We covered the legal definition and key 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 both the Securities and Exchange Commission (SEC) and each appropriate state administrator. Avoiding registration when it’s required is illegal and can lead to significant penalties and fines.
Registration means providing firm details on required paperwork and paying filing fees. The required disclosures are made on Form BD. It’s a long form, but we’ll focus on the parts that matter for the exam.
A main purpose of registration is to notify the state administrator that a new financial entity will be operating in the state. Form BD collects the basic identifying information the administrator needs, including:
Form BD also asks the firm to disclose other jurisdictions it will be subject to. Jurisdiction is a detailed topic covered later. For now, treat jurisdiction as a regulator’s authority to regulate the broker-dealer.
As discussed earlier, broker-dealers register federally with the SEC* and with each applicable state administrator (if doing business in that state). Form BD requires disclosure of the other states where the broker-dealer is doing business. For example, if a firm is registering as a broker-dealer in Texas, it’s useful for the Texas state administrator to know whether the firm is also registered in other states, because that helps show the scope of the firm’s operations.
*Broker-dealers operating intrastate (within one state only) are not eligible to register with the SEC. In order for the federal government to have jurisdiction, business activities must cross state lines. Therefore, broker-dealers located in and only doing business in one state will only be state-registered.
Businesses applying for broker-dealer registration must also disclose their business structure and dynamics. Typical business structures* include corporations, partnerships, and limited liability companies (LLCs). Business dynamics focus mainly on controlling affiliates, meaning the persons who have a controlling interest (influence) over the business. The administrator needs to know who controls and runs the firm.
The firm must also disclose the specific products and services it will offer. For example, what types of securities will the broker-dealer sell to customers?
*Although rare, a broker-dealer could also be registered as a sole proprietorship.
Business history is another required disclosure on Form BD. The form explicitly asks about qualifications, past legal actions, and any penalties or criminal convictions involving the business 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 its employees. In addition, the firm and its controlling affiliates generally need a fairly 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 SEC and state administrator regulate financial persons, they don’t have the same legal authority as the court system. If the administrator wants a court to take legal action (for example, to legally bar a broker-dealer from engaging clients of another broker-dealer, or to imprison an employee for fraud), the administrator must petition the court system. You’ll learn more later about the state administrator’s powers and when the administrator must appeal to the US court system.
The SEC does not have the power to criminally charge persons or imprison individuals, but it does have broader civil enforcement powers than the state administrator. This is quoted directly from the SEC’s website:
SEC investigations are civil, not criminal. The SEC can charge individuals and entities for violating federal securities laws and seek remedies such as monetary penalties, disgorgement of ill-gotten gains, injunctions, and restrictions on an individual’s ability to work in the securities industry or to serve as an officer or director of a public company, but the SEC cannot put people in jail. [The SEC] may refer potential criminal cases to criminal law enforcement authorities for investigation or coordinate SEC investigations with criminal investigations involving the same conduct. If a person is convicted of a criminal violation of the securities laws, a court may sentence that person to serve time in jail.
Regulatory actions include any action taken against the business by a regulator. This could involve a state administrator, the SEC, FINRA, the Commodities Futures Trade Commission (CFTC), or any other financial regulatory authority (domestic or foreign). Form BD is especially concerned with disclosure of rules violations, license suspensions or revocations, and/or false statements made to regulators. If the firm or its controlling affiliates have a sufficiently negative history, the state administrator may deny the registration application.
Information about prior criminal events involving the firm and its controlling affiliates is a high priority for the state administrator. 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 refer to guilty and no contest pleas. You can expect these to be generally referred to 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 process is a document submitted alongside the registration form. 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: this link. Here’s a snippet of the language used in the consent to service of process:
[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"
The consent to service of process ensures that legal actions involving a registered person (for example, a lawsuit or subpoena) can be served through the state administrator. In the US legal system, the recipient must be officially served (physically provided) with the documents before legal proceedings can move forward. That requirement can create an incentive to avoid service in some situations.
Even if a registered person tries to avoid being served with a subpoena or lawsuit, they can’t. Attorneys know the state administrator can legally be served on behalf of the applicant. This keeps the state administrator informed about legal proceedings involving persons registered in the state and prevents delays caused by failure to serve documents.
Submission of the consent of service of process is required for every registered person and security, but only with the initial application. There’s no need to renew this document once it has been filed.
Filing fees are a testable Series 65 topic. A filing fee must be paid when an application for registration is submitted. Every state* has 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 forms are denied.
*Although each state maintains its own fee schedule, the SEC does not charge a registration fee.
When a broker-dealer initially registers, the registration lasts only until the end of the calendar year (December 31), regardless of when the application is submitted. A full filing fee is required no matter how short that initial registration period is. For example, if a broker-dealer registers on December 20, the registration lasts only 11 days (until year-end), but the firm still pays a full year’s filing fee. State administrators do not prorate fees.
To remain 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 are also subject to filing fees.
If a person’s registration lapses, they can’t perform any role that requires registration. For example, a broker-dealer may not execute securities transactions until registration is renewed. The same concept applies to other financial professionals registered with the state, including agents, investment advisers, and investment adviser representatives (IARs).
There is one instance where state administrators do not require an additional filing fee: successor firms. If one broker-dealer buys out and takes over another broker-dealer, Form BD must be amended and updated to notify regulators of the change. Although state administrators charge filing fees in almost every instance of paperwork being filed, successor firm updates are free.
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