State Regulations Governing Broker-Dealers and Agents
General Registration of Financial Professionals Chapter 3
The Application Process
· Name of applicant AND address
· Type of business
· Qualifications and business history of partner, officer, director, or other person in an important position
· Financial status of applicant
· History of applicant
· ANY injunction, administrative order, felony conviction, or conviction of a securities related misdemeanor
· Details about unsatisfied judgments OR liens against registrant
· Has a bonding company denied OR paid out on OR revoked a bond for registrant
Amendment
· MUST occur in 30 days
Consent to Service of Process
· Irrevocable
· Appoints Administrator as the registered person’s attorney for service of legal papers
· Customers can serve notice to Administrator NOT registrant
· Consent, part of registrant’s file
Case Study
Ann believes that her registered representative, Blake, has taken funds from her securities account without authorization so she files a lawsuit in state court to recover her losses. However, Blake is no longer associated with his now former employer and cannot be located to serve him with legal papers. Does Ann have recourse?
· Ann MAY serve the papers on the state Administrator INSTEAD of Blake
· Equivalent to serving the legal papers on Blake directly
Filing Fee
· A filing fee MUST be paid at the time of initial registration and annually upon renewal
· If an application is denied OR withdrawn, the Administrator May keep ALL or PART of the fee
· If 2 or MORE firms become 1 firm, the new successor firm can fill the unexpired portion of the registration term by filing an application
Case Study
Heritage Securities, a California broker-dealer purchased GST Investments, a small New York-based broker-dealer. Heritage completed the purchase of GST in March and will now operate as the new firm. Heritage Investments, with offices in California and New York. What are the requirements for Heritage Investments to open as the successor firm for the remainder of the year?
· Heritage investments MUST file a new application with the Administrator in California and New York
· Successor firm will NOT need to pay another fee until the successor firm’s registration is renewed
Examinations
· The Administrator reserves the right to MAKE applicants take an examination
· Charter Financial Analysts can get a waiver for the Series 66
· After passing the exam, applicants MUST register with the state Administrator, Administrator MUST make their registration effective before they CAN effect business
Surety Bond
· Agrees to pay the sum of money awarded by a court up to a certain amount as a result of a registrant’s violations of the USA
· Bond applies to registered broker-dealers and agents WITH custody OR discretionary authority over client funds OR securities
· The bond MUST be maintained for as long as the registrant is in business and for 3 years afterward
· Bonds are NOT required of broker-dealers whose net capital exceeds specified minimum amounts as set by federal law
· Registrants MAY deposit cash OR securities
· If investment advisor’s net worth is above Administrator’s minimum, no bond is required
Effective Date and Expiration
· Registration IS effective at noon on the 30th day after filing the application OR on the 30th day after filing an amendment
· ALL registrations of financial professionals expire on December 31
· Application MUST be renewed
· Consent to Service of Process is ONLY filed once
Case Study
LJ Securities has completed all of its requirements for registration as a broker-dealer and has filed an application with the Administrator on May 1. Provided the Administrator does not deny LJ’s application, when will it become effective?
· Effective ON May 31
· Remain effective until December 31
· If Administrator notifies company on May 8, they may begin acting as a broker dealer earlier
State Registration of Broker-Dealers
Net Capital
· Broker dealer’s liquid net worth
· State Administrator may NOT exceed federal (SEC) rules
Advertising and Sales Literature
· File with Administrator
· NO filing for EXEMPT securities, EXEMPT transactions, OR federal covered transactions
Maintenance Requirements
· Broker-dealer records for 3 years, the first 2 years in an easily accessible location
Financial Reports
· MUST be filed with the Administrator every quarter or as often as determined by rule or order
Special Examination
· Administrator can inspect records periodically
Exclusions
· Broker-dealer persons MUSTR register in that state
· People who are not broker-dealers are not required to register
· A person that has NO place of business in the state AND only transacts business with issuers, other broker-dealers, financial institutions, or institutional buyers
· A person that has NO place of business in the state AND is registered where the person maintains her place of business and only conducts business with existing clients who are not residents of the state (e.g. clients on vacation, or attending school, or working there but not living there)
Case Study
· Rocksolid is a broker-dealer located in Wyoming that consistently engages in securities transactions with mutual fund managers in Colorado
· If Rocksolid has NOT opened an office in Colorado and its ONLY clients are institutional investors in Colorado
Does Rocksolid NEED to register as a broker-dealer in Colorado?
· NO, NO place of business, clients are limited to institutional investors in Colorado
Case Study
Rocksolid decides to expand and open a branch office in Colorado. It has yet to open any accounts with noninstitutional clients. Therefore, its only clients are institutional. Since Rocksolid has no retail clients in Colorado, will it be required to register in the state of Colorado?
· Yes, it has a place of business
· MUST register
Case Study
Younge Securities, a Michigan broker-dealer, has both institutional and retail clients. Grace, an existing retail client of the broker-dealer, is spending 3 weeks in Florida house-sitting for her best friend Stephen, who is travelling out of the country. If Younge Securities is not registered in Florida, will it be able to do business with Grace while she is in Florida> Will her agent Carolos be required to register in Florida?
· No, Grace is only in Florida temporarily
· Younge Securities will NOT be required to register in Florida
· Grace’s agent Carols will not be required to register in Florida since Grace is NOT a resident of Florida
Checklist
· identify the activity in which the firm is involved
· determine if the firm has an office in the state
· if YES, the firm MUST register
· if NO, think of who the client’s are
· If clients are institutional, NO registration requirement
· If 1 or more clients are retail clients, firm MUST register
Not Broker-Dealers
· Agents
· Issuers
· Banks, savings and loan companies, savings institutions, and trust companies
Agents of Issuers
· On behalf of an exempt issuer
-the U.S. government (national and local)
-The Canadian government and other specific foreign national government securities
-Securities of banks, trust companies, and savings institutions
· When the security is exempt
-Commercial paper with an initial maturity of 9 months or less
-Investment contracts for employees such as savings plans, profit-sharing and pension plans, and stock purchase plans
· When the sale is made through an exempt transaction
-Private placements
-Sales to qualified purchasers
-Transactions between an issuer and an underwriter
-Transactions with a trust company or savings institution
-Transactions involving the sale of the issuer’s stock to partners, directors, or employees of the company (an employee purchase plan) provided
-The transaction is initiated by the employee
-An officer of a company selling the stock of the company (issuer)
· IF an individual agent effects securities transactions for compensation, the person MUST be registered even if the security is EXEMPT from registration
Case Study
The treasurer’s office of the city of Metropolis frequently issues municipal notes directly to large institutional investors. Mona, a Metropolis government employee, arranges these transactions. Is Mona considered an agent and required to register?
· Mona is NOT an agent because these are municipal notes
· If an agent of Rocksolid Brokerage sold municipal notes, not EXEMPT
Agents of Broker Dealers
· Individual who represents a broker-dealer in effecting transactions in securities
· Register under USA with Form U4 through the CRD
· A B-D cannot employ an agent who is not registered
· If an agent leaves, Form U5 describes ending of relationship
· Dual registration is allowed only if Administrator allows
Case Study
Nathaniel is a sales assistant for a broker-dealer and performs functions that are purely clerical or ministerial, such as answering phones, filing paperwork, and giving clients quotations.
Is Nathan an agent?
· No, Nathan does not effect securities transactions
Case Study
Brenda has been employed as an agent of Fairmont Brokerage for the last 4 years. She was recently passed over for a promotion and decides to resign. Will her registration as an agent remain in effect?
· Both agent and broker-dealer MUST notify the Administrator
· Her registration will be terminated within 30 days and will not be effective unless she becomes affiliated with another broker-dealer within 2 years
Case Study
Morgan has resigned from Fairmont Brokerage and is taking a new position with another broker-dealer, Ostrich Investors Inc.
Who must notify the Administrator of the employment change?
· The agent, the prior employer, and the new employer MUST all notify the Administrator of the change
Agent Exemptions from State Registration
· The agent MUST be eligible to register in the state
· The agent’s broker-dealer MUST be registered in the state
· The agent MUST be registered with a national securities association (e.g. FINRA)
· The agent MUST be registered in at least one other state
Managers as Agents
· All partners, officers, and directors of a broker-dealer, who are involved in effecting securities transactions are automatically registered as agents when the broker-dealer initially registers with the state
Case Study
Al, Bob, and Charlene are the founders of Beeken Brokerage, Inc, and were named senior officers when the company was formed. Al is responsible for handling the finances and does not participate in the securities transactions in any way. Bob and Charlene are responsible for managing the brokerage business. Two years after Beeken was founded, Elsie replaced Bob as a senior officer. Who would be required to register as an agent? When would their registrations become effective?
· Bob and Charlene AS agents
· Al, NOT an agent
· Elsie, was not registered automatically, MUST register as an agent
Rules for Canadian Broker-Dealers and Agents
· Canadian broker can effect transactions with a person from Canada who is temporarily in a state if there was an existing broker-dealer/client relationship before the person entered the United States
North American Free Trade Agreement
· NAFTA eliminated MOST of the barriers to free trade and investment between the United States, Canada, and Mexico
· Did NOT expand the limited broker-dealer registration to include broker-dealers and agents of Mexico
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