1985 SEC No-Act. LEXIS 1961
Securities Exchange Act of 1934 -- Section 15(a)
Mar 5, 1985
CORE TERMS: non-profit, brokerage, broker-dealer, discount,
marketing, advertising, registered, Exchange Act, broker, staff, dealer,
promotional, recommendation, no-action, telephone number, compensated,
termination, toll-free, customers, selling, cease, required to register,
enforcement action, services offered, register, person-to-person, participating,
effecting, promoting, promotion
[*1]
Security Pacific Brokers, Inc.
TOTAL NUMBER OF LETTERS:
3
SEC-REPLY-1:
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
February 4, 1985
Anthony W. Djinis, Esq.
Pickard and Gerry
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036
Dear Mr. Djinis:
This is in response to your letters of March 27, 1984, and August 19, 1984, on
behalf of
Security Pacific Brokers, Inc. ("SPBI"), in which you requested the
staff's advice concerning the application of the broker-dealer registration
requirement under Section 15(a) of the Securities Exchange Act of 1934 (the
"Exchange Act") to certain non-profit organizations that may enter into a
marketing arrangement with SPBI, as described below. Based on your letters and
subsequent telephone conversations, I understand the facts to be as follows:
SPBI is a registered broker-dealer and a member of the National Association of
Securities Dealers, Inc. ("NASD"). SPBI proposes to enter into a marketing
arrangement with certain non-profit organizations, including trade associations,
professional associations, and charitable organizations, for the purpose of
advertising and promoting SPBI's discount brokerage services to members of and
persons associated with the [*2]
participating non-profit organizations (collectively referred to as "Members").
SPBI proposes to offer discount brokerage services in exchange listed and
over-the-counter common and preferred stocks, exchange listed options and
corporate and municipal bonds. SPBI will neither underwrite securities nor offer
investment recommendations to members; however, it proposes to provide
standardized, commercially available research materials and investment
information to Members. SPBI will execute and clear transactions through
Financial Clearing and Services Corporation, a registered broker-dealer, and a
member of the NASD and the New York Stock Exchange.
Under the proposed arrangement, the non-profit organization would not be
involved in the discount brokerage activities, but would restrict its activities
exclusively to the promotion and marketing of the program. Such promotional and
marketing activities would include: (1) endorsing the use of SPBI's discount
brokerage services in written communications to its Members; (2) permitting SPBI
to use its name; (3) distributing advertising and other literature such as
account opening forms, material explaining the types of orders and accounts [*3]
available through SPBI, a schedule of SPBI's commission rates, and a toll-free
telephone number that may be used by Members in placing orders or requesting
additional information concerning SPBI's services; (4) providing SPBI with
access to its membership and mailing lists; (5) allowing SPBI to advertise in
its publications; (6) providing SPBI representatives with (booths) or other
access to its conventions and other meetings; and (7) performing incidental
activities to assist SPBI in promoting its discount brokerage services.
All advertising, promotional and other literature used by the non-profit
organization in connection with the proposed marketing arrangement will be
prepared or authorized by SPBI and SPBI will be responsible for its accuracy and
for ensuring that the materials comply with the federal and state securities
laws, along with any relevant rules of securities exchanges and the NASD. Any
reference to the non-profit organization in the advertising, promotional or
other literature will clearly state that the non-profit organization is not a
registered broker-dealer and that all securities brokerage services will be
performed exclusively by SPBI and not by the non-profit [*4]
organization. Moreover, any reference to the non-profit organization will not
appear prominently.
Pursuant to the agreement, the non-profit organization would be required to
maintain segregated files containing all books, records, papers, and other
documents concerning its marketing arrangement with SPBI will comply with all
statutory and regulatory requirements protection, financial responsibility and
recordkeeping rules. Such books, records, papers and documents will be available
for inspection by the Commission.
The non-profit organization and its employees would be prohibited from engaging
in any securities-related activities in connection with the arrangement with
SPBI other than the activities described above. The non-profit organization and
its employees would be strictly prohibited from engaging in brokerage services
including making recommendations to a Member with respect to securities, giving
investment advice to a Member or assisting a Member in making an investment
decision, accepting orders to effect transactions in securities for any Member
or receiving securities and funds to be used in connection with securities
transactions from any Member.
Employees of [*5]
the non-profit organization will not engage in any person-to-person contact with
Members concerning SPBI's brokerage services or participate in an ongoing
relationship between Members and SPBI. All Members wishing to effect
transactions in securities will contact SPBI directly through the use of a
toll-free telephone number provided by SPBI. In the event that a Member seeks
information concerning SPBI's discount brokerage services directly from an
employee of the non-profit organization, such employee will refer the Member to
SPBI when asked to respond to inquiries concerning applications, Member
accounts, or specific securities transactions.
SPBI proposes to compensate the participating non-profit organization for its
promotional and advertising efforts with a percentage of the revenues generated
by the brokerage activities of its Members. Employees of the non-profit
organization would be compensated exclusively by the non-profit organization and
would not under any circumstances receive compensation based on the brokerage
commissions received by SPBI. Compensation to the non-profit organization would
cease immediately upon the termination of the arrangement by the non-profit [*6]
organization and would cease six months after such termination by SPBI. The
non-profit organization will be a person associated with a broker within the
meaning of Section 3(a)(18) of the Exchange Act.
On the basis of the facts set forth above, we would not recommend that the
Commission initiate enforcement action under Section 15(a) of the Exchange Act
against SPBI or a participating non-profit organization if such non-profit
organization enters into the arrangement described above without registering as
a broker-dealer. The foregoing is a staff position regarding enforcement action
only and does not express any legal conclusions regarding the applicability of
statutory or regulatory provisions of the federal securities laws. This position
is based solely on your representations; any different facts or conditions might
require a different response.
Sincerely,
Kathryn V. Natale
Attorney
Office of Chief Counsel
INQUIRY-1:
PICKARD AND GERRY
1800 MASSACHUSETTS AVENUE N.W.
WASHINGTON, D.C. 20036
TELEPHONE (202) 223-4418
August 10, 1984
Kathryn V. Natale, Esq.
Division of Market Regulation
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re:
Security Pacific [*7]
Brokers, Inc. Discount Brokerage Program
Dear Kathryn:
Pursuant to your request, enclosed are sample copies of the types of materials
referred to on page 2 item 2 of our March 27, 1984 letter which
Security Pacific Brokers, Inc. ("SPBI") proposes be sent to members of
non-profit organizations under its proposed marketing arrangement. The first
letter is designed to be sent on the letterhead of the non-profit organization
by a senior representative thereof. The letter will be included in a package of
materials which will also include the other enclosed letter on SPBI's
letterhead. In addition, there would be some type of brochure, which SPBI
presently makes available to its customers, explaining the type of service SPBI
provides and some kind of a response mechanism such as a business reply (to SPBI)
postcard.
If you have any questions or need additional information please call Lee Pickard
or myself.
Sincerely,
Anthony W. Djinis
INQUIRY-2:
PICKARD AND GERRY
1800 MASSACHUSETTS AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE
(202) 223-4418
1934 Act/§ 15(a)
§ 15(b)
§ 3(a)(4)
March 27, 1984
Mary E. Chamberlin, Esq.
Chief Counsel
Division of Market Regulation
Securities and Exchange Commission
[*8]
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Ms. Chamberlin:
We are submitting this letter on behalf of
Security Pacific Brokers, Inc. ("SPBI"), n1 a broker-dealer registered
with the Securities and Exchange Commission ("Commission"), the National
Association of Securities Dealers, Inc. ("NASD") and relevant state
jurisdictions and a member of the New York Stock Exchange. SPBI seeks a
no-action letter from the staff of the Commission with respect to a proposed
marketing arrangement which SPBI plans to enter into with certain non-profit
organizations including trade associations, professional associations,
charitable organizations and other non-profit organizations (hereinafter
referred to as "non-profit organizations") involving the advertising and
promotion of SPBI's discount brokerage program n2 to organizations (hereinafter
referred to as "members").
n1 SPBI's principal office is located in Pasadena, California; its second
service center is located in Memphis, Tennessee.
n2 Under its discount brokerage program, SPBI would offer discount brokerage
services as agent for its customers with respect to exchange listed and
over-the-counter common and preferred stocks, exchange listed options and
corporate and municipal bonds. SPBI will not underwrite securities or offer
investment recommendations to members. However it may provide standardized,
commercially available research materials and investment information to such
members. SPBI will provide execution and clearing services through its
affiliate, Financial Clearing and Services Corporation, a registered
broker-dealer, which is a member of the NASD and the New York Stock Exchange. [*9]
Under the proposed marketing arrangement, as more fully described hereinbelow, a
non-profit organization would limit its activities exclusively to the promotion
and marketing of the SPBI discount brokerage program and would have nothing to
do with the discount brokerage services offered by SPBI. All securities
transactions would be conducted directly between a member and SPBI. The
non-profit organization would conduct itself in the following manner:
1. The marketing and promotional activities of the non-profit organization would
include, among others, some or all of the following: endorsing the use of SPBI's
discount brokerage program; permitting SPBI to use its name; distributing
advertising materials, informational literature and other documents n3 regarding
SPBI's discount brokerage program; providing SPBI with space for advertising in
its publications; providing SPBI with space for advertising in its publications;
providing representatives of SPBI with a (booths) or other access to its
conventions and other meetings; and performing other incidental activities which
assist SPBI in promoting its dicsount brokerage services.
n3 These materials may include forms for opening accounts, an explanation of the
types of orders and accounts involved in the SPBI discount brokerage program, a
schedule of the commissions charged and the toll-free telephone number to be
used by members to place orders with SPBI and obtain additional information
about the SPBI discount brokerage program. [*10]
2. All advertising, promotional and other literature used by a non-profit
organization in connection with the proposed marketing arrangement will either
be prepared by SPBI or reviewed and approved in writing by SPBI prior to its use
and SPBI will bear the responsibility for the accuracy of such advertising. Any
reference to the non-profit organization in such advertising will state clearly
that the non-profit organization is not a registered broker-dealer and will make
clear that all securities brokerage services are performed exclusively by SPBI
and not by the non-profit organization.
3. Neither the non-profit organization nor any of its employees would have any
dealings with members with resepct to securities brokerage transactions which
might be effected by SPBI. All securities transactions will be initiated only by
the member contacting SPBI directly either through the use of a toll-free
telephone number provided by SPBI or otherwise. It is not contemplated that
employees of the non-profit organization will have any person-to-person
communication with any members except in the event a member requests information
about SPBI's discount brokerage program. In such event, [*11]
the employee will either answer only the member's simple administrative
questions, agree to send available literature to the member and/or refer the
member to SPBI. All other questions (including, e.g., inquiries concerning
applications, member accounts, or specific securities transactions) will be
referred to SPBI.
4. The arrangement between SPBI and the non-profit organization would provide
that employees of the non-profit organization be strictly prohibited from
engaging in brokerage services including making any recommendation to a member
with respect to securities, giving investment advice to a member or helping a
member make an investment decision, accepting orders to effect transactions in
securities for any member, and receiving securities and funds to be used in
connection with securities transactions from any member.
5. Employees of the non-profit organization would be compensated exclusively by
the non-profit organization. Under no circumstances would such employees receive
any compensation relating to the brokerage commissions received by SPBI for
securities transactions executed on behalf of members.
6. The non-profit organization would be required to establish, [*12]
keep and maintain a segregated (files) containing all records, correspondence,
papers and other documents relating to its activities under the proposed
marketing arrangement with SPBI. SPBI would have the right to inspect such
(files) at all reasonable times to assure itself that the non-profit
organization and its employees are in compliance with the proposed arrangement.
In addition, such (files) may be inspected by the Commission and by any
self-regulatory organization of which SPBI may be a member.
7. For its promotional and advertising efforts, the non-profit organization
would be compensated by SPBI based, among other things, upon the volume of
brokerage business provided to SPBI by members over a specified period of time.
Any compensation to the non-profit organization would cease immediately upon
termination of the agreement by the nonprofit organization and would cease six
months after termination by SPBI.
Analysis and Recommendation: Section 15(a) of the Exchange Act Does Not Require
a Non-Profit Organization to Register as a Broker or Dealer
Section 15(a) of the Securities Exchange Act of 1934 ("Exchange Act") provides
that it shall be unlawful for any broker [*13]
or dealer to effect any transactions in, or to induce or attempt to induce the
purchase or sale of any security, unless the broker or dealer is registered in
accordance with Section 15(b). A "broker" is defined in Section 3(a)(4) of the
Exchange Act as any person, other than a bank, "engaged in the business of
effecting transactions in securities for the account of others." A dealer is
defined in Section 3(a)(5) of the Exchange Act as any person, other than a bank,
engaged in the business of buying or selling securities for his own account,
through a broker or otherwise.
In our opinion, a non-profit organization operating pursuant to the
above-described arrangement with SPBI, could not be viewed as a broker or dealer
and thus would not be required to register under Section 15(b) of the Exchange
Act.
It is clear that a non-profit organization would not be a dealer since it would
not be engaged in the business of buying or selling securities for its own
account. Moreover, we believe it equally clear that a non-profit organization
would not be engaged in the business of effecting transactions in securities for
the account of others and, therefore would not be a broker.
Essentially, [*14]
the sole function of a non-profit organization would be to introduce the SPBI
service to the organization's members. Having been introduced to SPBI, the
member would thereafter decide independently whether or not to participate in
the SPBI discount brokerage program, and assuming such member chose to utilize
SPBI's services, would deal exclusively with SPBI in that regard. The non-profit
organization would not otherwise solicit its members or attempt to find
customers for SPBI. Nor would it be involved to any extent with the brokerage
services offered by SPBI to those members who elect to use the service. Neither
the non-profit organization nor any of its employees would make recommmendations
with respect to securities, give advice, accept orders, deliver or receive money
or securities or otherwise engage in activities customarily associated with
brokerage services. Moreover, employees of the non-profit organization would not
have any person-to-person contact with members concerning the brokerage service
offered by SPBI on behalf of members. It should be apparent that such a limited
function on the part of the non-profit organization could not be characterized
as effecting securities [*15]
transactions or inducing the purchase or sale of a security.
All securities transactions would be conducted exclusively by SPBI, a memb of
the NYSE and a fully registered broker-dealer with the Commission, the NASD and
relevant state jurisdictions. Further, SPBI would have full responsibility for
compliance with all statutory and regulatory requirements for broker-dealers.
For example, SPBI will satisfy all net capital, recordkeeping and reporting
requirements. Moreover, SPBI will provide fully-trained account representatives,
registered to the extent necessary pursuant to the Federal securities laws and
with appropriate securities regulatory organizations, to receive members' calls
and inquiries and to accept orders to effect transactions in securities for
members. Thus, all personnel engaged in securities activities will be fully
subject to the regulatory requirements of the Federal securities laws. In
addition, the Commission and other interested regulatory organizations will be
able to inspect the relevant books and records of the non-profit organization to
make certain that no violations of the Federal securities laws have occurred.
Consequently, under the proposed arrangement, [*16]
the public would be afforded all of the protection required by the Exchange
information please call Lee Pickard or myself.
Sincerely,non-profit organization to register as a broker-dealer.
Two no-action letters previously issued by the staff lend considerable support
to our conclusion: Michigan Savings and Loan League, Inc. (available October,
1983) ("Michigan League"); and American Medical Association (available September
9, 1977) ("AMA").
The Michigan League no-action letter involved a marketing arrangement which was
very similar to the arrangement involved here. consequently, the staff's
reasoning, which led to its conclusion that the Michigan League, a non-profit
organization, would not have to register with the Commission as a broker-dealer,
should apply with equal force to SPBI's proposed arrangement. In that case, the
League undertook to market the broker-dealer's discount brokerage program to its
members. It had no other activity under the arrangement and was not involved
with the discount brokerage services offered by the broker-dealer. For its
efforts, the League was paid a percentage of the gross compensation including
brokerage commissions received [*17]
by the broker-dealer as a result of securities transactions executed by
customers of the League's members. The Division of Market Regulation issued its
no-action letter on the basis of its determination, in particular, that the
entity engaged in securities activities was fully registered as a broker-dealer
with the Commission and all personnel involved in securities activities were
fully subject to the regulatory requirements of the Federal securities laws.
Those some factors are present in the proposed SPBI marketing arrangement.
Moreover, the reason why a non-profit organization should not be required to
register with the Commission as a broker-dealer, under the facts described
herein, is even more compelling than that relied upon by the staff in the AMA
no-action letter. That case involved a marketing arrangement to AMA members
whereby the AMA, itself not a registered broker-dealer, coordinated a program
with a registered broker-dealer involving the distribution and sale of
securities. While the AMA's promotional activities under the program included
substantially all of the activities contemplated under the instant arrangement,
the AMA performed additional functions [*18]
related to the brokerage services which will not be undertaken by non-profit
organizations here. For example, as the administrator of a mutual fund which was
the subject of the letter, the AMA handled certain inquiries from shareholders,
was involved with the preparation and distribution of the fund's prospectus,
bore the cost of printing and disseminating copies of the prospectus for use in
selling shares of the fund and of sales and advertising literature and approved
such advertising. Under the arrangement, the AMA's compensation was directly
linked to the success of the efforts of the AMA and the broker-dealer in selling
securities of the fund. The compensation arrangement proposed here is
essentially the same, i.e., the non-profit organization would be compensated by
SPBI based, among other things, upon the volume of brokerage business provided
to SPBI by members over a specified period of time.
On the basis of the foregoing, it is our opinion that a non-profit organization
entering into the limited arrangement described above should not be required to
register as a broker-dealer under Section 15(b) of the Exchange Act.
Accordingly, we hereby request that the staff not [*19]
recommend that the Commission take enforcement action against SPBI or a
non-profit organization, if the non-profit organization, without registering as
a broker-dealer pursuant to Section 15(b) of the Exchange Act, undertakes to
promote the SPBI discount brokerage program to its members pursuant to the
above-described arrangement.
If you have any questions or need any additional information please call Lee A.
Pickard or Anthony W. Djinis at (202) 223-4418.
Very truly yours,
Pickard and Gerry