Understanding the Exchange Act's Registration Requirements

BACKGROUND

I. STATUTORY AND LEGAL FRAMEWORK

B. The Exchange Act’s Registration and Other Requirements

40. To fulfill the purposes of the Exchange Act, Congress imposed registration and disclosure obligations on certain defined participants in the national securities markets, including but not limited to broker-dealers, exchanges, and clearing agencies. It also empowered the SEC to write rules to protect investors who use the services of those intermediaries.

41. In the Exchange Act, Congress explained that such oversight is essential to the proper functioning of the national securities markets and the national economy:

[T]ransactions in securities as commonly conducted upon securities

exchanges and over-the-counter markets are effected with a national

public interest which makes it necessary to provide for regulation

and control of such transactions and of practices and matters related

thereto … [to] perfect the mechanisms of a national market system

for securities and a national system for the clearance and settlement

of securities transactions and the safeguarding of securities and

funds related thereto, and to impose requirements necessary to make

such regulation and control reasonably complete and effective, in

order to protect interstate commerce, the national credit, the Federal

taxing power, to protect and make more effective the national

banking system and Federal Reserve System, and to insure the

maintenance of fair and honest markets in such transactions.

15 U.S.C. § 78b.

42. Congress also determined that “[t]he prompt and accurate clearance and settlement of securities transactions, including the transfer of record ownership and the safeguarding of securities and funds related thereto, are necessary for the protection of investors and persons facilitating transactions by and acting on behalf of investors.” 15 U.S.C. § 78q-1.

i. Registration of Exchanges

43. In enacting registration provisions for national securities exchanges, Congress found in Section 2(3) of the Exchange Act [15 U.S.C. §78b(3)] that:

Frequently the prices of securities on such exchanges and markets

are susceptible to manipulation and control, and the dissemination

of such prices gives rise to excessive speculation, resulting in

sudden and unreasonable fluctuations in the prices of securities

which (a) cause alternately unreasonable expansion and

unreasonable contraction of the volume of credit available for trade,

transportation, and industry in interstate commerce, (b) hinder the

proper appraisal of the value of securities and thus prevent a fair

calculation of taxes owing to the United States and to the several

States by owners, buyers, and sellers of securities, and (c) prevent

the fair valuation of collateral for bank loans and/or obstruct the

effective operation of the national banking system.

44. Accordingly, Section 5 of the Exchange Act [15 U.S.C. § 78e] requires an organization, association, or group of persons that meets the definition of “exchange” under Section 3(a)(1) of the Exchange Act, unless otherwise exempt, to register with the Commission as a national securities exchange pursuant to Section 6 of the Exchange Act.

45. Section 3(a)(1) of the Exchange Act [15 U.S.C. § 78c(a)(1)] defines “exchange” to mean “any organization, association, or group of persons, whether incorporated or unincorporated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as that term is generally understood, and includes the market place and the market facilities maintained by such exchange.”

46. Exchange Act Rule 3b-16(a) [17 C.F.R. § 240.3b-16(a)] further defines certain terms in the definition of “exchange” under Section 3(a)(1) of the Exchange Act, including “[a]n organization, association, or group of persons,” as one that: “(1) [b]rings together the orders for securities of multiple buyers and sellers; and (2) [u]ses established, non-discretionary methods (whether by providing a trading facility or by setting rules) under which such orders interact with each other, and the buyers and sellers entering such orders agree to the terms of a trade.”

47. Registration of a trading platform as an “exchange” under the Exchange Act is a bedrock Congressional requirement that permits the SEC to carry out its role of oversight over the national securities markets.

48. For example, properly registered exchanges must enact rules to govern their and their members’ behavior. Under Section 6 of the Exchange, the rules, among other things, must be “designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade … and, in general, to protect investors and the public interest.”

49. These rules are subject to review by the SEC under Section 19 of the Exchange Act [15 U.S.C. § 78s], including before an exchange can be registered and begin operating. This review process is designed to ensure that securities marketplaces operate in a manner consistent with the Exchange Act as its practices and procedures evolve over time, in part to protect investors and the integrity of securities markets that affect national commerce and the economy.

ii. Registration of Broker-Dealers

50. Section 15(a) of the Exchange Act [15 U.S.C. § 78o(a)] generally requires brokers and dealers to register with the SEC, and a broker or dealer must also become a member of one or more “self-regulatory organizations” (“SROs”), which in turn require members to adhere to rules governing members’ activities.

51. Section 3(a)(4) of the Exchange Act [15 U.S.C. § 78c(a)(4)] defines “broker” generally as “any person engaged in the business of effecting transactions in securities for the account of others.” Section 3(a)(5) of the Exchange Act [15 U.S.C. § 78c(a)(5)] defines “dealer” generally as “any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise.”

52. The regulatory regime applicable to broker-dealers is a cornerstone of the federal securities laws and provides important safeguards to investors and market participants. Registered broker-dealers are subject to comprehensive regulation and rules that include recordkeeping and reporting obligations, SEC and SRO examination, and general and specific requirements aimed at addressing certain conflicts of interest, among other things. All of these rules and regulations are critical to the soundness of the national securities markets and to protecting investors in the public markets who interact with broker-dealers.

53. To preserve the fair and orderly markets, avoid conflicts of interests, and protect investors, Section 11(a) of the Exchange Act [15 U.S.C. § 78k(a)] prohibits broker-dealers that are members of exchanges from effecting transactions on that exchange for their accounts.

iii. Registration of Clearing Agencies

54. Section 17A(b) of the Exchange Act [15 U.S.C. § 78q-1(b)] generally makes it unlawful “for any clearing agency, unless registered in accordance with this subsection, directly or indirectly, to make use of the mails or any means or instrumentality of interstate commerce to perform the functions of a clearing agency with respect to any security.”

55. Section 3(a)(23)(A) of the Exchange Act [15 U.S.C. § 78c(a)(23)(A)] defines the

term “clearing agency” as “any person who acts as an intermediary in making payments or

deliveries or both in connection with transactions in securities or who provides facilities for

comparison of data respecting the terms of settlement of securities transactions, to reduce the

number of settlements of securities transactions, or for the allocation of securities settlement

responsibilities,” as well as “any person … who (i) acts as a custodian of securities in connection

with a system for the central handling of securities whereby all securities of a particular class or

series of any issuer deposited within the system are treated as fungible and may be transferred,

loaned, or pledged by bookkeeping entry without physical delivery of securities certificates, or

(ii) otherwise permits or facilitates the settlement of securities transactions or the hypothecation

or lending of securities without physical delivery of securities certificates.”

56. Registered clearing agencies are subject to comprehensive regulation under the

Exchange Act and the rules thereunder, providing important safeguards to investors and market

participants, and to the maintenance of fair competition. These regulations and rules include

recordkeeping obligations and require SEC examination. Moreover, clearing agencies properly

registered under the Exchange Act must enact a set of rules to govern their and their members’

behavior, and these rules are subject to review by the SEC.