We covered the legal definition and characteristics of a broker-dealer in the previous unit. If a business wants to operate as a broker-dealer in a particular state, it must register with the appropriate state administrator. Avoiding registration when it’s required is illegal and can lead to significant penalties and fines.
Registration generally means:
For broker-dealers, the required disclosures are made on Form BD. It’s a long form, but only certain parts tend to matter most for exam purposes, and those are the focus here.
A major purpose of registration is to notify the state administrator that a new financial entity will be operating in the state. Form BD collects basic identifying information, including:
Form BD also asks the firm to disclose other jurisdictions it will be subject to. Jurisdiction is covered in more depth later. For now, treat jurisdiction as the regulators that have authority over the broker-dealer.
Broker-dealers register federally with the Securities and Exchange Commission (SEC) and also register with each applicable state administrator (if they do business in that state). Form BD requires disclosure of the other states where the broker-dealer is registered. For example, if a firm is registering in Texas, the Texas administrator would want to know whether the firm is also registered elsewhere, because that helps show the scope of the firm’s operations.
Businesses applying for broker-dealer registration must also disclose their business structure and how control of the firm is organized.
Typical business structures* include:
Business dynamics focus mainly on controlling affiliates - the persons who have a controlling interest (influence) over the business. The administrator needs to know who controls the firm. The firm must also disclose the products and services it plans to offer (for example, what types of securities it will sell to customers).
*Although rare, a broker-dealer could also be registered as a sole proprietorship.
Form BD also requires disclosure of the firm’s business history. It asks about qualifications, past legal actions, and any penalties or criminal convictions involving the firm and its controlling affiliates.
To qualify for broker-dealer registration, the firm must meet certain financial requirements (covered later in this unit). These requirements apply to the broker-dealer itself, not to its employees. In addition, the firm and its controlling affiliates generally need a relatively clean record. Past legal events, regulatory actions, and/or criminal cases usually must be disclosed.
Legal actions include court rulings against the firm, such as an injunction or enjoinment. Even though the state administrator regulates financial persons, it does not have the same legal authority as a court. If the administrator wants a court-ordered remedy (for example, to legally bar certain conduct or to pursue criminal penalties), the administrator must petition the court system. You’ll see more about the state administrator’s powers and when court involvement is required later.
Regulatory actions include actions taken against the firm by other regulators. This could include the SEC, FINRA, the Commodities Futures Trade Commission (CFTC), another state administrator, or other financial regulators (domestic or foreign). Form BD is especially concerned with disclosure of:
If the firm or its controlling affiliates have a sufficiently serious history, the state administrator may deny the registration application.
Criminal history involving the firm and its controlling affiliates is another key focus. Form BD requires disclosure of any charge, guilty plea, nolo contendere (no contest) plea, or conviction of any felony or securities-related misdemeanor within the past 10 years. If the charge was dropped or the defendant (the broker-dealer or its controlling affiliates) was found not guilty, it won’t affect registration status. Guilty pleas, nolo contendere (no contest) pleas*, and convictions can put the broker-dealer’s registration in jeopardy.
*Test questions typically don’t separate guilty pleas and no contest pleas. You can expect these to be referred to generally as convictions.
Here’s a summary of the general disclosures required on Form BD:
Basics of the business
Other jurisdictions
Business structure
Business dynamics
Business history
The consent to service of process is submitted with the registration application. It appoints the state administrator as the party who can accept civil (non-criminal) complaints or legal requests on behalf of the registered person.
If you want to see the actual form, here’s the link: Revised Form U-2. Here’s a snippet of the language:
[The person signing this form] hereby irrevocably appoints the officers of the Jurisdictions [of the state administrator]… [to] be served any notice, process or pleading in any action or proceeding against it"
This document helps ensure that legal actions (such as lawsuits or subpoenas) can be properly served. In the U.S. legal system, a legal proceeding generally can’t move forward until the recipient is officially served (physically provided) the required documents. That requirement can create an incentive to avoid service.
If you’ve ever seen Pineapple Express, Seth Rogen’s character’s job is to serve legal paperwork (warning: explicit language and material in the linked clip).
Even if a registered person tries to avoid being served, lawyers can serve the state administrator instead, because the consent to service of process makes that legally valid. This keeps the administrator informed about legal proceedings involving registered persons in the state and prevents delays caused by failure to serve documents.
Submission of the consent to service of process is required for every registered person and security, but only with the initial application. There’s no need to renew it after it has been filed.
Filing fees are testable on the Series 63. A filing fee must be paid when an application for registration is submitted. Each state sets its own fee schedule. For example, the Massachusetts state administrator requires a $450 filing fee for a broker-dealer’s initial registration. If the required filing fee isn’t paid, the registration application is denied.
When a broker-dealer initially registers, the registration lasts only until the end of the calendar year (December 31), no matter when the application is submitted. A full filing fee is still required, even if the registration period is short. For example, if a broker-dealer registers on December 20, the registration lasts only 11 days (until year-end), but the firm still pays the full annual filing fee. State administrators do not prorate fees.
To stay compliant, registered persons must renew registration for the next calendar year before December 31. If the renewal isn’t processed by year-end, the registration will lapse. Renewals also require filing fees.
If a person’s registration lapses, they can’t perform any activity that requires registration. For example, a broker-dealer can’t execute securities transactions until registration is renewed. The same idea applies to other state-registered financial professionals, including agents, investment advisers, and investment adviser representatives (IARs).
There’s one situation where state administrators do not require an additional filing fee: successor firms. If one broker-dealer buys and takes over another broker-dealer, Form BD must be amended to notify regulators of the change. While filing fees are required in most situations where paperwork is filed, successor firm updates are free.
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