Brokers and dealers play an important role in the sale and issuance of securities. Knowing who qualifies as a broker-dealer, however, is only one step in the process of lawfully transacting securities. The Securities and Exchange Commission (“SEC”), the agency who oversees the security industry and enforces federal security law in the United States, has developed guidelines and registration requirements for broker-dealers. These registration requirements serve as a minor inconvenience for the issuers of the securities, as the broker-dealer may not begin business until the registration requirements have been satisfied, while maintain investor confidence and protect the integrity of the market.
The Broker-Dealer Files a Form BD with the SEC
Before a broker-dealer takes any action concerning the securities, she must first file a Form BD with the SEC, and receive approval of this filing. The Securities Exchange Act of 1934 (the “34 Act”) provides many regulations for broker-dealers. Here, Section 15(a)(1) explains it shall be unlawful for any broker or dealer. . . to effect any transactions . . . to induce or attempt to induce the purchase or sale of [any security], unless such broker or dealer is registered in accordance with the registration process set forth by Section 15(b) of the 34 Act. However, some persons who transact securities may satisfy an exemption to the registration requirements of the 34 Act. Among these exempt persons include issuers, associated person of an issuer, and intrastate broker-dealers, as provided by Rule 3a4-1 (Associated persons of an issuer deemed not to be brokers).
The Broker-Dealer Becomes a Member of a Self-Regulatory Organization
In addition to the Form BD filing, broker-dealers shall become a member of a self-regulatory organization (SRO), such as the Financial Industry Regulatory Authority (“FINRA”) or a national securities exchange, before they are permitted to begin their business. SROs play the important role of assisting the SEC in regulating persons involved in the transaction of securities. Depending on the activity and scope involved in the transaction, the broker-dealer may be required to become a member of multiple SROs. For instance, if a broker-dealer transacts securities exclusively on national securities exchanges, it may be required to be a member of those exchanges. Alternatively, broker-dealers who will transact securities anywhere other than the national securities exchanges of where it is a member, including simple over-the-counter transactions, it must become a member of FINRA, notwithstanding the broker-dealer qualifying for an exemption provided in Rule 15b9-1 (Exemption for certain exchange members).
The Broker-Dealer Becomes a Member of the Securities Investor Protection Corporation
Broker-dealers are also required to be a member of the Securities Investor Protection Corporation (“SIPC”), generally. The SIPC members are required to pay an annual fee to the organization, and insurers its members’ customers’ cash and securities, in the event of the member’s liquidation. The SIPC provides coverage up to $500,000 per customer for cash and securities, though cash values are limited to $100,000. However, broker-dealers who maintain a principal business outside of the United States or who transact exclusively with the distribution of insurance, investment company shares, or variable annuities, are exempted from the SIPC membership requirement.
The Broker-Dealer Complies with All Applicable State Requirements
As with many industries, participants must comply with all applicable state regulations in addition to federal regulations. The North American Securities Administrators Association (“NASAA”), the organization composed of state securities administrates responsible for protecting consumers who purchase securities or seek investment advice, serves as a hub for investors and issuers, and provides materials to help promote education and regulatory compliance. Here, broker-dealers and their associated persons, can learn about the registration requirements and better comply with all applicable regulations.
The Associated Persons Satisfies Qualification Requirements
“Associated persons”, defined by Section 3(a)(18) of the 34 Act, means any partner, officer, director, or branch manager of such broker or dealer, and any person who controls, controlled by, or under common control with the broker-dealer. Broker-dealers shall complete a Form U-4, the form used to register individuals and disclose their employment and disciplinary history, for all associated persons and submit this information to each SRO where the broker-dealer maintains a membership. In addition to the Form U-4 reporting requirements, associated persons are required to pass the SRO securities qualification examination, commonly known as the “Series 7” exam. In addition to the Series 7, persons looking to participate in an exclusive asset class, including municipal securities, limited partnerships, or mutual funds, may take a specialized examination focused on the specific asset class, as an alternative to the general securities examination.
Broker-dealers are regulated to promote investor confidence and protect the integrity of the market. In addition to the skillset to recognize develop an investment opportunity and create an investment strategy, a network of investors to make the venture possible, business and investment endeavors also require an understanding of relevant law and regulations. Knowing the specific needs and objectives of the investment plan can allow broker-dealers and security issuers to structure a plan that will yield a performance with optimized results.
Disclaimer: The information contained in this post is for general information and educational purposes only. The application and impact of laws can vary widely based on the specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions or inaccuracies in information contained in this publication. Accordingly, the information on this post is provided with the understanding that the author and publishers are not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. Before making any decision or taking any action, you should consult a professional.