15 U.S.C. § 78o–3 — Registered securities associations

(a) Registration; application A group of brokers and dealers may register as a "national securities association" under subsection (b), or as an "affiliated securities association" under subsection (d). It applies by filing with the SEC, in the form the SEC requires, its rules and any other information or documents the SEC decides are necessary or appropriate in the public interest or for investor protection. (b) Determinations the SEC must make before registering a national securities association The SEC will not register an association unless it determines: (1) The number and geographic spread of its members, and the scope of their business, let the association carry out this section's purposes. (2) The association is organized well enough, and able, to carry out this chapter's purposes and to comply with — and (subject to any SEC rule or order) enforce against its members — this chapter, its rules, the Municipal Securities Rulemaking Board's (MSRB) rules, and the association's own rules. (3) Subject to subsection (g) (denial of membership), its rules let any registered broker or dealer become a member, and let any person become associated with a member. (4) Its rules ensure fair representation of members in choosing directors and running the association, and provide that at least one director represents issuers and investors and is not tied to a member, broker, or dealer. (5) Its rules fairly allocate reasonable dues, fees, and other charges among members, issuers, and others who use its facilities or systems. (6) Its rules are designed to prevent fraud and manipulation, promote fair and equitable trading, foster cooperation with others who regulate, clear, settle, or process securities information, remove barriers to a free and open national market, and generally protect investors and the public — while not being designed to unfairly discriminate among customers, issuers, brokers, or dealers, to fix minimum profits or commission rates, or to regulate matters outside this chapter's purposes. (7) Its rules provide that (subject to any SEC rule or order) members and associated persons will be appropriately disciplined — by expulsion, suspension, limits on activities, fines, censure, being barred from association, or other fitting sanctions — for violating this chapter, its rules, MSRB rules, or the association's rules. (8) Its rules follow subsection (h) and generally provide a fair process for disciplining members and associated persons, denying membership, barring someone from becoming associated, and limiting access to the association's or a member's services. (9) Its rules do not burden competition more than necessary to further this chapter's purposes. (10) It satisfies subsection (c), to the extent that applies. (11) Its rules govern the form and content of price quotations for securities sold off-exchange — who may publish them and to whom — designed to produce fair, informative quotes, prevent fictitious or misleading ones, and promote orderly collection, distribution, and publication of quotes. (12) As part of promoting fair trading under paragraph (6), its rules stop members from taking part in a "limited partnership rollup transaction" (as defined elsewhere in this chapter) unless it followed procedures protecting limited partners' rights, including (A) giving a "dissenting limited partner" one of: (i) an appraisal and payment, (ii) keeping a security on substantially the same terms, (iii) approval of the rollup by at least 75% of each participating partnership's outstanding securities, (iv) review by an independent committee — approved by a majority of each partnership's outstanding securities — with authority to hire advisors, negotiate with the sponsor, and recommend a decision to the limited partners, or (v) other comparable protections the association sets by rule; (B) the right not to have voting power unfairly reduced; (C) the right not to unfairly bear the costs of a rejected rollup proposal; and (D) restrictions on converting contingent fees into guaranteed ones, and on trading fees for services not yet performed for an equity stake. A "dissenting limited partner" is someone who held an interest when the offer materials were mailed, voted against the deal, and followed the association's procedures (or, for a tender or exchange offer, filed a written objection while the offer was open). (13) Its rules also stop a security resulting from a limited partnership rollup transaction from being quoted on the association's automated interdealer quotation system, unless the transaction followed the same limited-partner protections listed in paragraph (12) above — the dissent rights, the voting-power protection, the cost protection, and the fee-conversion restrictions. (14) Its rules cover securities sales or offers made on military installations to service members or their dependents, requiring (A) the broker or dealer to clearly disclose that the securities are not offered on behalf of, or endorsed by, the federal government, and to disclose the identity of the broker-dealer; (B) the broker or dealer to perform a suitability check — including cost and the buyer's knowledge — before recommending any security; and (C) that no one receive a referral fee or incentive payment for such a sale unless they are an associated person of a registered broker or dealer, qualified under a self-regulatory organization's rules. (15) Its rules provide that the association will (A) ask the MSRB for guidance interpreting MSRB rules, and (B) give the MSRB information about the association's enforcement actions and examinations under section 78o–4(b)(2)(E), so the MSRB can help with those actions and examinations and evaluate how well its own rules are working. (c) National association rules; provision for registration of an affiliated association The SEC may allow, or require, an applicant association's rules to let a registered affiliated securities association (subsection (d)) join it as an affiliate — on whatever powers, responsibilities, and other terms the applicant association's rules set — if the SEC finds those terms necessary or appropriate for the public interest, investor protection, and this section's purposes. Affiliation does not reduce the SEC's authority over either association. (d) Registration as an affiliated association An applicant cannot register as an affiliated securities association unless the SEC finds (1) it does not meet subsection (b)(1), but will, immediately upon registering, be admitted as an affiliate of a national securities association on the terms that association's rules set under subsection (c); and (2) it and its rules meet subsection (b)(2) through (10) and (12) — except that any membership restrictions like those allowed under (b)(3) must be at least as strict as the national association's it is affiliating with. (e) Dealings with nonmember professionals (1) An association's rules may say a member can deal with a "nonmember professional" only at the same prices, commissions or fees, and terms it offers the general public. (2) "Nonmember professional" means (A) for non-municipal securities, any registered broker or dealer who is not a member of any registered securities association — except one dealing solely in commercial paper, bankers' acceptances, and commercial bills; and (B) for municipal securities, any municipal securities dealer (other than a bank or a bank department) or municipal securities broker who is not a member of any registered association. (3) This does not stop (A) one association member from giving another member a dealer's discount or special terms on a securities purchase or sale; or (B) a member, or a bank (or bank department) that is a municipal securities dealer, from giving another member or municipal securities dealer a discount or special terms on a municipal securities purchase or sale — though such municipal securities discounts are subject to MSRB rules adopted under section 78o–4(b)(2)(K). (f) Transactions in municipal securities Nothing in subsection (b)(6) or (b)(11) lets a registered association make rules about a broker's or dealer's municipal securities transactions. (g) Denial of membership (1) An association must deny membership to anyone who is not a registered broker or dealer. (2) It may — and, if the SEC orders it as necessary or appropriate for the public interest or investor protection, must — deny membership to a disqualified registered broker or dealer, or bar a disqualified person from becoming associated with a member. It must notify the SEC at least 30 days before admitting a member, or letting a person become associated with a member, that it knew or should have known was disqualified, using whatever form and information the SEC requires. (3) (A) An association may deny or condition membership if the broker or dealer — or a natural person associated with it — does not meet the association's financial responsibility, operational capability, training, experience, or competence standards, or has engaged, and is reasonably likely to engage again, in conduct against just and equitable trading principles; it may verify an applicant's qualifications under its own procedures. (B) It may bar or condition a natural person's association with a member on the same grounds — unmet training/experience/competence standards, or a reasonable likelihood of repeated misconduct — and may require registration with the association. (C) It may bar anyone who will not agree to supply information about its dealings with the member, or to let its books and records be examined to verify that information. (D) None of (A) through (C) lets an association deny, condition, or bar membership or association for a broker or dealer that deals exclusively in municipal securities. (4) An association may deny membership to a registered broker or dealer not engaged in a type of business its rules require members to be in — but it cannot deny membership based on how much of that business, or of other business, the broker or dealer does. (h) Discipline of members and associated persons; summary proceedings (1) In an ordinary disciplinary proceeding, the association must bring specific charges, notify the member or person, give them a chance to defend against the charges, and keep a record. A sanction must be backed by a written statement covering (A) the act or omission found; (B) which specific provision — of this chapter, its rules, MSRB rules, or the association's rules — that act or omission is found to violate; and (C) the sanction imposed and why. (2) When denying membership, barring someone from becoming associated, or limiting access to services (outside a summary proceeding), the association must notify the person, give them a chance to be heard on the specific grounds, keep a record, and support its decision with a written statement of those grounds. (3) An association may summarily (A) suspend a member or associated person already expelled, suspended, or barred by another self-regulatory organization; (B) suspend a member in such financial or operational trouble that it cannot safely continue doing business; or (C) limit or bar access to services for anyone covered by (A) or (B), or a nonmember who does not meet its access qualifications and cannot safely keep that access. Anyone harmed by such summary action must promptly get a hearing under paragraph (1) or (2). The SEC may stay a summary action, on its own initiative or on request, if it finds — summarily, or after a hearing that can consist of just affidavits or oral argument — that a stay serves the public interest and investor protection. (i) Obligation to maintain registration, disciplinary, and other data (1) An association must (A) build and maintain a system for collecting and keeping registration information; (B) maintain a toll-free phone line and an accessible process to answer inquiries about (i) its own members' and associated persons' registration information, and (ii) that of any national securities exchange that uses the same system; and (C) adopt — in consultation with any such exchange — rules for how inquiries are made and what information is given in response. (2) It may charge reasonable fees for such inquiries, but not to individual investors. (3) It must adopt rules — in consultation with any such exchange — creating an administrative process to dispute the accuracy of information given in response to an inquiry. (4) The association, or an exchange reporting information to it, is not liable for actions or omissions taken in good faith under this subsection. (5) "Registration information" means information reported for a broker's or dealer's registration or licensing — including disciplinary actions and regulatory, judicial, or arbitration proceedings — plus other legally required information and its source and status. (j) Registration for sales of private securities offerings An association must create a limited qualification category, without testing, for an associated person of a member who sells securities as part of a non-public primary offering under specific Securities Act provisions — and must automatically qualify, without testing, any bank employee who did such sales in the six months before November 12, 1999. (k) Limited purpose national securities association (1) A futures association registered under section 21 of title 7 counts as a registered national securities association, but only for regulating members registered as brokers or dealers in security futures products under section 78o(b)(11). (2) It must (A) be organized and able to carry out the securities laws that apply to security futures products, and to comply with — and (subject to SEC rule or order) enforce against its members — those laws, their rules, and its own rules; (B) have rules that (i) prevent fraud and manipulation, promote fair trading, and protect investors — including sales-practice and advertising rules reasonably comparable to other national securities associations' rules for security futures products — and (ii) do not regulate matters outside this chapter's purposes; (C) have rules that (subject to SEC rule or order) provide for appropriate discipline of members and associated persons who violate the applicable securities laws, rules, or the association's own rules — by expulsion, suspension, limits on activities, fines, censure, being barred from association, or other fitting sanctions; and (D) have rules ensuring members and associated persons meet training, experience, and competence standards, and are tested on their knowledge of securities and security futures products. (3) It is exempt from filing proposed rule changes under section 78s(b), except (A) it must file changes involving higher margin levels, fraud or manipulation, recordkeeping, reporting, listing standards, decimal pricing, sales practices, advertising, or training/experience/competence standards for security futures products, or rules carrying out its duty to enforce the securities laws under section 78s(b)(7); (B) it must file margin-related changes under sections 78s(b)(1) and (2), except changes that raise margin levels; and (C) it must file changes the SEC has abrogated under section 78s(b)(7)(C). (4) It — and, solely for their security futures product transactions, its members — are exempt from, and do not have to comply with or enforce, (A) section 78h; (B) subsections (b)(1), (3), (4), (5), (8), (10), (11), (12), (13), (c), (d), (e), (f), (g), (h), and (i) of this section; (C) subsections (d), (f), and (k) of section 78q; and (D) subsections (a), (f), and (h) of section 78s. (l) Rules to avoid duplicative regulation of dual registrants Each national securities association registered under subsection (a) must issue rules to avoid duplicate or conflicting requirements for a broker or dealer registered both with the SEC under section 78o(b) (except paragraph (11)) and with the CFTC under section 6f(a) of title 7 (except its paragraph (2)) — specifically regarding (1) the association's rules of the type described in section 78o(c)(3)(B) that involve security futures products, and (2) similar rules of limited-purpose associations registered under subsection (k) and of national securities exchanges registered under section 78f(g) that also involve security futures products. (m) Procedures and rules for security futures products A national securities association registered under subsection (a) had to, within 8 months of December 21, 2000, put in place the procedures described in section 78f(h)(5)(A) and adopt the rules described in section 78f(h)(5)(B) and (C). (n) Data standards (1) A national securities association registered under subsection (a) must adopt data standards for all information regularly filed with or submitted to it. (2) Those data standards must, as much as practical, match and stay compatible with the data standards established under section 5334 of title 12 — including, as much as practical, the features described in clauses (i) through (vi) of that section's subsection (c)(1)(B).