Unit 1: Regulation of Broker Dealers & Agents

A broker dealer is

a person or firm that effects securities transactions for its own account or the accounts of others

BDs must register in

any state where they have an office (physical location) in the state OR 1 resident retail client in the state

Partners, directors, and officers, who are … in the firm’s securities business of a BD, are … when their firm registers in a state, but still…

active, automatically registered as agents, but still have to pass the qualification exam

Silent/inactive partners and control persons engaged in securities transactions do/ do not need to register

do not

Steps to register as a BD →

submit a Form BD at the state level, includes the consent to service a process, pay filing feels, publish an annoucement of the registration in a printed newspaper, and meet minimum financial, bonding, and recordkeeping reqs

BD application becomes effective at

noon 30 days after filing

Agent application becomes effective at

noon 30 days after filing

BD and Agent applications must be renewed

every December 31

The Form BD does not need to disclose

employee, director, executive salaries

Under SEC rules, the minimum … required for full-service BDs is

net capital is $250,000 (states can’t require higher net capital or bonding)

If a BD already meets the federal minimum net capital (SEC min. of $…)→

no bond, no cash deposit, no securities deposit is required

What is excluded from the net capital requirements?

intangible and illiquid assets

States require BDs and IAs to have a financial cushion to protect clients (bonding. That cushion can be provided in three interchangeable forms:

surety bonds, cash deposits, or marketable securities deposits

Exempt BD entities:

agents, issuers, trading in personal brokerage account, banks, savings institutions, trust companies, and “Out of state” BDs: no resident retail clients AND no office in a state → not a BD in THAT state

If a BD only sells securities in a state, do they have to register there?

NO office nor residential retail client, NOT institutions → don’t have to register in that state (where just selling securities)

BDs can only charge fees

once a trade occurs (not when it’s placed, can’t charge for a service not yet performed)

BDs can … charge a mark up/down AND a commission

never

Only charges mark ups and mark downs when the BD is trading for …, acting as …

it’s own account, a principal

Only charges commissions when the BD is trading for …, acting as …

another person, an agent

If a BD is selling from their inventory, they have to disclose

only the mark up, not the full profit

Omnibus accounts are…, so does/doesn’t require BDs to register as an investment advisor since acting as securities BDs

omnibus accounts are brokerage services, so it does not require BD registration as an IA

Unregistered individuals can/can’t provide research to a BD before becoming registered

can (bc research isn’t a securities activity)

Firms can give …-based bonuses to all employees, but can’t give any portion of a …‑based commission to an unregistered person

revenue based, can’t give transaction based commissions to unregistered

Only … agents may receive commissions (tied to effecting securities transactions) - unregistered employees can’t receive “…”

registered agents, straight commissions

Giving … or …, and gifting … is a __, requires BD/agent selling to customer to be …

Giving securities or warrants and giving assessable stock is a sale, required BD/agent selling to customer to be registered

Stock dividends, securities pledged as loan collateral, exchanges in mergers/reorganizations/bankruptcies, and gifts of nonassessable stock are/are not considered an offer or sale of securities

are not

An agent is a natural person that

represents BDs in effecting a securities transaction (employees)

Agents need to register in

any state where they do business: makes offers in, makes offers to, or makes offers from a state

Agents can’t do business or accept an offer from a state they…

aren’t registered in

includes unsolicited orders (ex. An offer coming from Virginia → must be licensed in Virginia to execute the offer)

An agent can work in a state without being registered in that new state if..

they have a client that is temporarily there, for less than 30 days, or a client relocated, they have 60 days to register in the new state - with conditions

An agent can work in a state without being registered in that new state as long as (conditional guidelines):

the agent has no office in that new state, the agent is registered with another state/an SRO/ are not ineligible, and their BD is registered there

An offer sent via mail is considered … the origin and designation states, and if they’re different, the agent …

considered an offer in both, the agent must be registered in both states

Insurance agents selling variable products must …, and do/don’t if selling fixed annuities

register as an agent, and don’t if selling fixed

True or false: An agent must be state registered to offer or sell any variable product (variable universal/life insurance, annuities)

true

Agents must disclose … to their BDs within …

existing brokerage accounts within 30 days

Agents can open … accounts without notice to their BD

520 plans, mutual funds, variable contracts, and UITS

Agent’s can/can’t register in states where their BD is not registered

can’t register where BD not registered

A security that is unregistered in a state can be sold in that state only … AND …

by an agent, and their BD, who is registered there AND only through an unsolicited order

An unsolicited order permits …. But rep/BD still has to be …

an unregistered security to be sold in a state, but rep and their BD still have to be registered in the state in which the security is unregistered.

Agents that are exempt from registration and can still sell securities have to be what and sell what type of securities?

agents that are employees of an issuing company can be unregistered and only sell exempt securities, doing an exempt transaction, or selling any security to a fellow employee WITHOUT receiving commissions

If an agent is an employee of a BD, selling exempt securities do they have to register?

yes, still have to since theyre a BD employee, not one of the issuer

Agent registration steps:

submit U4, consent to service of process, filing fees, no minimums

Agent applications are terminated by

filing U5, and all parties (agent, old firm, and new firm) must notify state securities administrator that they are terminating their association with a firm

Dual registration as an agent is when … and is allowed only when…

an agent is registered with more than one BD, only when the BDs are affiliated or under common control (connected through ownership or a parent company)

If an agent is filing under dual registratoin, they have to

file a separate U4 for each BD and pay separate fees for each firm

Affiliated/under common control BD scenarios:

both subsidiaries of the same parent, one owns the other, controlled by same holding company, the same entity owns 25% or more of each BD

Lawsuits initiated by a person who dies … (continue?)

can continue through their estate (even though the deceased is no longer a “person”)

Consent to service of process of for what type of lawsuits?

securities-related, civil actions

All states in which an agent is registered receive a consent to service of process at …

initial registration, and it and doesn’t have to be renewed after

Canadian BDs and agents have to renew

every December 1st (vs US-based on December 31st)

Canadian BDs and agents with no office in US state X can do business in state X with…

a Canadian client who is temporarily in state X, can do any trade with them. a Canadian client who becomes a resident of US state X, the BD/agent can only execute trades in tax-advantaged Canadian retirement plans (executed by the BD or self directed)

Discretion is needed for a rep to select any of the following in a “discretionary transaction” →

asset, action (buy/sell), amount

Discretion is NOT needed for a rep to select any of the following in a “discretionary transaction” →

time, price

Discretionary orders have to be approved …

by the close of business on the trade date by a supervisor

Custody is

holding (directly or indirectly) client funds or securities or having the authority to obtain possession of them

… (time) of holding a security until you become the custodian

Maximum of 3 business days

If a firm manages a pooled account (ETF, mutual fund, pension fund) with nominal ownership (owned in the name of the firm) of the assets, are they custodians?

yes

Custodians must give …to clients detailing what they hold in custody for the client

quarterly statements

Who is responsible for verifying that custody measures for a BD’s client assets are sufficient?

the BD

Custodians need to only give notice/ask for permission to the Admin to be a custodian or take custody of client assets

only give notice to the state administrator, not permission

FDIC insured CDs cover

principal and accrued interest up to $250,000 per depositor, per bank

State-level registration does/does not require fingerprints nor character affidavits

state does not require finger/character

Fingerprints nor character affidavits are SEC/FINRA requirements

FINRA

When BDs or IAs merge (one replaced another), the successor (survives the merger) firm receives… and doesn’t have to …

carry over registration of old firm’s employees, doesn’t have to pay immediate fee until charged the next Dec 31 renewal cycle

Under the Uniform Securities Act, state registration fees are assessed …, … for partial years

annually, not pro-rated

Prequalifying is

communicating with (potenital) customers to determine if they are qualified or have an interest in securities offerings must be registered to do this

Grounds of statutory disqualified if occurred in the past 10 years:

conviction of any felony/securities misdemeanor/ money misdemeanor, injunction by SEC/state admin/SRO, or being enjoined by any court from the securities business

If a conviction for a DWI in the last 10 years (non securities related) rises to a felony…

can lead to statutory disqualification of a state registration

… from the account, … fees for safekeeping, and … from the account are allowed under custody, but … in the account is not allowed without some form of authorization.

Withdrawing money from the account, charging fees for safekeeping, and removing securities from the account are allowed, but trading securities in the account is not allowed without some form of authorization.

A broker-dealer must retain account records for at least

3 years

Form … is what a broker-dealer files with the state in order to do business in the state. Form .., is for IA firm registration

BD, ADV

A professional investor is synonymous with … investor. Institutions, such as a fund, bank, or hedge fund, are included in the definition for an institutional investor

institutional

A successor broker-dealer does/doesn’t have to meet state registration requirements, file an application for the full/unexpired portion of the year, and does/does not have to pay the filing fee of the year

A successor broker-dealer must meet state registration requirements, file an application for the unexpired portion of the year, and does not have to pay the filing fee of the year

A synonym for a surety bond is a … bond.

fidelity

If a state Administrator believes that a firm is improperly supervising agents, the state can proceed with charges against…

the BD and the agent.

A "failure to supervise" violation against a firm only happens in situations where …

the agent has done something improper as well.

If the person is … licensed through a broker-dealer, they are considered a..

securities licensed, a registered rep

A successor (…) BD is formed as a result of a merger or acquisition to continue the original business in the predecessor's new name.

surviving

Both agents and their BD firm may both required to … when exercising discretion.

post a surety bond

A Canadian broker-dealer must obtain… to handle:

An existing Canadian client who is temporarily in a U.S. state and can execute any trade for them ( e.g., on vacation

An existing Canadian client who is now a permanent resident of a U.S. state, and can only execute trades in their Canadian tax-advantaged retirement accounts

limited registration