What is Broker-Dealer Registration? Securities Lawyer 101
Broker-dealers are subject to regulation by the SEC, FINRA, Self Regulatory Organizations (“SROs”) such as stock exchanges, and the states in which they do business. The Securities Exchange Act of 1934 (the “1934 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. The broker-dealer’s employees doing business within the state must also be registered there.
The determination of what constitutes broker dealer activity is a matter 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
In some circumstances, persons who provide services to broker-dealers–such as investment bankers, consultants, intermediaries and finders–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, in some cases 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 a registration application to be submitted and approved. Broker-dealer registration with the SEC entails the submission of an application under Section 15(b) of the 1934 Act. The SEC must either grant registration or institute proceedings to determine whether registration should be denied. Once registration is granted, 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 with 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 legal problems involving the applicant’s owners, registered employees, affiliated entities, and individuals holding senior management positions with affiliated entities. Certain background information including criminal convictions, 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 must be disclosed.
FINRA & SRO Membership for Broker-Dealers
FINRA requires broker-dealer applicants complete its New Member Application form (“NMA”). Form NMA contains fourteen individual standards for FINRA membership itemized in NASD Rule 1014. It 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 From 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 who 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. Those procedures are designed 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 states where the broker-dealer conducts business. Some states provide 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 in which they conduct business.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post 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. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com
