Broker Dealer Registration 101

Posted by Brenda Hamilton, Securities and Going Public Lawyer

Broker-dealers are subject to regulation by the SEC, FINRA and any other Self-Regulatory Organizations (“SRO”) such as stock exchanges, as well as the states in which they do business. The Securities Exchange Act of 1934 (“Exchange Act”) requires that any broker-dealer effecting securities transactions by means of interstate commerce be registered. State laws also regulate broker-dealer activity within their jurisdictions. Unless an exemption from registration is available, state laws require registration of any broker-dealer doing business from or with persons in their state, as well as the broker-dealer’s employees doing business within the state.

Broker Dealer Activity

The determination of what constitutes broker dealer activity is a question of fact and includes:

(i) participation in the solicitation, negotiation or execution of securities transactions;

(ii) receiving transaction-based compensation; or

(iii) holding investor funds or securities.

Persons or entities that (i) hold themselves out as being willing to purchase and sell securities on a continuous basis or (ii) originate securities that they purchase and sell, are often required to register as dealers. Underwriters, stockbrokers, market makers and other dealers must register as broker-dealers pursuant to Section 15(b) of the Exchange Act.

Finders as Broker-Dealers

Under some circumstances, other persons such as investment bankers, consultants, intermediaries and finders that provide services to broker-dealers may be required to register as broker-dealers if they engage in one or more activities characteristic of brokers or dealers.

Exemptions from Broker Dealer Registration Requirements

Finders who act as intermediaries may be exempt from registration under limited circumstances. Additionally, under some circumstances, exemptions from broker-dealer registration requirements may be available. For example, Issuers who sell their own securities through insiders and employees are exempt from registration if they meet certain conditions. Foreign broker-dealers meeting specified requirements are also exempt from U.S registration.

SEC Registration of Broker-Dealers

Both FINRA and the SEC require that an application be submitted and approved in order to accomplish broker-dealer registration. Broker-dealer registration with the SEC is accomplished by submitting an application under Section 15(b) of the Exchange Act. The SEC must grant registration institute proceedings to determine whether registration should be denied. When the SEC grants registration, it does not become effective until the broker-dealer becomes a member of FINRA. Until FINRA grants membership, a broker-dealer may not engage in any activities requiring registration including solicitation, negotiation or execution of securities transactions or the receipt of transaction based compensation.

SEC Form BD Informational Requirements

Under SEC Rule 15b1-1, Form BD must be filed through FINRA’s Central Registration Depository (CRD) system. The CRD system enables applicants to use a single form and combined payment to apply for registration and membership in multiple jurisdictions and FINRA.  Form BD consists of 13 items and schedules which require the applicant to provide detailed information.

Form BD requires disclosure of the following information about the broker-dealer applicant:

• The chain of ownership of the broker-dealer,
• Any affiliations between the broker-dealer and other entities in the securities or investment advisory businesses,
• Identity of the broker-dealer’s officers and directors, and
• The activities the broker-dealer intends to conduct.

Broker-Dealer Form BD Background Requirements

Form BD requires disclosure of any violation involving the applicant’s owners, registered employees, affiliated entities, and individuals holding senior management positions with affiliated entities, certain background information including crimes, violations of securities or investment-related laws or rules of foreign financial regulatory authorities, and proceedings that might result in a finding of such violation.

FINRA & SRO Membership for Broker-Dealers

FINRA requires broker-dealer applicants to complete its New Member Application form (“NMA”). Form NMA contains fourteen individual standards for FINRA membership itemized in NASD Rule 1014.  Form NMA also lists the forms and supporting documents required for submission of an application. NMA requires certain mandatory information, including:

• Completed Form BD,
•  Detailed business plan that includes the trial balance and net capital computations, projections, intended business locations, the types of securities intended to be offered, description of the facilities including the proposed lease, number of markets to be made, plans to enter into any  contractual arrangements such as underwriting, plans for any proprietary positions, and a description of the communications and  operational systems employed to conduct business and any business continuity plans.
• Financial and source of capital information,
• An organization chart, and
• Written supervisory policies, procedures, and controls.

Additional FINRA Requirements for Broker-Dealers

In addition to the NMA Application for membership, the broker-dealer application must provide a FINRA Entitlement Agreement and FINRA Account Administrator Entitlement Form for access to Web CRD. Once the broker-dealer firm is approved for access to Web CRD, it must electronically submit Forms U-4 (for individual broker registration), any subsequent amendments to its Form BD and any Forms U-5 (broker termination) over Web CRD.

SIPC Requirements for Broker Dealers

The broker-dealer application must also become a member of the Securities Investor Protection Corporation (SIPC), to obtain a fidelity bond and complete a Lost or Stolen Securities Program registration.

Broker-Dealer Form U-4 Requirements

The principal officers and other persons associated with the broker-dealer intended to engage in the broker-dealer’s securities or investment banking business, the broker-dealer’s management and those will supervise its activities must submit Form U-4 and provide fingerprints as well as pass specific exams.

FINRA requires that the broker-dealer have at least two securities principals and a financial and operations principal (FINOP).

Broker-Dealer Exams

FINRA requires the following examinations:

• The chief executive officer and all of the broker-dealer’s other supervisory principals must pass the Series 7 and Series 24 exams;
• The FINOP must pass the Series 27 examination; and
• Generally, the broker-dealer’s registered representatives must pass the Series 7 and the Series 63 Uniform State Law examination.

Broker-Dealer’s Supervisory Procedures

NASD Rule 3010 provides that the broker-dealer must have written supervisory procedures reasonably designed to prevent and detect violations of the securities laws and NASD rules including to:

(1) prevent insider trading as required by Section 15(f) of the Exchange Act,

(2) serve as the broker-dealer’s system of supervision as required by NASD Rule 3010, and

(3) provide a defense against liability for the failure to supervise by the firm and its employees under Sections 15(b)(4) and 15(b)(6) of the Exchange Act.

NASD Rule 3010 provides that the broker-dealer must have written supervisory procedures reasonably designed to prevent and detect violations of the securities laws and NASD rules.

State Registration Requirements for Broker-Dealers

In addition to registration with the SEC and FINRA membership, unless an exemption is available, a broker-dealer must register in any state from or into which the broker-dealer intends to conduct its securities business. The agents of the broker-dealer must also become registered in those states where the broker-dealer conducts business.   Some states provide for an exemption for transactions with institutional clients.  Salespersons are required to pass the Series 63 Uniform State Law examination in order to qualify as a registered agent in the states.

For further information about broker dealer registration and securities law, please visit www.securitieslawyer101.com or contact Brenda Hamilton, Securities Attorney, 101 Plaza Real South, Suite 201 S, Boca Raton, Florida, 33432, at (561) 416-8956 or by email at [email protected]. This information is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. For more information concerning the rules and regulations affecting the use of Rule 144, Form 8K, FINRA Rule 6490, Rule 506 private placement offerings, Regulation A, Rule 504 offerings, Rule 144, SEC reporting requirements, SEC registration on Form S-1 and Form 10, Pink Sheet listing, OTCMarkets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, go public direct transactions and direct public offerings, please contact Hamilton and Associates at (561) 416-8956 or [email protected]. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Going Public Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com