Do I need to register as a broker-dealer?
Most “brokers” and “dealers” must register with the SEC and join a self-regulatory organization (“SRO”).
Section 3(a)(4)(A) of the 1934 Act defines a “broker” as “any person engaged in the business of effecting transactions in securities for the account of others.” The SEC has indicated that affirmative answers to the following questions may indicate that a person or firm needs to register as a broker:
- Do you participate in important parts of a securities transaction, including solicitation, negotiation, or execution of the transaction?
- Does your compensation for participation in the transaction depend upon, or is it related to, the outcome or size of the transaction or deal? Do you receive trailing commissions, such as 12b-1 fees? Do you receive any other transaction-related compensation?
- Are you otherwise engaged in the business of effecting or facilitating securities transactions?
- Do you handle the securities or funds of others in connection with securities transactions?
Section 3(a)(5)(A) of the 1934 Act defines a “dealer” as “any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise.” The SEC has indicated that affirmative answers to the following questions may indicate that a person or firm needs to register as a dealer:
- Do you advertise or otherwise let others know that you are in the business of buying and selling securities?
- Do you do business with the public (either retail or institutional)?
- Do you make a market in, or quote prices for both purchases and sales of, one or more securities?
- Do you participate in a “selling group” or otherwise underwrite securities?
- Do you provide services to investors, such as handling money and securities, extending credit, or giving investment advice?
- Do you write derivatives contracts that are securities?
How do I register as a broker-dealer?
Most brokers and dealers must register with the SEC and become members of FINRA.
Broker-dealers register by filing an application on Form BD. Form BD asks questions about the background of the broker-dealer and its principals, controlling persons, and employees. The SEC must either grant registration or institute proceedings to determine whether the application should be denied within 45 days of the filing of a completed application. In practice, the SEC’s review of broker-dealer applications is usually perfunctory. If an application is facially acceptable, the SEC will normally permit the applicant to be registered, subject to the applicant’s acceptance by FINRA.
A broker-dealer must promptly update its Form BD by filing amendments whenever the information on file becomes inaccurate or incomplete for any reason.
In practice, FINRA rather than the SEC reviews applicants’ qualifications. Applying to FINRA involves the following steps:
- An applicant must request and reserve a name for its broker-dealer with FINRA’s Department of Registration and Disclosure.
- The application consists of:
- Form NMA;
- the applicant’s signed and notarized paper Form BD;
- a FINRA-approved fingerprint card and a Form U4 for each associated person of the prospective broker-dealer who is to be registered with FINRA;
- a New Member Assessment Report;
- payment of the required application, registration, and other fees;
- a detailed business plan;
- disclosure of any temporary or permanent adverse decisions regarding it or any of its associated persons as to securities registration or licensing;
- a list of its associated persons and any other persons or firms exercising control over its business activities;
- documentation of any criminal actions, regulatory actions, investment-related civil actions or arbitrations, investment-related customer complaints against the applicant or associated person;
- documentation of any termination or resignation because of a violation of regulations, rules, or industry standards;
- description of remedial training, continuing education, or heightened supervision imposed by any federal or state authorities or SROs;
- any draft or final agreements with service firms, banks, or clearing corporations;
- a copy of its written supervisory procedures;
- a description of its proposed recordkeeping system; and
- a written continuing education program.
- Before deciding upon an application, FINRA will conduct an interview with the applicant. The interview must be conducted by the later of (i) 90 days after the filing of the application, or (ii) 60 days after the submission of any supplementary documentation.
- FINRA must issue a written decision within 30 days of the later of the interview or the submission of additional documents and information.
Every registered broker-dealer (other than a broker-dealer that transacts solely in investment company shares) must be a member of the Securities Investor Protection Corporation.
A broker-dealer may be required under state law to register in the state or states where it will be conducting business.