Chapter 1: Regulations of Firms and Individuals - E. Registration Application Flashcards
Broker/dealer or investment firm registration application
When either a broker/dealer or investment adviser firm is registering within a state, along with any individuals associated with the firm (such as an investment adviser representative or an agent for a broker/dealer), the administrator will require the following information on the registration application:
- Location and type of business organization (e.g., corporation, partnership, sole proprietorship);
- Proposed method of doing business;
- Qualifications and business history of the applicant, including those of any partners or officers for broker/dealers and investment adviser firms;
- Fingerprints may be required for the applicant and for any partners, officers, representatives or agents (generally required for associates of FINRA member firms and not necessarily by the state administrators);
- Applicant’s financial history and current condition;
- Consent to Service of Process to allow the state administrator to be served legal documents on behalf of the registrant, and to cross state lines and serve the registrant with the legal paperwork; and
- Any court-ordered (even from a foreign country) injunctions, administrative orders, convictions of any securities related misdemeanors, and convictions of any type of a felony.
Registration examinations
All applicants may be required to pass a written or oral examination to meet qualification standards of the administrator.
Passing the examination is not sufficient for registration. Applicants cannot transact business until all required items are filed and the registration is granted by the administrator. In the case of an agent, the broker/dealer will be informed by the administrator that the registration of the agent is in effect.
Federal covered advisors
Although federal covered advisers are not required to register with the state, the state may require advisers registered with the SEC to do the following:
- File with the state a copy of any documents filed with the SEC;
- File a Consent to Service of Process (Form U2); and
- Pay a state filing fee.
This is called a notice filing, and it is important to remember for exam purposes that the state often requires a consent to service of process, as well as a filing fee in order to operate within their state. Notice filing applies to federal covered advisers under the Investment Adviser Act of 1940, or the adviser to an investment company registered under the Investment Company Act of 1940.
Registration effective date and expiration
Registrations become effective 30 days from the filing date. If an amendment to the application is filed, the effective date is 30 days from the filing date of the amendment.
If not renewed, all registrations expire on December 31 (midnight) of the year for which the application for registration is filed. A registration may be automatically renewed every year if appropriate records are filed, and appropriate filing processing fees are paid. Note that for Canadian broker/dealers and agents who have limited registration, the annual renewal date is December 1.
Registration of successor firms
If a broker/dealer or investment adviser wants to name a successor firm to fill an unexpired portion of a yearly registration, a new application is required, but no additional fees are due. It is not required that the successor firm be in existence at the time of the application. However, a new consent to service of process may be needed. The consent to service of process only needs to be filed once. It is a permanent document, but if the new entity takes over, they may need to file their own consent to service of process.
Registration financial requirements
The administrator may require minimum net worth standards for broker/dealers and registered investment advisers. Such standards are imposed because these professionals may be permitted to take custody of client assets and exercise discretion over their accounts. The minimum standards are normally higher for investment advisers who maintain custody of client’s funds and securities.
Note that the financial requirements apply only to broker/dealers and investment advisers (the firms) but do not apply to the agents or investment adviser representatives (the individuals employed by the firms).
An agent may not have custody of funds or securities of a customer except under the supervision of a broker/dealer. The same applies to investment adviser representatives who must be under the supervision of an investment adviser.
Minimum capital requirement for registration
The Uniform Securities Act (USA) may establish minimum capital requirements for registered broker/dealers or investment advisers. NASAA Model Rule 202(d) further stipulates the minimum financial requirements for registered investment advisers:
- A registered investment adviser who has custody of client funds and/or securities is required to maintain at all times a minimum net worth of $35,000.
- Advisers who have discretionary authority (meaning the adviser has the authority to make decisions regarding assets, amounts, and actions on behalf of the investor) over a client’s securities, but do not have custody of client’s funds or securities, are required to maintain a minimum net worth of $10,000.
- Investment advisers who accept prepayment over $500 per client at least 6 months in advance must always maintain a positive net worth (or an excess of assets over liabilities). If a financial impairment occurs, the investment adviser is required to notify any of its clients who have paid such a substantial prepayment. (Note for federal covered advisers the pre-paid amount is $1,200 in 6 months.)
As a condition for transacting business in their state, registered investment advisers must notify the administrator by the end of business on the next business day if the adviser’s net worth is less than the required minimum. By the close of business on the following business day, the adviser must also file a report with the administrator. In addition, these notification rules also apply if the adviser were to commingle customer funds or securities with those of the adviser. The rules governing the adviser with regarding requirements are based on the adviser’s home state.
The report to the state administrator must include the following:
- A trial balance of all ledger accounts;
- A statement of all client funds or securities that have been commingled (not segregated);
- A computation of debit balances; and
- The number of client accounts.
Financial reports for registered broker/dealers and investment advisers
Registered broker/dealers and investment advisers must file financial reports with the administrator. If the reports have incomplete or inaccurate information concerning any material fact, a correcting amendment must be filed promptly.
If the investment adviser is federally registered (managing $100 million or more in assets), the reports that are filed under the federal acts may also be filed with the state to satisfy this requirement.
Rule 13f-1 – Reporting by Institutional Investment Managers of Information with Respect to Accounts Over Which They Exercise Investment Discretion (Schedule 13F):
- Every institutional investment manager who maintains investment discretion over accounts holding equity of a nationally traded security having a fair market value of at least $100 million must file a report on Form 13F with the Commission within 45 days after the end of each calendar quarter. Form 13F is used to disclose the holding of these discretionary accounts.
Consent to Service of Process
Broker/dealers, agents, investment advisers and investment adviser representatives obtain their registration by filing an application and submitting a Form U-2 (Uniform Consent to Service of Process) with the administrator of each state in which they will effect transactions.
The Consent to Service of Process is a form that appoints the state administrator as the registrant’s attorney to receive and process any noncriminal legal proceedings. This is the document that enables the state administrator to cross state lines in order to issue subpoenas and compel testimony.
This appointment is irrevocable and remains in force as long as a registration is effective.
The consent needs to be filed only with the initial application; it is not required for renewal applications. The consent to service of process is a permanent document.
Registration filing fee
Every state requires payment of a registration fee for all initial and renewal applications. If the registration is denied or withdrawn, the administrator may retain a portion of the fee.
Registration surety bond
Registered broker/dealers, agents and investment advisers who have discretionary authority over client accounts or have custody over client funds or securities may be further required by the administrator to post a surety bond to cover the cost of potential legal fees arising from violations of the Uniform Securities Act. A deposit of cash or an appropriate amount of cash equivalent securities (usually U.S. Treasury bills, notes or bonds) may be accepted in lieu of the bond.
Note that in the case of an Investment Adviser who terminates his registrations, he is required to maintain a surety bond for 3 years after termination.
This surety bond requirement does not apply to:
- Broker/dealers whose net capital exceeds the minimum standards set by the administrator; or
- Investment advisers who meet the minimum financial requirements.
