreign financial institutions that work within a 15a-6 chaperoning agreement with Marco Polo Securities Inc., MPX’s broker-dealer subsidiary.

Key Features of MPX Passport

  • Regulatory Compliance: Ensure full compliance with SEC Rule 15a-6 through a comprehensive suite of tools designed to meet U.S. securities laws.
  • Workflow Management: Manage all aspects of your business operations, including deal placements, trading blotters, research reports, and client interactions, in one centralized platform.
  • Distribution Capabilities: Seamlessly distribute your investment products to U.S. institutional investors through a compliant and efficient electronic environment.
  • Advanced Analytics: Gain insights into your market performance and client relationships with customizable dashboard tools and detailed reporting features.

Benefits of Using MPX Passport

  • Real-Time Tracking: Monitor all U.S. marketing activities in real time.
  • Compliance Management: Ensure all interactions comply with SEC Rule 15a-6 requirements.
  • Data Insights: Access detailed summary information and management dashboards for better business oversight.

mpx passport

Conclusion

In conclusion, navigating the broker-dealer registration process in the United States can be complex and time-consuming, but it is a critical step for any firm seeking to participate in the dynamic U.S. capital markets.

By understanding the requirements set forth by the SEC and FINRA, including registration, compliance, supervisory procedures, and net capital requirements, firms can ensure they meet regulatory standards and avoid potential legal issues.

For foreign institutions, leveraging the broker-dealer chaperoning services under SEC Rule 15a-6 offers a streamlined path to accessing U.S. markets without the full registration burden. MPX’s Broker-Dealer Chaperoning Services, facilitated through the MPX Passport platform and provided by Marco Polo Securities, Inc., the broker-dealer affiliate of MPX, provide comprehensive regulatory and back-office solutions, ensuring compliance and operational efficiency.

Whether you are a domestic firm embarking on the registration journey or a foreign institution seeking U.S. market access, understanding and adhering to these regulatory requirements is essential.

Consulting with legal experts and utilizing professional services like those offered by MPX can provide valuable guidance and support throughout the process, helping your firm to achieve its business objectives while maintaining compliance in the highly regulated U.S. financial landscape.