Disclosures & fees

Agents are employees of broker-dealers or issuers who facilitate securities transactions for customers. Here’s the legal definition of an agent under the Uniform Securities Act (USA):

Like broker-dealers, agents generally must register to legally do business in a state (unless an exemption or exclusion applies). The registration process is similar to broker-dealer registration, but there are a few key differences you’ll want to keep straight.

Agents use Form U4 to register with each applicable state administrator. Form U4 requires disclosures and related obligations that include:

• Name and any nicknames
• Current address
• List of all current registrations
• Employment & residential history
• Criminal events
• Regulatory events
• Court actions
• Financial disclosures
• Payment of filing fee

Name & current address

This part is straightforward. You must provide your legal name and any nicknames you use. You must also provide your current residential address.

List of all current registrations

Depending on an agent’s business model, they may be registered in one state or in many states. If an agent is already registered in other states and is applying in a new state, those existing registrations must be listed on Form U4. This helps the state administrator understand the scope of the agent’s activities.

Even though an agent may be registered in multiple states, they’re generally prohibited from being registered with more than one broker-dealer or issuer at the same time. There are two exceptions:

• Affiliated firms: An agent may be registered with multiple broker-dealers or issuers if the firms are affiliated. For example, John could be registered with ABC Brokerage and XYZ Brokerage if both firms are subsidiaries of the same parent company.
• Administrator-granted exception: The state administrator may allow an agent to register with multiple unaffiliated broker-dealers or issuers.

Employment & residential history

Employment and residential history are important because they provide background on the applicant. Employment history is also publicly available, which helps investors understand a registered person’s experience and prior associations. This information is disclosed through FINRA’s BrokerCheck system.

The required disclosures are:

• 10 years of employment history
• 5 years of residential history

Criminal events

State administrators also review an applicant’s criminal history. Form U4 asks (in part):

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]

This information matters because registered persons may have access to investor assets. To support confidence in the markets, administrators typically won’t register individuals with certain recent criminal histories.

Key rules to remember:

• All relevant criminal events must be disclosed, including charges, no matter how long ago they occurred.
• Only certain convictions within the past 10 years can prevent registration: felony convictions and securities-related misdemeanor convictions.
• A disqualifying event is called a statutory disqualification. If an applicant has one, the registration request will be denied.
• If a currently registered agent is convicted of a felony or a securities-related misdemeanor while in the industry, the state administrator will likely revoke the registration.

We’ll cover more about the powers of the state administrator later.

Regulatory events

The state administrator isn’t the only regulator in the securities markets. The Securities and Exchange Commission (SEC) and FINRA regulate securities markets, and the Commodity Futures Trading Commission (CFTC) regulates the futures markets. Many other regulators exist (domestic and foreign), but you don’t need to memorize them.

Form U4 requires disclosure of regulatory actions by a wide range of regulators. The form asks whether any regulator or agency has ever:

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?

Disclosing one of these items often leads to closer review, but it doesn’t automatically prevent registration. Administrators typically evaluate these situations case by case.

Court actions

Courts can also take actions that must be disclosed on Form U4. The form asks whether any court has ever:

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?

Form U4 also asks:

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, court-related actions involving securities must be disclosed. Depending on the facts, a disclosure could lead to denial of registration.

Financial disclosures

Applicants must also disclose certain financial events. Form U4 asks:

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?

The key takeaway is that an agent must disclose bankruptcies and compromises with creditors (agreeing to pay less than the amount originally owed) that occurred within the last 10 years.

Payment of filing fee

A filing fee must be paid as part of the registration process. If the fee isn’t included, the registration request will be denied.

Similar to broker-dealers, initial registration lasts only until the end of the calendar year (December 31), and the fee is not prorated. To avoid a lapse in registration, a renewal request and fee must be submitted before January 1.