15 U.S.C. § 78k — Trading by members of exchanges, brokers, and dealers

submitted 92 years ago by ch. 404 to r/title-15-COMMERCE-AND-TRADE · 1,510 words · no verdicts yet

in plain englishAI-generated · not legal advice

Exchange members generally can't trade for their own account or accounts they control on the exchange floor, with listed exceptions like market making and bona fide hedging. The SEC can regulate related off-exchange trading too. Specialists face strict disclosure limits, and broker-dealers can't extend credit on new securities they just helped sell.

(a) Trading for own account or account of associated person; exceptions — (1) It's illegal for an exchange member to trade on that exchange for its own account, an associated person's account, or an account it controls through investment discretion — except for these listed situations: (A) a dealer acting as a market maker; (B) an odd-lot dealer trading in a security it's registered for; (C) a stabilizing transaction, done under section 78j(b) rules, to help sell newly-issued securities the member is helping distribute; (D) a genuine arbitrage trade, a genuine hedge trade combining positions in a stock and a related convertible security, or a risk-arbitrage trade tied to a merger or similar deal; (E) a trade for an individual person, their estate, or a trust they created for themselves or another person; (F) a trade fixing an error; (G) another trade for the member's own account, if the member's business is mainly underwriting, selling to customers, or acting as a broker, and the trade follows SEC rules ensuring fair markets and giving priority to non-member customer orders; (H) a trade for a discretionary account, if the member first got express written authorization to trade that way, gives the account holder an annual statement of the fees earned, and follows any related SEC rules; and (I) any other trade the SEC decides, by rule, fits the purpose of protecting investors and keeping fair markets. (2) The SEC can regulate or ban: (A) exchange trades not already banned by paragraph (1), done by a member for its own account (unless acting as market maker or odd-lot dealer) or a discretionary account; (B) off-exchange trades by a member, broker, or dealer for its own account (unless as market maker) or a discretionary account; and (C) exchange trades by a non-member broker or dealer for its own account (unless as market maker) or a discretionary account. (3) For a member who was already a member as of February 1, 1978, paragraph (1)'s ban didn't start until February 1, 1979 — but the SEC could still regulate or ban such trades earlier under paragraph (2). (b) Registration of members as odd-lot dealers and specialists — Under SEC rules meant to protect investors and keep fair markets, an exchange's rules can let a member register as an odd-lot dealer (buying and selling as needed to handle odd-lot trades) or as a specialist. Under SEC rules, a specialist may be allowed to act as both a broker and dealer, or limited to just one role. It's illegal for a specialist or exchange official to share information about orders placed with the specialist with anyone besides an exchange official, an SEC representative, or another specialist covering for them — unless the SEC requires broader disclosure to all members by rule. It's also illegal for a specialist acting as broker to execute a trade on the exchange except on a market or limited-price order. (c) Exemptions from provisions of section and rules and regulations — If an exchange has so little trading volume that the SEC thinks applying this section's rules is impractical and unnecessary, the SEC can exempt that exchange and its members — but only if the exchange applies for the exemption and shows its own rules already protect investors adequately. (d) Prohibition on extension of credit by broker-dealer — It's illegal for a member who is both a broker and dealer (or anyone who acts as both, doing business through a member) to, through an exchange or interstate commerce: (1) extend or arrange credit to a customer on a security that was part of a new offering the firm helped sell as part of a selling group, within 30 days before the trade — except credit isn't considered "extended" for a genuine delayed delivery of (i) that security, against full payment, within 35 days of purchase, or (ii) a mortgage-related or small-business-related security, against full payment, within 180 days of purchase (or a shorter SEC-set period); or (2) trade any security (other than an exempted one) without telling the customer, in writing, by the time the trade is done, whether the firm is acting as dealer for itself, as broker for the customer, or as broker for someone else.

the actual law source: uscode.house.gov ↗public domain

(a) Trading for own account or account of associated person; exceptions

(1)

It shall be unlawful for any member of a national securities exchange to effect any transaction on such exchange for its own account, the account of an associated person, or an account with respect to which it or an associated person thereof exercises investment discretion: Provided, however, That this paragraph shall not make unlawful—

(A)

any transaction by a dealer acting in the capacity of market maker;

(B)

any transaction for the account of an odd-lot dealer in a security in which he is so registered;

(C)

any stabilizing transaction effected in compliance with rules under section 78j(b) of this title to facilitate a distribution of a security in which the member effecting such transaction is participating;

(D)

any bona fide arbitrage transaction, any bona fide hedge transaction involving a long or short position in an equity security and a long or short position in a security entitling the holder to acquire or sell such equity security, or any risk arbitrage transaction in connection with a merger, acquisition, tender offer, or similar transaction involving a recapitalization;

(E)

any transaction for the account of a natural person, the estate of a natural person, or a trust created by a natural person for himself or another natural person;

(F)

any transaction to offset a transaction made in error;

(G)

any other transaction for a member’s own account provided that (i) such member is primarily engaged in the business of underwriting and distributing securities issued by other persons, selling securities to customers, and acting as broker, or any one or more of such activities, and whose gross income normally is derived principally from such business and related activities and (ii) such transaction is effected in compliance with rules of the Commission which, as a minimum, assure that the transaction is not inconsistent with the maintenance of fair and orderly markets and yields priority, parity, and precedence in execution to orders for the account of persons who are not members or associated with members of the exchange;

(H)

any transaction for an account with respect to which such member or an associated person thereof exercises investment discretion if such member—

(i)

has obtained, from the person or persons authorized to transact business for the account, express authorization for such member or associated person to effect such transactions prior to engaging in the practice of effecting such transactions;

(ii)

furnishes the person or persons authorized to transact business for the account with a statement at least annually disclosing the aggregate compensation received by the exchange member in effecting such transactions; and

(iii)

complies with any rules the Commission has prescribed with respect to the requirements of clauses (i) and (ii); and

(I)

any other transaction of a kind which the Commission, by rule, determines is consistent with the purposes of this paragraph, the protection of investors, and the maintenance of fair and orderly markets.

(2)

The Commission, by rule, as it deems necessary or appropriate in the public interest and for the protection of investors, to maintain fair and orderly markets, or to assure equal regulation of exchange markets and markets occurring otherwise than on an exchange, may regulate or prohibit:

(A)

transactions on a national securities exchange not unlawful under paragraph (1) of this subsection effected by any member thereof for its own account (unless such member is acting in the capacity of market maker or odd-lot dealer), the account of an associated person, or an account with respect to which such member or an associated person thereof exercises investment discretion;

(B)

transactions otherwise than on a national securities exchange effected by use of the mails or any means or instrumentality of interstate commerce by any member of a national securities exchange, broker, or dealer for the account of such member, broker, or dealer (unless such member, broker, or dealer is acting in the capacity of a market maker) 1 the account of an associated person, or an account with respect to which such member, broker, or dealer or associated person thereof exercises investment discretion; and

(C)

transactions on a national securities exchange effected by any broker or dealer not a member thereof for the account of such broker or dealer (unless such broker or dealer is acting in the capacity of market maker), the account of an associated person, or an account with respect to which such broker or dealer or associated person thereof exercises investment discretion.

(3)

The provisions of paragraph (1) of this subsection insofar as they apply to transactions on a national securities exchange effected by a member thereof who was a member on February 1, 1978 shall not become effective until February 1, 1979. Nothing in this paragraph shall be construed to impair or limit the authority of the Commission to regulate or prohibit such transactions prior to February 1, 1979, pursuant to paragraph (2) of this subsection.

(b) Registration of members as odd-lot dealers and specialists

When not in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest and for the protection of investors, to maintain fair and orderly markets, or to remove impediments to and perfect the mechanism of a national market system, the rules of a national securities exchange may permit (1) a member to be registered as an odd-lot dealer and as such to buy and sell for his own account so far as may be reasonably necessary to carry on such odd-lot transactions, and (2) a member to be registered as a specialist. Under the rules and regulations of the Commission a specialist may be permitted to act as a broker and dealer or limited to acting as a broker or dealer. It shall be unlawful for a specialist or an official of the exchange to disclose information in regard to orders placed with such specialist which is not available to all members of the exchange, to any person other than an official of the exchange, a representative of the Commission, or a specialist who may be acting for such specialist: Provided, however, That the Commission, by rule, may require disclosure to all members of the exchange of all orders placed with specialists, under such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. It shall also be unlawful for a specialist permitted to act as a broker and dealer to effect on the exchange as broker any transaction except upon a market or limited price order.

If because of the limited volume of transactions effected on an exchange, it is in the opinion of the Commission impracticable and not necessary or appropriate in the public interest or for the protection of investors to apply any of the foregoing provisions of this section or the rules and regulations thereunder, the Commission shall have power, upon application of the exchange and on a showing that the rules of such exchange are otherwise adequate for the protection of investors, to exempt such exchange and its members from any such provision or rules and regulations.

(d) Prohibition on extension of credit by broker-dealer

It shall be unlawful for a member of a national securities exchange who is both a dealer and a broker, or for any person who both as a broker and a dealer transacts a business in securities through the medium of a member or otherwise, to effect through the use of any facility of a national securities exchange or of the mails or of any means or instrumentality of interstate commerce, or otherwise in the case of a member, (1) any transaction in connection with which, directly or indirectly, he extends or maintains or arranges for the extension or maintenance of credit to or for a customer on any security (other than an exempted security) which was a part of a new issue in the distribution of which he participated as a member of a selling syndicate or group within thirty days prior to such transaction: Provided, That credit shall not be deemed extended by reason of a bona fide delayed delivery of (i) any such security against full payment of the entire purchase price thereof upon such delivery within thirty-five days after such purchase or (ii) any mortgage related security or any small business related security against full payment of the entire purchase price thereof upon such delivery within one hundred and eighty days after such purchase, or within such shorter period as the Commission may prescribe by rule or regulation, or (2) any transaction with respect to any security (other than an exempted security) unless, if the transaction is with a customer, he discloses to such customer in writing at or before the completion of the transaction whether he is acting as a dealer for his own account, as a broker for such customer, or as a broker for some other person.

Source credit: (June 6, 1934, ch. 404, title I, § 11, 48 Stat. 891; Aug. 10, 1954, ch. 667, title II, § 201, 68 Stat. 686; Pub. L. 94–29, § 6, June 4, 1975, 89 Stat. 110; Pub. L. 95–283, § 18(a), May 21, 1978, 92 Stat. 275; Pub. L. 98–440, title I, § 104, Oct. 3, 1984, 98 Stat. 1690; Pub. L. 103–68, § 1, Aug. 11, 1993, 107 Stat. 691; Pub. L. 103–325, title II, § 205, Sept. 23, 1994, 108 Stat. 2199.)

history & why it existsrecord from the source credit

1934Enacted · Act of June 6, 1934, ch. 404 · 48 Stat. 891
1954Amended · Act of Aug. 10, 1954, ch. 667 · 68 Stat. 686
1975Amended · Pub. L. 94-29 · 89 Stat. 110
1978Amended · Pub. L. 95-283 · 92 Stat. 275
1984Amended · Pub. L. 98-440 · 98 Stat. 1690
1993Amended · Pub. L. 103-68 · 107 Stat. 691
1994Amended · Pub. L. 103-325 · 108 Stat. 2199

A history note hasn’t been published yet. The record shows enactment by ch. 404 on 1934-06-06.

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