Exclusions

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There are a number of circumstances that allow persons to avoid registration as a broker-dealer.
As you learned in previous chapters, registration requires numerous disclosures, seemingly
endless paperwork, and filing fees. Financial firms can save significant money and time if they
can avoid the process. Qualifying for an exclusion, which means a person does not meet the
definition of a broker-dealer, legally allows firms to avoid registration.
These are the exclusions discussed in this chapter:
 General broker-dealer exclusions
 Institution rule
 Vacation (snowbird) rule
 Limited registration of Canadian broker-dealers
General broker-dealer exclusions
The Uniform Securities Act (USA) explicitly names three persons that are consistently excluded
from the definition of a broker-dealer:
 Agents
 Issuers
 Banks, savings institutions, and trust companies
Agents are the natural persons (human beings) that represent (work for) broker-dealers.
Essentially, agents are the employees, while broker-dealers are the employers (firms).
Issuers may raise capital (money) by selling their securities to investors, but are not considered
broker-dealers unless they facilitate trading in another issuer’s securities. For example, Charles
Schwab is an issuer of their own common stock, which normally would exclude them from
broker-dealer registration. However, the exclusion does not apply because they facilitate trading
in securities from other issuers.
Banks and savings institutions offer financial products to their own customers, but it’s always
safe to assume they’re not included in the definition of a broker-dealer. The same goes for trust
companies, which are organizations that help their clients manage trusts. One important note
here - this exclusion does not carry over to bank holding companies. The Federal Reserve Bank
of St. Louis, which is a regional division of the Federal Reserve (the US Central Bank), describes
bank holding companies this way:
“Bank holding companies are corporate entities that own one or more banks”
Bank holding companies are large organizations with numerous subsidiaries, which include a
bank (or multiple banks). These organizations also have subsidiaries engaged directly in the
securities business. For example, Bank of America operates a banking business, but also owns
the broker-dealer business Merrill Lynch. Therefore, Bank of America cannot claim the banking
exclusion due to its ownership of a broker-dealer (which makes them a bank holding company).
Bottom line - banks and other savings institutions are excluded from the definition of a broker-
dealer, but bank holding companies are not.
Institution rule
Firms may also be excluded from the definition of a broker-dealer if these two conditions exist:
 No place of business in the state
 Only doing business with:
o Issuers
o Other broker-dealers
o Banks, savings institutions, and trust companies
o Insurance companies
o Investment companies (e.g. mutual funds)
o Pension or profit-sharing trusts
o Financial institutions
o Institutional investors
First and foremost, a business engaged in broker-dealer activities with an office in the state
(a.k.a. a place of business) is not excluded and must register. For example, Northwestern
Mutual, which has a part of its business dedicated to broker-dealer activities, has its company
headquarters located in Wisconsin. It doesn’t matter what type of investors the company
handles; registration is required with Wisconsin’s state administrator because of the physical
presence of their offices.
However, organizations can avoid registration if they have no place of business in a state and
generally avoid retail investors. As we learned in the investors chapter, there are two general
categories of investors: retail and institutional. If you scroll back up to the list of investors
above, they’re all institutions. Don’t worry about the specifics if you’re not aware of these
institutions (e.g. what’s a profit-sharing trust?). It’s important you know broker-dealers can
avoid registration when engaging these investors, not specifically what those investors are.
If you think back to what we discussed in previous chapters, the regulators are most concerned
with protecting retail investors. Institutional investors are sophisticated and don’t need much
protection from state administrators. That’s why the USA doesn’t enforce registration
requirements for broker-dealers that only transact with institutional investors. Of course, this
rule only applies to broker-dealers that don’t maintain a place of business in the state, as it’s
assumed retail investors may show up to the office.
Vacation (snowbird) rule
Another way a firm can avoid registration as a broker-dealer exists if the following conditions
are met:
 No place of business in the state
 Only doing business with existing customers temporarily in that state (non-residents)
This is commonly referred to as the vacation rule, or the snowbird exclusion in the industry.
Similar to the institution exclusion, it comes with a prerequisite of having no office or physical
presence in the state. If an existing customer travels to another state the broker-dealer does not
do retail business in or maintain an office, they can continue to do business with that customer
without registering in the new state. The exclusion exists as long as the customer isn’t a resident
of the new state, assumptively there temporarily.
For example, let’s assume ABC Brokerage Firm has its headquarters in Idaho. The majority of the
company’s business is in the state, and the business is properly registered as a broker-dealer
with the Idaho state administrator. One of their customers, who is an Idaho resident, travels to
Texas for a two-week vacation. ABC Brokerage Firm can continue to do securities transactions
with that customer while they’re on vacation without registering in Texas. This exclusion
prevents unnecessary registration requirements for firms with traveling customers.
Generally speaking, vacation is considered 30 days or fewer in the new state. A broker-dealer
could be required to register should their customer go on vacation for longer than a month.
However, it’s possible you encounter a valid situation where the customer stays longer than 30
days and the broker-dealer still obtains the exception.
While the snowbird rule largely focuses on customers on vacation, the rules and regulations
technically reference ‘non-residents.’ If a customer goes to another state for an education or
work-related program and maintains residency in the original state, the exclusion will still apply
regardless of the timeframe. For example, let’s assume a customer goes to another state for a
master’s program or a work-related assignment for several months. They can continue to do
business with their broker-dealer without the firm registering in the new state as long as the
customer retains residency in the original state.
Limited registration of Canadian broker-dealers
When the USA was originally written, representatives from Canada were a part of the
lawmaking process. That’s why there’s specific mention of Canadian persons in the law. While
they don’t avoid registration completely, the process a Canadian broker-dealer goes through to
legally do business in a US state is less intense than the normal American registration process.
Canada has its own registration system for financial firms, which you don’t need to know much
about. You can safely assume Canada’s registration process is similar to the American process. If
a broker-dealer is located in Canada, is properly registered in Canada, and maintains no offices
in any given US state, they can apply for limited US registration.
This would only be a concern if the broker-dealer wanted to do securities transactions with a
customer located in a US state. For example, what if a Canadian customer of a Canadian broker-
dealer travels or moves to a US state? Can they continue to do business together? The USA
provides a form of limited registration status to Canadian broker-dealers in certain
circumstances (discussed below).
Limited registration requires Canadian broker-dealers to maintain effective registration with the
appropriate self-regulatory organization (SRO) or stock exchange in Canada and continue to
maintain “good standing” with their regulators. Additionally, the following requirements must
be met:
 Must file an application with the appropriate Canadian jurisdiction (regulator)
 Filing of consent to service of process
 Submission of books and records (if requested by state administrator)
If these conditions are met, Canadian broker-dealers can do securities transactions in a US state
in one of two circumstances.
First, a Canadian broker-dealer can gain limited registration status if they’re doing business with
a person from Canada that is temporarily in a US state, assuming there was a pre-existing
relationship with that person. For example, let’s assume a Toronto-based broker-dealer has a
relationship with Leon, a Canadian customer. Leon travels to California for the winter season to
avoid cold weather. The broker-dealer can gain limited registration status and continue to do
business with Leon as long as he’s there temporarily. ‘Temporarily’ is defined as less than 183
days (yes, this is a weirdly specific number), or basically 6 months.
The second circumstance relates to Canadian persons with full-time residence in a US state. This
rule only applies if the broker-dealer is doing securities transactions exclusively in a Registered
Retirement Savings Plan (RRSP), which is basically Canada’s version of an Individual Retirement
Plan (IRA). Let’s assume the same example as before, but this time Leon moves from Toronto
and is now a full-time resident of California. The Canadian broker-dealer can utilize limited
registration status and continue to do business with Leon even though he’s not temporarily in
California. However, the securities transactions are limited to those done in Leon’s RRSP.
If Canadian broker-dealers plan on claiming limited registration status in the United States for
prolonged periods of time, they must renew their applications just like American broker-dealers.
If you recall from the disclosures and fees chapter, registration for American persons lasts until
the end of each calendar year (December 31st), requiring renewal prior to the end of the year
to avoid a registration lapse. The rule is essentially the same for Canadian broker-dealers, except
the cutoff is December 1st. In order to avoid a registration lapse, Canadian broker-dealers
should renew by the end of November.
The following video summarizes the key points covered in this chapter:
Key points
Broker-dealer exclusions
 General exclusions:
o Agents
o Issuers
o Banks, savings institutions, and trust companies
 Institution rule
 Vacation (snowbird) rule
 Limited registration of Canadian broker-dealers