Time Running Out on Retail Currency Business for SEC-Registered Broker-Dealers


As things currently stand, on July 16, when the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act)1 becomes effective, Securities and Exchange Commission (SEC)– registered broker-dealers (BDs) will no longer be able to enter into many types of foreign currency transactions for their retail customers. Although the law is not entirely clear, there is even a question as to whether BDs may purchase foreign currency for retail customers in connection with foreign securities trades if the settlement date for the currency transaction extends beyond two days.2 The reason for these changes is that the Dodd-Frank Act included a requirement that the applicable functional regulator pass rules governing conduct of a regulated entity regarding retail forex in order for an entity to be able conduct such business. The Commodity Futures Trading Commission (CFTC),3 the Federal Deposit Insurance Corporation (FDIC),4 and the Office of the Comptroller of the Currency (OCC)5 have passed rules, but the SEC has not.

The bad news for BDs does not end there. A provision in the Dodd-Frank Act disallows a BD from using its CFTC-registered futures commission merchant (FCM) to conduct such foreign currency transactions (even though a stand-alone FCM may legally carry out the trades), and the CFTC has provided in its rules that a BD may not solve its problem by registering as a retail foreign exchange dealer (Forex Dealer). Going forward, unless the SEC acts, the only types of entities that may solicit and effect foreign exchange transactions with customers that are not “eligible contract participants” (ECPs) are banks and stand-alone FCMs and Forex Dealers. Investment advisers that assist retail customers will also have to separately register as commodity trading advisers (CTAs) in order to advise on foreign exchange trades carried out at FCMs and Forex Dealers.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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