Chapter 1: Regulations of Firms and Individuals - A. Regulations Of Broker/Dealers Flashcards
Content Outline
Chapter 1: Regulations of Firms and Individuals
A. Definition of “A Person”
B. Regulations of Broker/Dealers
1. Exclusions
2. Registration requirements
3. Exemption
C. Regulations of Agents of Broker/Dealers
1. Exclusions
2. Registration requirements
3. Exemption
D. Regulations of Investment Advisers
1. Exclusions
2. Registration
3. Exemption from registration
4 Brochure rule
E. Regulations of Investment Adviser Representatives
1. Employment of representatives
2. Registration
3. Exemption from Registration
F. Registration Application
1. Examinations
2. Federal Covered Advisers
3. Effective Date and Expiration
4. Successor firms
5. Financial requirements
6. Minimum Capital Requirement
7. Financial reports
8. Consent to Service of Process
9. Filing fee
10. Surety bond
G. Sale, Offer to Sell and Offer to Purchase
1. Sale
2. Offer to sell
3. Offer to purchase
4. Exclusions
Not considered “a person” under the Uniform Securities Act
Under the Uniform Securities Act (USA), a person is defined as an individual or legal entity that either trades or issues securities.
The following are not included in the definition of a person:
1. Deceased individuals;
2, Individuals who have been declared mentally incompetent (most states require a certificate of incompetence to be issued by the court system within the last 60 days to authorize a third party to enact legally binding transactions on these persons’ behalf); and
3. Minors (anyone who is under the age of majority in the state in which the minor resides) because they may not legally enter a contract.
Considered “a person” under the Uniform Securities Act
“A person” can represent either an individual or an organization. The Act defines the following as a person:
- An individual (a natural person);
- A corporation;
- A partnership;
- An association;
- A joint venture or joint stock company;
- An estate;
- A business trust;
- A trust where the interests of the beneficiaries are evidenced by securities;
- An unincorporated organization; and
- A government or governmental body such as a political subdivision.
A conservatorship is a type of estate where a court-appointed guardian takes control of an incapacitated individual’s financial, real estate and other monetary affairs. The guardian can be a related or nonrelated competent adult, a public or private institution or a financial institution.
Broker vs. Dealer
Broker: Agent, makes trades for the accounts of others
Dealer: Principal, trading from own inventory to benefit self.
- For each transaction, the capacity in which the broker/dealer acts must be disclosed on the customer’s trade confirmation.
- A broker/dealer must register under the Uniform Securities Act (USA) in any state in which it transacts business unless an exemption is available.
Exclusions from definition of a broker/dealer
The term broker/dealer does not include
- Agents;
- Issuers; or
- Certain banks (including international banking institutions), savings institutions and trust companies with limited activities;
- Persons (firms) that have no office in the state and transact securities business within the state exclusively with:
- Broker/dealers;
- Financial institutions (including banks, savings & loans, and credit unions);
- Insurance companies;
- Investment companies;
- Pension plan providers;
- Profit-sharing trusts; or
- Trust companies.
Broker/Dealer Registration Requirements - Illegal activity
Under the Uniform Securities Act (USA), it is illegal for a broker/dealer to:
- Conduct business without proper registration with the state or qualification for an exemption;
- Employ an agent who is not properly registered (an agent’s registration is in effect only while the agent has an association with a registered broker/dealer or issuer).
Broker/Dealer registration requirements
The registration of a broker/dealer constitutes the automatic registration of any partners or officers of the firm as agents if they were with the firm at the time the registration is filed in the state, and if the partner or officer is operating in a supervisory role or in an agent capacity at the time of the registration.
Note that broker/dealers are required to have a supervisory system for the activities of its agents that complies with securities laws and regulations, and FINRA rules.
If a broker/dealer loses its registration, its agents’ registrations are no longer in effect. Remember: the agents cannot do any securities business until they re-register with another broker/dealer or issuer. However, if an agent loses their registration, the broker/dealer is not affected.
Broker/dealer registration exemptions
Broker/dealers who have no place of business in the state are exempt from registration ONLY if they fall into any of the following categories:
1). Transact business only with other broker/dealers, issuers, institutional buyers, or financial institutions.
2). Registered in the state where they maintain their place of business and make offers only to existing customers who are not residents of the state that the broker/dealer is making the offer into. This means that a broker/dealer can conduct business with existing customers who are vacationing in another state even if the broker/dealer is not registered in that state as long as the customer is only temporarily in that state. This is sometimes called the ”snowbird exemption.” For example, assume a broker/dealer is located in New Jersey and its customers are all New Jersey residents. Many of those customers spend the winter months in Florida. Neither the broker/dealer nor its agents must register in Florida as long as they only service their current New Jersey customers in Florida and do not solicit Florida residents for new business.
3). Have a customer who moves to a state where the broker/dealer is not registered. The broker/dealer can do business with this customer if the broker/dealer files for registration within 30 days of the customer’s first trade in this state.
4). Execute an occasional trade that is unsolicited and non-exempt. However, if there is any sort of pattern of trading established, the broker/dealer must register in the state.
Broker/Dealer and government securities personnel
Another type of a person exempt from a registration as a broker/dealer is a person who deals solely in United States government securities and is supervised as that type of dealer by the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, or the Office of Thrift Supervision.
Broker/Dealer and business in affiliate bank’s branch office
When a broker/dealer subsidiary is operating in an affiliate bank’s branch office, the broker/dealer’s securities activity must take place in a separate, defined area of the facility. This separate area must be identified as where securities activity is performed.
When a customer does business with a broker/dealer located within the financial institution, the agent must make every effort to get a signed disclosure document from the customer. This disclosure document must state that the customer understands that the securities
- Are not FDIC insured;
- Are not guaranteed and are in no other way obligations of the bank; and
- Carry investment risk.
If the agent is unable to get the customer to sign the disclosure document, the agent may still do business with the customer, but should document that the appropriate disclosures to the client have been made, and that the agent tried to get the customer to sign the disclosure document.
Commission sharing between a broker/dealer and a subsidiary
Note that commission sharing between a broker/dealer and a subsidiary is permissible. For example, a full-service broker/dealer and its affiliated discount broker/dealer may share commissions among their agents because the firms are under common control.
However, it is not appropriate to share commissions with agents who are not registered with either the same broker/dealer or a broker/dealer under common control with the employing broker/dealer.
Canadian broker/dealers
When a broker/dealer from Canada with no place of business in the United States has an existing customer who is temporarily in the United States, neither the broker/dealer nor its agent must register in the United States to transact business with that existing customer or customers, as long as they are properly registered with a Canadian SRO and are in good standing by having met all the registration requirements in Canada.
Additionally, if there is an established relationship with a customer prior to the customer relocating to the United States, the foreign broker/dealer and agent need not be registered in the United States as long as the client is transacting business in a tax-qualified retirement plan.
However, if the foreign broker/dealer has a new physical location in the United States, or their established customer who has moved to the United States is transacting business in an account other than a tax-qualified retirement account, the broker/dealer and the agent must be registered with the SEC and become a member of an SRO, such as FINRA. Also, the broker/dealer and agent must register in any state in which they are transacting business.
