Before opening for business, a broker-dealer must register with several entities to comply with relevant securities laws. Details of the registration process are outlined briefly below. |
Who Must Register?
Most brokers and dealers are required to register with the Securities and Exchange Commission (“SEC”) and join a self-regulatory organization (“SRO”), such as the Financial Industry Regulatory Authority (“FINRA”), before commencing business. As demonstrated below, the Securities Exchange Act of 1934 (“Exchange Act”) defines both terms broadly.
• “Broker” is defined by the Exchange Act as: any person engaged in the business of effecting transactions in securities for the account of others.
• “Dealer” is defined by the Exchange Act as: any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise.
While the definition of dealer appears to encompass anyone who trades professionally, SEC interpretive guidance notes that to be considered a dealer, a firm generally must hold itself out to the public as being willing buyers or sellers on a continuous basis.
How To Register
Now that you have determined that you would like to be in the broker-dealer business, you cannot begin business until the following steps are completed:
• File Form BD and register with the SEC
• File Form NMA and become a member of FINRA
• Become a member of the Securities Investor Protection Corporation (“SIPC”)
• Register as a broker-dealer with the state(s) where you intend to conduct business
Form BD & SEC Registration
To apply for registration, Form BD must be filed with the Central Registration Depository ("CRD"), which is operated by FINRA. Form BD requires detailed information regarding the proposed broker-dealer, including: a description of the types of securities the proposed broker-dealer intends to buy and sell; the states in which the broker-dealer intends to conducts its business; information disclosing the persons and/or entities controlling the broker dealer; and disclosures of the prior crimes, litigation, insolvencies, and other bad acts of the broker-dealer’s principals.
Within 45 days of filing a completed application, the SEC will either grant registration or begin proceedings to determine whether it should deny registration. Typically, SEC registration will be granted on the condition that the broker-dealer must also register with an SRO. Once registration has been granted, the broker-dealer has an ongoing responsibility to amend its Form BD whenever its contents become inaccurate or incomplete.
Form NMA and FINRA Membership
Broker-dealers have the option of registering directly with an exchange or exchanges, such as the NYSE or NASDAQ, but doing so precludes them from buying or selling securities not traded on their registered exchanges. Registering with FINRA allows broker-dealers to buy and sell securities traded on all national exchanges and over-the-counter. Thus, registering with FINRA will give the broker-dealer the broadest access to differing markets.
The FINRA registration process begins with the proposed broker-dealer submitting a name for the firm. After the name is reserved, the broker-dealer must then submit a Super Account Administrator Entitlement Form, Email Notification Contact Form, and resubmit a hardcopy of Form BD. These forms allow the broker-dealer to determine who will have access to CRD, FINRA’s web-based submission system, which is required to complete the registration process. Broker-dealers must also submit a New Assessment Report, which allows FINRA to estimate the firm’s annual fees, based on the number registered representatives and gross revenue.
Once the broker-dealer has been granted CRD access, it must then complete Form NMA (New Member Application). Form NMA is a comprehensive filing, requiring detailed disclosures of the proposed broker-dealers business, management, organization, financial status, backgrounds of the firm’s principals and written supervisory procedures. The form also requires a detailed business plan which must address: material aspects of the business; an opening trial balance sheet and net capital computation; a monthly income statement projection for the first 12 months of operation; a description of financial controls; organizational charts; and a list of all associated persons and their disciplinary histories.
Following Form NMA’s submission, FINRA may seek additional information from the broker-dealer or proceed with the interview stage of the membership process. The interview must take place within 90 days of the receipt of the completed application or with 60 days of a request for additional information. The interview typically covers principals’ experience, the firm’s source of capital, business model, and how compliance functions will be managed. Applications will be approved if they satisfy the 14 qualification standards enumerated in NASD Rule 1014 . Registration becomes effective upon the broker-dealer signing FINRA’s membership agreement, promising to maintain high commercial standards.
Every registered broker-dealer must be a member of the SIPC, unless its principal business is conducted outside of the United States or consists exclusively of the sale or distribution of investment company shares, variable annuities, or insurance. Membership becomes effective once the broker-dealer completes its SEC and SRO registrations. Each member must pay an annual assessment to the SIPC of .25% of the broker-dealer’s net operating revenue.
Each state has its own requirements for the registration of broker-dealers who conduct a securities business there. Whether a broker-dealer conducts a securities business within a state is independent of the firm’s physical location. The mere solicitation of orders from residents of a state will suffice to satisfy the conducting a securities business threshold, requiring state registration. Thus, the broker-dealer must determine how and where it intends to market itself and register itself accordingly. Unlike the SEC registration and the FINRA membership process, however, state registration only requires submitting the completed version of Form BD through CRD and paying a fee, without review before registration by the state. Once the broker-dealer has registered with the state(s) it intends to conduct business in, it can commence brokerage activities.
Riveles Law Group, a law firm based out of New York, offers legal advice on all aspects of starting and managing a hedge fund, venture capital, commodity pools, and other private investment vehicles ( http://riveleslawgroup.com/private-fund-formation/ ). To learn more about broker – dealer registration, you may visit SEC.gov.
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