Series 63 Chapter 2

If a business wants to operate as a broker-dealer in a particular state, it must register with the appropriate _______________?

State administrator

What does registration generally mean?

1. Disclosing key information about the firm on required paperwork

2. Paying the required filing fees.

For broker-dealers, the required disclosures are made on Form _______?

BD

What is form BD?

A mandatory filing required by the SEC for entities seeking to register as broker-dealers in the United States.

What is some basic identifying information form BD collects?

1. Business name

2. EIN (tax reporting number)

3. Business address

4. Contact person (the employee the administrator can reach if they need to contact the broker-dealer)

Who do broker-dealers have to register with?

1. The SEC (federally)

2. With each applicable state administrator

What is a controlling affiliate?

The persons who have controlling interest (influence) over the business.

Does the Broker-Dealer need to disclose firm history on form BD?

Yes

Must legal events, regulatory actions, and/or criminal cases be disclosed on form BD?

Yes

What do legal actions include?

Court rulings against the firm, such as an injunction or enjoinment

What is an Injunction?

A legal order from a court requiring either:

1. An action to occur

2. An action to cease

What is an Enjoinment?

A legal order requiring a person to cease an action.

What is the consent to service of process?

A form submitted with the registration application to appoint the state administrator as the party who can accept civil (non-criminal) complaints or legal requests on behalf of the registered person.

What is the consent to service of process also called?

Form U-2

What must be paid when an application for registration is submitted?

A filing fee

If the required filing fee isn’t paid, what happens?

The registration application is denied.

When a broker-dealer initially registers, the registration lasts only until the _______________________, no matter when the application is submitted.

end of the calendar year

If a broker-dealer registers on December 20, the registration lasts only 11 days. Does the firm still pay the full annual filing fee?

Yes

What is the only situation where state administrators do not require an additional filing free?

If one broker-dealer buys and takes over another broker-dealer.

The Uniform Securities Act obligates broker-dealers applying for registration to disclose a number of facts related to their business. Which of the following disclosures are required?

I. The fact the business is structured as an LLC
II. SEC registration status

III. Social security numbers of controlling affiliates

IV. Regulatory actions taken against the firm by another securities regulator

I, II, and IV

Does the consent to service of process need to be updated annually?

No

What is a Net Capital requirement?

Financial requirements broker-dealers must meet in order to register.

Broker-dealers are registered with and regulated by both the _________ and the _____________?

1. SEC

2. State Administrator

Are Broker-dealers that operate in one state only subject to SEC regulation or registration?

No

If a broker-dealer faces two different financial requirements, one from the State Administrator and one from the SEC which one do they follow?

The SEC

What law addresses the dispute between State Administrators net capital requirements and the SEC?

The National Securities Market Improvement Act (NSMIA) of 1996.

What is a FOCUS report?

A report that discloses the firms financials to securities regulators to ensure minimum financial requirements are met.

Which law requires broker-dealers to complete and file FOCUS reports?

The Securities Act of 1934.

What is the Securities Investor Protection Corporation (SIPC)?

An industry funded nonprofit organization that provides insurance to brokerage firm customers if a broker-dealer goes bankrupt.

SIPC insurance covers customers up to $500,000 of _________ and cash per registration, but no more than $250,000 in __________ cash?

1. Securities

2. Cash

Does SIPC insurance cover market risk?

No, it only covers broker-dealer failure.

What happens if a customer's claim exceeds SIPC limits during a broker bankruptcy?

The customer becomes a general creditor of the broker-dealer.

In addition to net capital requirements, broker-dealers may be required by state administrators to post __________?

Surety bonds

What is a Surety Bond?

A guarantee offered by a third party coving obligations and promises made by another party.

What is the synonym of surety bond?

Fidelity bond

States may require broker-dealers to post surety bonds if what two things happen?

Broker dealers take custody of customer securities and practice discretionary trading.

Can Broker-Dealers post cash or securities instead of surety bond?

Yes

Who is the registrant?

A person that applies for registration with the state administrator

What are the important things broker-dealers need to submit to become registered?

1. Form BD disclosures

2. Filing fees

3. Consent to service of process

4. Net Capital Requirements

5. Surety Bonds

If no denial order is in effect and no proceeding is pending… registration becomes effective on the _________ day after an application is filed, unless earlier made effective?

30th

Once the state administrator expects registration to be granted they may require the firm to publish a ______________________?

newspaper announcement of the application of

What term does the broker dealer use to communicate registration?

EFFECTIVE REGISTRATION

What is a Blotter?

An internal record of trades and transactions executed over a given time period

Broker-dealers records are subject to a ______ year retention period, and the most recent 2 years must be kept in a readily accessible place?

three

How can broker-dealer records be maintained?

1. Paper or Hard copy

2. Micrographic media

3. Digital storage

BD operations must be separate from _______ areas?

deposit

Who enforces the Uniform Securities Act?

The State Administrator =

Can the State Administrator change the Uniform Securities Act?

No

What is the most important role of the State Administrator?

To enforce the anti-fraud provisions of the Uniform Securities Act.

What is the primary function of the state administrator?

To protect investors from being taken advantage of by financial professionals, issuers of securities, and even other investors.

What are the three main powers of the State Administrator?

1. Registration oversight

2. Authority to investigate

3. Ability to issue rules, orders, forms, and notices

Any action taken against a person’s registration status must qualify as “in the interest of the _________”

public

If it cannot be argued to benefit the public in some way, the administrator cannot _______________?

deny, suspend, or revoke a registration

A __________ temporarily prohibits a registered person from operating in a state, or a security from being sold in a state?

suspension

A ______________ permanently removes registration, effectively barring a person from operating in a state, or a security from being sold in a state?

revocation

If an agent or investment adviser rep registration is suspended or revoked, what happens to the firms registration?

Nothing

If a broker-dealer or investment adviser’s registration is revoked what happens to their employees’ registrations?

They all become inactive.

Who are the three types of persons that are consistently excluded from the definition of a broker-dealer?

1. Agents

2. Issuers

3. Banks, savings institutions, and trust companies

What are Agents?

Natural persons who represent broker-dealers

Does the broker-dealer exclusion regarding banks apply to bank holding companies?

No

If a broker dealer does not have a physical office in the state and only works on the institutional level, does it need to register in that state?

No

What is the vacation rule or the snowbird exclusion?

If the broker dealer’s client travels temporarily to a state they are not registered in they may continue to do business with that existing client without having to register with that state administrator.

ABC Brokerage Firm is headquartered in Idaho and is properly registered with the Idaho state administrator. One of its customers, an Idaho resident, travels to Texas for a two-week vacation. Can ABC continue to execute securities transactions for that customer while they are in Texas without registering in Texas?

Yes

What is the general understanding of Vacation?

30 days or fewer in the state.

If a broker-dealer is located in Canada, is properly registered in Canada, and maintains no offices in any US state; can it apply for limited US registration?

Yes

What is an agent?

Any individual who represents a broker-dealer or issuer in effecting or attempting too effect purchases or sales of securities.

What form do agents use to register with each applicable state administrator?

Form U4

If an agent is already registered in other states and is filling out a U4 for a new state, must those existing registrations be listed on the form?

Yes

An agent may be registered with multiple broker-dealers or issuers if the firms are ____________?

affiliated

If the state administrator grants an exception to allow an agent to register with multiple unaffiliated broker-dealers or issuers, is this allowed?

Yes

How many years of employment history are needed to be disclosed on the form U4?

10 years

How many years of residential history are required to be disclosed on form U4?

5 years

What kind of criminal activity can prevent registration?

1. Any felony conviction

2. securities-related misdemeanor conviction within the past 10 years

When someone is disqualified due to criminal activity, what is this called?

statutory disqualification

What does Enjoined mean?

To legally prevent a person from engaging in a particular action or activity

Does a filing fee need to be paid when trying to register as an agent?

Yes

How long does initial registration last?

Until the end of the calendar year (December 31) and the fee is not prorated

To avoid a lapse, a renewal request and fee must be submitted before ____________?

January 1

What other form does the agent need to submit for the initial application to become registered in a particular state?

The Consent to service or process

Does the consent to service of process need to be submitted to the same state administrator later?

No

Are agents subject to minimum financial requirements?

No

What financial events happening could be grounds for an application to be denied?

Bankruptcy or compromises with creditors

What form needs to be filled out when registration ends?

Form U-5

If an agent leaves one broker-dealer and joins another, how must the state administrator be notified?

The agent and the former broker-dealer complete and submit form U-5, the agent and the new broker-dealer complete and submit Form U-4.

When a termination occurs, when should the state administrator be notified?

Within 30 days

Do clerical employees (secretaries, etc.) need to register as agents?

generally no

Securities issued by any form of United States or Canadian government are _____________ from registration?

excluded

Do federally covered advisers have to register with the state?

No

What is a Federal-covered adviser?

1. Is subject to SEC registration and regulation

2. Is excluded from state registration and regulation

Even though federal-covered advisers don’t register with the state administrator, they still must make a ___________ in each state where they plan to do business?

notice filing

What is a key factor in whether an adviser is federal-covered?

Assets under management (AUM)

Under the Dodd-Frank Wall Street Reform Act what are the three categories of investment advisers?

1. Large investment advisers

2. Mid-size investment advisers

   1. Small investment advisers

Advisory firms with at least __________ of AUM are considered large investment advisers?

100 million

At ____________ AUM, the firm is eligible to register with the SEC as a federal-covered adviser?

100 million

Above _________ AUM, the firm must register with the SEC as a federal-covered adviser?

110 million

Dodd-Frank allows an adviser to register with the SEC in advance if what happens?

The firm reasonably expects to reach at least $100 million of AUM within 120 days (eligible, but not required)

A federal-covered adviser may keep its SEC registration until its AUM falls below ___________?

90 million

What happens when a federal covered advisor’s AUM falls below 90 million?

The adviser must withdraw its federal registration and register with the appropriate states.

How many days from filing its annual updates does a state registered advisor have to register with the SEC when its AUM reaches $110 million?

90 days

A federal-covered adviser that falls below 90 million AUM has _________ days to de-register from the SEC and register with the appropriate state administrators?

180 days