Registration & Licensing - Standards

Question 1

Registration Standards for Broker-Dealers

Answer 1

Minimum dollar amounts of net capital;

Surety bond coverage (amount set by each State Administrator; old law called for a $10,000 minimum); the law requires the Administrator to accept a deposit of cash or securities in lieu of the bond; and

The passing of a qualification exam

Question 2

Why are net capital and surety bond standards imposed?

Answer 2

Because broker-dealers are permitted to take custody of customer funds and securities, or may have discretionary authority over client funds;

Question 3

What is a surety bond?

Answer 3

A deposit of cash, securities (the State Administrator decides which securities are acceptable), or an insurance bond. State can seize assets on deposit if there is a violation of State law.

Question 4

Registration Standards for Investment Advisers

Answer 4

To register as an investment adviser, the State Administrator can require:

Minimum dollar amount of net worth (min. financial requirements);

Surety bond coverage (amount set by State Administrator; old law required $10,000 minimum). Law requires Administrator to accept a deposit of cash or securities in lieu of a bond; and

The passing of a qualification exam;

Question 5

When is a surety bond required for an investment adviser?

Answer 5

When the investment adviser takes custody of a client’s funds and securities.

Not required if the IA will not take custody.

Question 6

IAs that take custody of customer funds must have a minimum net worth of what?

Answer 6

$35,000

Question 7

IAs that do not take custody of customer’s funds, but have discretionary power, must maintain a minimum net worth of what?

Answer 7

$10,000

Question 8

IAs that have either custody or discretionary authority over customer accounts must maintain minimum surety bond coverage of what?

Answer 8

$35,000 if their reported net worth is less than this amount;

Question 9

Can the Administrator require different minimum financial requirements and bonding requirements for IAs that take custody of customer funds than for ones that don’t?

Answer 9

Yes

Question 10

Can the Administrator require different minimum financial requirements and bonding requirements for IAs that have discretionary authority than for ones that don’t?

Answer 10

Yes

Question 11

Where is the IA minimum net worth requirement required?

Answer 11

Only the state where the adviser has its principal place of business - it does not matter if it has out of state branches; only the net worth requirement of the adviser’s State where it has its principal office applies.

Question 12

Calculation of minimum net worth or net capital requirement for IAs:

Answer 12

All Assets - All Liabilities - Intangibles (e.g., goodwill, trademarks, copyrights, etc.)

Question 13

How does the net worth or net capital computation change if the IA is an individual?

Answer 13

All Assets - All Liabilities - Intangibles - All personal property (home, furnishings, automobile)

*If the IA is a partnership or corporation, these items used in the business are included and are not deducted.

Question 14

Financial Reports required by Administrator

Answer 14

Act requires every registered broker-dealer and IA to file a statement of financial condition (balance sheet) for the applicant, along with an oath or affirmation that it is true and accurate.

Question 15

What happens if an IA or broker-dealer knows, or has reason to know that it is not meeting the Net Capital or Net Worth requirements?

Answer 15

The firm must promptly notify the Administrator of its financial condition - notice is required by the next business day. No later than the day after notice is given, a report must be filed with the Administrator detailing the adviser’s financial condition.

*NOTE: net worth deficiency notice is given the day after discovery and a report is filed the day after is important for the exam;

Question 16

Registration Standards for Agents

Answer 16

Surety bond coverage (if the agent will have custody of, or discretionary power over, client funds); and

the passing of a qualification exam (if no exam is required, the Administrator can ask for certification that the individual has reviewed the State’s Blue Sky laws)

Question 17

Registration Standards for Investment Adviser Representatives (IARs)

Answer 17

Passing of a qualification exam (if none required, Administrator can ask for certification that the individual has reviewed the State’s Blue Sky laws);

Question 18

Exam waiver

Answer 18

If an individual holds and maintains in good standing, a Certified Financial Planner (CFP) or Certified Financial Analyst (CFA) designation, the State Administrator waives the Series 65 (Registered Investment Adviser Rep) exam requirement; however, the individual must still register in the state and pay the registration fees; the waiver does NOT apply to an individual taking the Series 63 or 66.

Question 19

Is the filing of fingerprints a requirement for State registration of agents or representatives under the Uniform Securities Act?

Answer 19

No, but many States require them anyway.

Question 20

State treatment of fingerprints

Answer 20

If fingerprints have been filed with CRD (Central Registration Depository run by FINRA) for a federal registration, then they are not required to be filed in the State, if not, then they are required.