Broker-Dealer & Agent Registration
Broker-Dealer Registration Requirements
Under the Uniform Securities Act, a broker-dealer must register in each state where it conducts securities business. The registration process involves filing an application with the state Administrator, paying the required fees, meeting minimum financial requirements (net capital), posting a surety bond if required, and filing a consent to service of process. The registration becomes effective at noon on the 30th day after the application is filed, unless the Administrator issues an earlier effective date or denies the application.
The registration is effective from the date it becomes effective until December 31 of that year. Registrations must be renewed annually. The renewal process typically requires the filing of updated information, payment of the renewal fee, and any required financial statements. If a broker-dealer fails to renew its registration by the expiration date, it can no longer legally conduct securities business in the state.
Definition
Broker-Dealer: Any person engaged in the business of effecting transactions in securities for the account of others (acting as broker) or for its own account (acting as dealer). Under the USA, BDs must register in each state where they conduct business. The firm itself registers as a BD; its individual representatives register as agents.
Application Requirements
The broker-dealer registration application (typically filed through the Central Registration Depository, or CRD, operated by FINRA) must include the applicant's form and place of organization, proposed method of doing business, qualifications and business history of the applicant and its principals (for the past 10 years), any injunctions or administrative orders, any criminal convictions, any pending litigation, current financial condition (including a balance sheet), and any additional information the Administrator may require.
The Administrator may also require that the applicant pass an examination (although in practice, the FINRA registration exams serve this purpose). The Administrator can impose conditions on the registration, require the posting of a surety bond, or require minimum net capital. If the applicant or any of its control persons has been the subject of adverse regulatory actions, the Administrator may deny the registration.
Exclusions from the Broker-Dealer Definition
As discussed in Chapter 1, certain persons are excluded from the definition of broker-dealer. These exclusions mean the person does not need to register as a BD, regardless of their activities. The key exclusions are:
- Agents (individuals who represent BDs are not themselves BDs)
- Issuers (companies selling their own securities)
- Banks, savings institutions, and trust companies
- Persons with no place of business in the state who effect transactions only with other BDs, institutional buyers, or existing clients who are temporarily in the state but are not state residents
Exam Tip
The "no place of business" exclusion for broker-dealers is heavily tested. A BD with no office in the state does NOT need to register if it deals ONLY with: (1) other broker-dealers, (2) institutional investors, or (3) existing clients who are temporarily present in the state but are not residents. If the BD solicits new retail clients in the state, it must register regardless of whether it has an office there.
Agent Registration Requirements
An agent is any individual who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities. Agents must register in each state where they conduct securities activities. An agent's registration is linked to the employing broker-dealer or issuer. If the agent changes firms, the agent must re-register under the new firm's registration.
The agent registration process typically involves filing Form U4 (Uniform Application for Securities Industry Registration) through the CRD system. The application must include the individual's personal information, employment history for the past 10 years, disciplinary history, criminal history, financial disclosures (including bankruptcies and unsatisfied judgments), and any other information required by the Administrator.
When an Agent Must Register
An agent must register in a state when the agent represents a broker-dealer and effects transactions with persons in that state. The key factors are where the clients are located and whether the agent is actively soliciting business in the state. An agent's registration, like a BD's registration, expires on December 31 and must be renewed annually.
When an agent leaves one broker-dealer and joins another, the agent's registration with the first firm is automatically terminated, and the agent must apply for a new registration with the new firm. There is typically no gap in registration if the agent transitions promptly, as many states allow the new registration to become effective immediately upon proper filing.
Exclusions from the Agent Definition
The following individuals are excluded from the definition of agent and do not need to register:
- Individuals representing issuers in transactions involving exempt securities (such as government bonds, municipal securities, or bank securities)
- Individuals representing issuers in exempt transactions (such as private placements with institutional investors)
- Individuals representing issuers in transactions with employees, partners, or directors where no commission is specifically paid for solicitation
- Clerical and administrative personnel of a broker-dealer who do not effect transactions or provide investment advice
Warning
Agents are always natural persons (individuals). A corporation, partnership, or other entity cannot be an agent. Only individuals can be agents. This is a key distinction. Similarly, an agent must always be associated with a broker-dealer or issuer. An agent cannot act independently without a BD affiliation. If an individual represents a BD that is not registered in a state, the agent's registration in that state is also invalid.
| Feature | Broker-Dealer | Agent |
|---|---|---|
| Type | Firm (any legal entity) | Individual (natural person only) |
| Registration Form | Form BD (via CRD) | Form U4 (via CRD) |
| Effective Date | Noon on 30th day after filing (or earlier by order) | Noon on 30th day after filing (or earlier by order) |
| Expiration | December 31 (annual renewal) | December 31 (annual renewal) |
| Can Act Independently | Yes | No (must be associated with a BD or issuer) |
| Financial Requirements | Net capital, surety bond | None (covered by BD requirements) |
Successor Registration
A successor firm is a broker-dealer or investment adviser that acquires or succeeds to the business of another registered broker-dealer or investment adviser. The USA provides for successor registration to ensure continuity of business when a firm undergoes a corporate restructuring, merger, acquisition, or change of control.
Under the USA, a successor firm may automatically succeed to the registration of the predecessor firm if the succession is the result of a change in the form of business organization (such as converting from a partnership to a corporation, or from an LLC to a corporation). The successor must promptly file an application for registration, and the predecessor's registration remains effective until the Administrator processes the new application or for a period specified by rule.
This automatic succession does not apply if the successor represents a fundamentally different business or if the Administrator determines that the public interest requires a new review. In such cases, the successor must apply for a new registration from scratch. The Administrator retains the authority to deny the successor registration if there are grounds for denial under the USA.
Example
ABC Securities, LLC is a state-registered broker-dealer that decides to reorganize as ABC Securities, Inc. (converting from an LLC to a corporation). Under the successor registration provision, ABC Securities, Inc. may automatically succeed to the registration of ABC Securities, LLC. The firm must file a new application promptly, but it can continue operating under the predecessor's registration until the Administrator acts on the new application. However, if XYZ Capital acquires ABC Securities and plans to operate it under a completely different business model, the successor registration may not be automatic, and a new application may be required.
Denial, Suspension, and Revocation of Registration
The Administrator has the authority to deny, suspend, revoke, cancel, or withdraw the registration of any broker-dealer or agent. The grounds for such action include violations of the USA or its rules, filing false or misleading information on an application, having been convicted of a securities-related felony within the past 10 years, being subject to an injunction by a court involving securities activities, being the subject of an adverse order by another securities regulator, engaging in dishonest or unethical business practices, being insolvent, or failing to meet the qualification requirements.
Before denying, suspending, or revoking a registration, the Administrator must provide:
- Prior notice of the proposed action
- An opportunity for hearing
- Written findings of fact and conclusions of law
However, if the Administrator finds that the public interest requires immediate action, the Administrator may summarily postpone or suspend a registration pending a hearing. In such cases, the hearing must be scheduled promptly after the summary action is taken. The respondent has the right to request judicial review of any adverse administrative action.
Key Takeaway
The Administrator's power to deny, suspend, or revoke BD and agent registrations is broad but not unlimited. Due process protections (notice, hearing, written findings) are required for all adverse actions. Summary suspensions are only permitted when the public interest demands immediate action, and a hearing must be promptly scheduled. The Administrator may also impose conditions on registrations, such as requiring additional supervision, net capital, or surety bonds.
Withdrawal of Registration
A broker-dealer or agent may voluntarily withdraw its registration by filing a notice of withdrawal with the Administrator. The withdrawal becomes effective 30 days after receipt by the Administrator (or later if the Administrator has commenced a proceeding against the registrant). A withdrawal does not protect the registrant from actions based on conduct that occurred while the registration was in effect. The Administrator may institute proceedings against a former registrant for violations that occurred during the period of registration.
Deep Dive The Canadian Broker-Dealer Exemption
The USA provides a special exemption for certain Canadian broker-dealers. A Canadian broker-dealer may be exempt from state registration if it has no office or physical presence in the state and its only clients in the state are Canadian citizens temporarily residing there. This exemption recognizes the integrated nature of North American securities markets and the regulatory oversight provided by Canadian securities regulators.
To qualify, the Canadian broker-dealer must be registered in its home jurisdiction in Canada, must limit its activities in the U.S. state to servicing existing Canadian clients who are temporarily present, and must not solicit new U.S. clients. The exemption is reciprocal in nature, reflecting the cooperative relationship between NASAA and Canadian securities administrators.
Similarly, Canadian agents associated with exempt Canadian broker-dealers may be exempt from state registration under the same conditions. However, both the Canadian BD and its agents remain subject to the anti-fraud provisions of the USA, and the state Administrator retains full authority to investigate and prosecute any fraudulent activities.
Mnemonic
Remember the due process requirements for adverse actions with "NOW": Notice (prior notice of the action), Opportunity for hearing (the registrant gets to present their case), Written findings (the Administrator must document findings of fact and conclusions of law). The Administrator must follow NOW before denying, suspending, or revoking any registration.
Check Your Understanding
Test your knowledge of broker-dealer and agent registration. Select the best answer for each question.
1. A broker-dealer with no place of business in a state is exempt from registration if it transacts business exclusively with:
2. Broker-dealer and agent registrations expire on:
3. Before the Administrator can revoke a broker-dealer's registration, the Administrator must provide:
4. An agent who changes broker-dealers must:
5. A successor broker-dealer may automatically succeed to a predecessor's registration when: