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 given 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 requires the firm to disclose key information on required paperwork and pay filing fees. Those disclosures are made on Form BD. (If you open the link, you’ll see it’s a long, straightforward form.) This section focuses on what you need to know about it.
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 the business name, EIN (tax reporting number), business address, and a contact person (an employee the administrator can reach if they need to contact the broker-dealer).
Form BD also asks the firm to disclose other jurisdictions it will be subject to. Jurisdiction can get complex, and you’ll cover it in more depth 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 helps the Texas state administrator to know whether the firm is also registered elsewhere, because that gives context about 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.
Applicants 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 - the persons who have a controlling interest (influence) over the business. The state administrator needs to know who controls the firm. The firm must also disclose the types of products and services it will 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 business history. The form explicitly 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 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. The SEC and state administrator regulate financial persons, but 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. 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 is granted more 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 actions taken against the business by a regulator. This could include a state administrator, the SEC, FINRA, the Commodities Futures Trade Commission (CFTC), or another financial regulator (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: Revised Form U-2. 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 helps ensure that legal actions involving a registered person (such as a lawsuit or subpoena) are delivered to 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. 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 with a subpoena or lawsuit, they can’t avoid the process entirely. Attorneys know the state administrator can legally be served on behalf of the registrant. This keeps the state administrator informed about legal proceedings involving persons registered in the state and helps prevent 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 after it has been filed.
Filing fees are a testable topic on the Series 66. 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. Registration forms are denied if the required filing fee is not paid.
*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 the 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 is not processed by year-end, the person’s registration will lapse. Renewals are also subject to filing fees.
If a person’s registration lapses, they may no longer perform any function 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 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. Although filing fees are required in most situations where paperwork is filed, successor firm updates are free.
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