Exclusions from the Broker-Dealer Definition
In Unit 3, you learned who qualifies as a broker-dealer (BD) and how registration works. Now let's look at the flip side: certain entities that fall entirely outside the BD definition under the Uniform Securities Act (USA).
Exclusion vs. Exemption
This is one of the most commonly tested distinctions on the Series 63.
| Concept | Meaning | Registration Required? |
|---|---|---|
| Exclusion | The person does not meet the definition of "broker-dealer" at all | No, the requirement never applies |
| Exemption | The person meets the BD definition but is relieved from registering | No, but only because of the specific exemption |
The USA uses exclusions from the BD definition, not exemptions. This matters because the legal reasoning is different: an excluded entity was never a BD in the first place.
Key point: Even excluded entities remain subject to the antifraud provisions of the USA. Being outside the BD definition does not shield anyone from fraud liability.
Entities Excluded from the BD Definition
The following are not broker-dealers under the USA:
| Excluded Entity | Rationale |
|---|---|
| Agents | An agent represents a BD; the agent is not the BD itself |
| Issuers | A company selling its own securities is an issuer, not a BD (unless separately engaged in BD activity) |
| Banks | Federally regulated financial institutions are excluded |
| Savings institutions | Federally regulated; excluded from BD definition |
| Trust companies | Excluded from BD definition |
Exam Tip: Gotchas
- Bank holding companies are NOT excluded from the BD definition. Only the bank itself qualifies for the exclusion. If the exam asks whether a bank holding company must register as a BD, the answer is yes (assuming it is engaged in BD activity).
The No-Place-of-Business Exclusion
A person with no place of business in the state may be excluded from the BD definition if one of two conditions is met.
Both elements must be present:
- The firm has no office in the state, AND
- One of the following qualifying conditions applies
- (A) Institutional-only transactions: Effects transactions exclusively with or through: issuers, other BDs, banks, savings institutions, trust companies, insurance companies, investment companies, pension or profit-sharing trusts, or other institutional buyers
- (B) Existing customer in the state: The person is licensed in the state where it maintains its place of business AND deals only with an existing customer whose residence is not in that state
Condition A turns on the word "exclusively." Even one retail customer transaction in the state destroys the exclusion entirely.
Condition B is sometimes called the "snowbird" or "vacation" rule. It allows a BD registered in its home state to serve an existing client who happens to be temporarily present in another state, provided the client is not a resident of that state.
Exam Tip: Gotchas
- There is no de minimis exemption for broker-dealers under the USA. Investment advisers have a five-client de minimis exemption, but BDs do not. If a BD with no office in the state solicits even one retail customer there, the no-place-of-business exclusion is lost.
Federal vs. State Registration
Federal registration with the SEC under the Securities Exchange Act does not replace state registration.
- A BD registered with the SEC must also register in each state where it conducts business
- Federal registration does not satisfy, preempt, or substitute for state registration requirements
- The one area of federal preemption: a state cannot impose net capital requirements higher than those set by the SEC