Unit 3 - Regulation of Broker-Dealers and Their Agents Flashcards
Broker-Dealer Definition
When are they acting as a principal vs. as an agent?
*Role as Underwriter
Any person engaged in the business of effecting transactions in securities for the accounts of others or for its own account. They are firms for who the reps or (agents) work for.
Act as a principal when buying or selling from their own account.
Act as an agent when buying or selling for client’s accounts.
BD’s underwrite shares of new securities for issuers and earn the spread, or earn a commission.
Broker-Dealer Exclusions from Registration with the State
People excluded from the definition are:
- Agents (aka Representatives)
- Issuers
- Banks, Savings Institutions, and Trust Companies
- Using the internet (cannot make it seem like you’re registered in states that you are not. Disclosure, cannot provide investment advice to a non-clients, general information only on the website, not specific)
- BD’s with no place of business in the state
(that only deal with - other BDs, other fin. insititutions, such as banks, savings and loan associations, trust companies, insurance companies, investment companies, or employee benefit plans with at least $1MM in assets)
(or have no business in the state, but are licensed in a state where they have a place of business, an doffer and sell securities in the state only with persons in the state who are existing customers and who are not residents of the state)(official residency in the state)
**No de minimus exemption. 1 client out of state must register.
**If you have a place of business in the state, or if you have 1 client in the state, you must register.
Federal Exemption from Registration as a Broker Dealer
Intrastate dealing only. This means no dealing with securities listed on a national exchange.
State Exemption from Registration as a Broker Dealer
Exempt a BD without a place of business in the state if its only transactions effected in the state are with the issuer of the securities involved in the transaction.
***Associated Persons
Anybody involved with the firm, including outside directors or partners who only contribute capital.
Broker Dealer Agent or Registered Representative Exclusions
Clerical employees that do not engage in securities transactions.
If an intern called existing clients and received compensation, they must register as an agent.
Basically, there is no way for an individual to represent a broker-dealer in a securities sales function without being an agent.
Exclusion from definition of an agent for personnel representing the issuer. (Using 3rd parties to sell issues)
Agents typically sell for the BD, so must register as such unless:
- They are exempt from registration
- It is a certain exempt security (5 of these)
- transaction is with exisintg employees/directors, etc. and no compensation is involved.
Exempt Securities that keep an individual from having to register as an agent (5)
- Any security guaranteed by the U.S., any state, political subdivision, or guaranteed by Canada, Canadian Providence or political subdivision.
- Securities of foreign governments that have diplomatic relations with the U.S.
- Any security issued by or guaranteed by any bank, savings insitutution or trust company,
- Commercial paper with major rating agency and denomination of 50k or more with maturities 9 months or less.
- Investmnet contracts issued in connection with employees stock purchase plan, savings, pension or profit sharing plan.
Exempt transactions that make a person not have to register as an agent. (4)
- Unsolicited brokerage transactions
- Transaction between the issuer and underwriters
- Transactions with financial insitutions
- Private Placements
(No deminimus exemption for out of state clients)
Agent Of Issuer
Help corporations sell IPOs (not a BD). Must register as an agent even if not receiving compensation based on sales.
Agents
Individuals representing BD’s IN A SALES CAPACITY must register as agents, whether they sell registered securities, exempt securities, or securities in an exempt transaction. If the BD is registered in the state, the agent must be registered there also.
Individuals applying DO NOT have to submit fingerprints, unlike the FINRA qualification.
Key Notes:
- Almost all BD’s register with the SEC and at least one state. Exam will focus on state registration requirements.
- Exemptions from registration as an agent generally apply to representatives of issuers, not reps of broker dealers.
Net Capital Requirements
BD’s who meet the SEC net capital or bonding requirements cannot be required to meet higher ones in any state they do business.
In liue of a surity bond, the admin will accept cash or securities deposits.
Agent Termination Notice to the State
IAR Termination Notice to State or SEC
- If an agent terminates employee with the BD, both parties must notify the Administrator promptly.
- if that agent is joining another BD, all 3 parties must notify the Administrator.
(A means All parties) - If an IAR terminates employement as a state registered rep, the firm must notify the Admin.
- If an SEC registered rep, the registered rep must notify the Administrator.
IAs, IARs, BDs, Agents
Who do they register with? State, SEC, or both?
IAs - Federal OR State Level
IARs- Only State Level
BDs - Federal and State Level
Agents - Federal and State Level
