2.2.1 Disclosures & fees
Agents are the employees of broker-dealers or issuers that facilitate securities transactions for customers. Let’s refresh ourselves with the legal definition of an agent according to the Uniform Securities Act (USA):
Similar to broker-dealers, agents must go through a registration process in order to legally operate in a state (unless an exemption or exclusion exists). The process is generally similar, but there are some important differences to keep track of.
Agents utilize Form U4 as their registration form with each applicable state administrator. Disclosures required to be made on Form U4 and additional obligations include:
This disclosure is straightforward and simple. Applicants must provide their name, plus any nicknames they go by. Additionally, their current residence must be provided.
Depending on the business model an agent follows, they may be registered in one or numerous states. If an agent is already registered in other states while applying in a new state, they’ll list those registrations on Form U4. This provides the state administrator with context in regard to the scope of the agent’s operations.
Although agents may be registered in multiple states, they’re generally barred from registering with more than one broker-dealer or issuer. There are two exceptions to this rule. First, an agent could be registered with multiple broker-dealers or issuers if those firms were affiliated. For example, John could be registered with ABC Brokerage and XYZ Brokerage if both brokerage firms were subsidiaries of the same parent company (part of the same larger organization). Second, the state administrator has the power to grant an exception allowing multiple registrations with unaffiliated broker-dealers or issuers.
Employment and residential history are important disclosures to obtain from persons applying for agent registration. Employment history becomes publicly available information, providing insights into a registered person’s background. Think about it - if you entrusted an agent with handling your finances, you’d probably want to know the extent of their industry experience. Also, what if the agent was previously employed by a firm known for stealing client funds? This information is publicly disclosed on FINRA’s BrokerCheck system.
The required employment and residential disclosures are:
The state administrator also wants to know about previous criminal history. Let’s take a look at the specific language on Form U4:
Have you ever:
- been convicted of or pled guilty or nolo contendere (“no contest”) in a domestic, foreign, or military court to any felony?
- been charged with any felony?
Have you ever:
- been convicted of or pled guilty or nolo contendere (“no contest”) in a domestic, foreign or military court to a misdemeanor involving: investments or an investment-related business or any fraud, false statements or omissions, wrongful taking of property, bribery, perjury, forgery, counterfeiting, extortion, or a conspiracy to commit any of these offenses?
- been charged with a misdemeanor [as specified above]
Gaining knowledge of an applicant’s criminal history is important given registered persons gain access to the assets of the investors they engage. Would you feel comfortable placing a trade with an agent that had a long criminal history of theft? To ensure investors maintain confidence in the financial markets, the state administrator typically does not register persons with a recent criminal history. The first step to determine if someone will be barred is obtaining their history, which is why Form U4 requests the information listed above.
All relevant criminal events (including charges) must be disclosed, regardless of how long ago the event occurred. However, only felony and securities-related misdemeanor convictions within the past 10 years can prevent an applicant from being registered. Known in the industry as a statutory disqualification, an applicant reflecting this in their recent history would have their registration request denied. If a currently registered agent was convicted of any felony or a securities-related misdemeanor while employed in the industry, their registration would likely be revoked by the state administrator. We’ll learn more about the powers of the state administrator later in this material.
The state administrator is not the only regulator in the financial markets. The Securities and Exchange Commission (SEC) and FINRA both exercise regulatory authority over the securities markets. The Commodity Futures Trading Commission (CFTC) regulates the futures markets, which are similar to stock options (although futures are not securities). There are many others (both domestic and foreign), but you don’t need to know them by name.
Although the state administrator is the primary regulator enforcing state securities laws and regulations, actions taken by regulators of all shapes and sizes are required to be disclosed on Form U4. The specific language on the form requests the following:
Has [any domestic or foreign securities regulator, financial regulator, state or federal agency] ever:
- found you to have made a false statement or omission?
- found you to have been involved in a violation of its regulations or statutes?
- found you to have been a cause of an investment-related business having its authorization to do business denied, suspended, revoked, or restricted?
- entered an order against you in connection with investment-related activity?
- imposed a civil money penalty on you, or ordered you to cease and desist from any activity?
- found you to have willfully violated any provision of [securities laws]?
- found you to have willfully aided, abetted, counseled, commanded, induced, or procured the violation by any person?
- found you to have failed reasonably to supervise another person subject to your supervision?
Registration applications tend to be looked at closer if any of the items listed above are disclosed. However, it may not prevent an applicant from gaining registration as an agent. The administrator tends to approach these situations on a case-by-case basis.
In addition to regulators, court systems can take action against persons. Those actions must be disclosed on an agent’s application for registration. Let’s take a look at what’s specifically requested on Form U4:
Has any domestic or foreign court ever:
- enjoined you in connection with any investment-related activity?
- found that you were involved in a violation of any investment-related statute(s) or regulation(s)?
- dismissed, pursuant to a settlement agreement, an investment-related civil action brought against you by a state or foreign financial regulatory authority?
It goes further:
Have you ever been named as a respondent/defendant in an investment-related, consumer-initiated arbitration or civil litigation which alleged that you were involved in one or more sales practice violations and which:
- is still pending, or;
- resulted in an arbitration award or civil judgment against you, regardless of amount, or;
- was settled
In general, any court-related actions relating to securities taken against a person must be disclosed on registration applications. It’s possible the disclosure could result in the denial of a registration request (depending on how bad the situation was).
Prospective agents also must disclose certain financial events in their background. This is what’s asked on Form U4:
Within the past 10 years:
- have you made a compromise with creditors, filed a bankruptcy petition or been the subject of an involuntary bankruptcy petition?
- based upon events that occurred while you exercised control over it, has an organization made a compromise with creditors, filed a bankruptcy petition or been the subject of an involuntary bankruptcy petition?
- based upon events that occurred while you exercised control over it, has a broker or dealer been the subject of an involuntary bankruptcy petition, or had a trustee appointed, or had a direct payment procedure initiated under the Securities Investor Protection Act?
Don’t worry too much about the details, but an agent must disclose any bankruptcies or compromises with creditors (agreeing to pay an amount lower than was originally owed) within the last 10 years.
As with any other person going through the registration process, a filing fee must be paid. If not included, the registration request will be denied. Similar to broker-dealers, the initial registration only lasts until the end of the year (December 31st), and the fee is not prorated. Additionally, a renewal request and fee must be submitted before January 1st to avoid a lapse in registration.
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