Chapter 1: Regulations of Firms and Individuals - B. Regulations of Agents Of Broker/Dealers

Question 1

Agent

Answer 1

The term agent means any individual (human being, natural person) who represents a broker/dealer or issuer in effecting or attempting to effect purchases or sales of securities in a state. An agent is any individual who effects or attempts to effect trades. Furthermore, the following additional principles and requirements apply:

• An individual can be an agent for a purpose other than effecting or attempting to effect purchases or sales of securities and not be an authorized agent under the Act;
• All agents must be registered in every state in which they effect transactions or offer securities for sale. Note that advertising in a state may constitute an offer to sell;
• Whether or not a person earns a commission has no bearing on whether the person is defined as an agent.

Question 2

Example of an agent

Answer 2

An officer of a firm who handles customer account transactions must be registered as an agent. In contrast, the officer is not required to register as an agent under the Uniform Securities Act (USA) if no sales functions are performed and no securities transactions are effected unless, however, the officers are involved with the day-to-day supervision of the securities transactions within the state.

Question 3

Exclusions from definition of an agent

Answer 3

Employees of brokerage firms who perform only clerical or ministerial functions and do not effect trades are excluded from the definition of an agent. Officers, owners and directors who are not involved in the sales function or management of the firm are not required to be registered as an agent.

Question 4

Registration requirements for agents

Answer 4

It is unlawful for an individual to transact business in a state unless the individual is properly registered under the Uniform Securities Act (USA). In the process of registration, agents

• Must perform the registration through the broker/dealer; and
• Cannot register individually with the state administrator.

An agent must be associated with a registered broker/dealer in order for the agent’s registration to be in effect. If an agent is not associated with any broker/dealer for a period of 2 years, then the registration process must be restarted (including retaking any required examinations) by making a new application through a properly registered broker/dealer firm.

Once the agent files registration papers with the state administrator, the agent’s registration becomes effective within 30 days unless the administrator informs the broker/dealer earlier that the registration is effective. Under the USA, the state administrator would have jurisdiction over the agent for a period of 1 year following the termination.

Most states only allow dual or multiple registrations (agent registration with more than one broker/dealer) if under “common control.” For example: ABC broker/dealer is owned and operates as a subsidiary of XYZ broker/dealer. An agent may be registered with both ABC and XYZ because both firms are under common control. Ex: MassMutual and Baystate

Question 5

Exemptions from registration as an agent

Answer 5

• Agents who act for exempt broker/dealers;
• Individuals who represent an issuer with respect to an offer or sale of the issuer’s own securities, and who are not compensated directly or indirectly in connection to the transactions in those securities; and
• Individuals representing an issuer that affects transactions only in federal covered securities (securities that are exempt from state registration because they are registered with the SEC and are traded on an exchange or on Nasdaq). The exemption does not apply if the agent is compensated in connection with those transactions.

Question 6

Individuals Representing Issuers in Exempt Securities

Answer 6

Individuals who represent issuers (as opposed to broker/dealers)in the trading of specific exempt securities are exempt from registration as an agent.

Individuals representing a broker/dealer, however, must be registered unless another exemption is available to them.

Exempt securities include, but are not limited to the following:
- U.S. government securities;
- Canadian government and certain other foreign government securities;
- Municipal notes and bonds;
- Banks, trust companies, savings institutions, or credit union securities such as certificates of deposit and passbook savings accounts;
- Securities issued for employee savings plans, pension plans, profit sharing, and stock purchase plans; and
- Commercial paper with a maturity of 270 days or less.

Question 7

Agent registration exemption

Answer 7

In general, an agent must be registered in a state prior to effecting securities transactions with a client who resides in that state.

However, there is an exemption that applies when a client has moved to a different state or is temporarily in a state that is not the client’s state of residence. If an agent is not currently registered in a particular state, the agent may effect transactions with a client who is in that state, under the following circumstances:

1). If a client has moved to a different state, the agent may engage in transactions with that client for up to 30 days, while the agent’s application for registration is pending. The 30-day registration rule also applies to the agent’s broker/dealer.

To be eligible for this exemption, the agent must be eligible to register in that state, must be registered with FINRA, and must be registered in at least one other state. In addition, the broker/dealer must be registered in that state or have a pending registration that falls within the 30-day requirement.

2). If an existing client is temporarily in a different state. For example, if a customer has a vacation home in a different state and spends only summers there, the agent may service the customer while the customer is in that state, as long as the agent does not solicit other clients in that state.

Question 8

Representing Issuers in Exempt Transactions

Answer 8

Also exempt from registration as an agent are individuals who represent issuers in exempt transactions (trades that do not include the public). This exemption applies only to representatives of issuers; individuals who represent broker/dealers are not allowed these exemptions. Examples of exempt transactions include the following transactions:

• Between the issuer and the underwriter;
• With financial or institutional investors such as banks, trust companies, insurance companies, savings institutions, and pension plans;
• Affecting employees, officers, partners, and directors of the issuer when no compensation is paid to the individuals for their solicitation; and
• Private placements.

For example: An issuer is preparing a new stock offering and hires an underwriter to file the necessary forms and sell the offering when it is released. The issuer and underwriter agree that the underwriter will receive stock from the new offering as a partial payment for the underwriter’s services. This is an exempt transaction. If a company wants to sell shares of its stock to employees, officers, partners and directors, as long as the company (issuer) receives no compensation, the transaction is exempt.