Broker-Dealer & Agent Regulation

Broker-Dealer Registration Requirements

Under the Uniform Securities Act, it is unlawful for any person to transact business as a broker-dealer in a state unless registered or exempt from registration. The registration requirement is designed to ensure that firms engaging in the securities business meet minimum standards of competence, integrity, and financial responsibility.

The registration process for broker-dealers under the USA typically requires the following:

Filing an application: The broker-dealer must file an application with the state Administrator. The application includes the firm's name and form of organization, the address of its principal office, the names and addresses of its partners, officers, or directors (or persons holding similar positions), any information the Administrator may reasonably require about the applicant's business and affiliations, and a statement of the applicant's financial condition.
Consent to service of process: The broker-dealer must file a consent to service of process, designating the Administrator as attorney-in-fact for receiving legal documents.
Filing fee: The broker-dealer must pay the required registration fee.
Minimum net capital: The broker-dealer must demonstrate that it meets the state's minimum net capital requirements, which are designed to ensure the firm has sufficient financial resources to meet its obligations to customers.
Posting a surety bond: The Administrator may require the broker-dealer to post a surety bond as a condition of registration. The bond provides a financial guarantee to protect customers in case the broker-dealer fails to meet its obligations.

The registration is effective for one year from the date of grant (or from a date specified by the Administrator) and must be renewed annually. The Administrator may require additional information at any time and may conduct examinations of the broker-dealer's books and records.

Broker-Dealer: Any person engaged in the business of effecting transactions in securities for the account of others (broker) or for its own account (dealer). Under the USA, broker-dealers must register in each state where they conduct business unless an exclusion or exemption applies.

Net Capital: The liquid financial resources a broker-dealer must maintain to cover its obligations to customers. It is calculated as total assets minus total liabilities, with certain adjustments for illiquid assets. States and the SEC impose minimum net capital requirements.

Successor Broker-Dealer Registration

If a broker-dealer registered under the USA changes its form of organization (for example, a partnership converts to a corporation), it may file an amendment to its registration rather than filing a brand-new application, provided the change does not materially alter the facts in the original registration. The Administrator must be promptly notified of any material changes. This "successor" provision streamlines the administrative process and avoids unnecessary disruption to the firm's business.

Exclusions from the Broker-Dealer Definition

The USA specifically excludes certain persons from the definition of "broker-dealer," meaning they are not required to register as broker-dealers even though they may engage in certain securities-related activities. These exclusions are based on the nature of the person or the limited scope of their activities.

Key Exclusions

Agents: An individual who represents a broker-dealer is an "agent," not a broker-dealer. The agent registers separately. The employing firm is the broker-dealer.
Issuers: A company that issues its own securities is generally not a broker-dealer. The issuer is selling its own product, not effecting transactions for others or as a regular business of trading.
Banks, Savings Institutions, and Trust Companies: These financial institutions are excluded from the broker-dealer definition when they engage in securities activities within the scope of their banking business. Banks are already subject to extensive federal and state banking regulation. However, if a bank creates a separate subsidiary to engage in brokerage activities, that subsidiary would need to register as a broker-dealer.
Persons with No Place of Business in the State: A broker-dealer that has no place of business (office) in the state is excluded from the registration requirement if it effects transactions only with:
- Other broker-dealers
- Issuers of the securities involved in the transaction
- Institutional buyers (banks, insurance companies, investment companies, pension funds, etc.)
- Existing customers who are in the state only temporarily (the "snowbird" exception)

The "no place of business" exclusion is heavily tested. Remember: an out-of-state broker-dealer can deal with other BDs, institutional buyers, and existing clients temporarily in the state without registering. But if it has any office in the state, or if it deals with retail customers who are residents of the state, it must register. The key phrase is "no place of business in the state."

Figure 3.1 — Decision flow for determining whether an out-of-state broker-dealer must register. The key factors are physical presence and the type of clients served.

Agent Registration

Under the USA, it is unlawful for any individual to transact business as an agent in a state unless the individual is registered under the Act. The agent registration requirement applies to individuals who represent broker-dealers or issuers in effecting or attempting to effect securities transactions.

Agents of Broker-Dealers

An individual who represents a broker-dealer in effecting securities transactions is an agent and must register in the state. This includes all registered representatives, financial advisors, and other sales personnel employed by or associated with a broker-dealer firm. The agent's registration is tied to the broker-dealer: when the agent moves from one broker-dealer to another, the agent must file a new registration with the state and cannot conduct business until the new registration is effective.

Key rules regarding agent registration:

An agent may not be registered with more than one broker-dealer at the same time, unless the broker-dealers are affiliated (under common ownership or control).
If the broker-dealer's registration is revoked, suspended, or denied, the agent's registration is automatically affected. The agent cannot continue to conduct business under a different broker-dealer without a new registration.
The agent must promptly notify the Administrator of any change in the information contained in the registration application (change of name, address, disciplinary history, etc.).

Agents of Issuers

An individual who represents an issuer in effecting securities transactions may also need to register as an agent. However, there are important exemptions:

An individual representing an issuer in transactions involving exempt securities is NOT considered an agent and does not need to register. For example, a Treasury Department employee selling government bonds is not an agent under the USA.
An individual representing an issuer in exempt transactions is NOT considered an agent. For example, an employee who sells the issuer's stock to other employees in an exempt employee plan transaction is not an agent.
An individual representing an issuer in transactions with existing employees, partners, or directors of the issuer is NOT considered an agent, provided no commission or other remuneration is paid for soliciting any person in the state.

An agent can only be registered with one broker-dealer at a time (unless the BDs are affiliated). This is a frequently tested rule. If an agent wants to move to a new firm, the old registration must be terminated and a new one filed. An agent cannot "moonlight" at two unaffiliated broker-dealers simultaneously.

Agent Registration Procedures

The agent registration application must include:

The applicant's name, address, and employment history for the past 10 years
The name of the broker-dealer or issuer the agent will represent
Whether the applicant has been convicted of any felony or securities-related misdemeanor within the past 10 years
Whether the applicant has been the subject of any regulatory action (denial, suspension, or revocation of registration, censure, or bar by any securities regulator, SRO, or foreign financial regulatory authority)
Whether the applicant is subject to any unsatisfied judgment or lien
Whether the applicant has been involved in any bankruptcy proceeding
A consent to service of process
The filing fee

The registration becomes effective at noon on the 30th day after the application is filed (or at such earlier time as the Administrator may determine by order). If the Administrator does not deny the application within 30 days, it becomes effective automatically. This is sometimes called "registration by default."

Notice Filing for Federal Covered Securities

As discussed in earlier chapters, federal covered securities are exempt from state registration. However, states retain the right to require a notice filing for certain categories of federal covered securities, most commonly for securities issued by investment companies (mutual funds and ETFs) and securities offered under Rule 506 of Regulation D.

What is Required in a Notice Filing?

A notice filing typically includes:

A copy of the documents filed with the SEC (such as the registration statement for investment company securities, or the Form D for Rule 506 offerings)
A consent to service of process
A filing fee as specified by the state

The notice filing is not a registration; it is simply a notification to the state that federal covered securities are being offered within its borders. The Administrator reviews the notice filing for completeness but does not engage in a merit review of the offering (unlike a full qualification registration). The notice filing becomes effective upon filing, unless the Administrator issues an order denying effectiveness.

Federal Covered Advisers and Notice Filing

Similarly, federal covered advisers (investment advisers registered with the SEC, typically those with assets under management of $100 million or more) are not required to register with the state but may be required to make a notice filing. This notice filing typically includes a copy of the adviser's Form ADV and the required fee. The state retains anti-fraud jurisdiction over the adviser's activities within the state and requires the adviser's investment adviser representatives (IARs) to register at the state level.

Vanguard Total Stock Market Index Fund is a mutual fund issued by a registered investment company. It is a federal covered security. When Vanguard wants to sell shares of this fund to investors in Ohio, it does not need to register the fund shares with Ohio's securities division. Instead, it makes a notice filing by submitting a copy of its SEC registration documents, a consent to service of process, and a filing fee. Ohio's Administrator can require this notice filing but cannot impose additional registration requirements beyond what the SEC requires.

Net Capital and Financial Requirements

The USA authorizes the Administrator to establish minimum financial requirements for broker-dealers and investment advisers. These requirements are designed to ensure that firms have adequate financial resources to meet their obligations to customers and to maintain the stability of the securities markets.

Net Capital Requirements for Broker-Dealers

Net capital is the amount of liquid assets a broker-dealer has in excess of its liabilities. It represents the firm's financial cushion and its ability to absorb losses without defaulting on obligations to customers. The SEC establishes federal net capital requirements under Rule 15c3-1 of the Securities Exchange Act of 1934, and states may adopt these requirements or impose additional requirements (as long as they are not less stringent than the federal minimums).

Key aspects of net capital requirements include:

Minimum dollar amount: Broker-dealers must maintain a minimum net capital amount that varies based on the type of business they conduct (e.g., introducing firms have lower requirements than clearing firms).
Ratio test: The aggregate indebtedness of a broker-dealer cannot exceed a specified multiple (typically 15 times) of its net capital.
Early warning notification: Broker-dealers must notify the Administrator if their net capital falls below specified early warning levels (typically 120% of the minimum requirement).
Prohibited actions: A broker-dealer whose net capital falls below the minimum may not open new customer accounts, accept new orders, or make withdrawals of capital.

Surety Bonds

As an alternative or supplement to net capital requirements, the Administrator may require broker-dealers (and, in some cases, investment advisers) to post a surety bond. A surety bond is a financial guarantee from a third-party insurance company (the surety) that ensures the broker-dealer will meet its obligations. If the broker-dealer defaults, the surety company will compensate affected customers up to the bond amount.

The Administrator determines the amount of the bond, which is typically based on the volume and nature of the firm's business. In some jurisdictions, a firm may deposit cash or securities with the Administrator in lieu of a surety bond.

Books and Records Requirements

Broker-dealers and agents must maintain complete and accurate books and records of their business activities. The Administrator has the authority to require specific records and may examine these records at any time. Books and records requirements typically include:

Customer account records (new account forms, trade confirmations, account statements)
Order tickets and trade blotters
Correspondence with customers (written and electronic)
Financial records (trial balances, net capital computations, financial statements)
Supervisory procedures and compliance manuals
Advertising and sales literature
Records of customer complaints

These records must generally be preserved for specified periods (typically 3 to 6 years, depending on the type of record) and must be made available to the Administrator upon request.

Broker-dealers must meet net capital requirements and may be required to post surety bonds. These financial safeguards protect customers and maintain market stability. The Administrator can examine books and records at any time and can deny registration to firms that fail to meet financial requirements. Agent registration is tied to the broker-dealer and cannot be held with more than one unaffiliated BD simultaneously.

Deep Dive The Canadian Broker-Dealer Exception

The USA includes a special provision for Canadian broker-dealers. Under certain conditions, a Canadian broker-dealer that has no office in the state may effect transactions with or for Canadian persons temporarily in the state, without registering in the state. This is sometimes called the "Canadian broker-dealer exception" or "snowbird provision."

The rationale is that Canadian investors who winter in U.S. states (particularly Florida and Arizona) should be able to continue managing their Canadian securities accounts without forcing the Canadian firm to register in the state. The exception is narrowly drawn: the Canadian firm must be registered in Canada, the transactions must be with Canadian nationals or residents, and the firm must not maintain an office or otherwise solicit U.S. residents.

This provision reflects the close economic ties between the United States and Canada and the practical reality that securities professionals often serve clients across the border. NASAA has worked with Canadian securities regulators to facilitate this cross-border activity while maintaining appropriate investor protections.

Grounds for Denial, Suspension, or Revocation

The Administrator has the authority to deny, suspend, revoke, cancel, or withdraw the registration of a broker-dealer or agent. This authority is a critical enforcement tool. The grounds for such action include:

Filing a false or incomplete application: If the applicant willfully provides false or misleading information in the registration application.
Conviction of a felony or securities-related misdemeanor: Within the past 10 years (or at any time if the offense involved securities).
Being subject to an order from another regulator: If another state, the SEC, or an SRO has denied, suspended, or revoked the person's registration, or if the person has been barred from association.
Being enjoined by a court: If a court has issued an injunction against the person for securities-related violations.
Engaging in dishonest or unethical business practices: This is a broad ground that covers a wide range of misconduct.
Being insolvent: If the broker-dealer cannot meet its financial obligations as they come due (not the same as having more liabilities than assets, if the liabilities are not yet due).
Failure to supervise agents: If the broker-dealer fails to reasonably supervise its agents, resulting in violations of the Act.
Failure to meet minimum financial requirements: If the broker-dealer's net capital falls below the required minimum.

The Administrator must generally provide notice and an opportunity for a hearing before taking any of these actions. However, the Administrator may issue a summary order (taking effect immediately) if the Administrator finds that the public interest requires immediate action. Even in that case, a hearing must be provided promptly afterward.

Grounds for denial can be remembered with "FICE-D": False application, Insolvency, Conviction of felony/misdemeanor, Enjoinment by a court, Dishonest practices. These are the big five grounds that come up repeatedly on the exam.

Action	Meaning	When Used
Denial	Refusing to grant initial registration	Application is deficient or applicant is disqualified
Revocation	Permanently revoking an existing registration	Serious violations discovered after registration
Suspension	Temporarily halting an existing registration	Investigation pending; temporary measures needed
Cancellation	Removing a registration that is no longer valid	Registrant cannot be located, is deceased, or is no longer in business
Withdrawal	Voluntary termination by the registrant	Registrant no longer wishes to conduct business in state