Quick Answer
The Uniform Securities Act excludes agents, issuers, banks, savings institutions, and trust companies from the broker-dealer (BD) definition entirely, plus a firm with no in-state office that deals only with institutions or serves an existing customer whose residence is outside that state. Excluded persons still answer to the antifraud provisions, and federal registration never substitutes for state registration.
Unit 3 covered who qualifies as a BD and how registration works. This lesson covers the opposite question: which persons never meet the BD definition at all, so the registration requirement never reaches them in the first place.
Exclusion vs. Exemption: What's the Difference?
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.
Which Entities Are 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 | Excluded by entity type; the statute does not condition this on federal or state charter |
| Savings institutions | Excluded by entity type; the statute does not condition this on federal or state charter |
| 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).
What Is 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 in the state exclusively with or through: the issuers of the securities involved in those transactions, other BDs, or banks, savings institutions, trust companies, insurance companies, investment companies, pension or profit-sharing trusts, or other financial institutions or institutional buyers (whether acting for themselves or as trustees)
- (B) Existing customer whose residence is elsewhere: The person is licensed in the state where it maintains its place of business AND, in the state where it has no office, offers and sells only to an existing customer whose residence is not in that no-office state
Condition A turns on the word "exclusively." Even one transaction with a non-institutional customer in the state defeats Condition A. Condition B is a separate, independent path and may still apply.
Condition B is sometimes called the "snowbird" or "vacation" rule. It allows a BD licensed in its home state to serve an existing client whose residence is not in the no-office state. The client does not need to be only temporarily present there; residence outside the state is the actual test, not the length of a visit.
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 effects a transaction with a retail customer who resides in that state, Condition A's "exclusively" test fails and Condition B cannot save it (Condition B reaches only existing customers whose residence is outside the state).
- Condition A's pension or profit-sharing trusts qualify with no minimum asset size. Do not import the investment-adviser world's $1 million employee-benefit-plan threshold into this BD exclusion; nothing in Condition A conditions the trust's status on its asset size.
Does Federal Registration Replace 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
- Federal law does cap state authority in several areas. The act makes a state's minimum capital, custody, margin, financial-responsibility, recordkeeping, bonding, and financial or operational reporting requirements for BDs all subject to the limitations of the Securities Exchange Act. A state cannot exceed the SEC's standards in any of these areas.
What Should You Check on Exam Day?
- Confirm whether a question is testing an exclusion (never a BD) or an exemption (a BD relieved from registering); the USA only uses exclusions for BDs
- Match the no-place-of-business exclusion's two elements: no office in the state, AND either exclusively institutional dealing or an existing out-of-state customer
- Remember excluded persons still face antifraud liability, and federal SEC registration never substitutes for state registration