State Regs Governing B/Ds, Agents, IAs, IARs

Question 1

Is or Is Not a Broker Dealer

Answer 1

NOT
-Agents
-Issuers
-Banks, savings institutions, trust cos
-B/D with no place of business in a state that only transacts business there with:
+financial institutions, or
+existing individual clients who are not residents of the state

IS

• B/D with a physical presence in a state
• B/D with resident customers in a state (no de minimus exception)

Question 2

B/D Agent Registration Exemptions

Answer 2

1) Existing customer is temp visiting another state (visitation up to 30 days in aggregate)
2) Existing customer moves to a new state and
- agent’s reg is pending in new state
- Agent is already registered in at least one other state
- Agent is registered w a national securities association (like FINRA)
- Agent’s B/D is registered in new state (no free agents)

Question 3

Limited Reg for Canadian B/Ds and Agents

Answer 3

• Canadian firms can conduct business with existing Canadian Clients who are temporarily in the USA state, provided B/D does not have an office in the state
• Mexico is not included in this exception

-B/D must be registered properly in Canada AND -must file the following documents with the Administrator:
+a Consent to Service of Process AND
+a copy of the registration document filed with its Canadian regulator at the provincial level AND
+proof that it is regulated by a self-regulatory entity, such as an exchange.

Question 4

Is or Is Not an Investment Adviser

Answer 4

NOT
-IARs
-Banks, savings institutions and trust cos
-PLATE (publishers, lawyers, acctnts, teachers, engineers –> if advice is incidental)
-Broker-dealers and their agents
-Periodical Publishers
-Federal covered advisers (under NSMIA)
+Subject to reg w SEC
+Subject to Notice Filing w States
+Main types:
1)Advisers to registered investment cos OR
2)Those with $100mm or more under mgmt OR
3)Providers of advisory services in 15 or more states

An adviser with no place of business in a state who only provides advice to mutual funds, other investment advisers, broker-dealers, banks, trust companies, insurance companies, saving and loan associations, and employee benefit plans such as a 401(k) where the minimum amount of the assets is $1,000,000, is exempt from registration.

Adviser exemptions:
-Adviser with no place of business in a state AND:
1)All clients there are INSTITUTIONS
OR
2)Has no more than 5 non institutional clients in the state within the last 12 months (de minimus)

Question 5

IA Rep Registration

Answer 5

IAR of State Registered advisor

• Must register in any state in which he has place of business
• Must register in any state in which he has more than 5 non institutional clients

IAR of Federal Covered Adviser

• Must register in any state in which he has a place of business
• Does NOT need to register in any state in which he does not have an office

Question 6

Forms and Where they’re filed

Answer 6

• B/D: Form BD @ Central Registration Depository (CRD)
• B/D Agent: Form U4 @ CRD
• IA: Form ADV pt. 1&2 @ Inv Adviser Reg Depository (IARD)
• IAR: Form U4 @ IARD

Question 7

Registration Procedure

Answer 7

Application

• Effective on 30th day after filing
• Expires ANNUALLY on Dec 31
• Updated annually at time of renewal
• Amendments for material changes are filed promptly (w/in 30 days)

Consent to Service of Process

• Filed once, not renewed; irreversible
• Grants Admin power of attorney to receive and process non-criminal legal complaints

Filing Fee
-paid annually
-For successor firms:
  \+new app must be filed
  \+no additional filing fee for rest of year

Question 8

Reg Procedure: Bonding Requirement

Answer 8

Posted to cover cost of possible legal action

• Required for B/Ds, agents and IAs who have custody OR discretionary authority over client funds and securities
• NOT REQUIRED if B/Ds net capital or IA’s net worth exceeds minimum set by Admin
• Must be maintained as long as in business PLUS 3 YRS THEREAFTER
• Cash/securities can be deposited instead of bond

Question 9

Custody of Funds & Securities by Adviser

Answer 9

Custody is evidenced by adviser directly or indirectly holding customer funds and securities, including:

• Full discretion over an acct at a B/D
• Check-writing privileges in a client acct
• Inadvertently obtaining client funds/securities and not returning them w/in 3 business days (access to funds)
• Failing to forward 3rd party checks w/in 24 hrs

If an IA has custody it must:
-Notify the Admin in writing
-appoint a qualified custodian to hold client funds in a separate acct
-Notify clients of name of custodian an manner in which assets are held
-Ensure clients are sent quarterly statements by IA or custodian
+if sent by IA, bust arrange for unannounced annual audit and report results to Admin on Form ADV-E w/in 30 days

Question 10

Min Financial Requirements for B/Ds

Answer 10

• Who determines it: SEC (no state can impose a higher req)
• Min req: depends on activity
• When to report deficiency: within 1 business day

Question 11

Min Financial Requirements for IAs

Answer 11

-Who determines it: State Admin where IA’s home office is located
-Min Req:
$35,000 for custody
$10,000 for discretion only
-When to report deficiency: within 1 business day

Question 12

Record Keeping Reqs

Answer 12

-Books, records and correspondence for:
3 years for B/Ds - easily accessible for 2 yrs
5 years for IAs - easily accessible for 2 yrs

• File w Admin any advertising, sales lit or other communication disseminated to existing or prospective clients (unless it’s an exempt sec)
• File w Admin any required financial reports with amendments for material changes filed w/in 30 days
• Provide full and fair disclosure to clients
• Federal Covered Advisor records are also subject to inspection by Admin