15 U.S.C. § 78o — Registration and regulation of brokers and dealers

(a) Registration of people using exchange facilities; exemptions (1) It is illegal for most brokers and dealers to use the mail or any interstate tool to buy or sell securities unless they are registered under subsection (b). This ban covers brokers and dealers that are not natural persons, and natural persons who are not associated with such a broker or dealer. It does not cover exempted securities, commercial paper, bankers' acceptances, or commercial bills. It also does not cover a broker or dealer whose business stays entirely inside one state and does not use a national exchange. (2) The SEC may exempt any broker, dealer, or class of them from this registration rule, by rule or order, if that fits the public interest and protects investors. (b) How brokers and dealers register (1) A broker or dealer registers by filing an application with the SEC. Within 45 days of filing (or longer if the applicant agrees), the SEC must either grant the registration or start a proceeding on whether to deny it. A denial proceeding must give notice of the reasons and a chance for a hearing. It must end within 120 days, though the SEC can extend that by up to 90 more days for good cause it explains publicly, or longer if the applicant agrees. The SEC must grant registration if this section's requirements are met. But the grant does not take effect until the broker or dealer joins a registered securities association, or a national exchange if it trades only there, unless the SEC exempts it from that membership rule. The SEC must deny registration if the requirements are not met, or if the registration would soon be subject to suspension or revocation under paragraph (4). (2)(A) A firm being formed can apply for registration through the existing broker or dealer it is meant to succeed. The same grant-or-deny process in paragraph (1) applies. If granted, that registration ends automatically 45 days later unless the new successor firm adopts the application as its own, following SEC rules. (B) A person who is a broker or dealer only because of acting as a municipal securities dealer or broker through a separate department, and who did so on June 4, 1975, may register that department on its own under SEC rules. Once that happens, the department — not the person — is legally the broker or dealer. (C) Within six months of granting registration, the SEC (or a securities association or exchange the SEC authorizes) must inspect the broker or dealer to check compliance with this chapter. The SEC may delay this inspection for a whole class of brokers or dealers, but not by more than six months. (3) Other parts of this chapter (except section 78e and this section's subsection (a)) ban certain acts only when the mail or interstate commerce is used. For a registered broker or dealer, or anyone acting for one, those bans apply even if the mail or interstate commerce is not actually used. (4) The SEC must censure, limit, suspend for up to 12 months, or revoke a broker's or dealer's registration if — after notice and a hearing, and based on the record — it finds that doing so serves the public interest, and that the broker or dealer (or an associated person, before or after becoming one): (A) willfully made a false or misleading statement about a material fact, or left one out, in a registration application, required report, or SEC proceeding; (B) was convicted, within the past 10 years or since, of a felony or misdemeanor (or an equivalent foreign crime) that (i) involves buying or selling securities, a false oath, a false report, bribery, perjury, burglary, or conspiracy to do any of these; (ii) grew out of work as a broker, dealer, municipal securities dealer or advisor, government securities broker or dealer, investment adviser, bank, insurer, fiduciary, transfer agent, rating organization, or similarly regulated foreign person or Commodity Exchange Act registrant; (iii) involves theft, robbery, extortion, forgery, counterfeiting, embezzlement, or misappropriating funds or securities; or (iv) violates specific federal fraud or racketeering statutes (18 U.S.C. §§152, 1341, 1342, 1343, or chapters 25 or 47), or an equivalent foreign law; (C) is permanently or temporarily enjoined by a court from acting as, or being employed by, an investment adviser, broker, dealer, swap dealer, transfer agent, rating organization, bank, insurer, investment company, or similar entity, or from related securities conduct; (D) willfully violated, or cannot comply with, the Securities Act of 1933, the Investment Advisers Act of 1940, the Investment Company Act of 1940, the Commodity Exchange Act, this chapter, their rules, or Municipal Securities Rulemaking Board rules; (E) willfully helped someone else violate those same laws, or failed to reasonably supervise a person under their supervision who committed such a violation. A person is not treated as having failed to supervise if they had set up procedures reasonably designed to catch and prevent such violations, and had reasonably carried out their duties under those procedures without reason to believe the procedures were not being followed; (F) is under an SEC order barring or suspending association with a broker, dealer, or swap dealer or major participant; (G) has been found by a foreign regulator to have made a false or misleading statement in a foreign registration filing, violated a foreign securities or commodities law, or aided or failed to supervise someone who did; (H) is under a final order from a state securities, banking, insurance, or credit union regulator, or a federal banking agency, that either bars the person from that industry or rests on findings of fraud, manipulation, or deception. (5) While the SEC is still deciding whether to revoke a registration, it may suspend the registration if a hearing shows that is necessary or appropriate for the public interest or investor protection. A broker or dealer may withdraw its own registration by filing written notice, on any terms the SEC requires. If the SEC finds a registered broker or dealer no longer exists or has stopped operating as one, it must cancel that registration. (6)(A) For a person associated (or seeking to associate) with a broker or dealer, or involved in a penny stock offering, the SEC may — after notice and a hearing, if it is in the public interest — censure, limit, suspend up to 12 months, or bar the person from associating with a broker, dealer, investment adviser, municipal securities dealer or advisor, transfer agent, or rating organization, or from taking part in penny stock offerings. This applies if the person committed acts listed in paragraph (4)(A), (D), (E), (G), or (H); was convicted of a crime under (4)(B) within the past 10 years; or is enjoined as in (4)(C). (B) It is illegal for a barred person to knowingly associate with a broker or dealer, or take part in a penny stock offering, against that bar, without SEC consent. It is also illegal for a broker or dealer to knowingly let that happen — or to let it happen without using reasonable care to find out about the bar. (C) "Person participating in an offering of penny stock" means a promoter, finder, consultant, agent, or similar person working with a broker, dealer, or issuer to issue or trade penny stock, or to induce its purchase or sale. The SEC may expand this definition by rule, or grant exemptions from it. (7) A registered broker or dealer (and its government-securities counterpart) may not trade securities unless it meets SEC standards for operational capability, and unless everyone associated with it meets SEC standards for training, experience, and competence. The SEC sets these standards by rule and may: (A) apply them to specific classes of firms and people; (B) require passing tests — for partners, officers, and supervisory employees, including branch managers, the tests must cover bookkeeping, accounting, internal controls, supervision, and recordkeeping; (C) let other classes qualify just by meeting training standards. The SEC may charge reasonable fees for these tests and may work with securities associations or exchanges to write and administer them. (8) A registered broker or dealer may not trade securities (other than commercial paper, bankers' acceptances, or commercial bills) unless it belongs to a registered securities association or trades only on a national exchange it is a member of. (9) The SEC may exempt any broker, dealer, or class of them from paragraph (8), by rule or order, consistent with the public interest and investor protection. (10) When deciding if someone is subject to a "statutory disqualification" under sections 78f(c)(2), 78o–3(g)(2), or 78q–1(b)(4)(A), the word "Commission" in paragraph (4)(B) instead means the exchange, association, or clearing agency involved. (11) Registering to trade security futures products: (A) A broker or dealer that must register only because it trades security futures products on an exchange registered under section 78f(g) may instead file a simple written notice with the SEC, containing information the SEC requires. It must also belong to a national securities association registered under section 78o–3(k). This registration takes effect as soon as the notice is filed, unless it would already be subject to suspension or revocation under paragraph (4). It is automatically suspended if that securities association suspends the firm's membership, and automatically ends if any registration condition stops being met. (B) A broker or dealer registered this way is exempt, for security futures product transactions, from sections 78h and 78k, from subsections (c)(3) and (c)(5) of this section, from sections 78o–4 and 78o–5, and from subsections (d) through (i) of section 78q. (12) Exemption for exchange members trading security futures products: (A) A natural person does not need to register if they belong to a designated contract market registered as an exchange under section 78f(g), trade securities only on that exchange, and do not directly take orders from, or advise, public customers about security futures products. (B) That exempt person is also excused from sections 78h and 78k, from subsections (c)(3), (c)(5), and (e) of this section, from sections 78o–4 and 78o–5, and from subsections (d) through (i) of section 78q. (13) Registration exemption for merger-and-acquisition brokers: (A) An "M&A broker" (defined below) does not need to register, unless (B) applies. (B) The exemption does not apply if the broker: (i) holds or handles the funds or securities being exchanged; (ii) works for an issuer on a registered (or required-to-be-registered) public offering, or one where the issuer files periodic reports; (iii) works on a deal involving a shell company, other than one formed just to reorganize or combine businesses; (iv) directly or through an affiliate provides financing for the deal; (v) helps a party get outside financing without following laws like Regulation T and disclosing its compensation in writing; (vi) represents both the buyer and seller without written disclosure to, and written consent from, both; (vii) helps put together a group of buyers to acquire the company; (viii) helps transfer the company to a passive buyer or buyer group; or (ix) legally binds a party to the deal. (C) The exemption also does not apply if the broker (or its officers, directors, or similar people) has been barred, or is currently suspended, from associating with a broker or dealer. (D) This paragraph does not limit the SEC's other power to grant exemptions. (E) Key definitions: a "business combination related shell company" is a shell company formed only to move an entity's corporate home within the U.S., or only to complete a combination of non-shell companies. "Control" means the power to direct a company's management or policies; it is presumed if, after the deal, the buyer or buyer group can vote or sell 25% or more of a voting class, or (for a partnership or LLC) has contributed or would receive 25% or more of the capital on dissolution. An "eligible privately held company" has no securities registered (or required to be registered) with the SEC, and in the fiscal year before the M&A broker was hired, had either EBITDA under $25,000,000 or gross revenue under $250,000,000 (the SEC may adjust these figures by rule). An "M&A broker" is a broker (or associated person) who deals only in transferring ownership of such a company, reasonably believing that the buyer will end up controlling and actively managing the company or its business, and that, if securities are exchanged, the seller will get the issuer's recent financial statements and related information before being bound to the deal. A "shell company" is one with no or nominal operations and no or nominal assets (or only cash and cash equivalents). (F) Starting five years after December 29, 2022, and every five years after that, the SEC must adjust the dollar figures in (E)(iii)(II) using the change in a Bureau of Labor Statistics wage index since the end of 2020, rounded to the nearest $100,000. (c) Banning manipulation and rule violations (1)(A)–(C) Brokers, dealers, municipal securities dealers, and government securities brokers or dealers may not use the mail or interstate commerce to trade (or induce trading in) securities, municipal securities, government securities, or related security-based swap agreements, using any manipulative, deceptive, or fraudulent device. (2)(A)–(C) The same groups may not use the mail or interstate commerce to trade off-exchange, or to trade municipal or government securities, while engaging in fraudulent, deceptive, or manipulative acts, or giving fake price quotes. (D) The SEC must define by rule what counts as such fraudulent, deceptive, or manipulative acts and fake quotes, and set rules meant to prevent them. (E) Before writing rules under (C) for government securities, the SEC must consult the Treasury Secretary and other regulators, and must respond in writing to their written comments. If Treasury finds a proposed rule would hurt the government securities market's liquidity or efficiency, or burden competition more than necessary, the SEC must still find the rule necessary before adopting it. (3)(A) Brokers and dealers (except registered government securities brokers or dealers) may not trade securities in violation of SEC rules meant to protect customers' securities, deposits, and credit balances. These rules must require reserves against customer deposits and credit balances, and had to set minimum financial responsibility requirements by September 1, 1975. (B) The SEC must work with the Commodity Futures Trading Commission to avoid conflicting rules for firms registered with both agencies, on financial responsibility and recordkeeping rules covering security futures products. (C) A dually registered broker-dealer and futures commission merchant may hold cash and securities in a portfolio margining account under an SEC exemption or rule and a CFTC-approved margining program, even though normal commodity-account segregation rules would otherwise apply; the SEC and CFTC must make sure similar products face comparable requirements. (4) If, after notice and a hearing, the SEC finds someone covered by sections 78l, 78m, 78n, or subsection (d) has materially failed to comply, it may publish its findings and order that person — and anyone who knowingly or negligently caused the failure — to fix it, on terms and within a time the SEC sets. (5) A dealer acting as a market maker (other than an exchange specialist) may not trade securities (other than exempted or municipal securities) in violation of SEC standards meant to keep markets fair and orderly, or to improve the national market system. SEC rules may bar a dealer in a security from also acting as its broker. (6) Brokers and dealers may not trade securities (other than exempted, municipal, or certain short-term instruments) in violation of SEC rules for a national system that clears and settles securities transactions promptly and accurately — covering timing, methods, and document formats for settlements, payments, transfers, deliveries, and closing accounts. This does not change, or give the SEC, the Federal Reserve Board's power under section 78g to limit credit used to buy or hold securities. (7) When bidding for or buying government securities in an offering, brokers, dealers, and other bidders or buyers may not knowingly or willfully make false or misleading written statements, or leave out facts needed to make their statements not misleading. (8) A broker, dealer, or associated person may not solicit or accept payment for helping a lawyer get a client for a private lawsuit under this chapter or the Securities Act of 1933. (d) Ongoing reporting by issuers (1) An issuer whose 1933 Act registration statement is or becomes effective must file periodic reports under section 78m, as the SEC requires. This duty is automatically suspended while the issuer's securities are registered under section 78l. It is also automatically suspended for later fiscal years if, at the start of that year, each class of securities (other than asset-backed securities) is held by fewer than 300 people of record — or fewer than 1,200 for a bank, savings-and-loan holding company, or bank holding company. "Class" means securities with substantially similar terms and rights. The SEC may define "held of record" to stop people from dodging this rule. This duty never applies to securities of a foreign government or its subdivisions. (2)(A) The SEC may suspend or end this reporting duty for any class of asset-backed securities, on terms it thinks are necessary or appropriate. (B) The SEC may sort issuers into classes and set separate reporting requirements for each class of asset-backed security issuer. (e) Telling customers about securities lending — a registered broker or dealer must tell customers they can refuse to let their fully paid securities be used for short sales. If it does use a customer's securities that way, it must also tell the customer it may be paid for lending them. The SEC may set the form, content, timing, and delivery method for this notice. (f) Non-registered exchange members — the SEC may require an exchange member who is not required to register (and people associated with that member) to follow chapter rules that apply to "brokers or dealers" or people associated with them — except subsection (a)'s registration rule itself — if that serves the public interest, investor protection, or equal treatment. (g) Stopping misuse of inside information — every registered broker or dealer must create, keep, and enforce written policies, suited to its kind of business, to stop itself or its associated people from misusing material nonpublic information in violation of this chapter. The SEC must adopt rules requiring specific such policies. (h) Rules for selling penny stocks (1) A broker or dealer may not use the mail or interstate commerce to sell penny stock to a customer except as this subsection and its rules allow. (2) Before any penny stock sale, the broker or dealer must give the customer a risk disclosure document that: (A) describes the risks of the penny stock market, for both new offerings and later trading; (B) describes the firm's duties to the customer, and the customer's rights if those duties are broken; (C) plainly explains how dealer markets work, including "bid" and "ask" prices and what the gap between them means; (D) gives a toll-free number for checking disciplinary records; (E) defines key terms used in the document or in penny stock trading; and (F) includes anything else, in whatever form, the SEC requires. (3) The SEC must also require brokers and dealers to: (A) disclose, before and when confirming each trade, the bid and ask prices (or other pricing information the SEC prefers), the number of shares involved (or similar liquidity information), and the compensation the firm and the salesperson will get or got from the trade; (B) send a monthly statement showing the market value of a customer's penny stocks, or saying that value cannot be determined; and (C) as needed, disclose other information the SEC finds appropriate. (4) The SEC may exempt any person, class of persons, transaction, or class of transactions from this subsection, including firms that earn only a small share of their commissions from penny stocks. (5) Violating SEC rules written to carry out this subsection, or to stop fraud and manipulation in penny stocks, is illegal. (i) Limits on state regulation (1) States cannot impose capital, custody, margin, financial-responsibility, recordkeeping, bonding, or reporting requirements on brokers, dealers, municipal securities dealers, or government securities brokers or dealers that differ from, or add to, the federal requirements in this chapter. The SEC must regularly check in with state securities regulators about whether the federal requirements are adequate. (2)(A) States generally cannot enforce their own laws against a registered funding portal for its business as a funding portal. (B) Exception: the state where the funding portal's main office is located may examine and enforce its own laws, as long as they do not add to or differ from the SEC's own funding portal rules. (C) "State" here includes the District of Columbia and U.S. territories. (3) A state cannot stop an associated person of a broker or dealer from doing a "described" transaction (defined in paragraph 4) for an in-state customer if: (A) the person is not otherwise barred from registering in that state; (B) the person is registered with a securities association and at least one state; and (C) the broker or dealer is registered with that state too. (4)(A) A transaction is "described" if it is done for a customer who has held an account with the firm for at least 30 days, by an associated person who has been assigned to that customer for at least 14 days and who is registered in the customer's home state — or, alternatively, during the up-to-60-day window after that person applies to register in the customer's state, as long as the state has not yet denied or paused the application. (B) Up to three backup associated persons covering for the main one count as "assigned" to the customer. If the customer moves to, or spends 30 or more straight days in, another state, the transaction stops being "described" unless the associated person applies to register there within 10 business days of learning about the move or the 30-day stay. (j) [This section carries two subsections labeled (j).] Extending rules to new hybrid products (1) Before writing rules about new hybrid financial products, the SEC must consult the Federal Reserve Board and try to get its agreement, considering the product's nature, how banking law has treated it, and the impact on banks. (2) The SEC cannot require a bank to register as a broker or dealer, or sue a bank for not registering, just because it deals in a new hybrid product — unless the SEC has already imposed that requirement by rule. (3) The SEC can only impose that requirement if it decides the product is a security and that requiring registration serves the public interest and investor protection. (4) In deciding that, the SEC must weigh the product's nature and the history of its regulation under both securities and banking law. (5) The Federal Reserve Board may challenge a final SEC rule in the D.C. Circuit Court of Appeals by filing a petition within 60 days of the rule's publication; the case is expedited. The petition and record go to the SEC, and once filed, the court has exclusive power to uphold or set the rule aside. The court decides based on whether the product is truly a "new hybrid product," is a security, and whether requiring bank registration fits the history of securities and banking regulation — without favoring either agency's view. Filing the petition automatically pauses the rule until the court's decision is final. Any other harmed party may separately seek court review under section 78y. (6) A "new hybrid product" is one that (A) was not regulated by the SEC as a security before the Gramm-Leach-Bliley Act became law on November 12, 1999; (B) is not an "identified banking product" under that Act's section 206; and (C) is not an equity swap under section 206(a)(6) of that Act. "Board" means the Federal Reserve Board. (j) [second subsection labeled (j)] Limit on swap authority — the SEC's power under this section over security-based swap agreements is limited by section 78c–1(b). (k) [This section carries two subsections labeled (k).] Foreign broker-dealer registration — when deciding whether to let a foreign person, or its affiliate, register as (or take over) a U.S. broker or dealer, the SEC may consider — for one that poses a risk to U.S. financial stability — whether its home country has adopted, or made real progress toward adopting, suitable financial regulation to manage that risk. (l) [This section carries two subsections labeled (l).] Ending a foreign broker-dealer's registration — for such a risky foreign person or affiliate, the SEC may end its U.S. broker-dealer registration if it decides the home country has not adopted, or made real progress toward adopting, that kind of regulation. (k) [second subsection labeled (k)] Standard of conduct for investment advice (1) The SEC may make rules saying that when a broker or dealer gives personalized investment advice to a retail customer (or other customers the SEC names), it must meet the same conduct standard that applies to investment advisers under section 211 of the Investment Advisers Act. Earning a commission or standard sales pay is not, by itself, a violation of that standard. A broker, dealer, or its representative does not have to keep watching over or staying loyal to the customer after giving the advice. (2) If a broker or dealer sells only its own products, or a limited range the SEC identifies, the SEC may require it to notify each retail customer and get the customer's consent or acknowledgment. Selling only a limited range of products is not, by itself, a violation of the standard in (1). (l) [second subsection labeled (l)] Other duties — the SEC must (1) help make sure investors get simple, clear information about their relationships with brokers, dealers, and investment advisers, including any real conflicts of interest, and (2) study, and where needed write rules limiting or banning, sales practices, conflicts of interest, and pay structures for brokers, dealers, and advisers that the SEC decides go against the public interest and investor protection. (m) Enforcing the conduct standard together — the SEC's power to enforce the broker-dealer conduct standard for personalized investment advice includes both its usual authority under this chapter and its authority (including penalties) under the Investment Advisers Act. The SEC must pursue and punish violations of the broker-dealer standard just as strictly as it pursues adviser violations under the Advisers Act. (n) Disclosures for retail investors (1) The SEC may write rules naming documents or information that a broker or dealer must give a retail investor before selling them an investment product or service. (2) In writing those rules, the SEC must weigh investor protection, market efficiency, competition, and capital formation. (3) Any required documents or information must be in summary form and clearly cover (i) the investment's objectives, strategies, costs, and risks, and (ii) any compensation or financial incentive the broker, dealer, or middleman gets from the sale. (o) Limiting mandatory arbitration — the SEC may, by rule, ban or place conditions on agreements that force a broker's, dealer's, or municipal securities dealer's customers or clients to arbitrate future disputes under federal securities law, SEC rules, or self-regulatory organization rules, if the SEC decides that serves the public interest and protects investors.