Registration of Agents

When an individual must register

Section 201(a) makes it unlawful for any person to transact business in a state as an agent unless registered. Section 201(b) adds the other side: it is unlawful for a broker-dealer or issuer to employ an agent who is not registered.

So both the firm and the individual commit a violation when an unregistered person transacts business, and both are exposed.

Whether registration is required turns on the definition and its exclusions, from lesson 1.2. To restate the ones that matter most:

An individual representing a broker-dealer who effects or attempts to effect transactions must register in each state where they transact business — where an offer originates or is directed and received.

An individual representing an issuer is not an agent when effecting transactions in specified exempt securities, in exempt transactions, in specified federal covered securities, or with the issuer's existing employees, partners or directors if no commission or other remuneration is paid for soliciting anyone in the state.

A partner, officer or director of a broker-dealer or issuer is an agent only if they otherwise meet the definition — that is, only if they effect or attempt to effect transactions.

Clerical and ministerial employees are not agents, because they do not effect or attempt to effect transactions. The moment such a person takes an order or discusses an investment, they do.

And note that the agent exclusions attach to representing an issuer, not to representing a broker-dealer. An individual representing a broker-dealer in effecting transactions is an agent even where the securities involved are exempt — the exemption belongs to the security, not to the person selling it.

Registration is not portable

The Act says it plainly: the registration of an agent is not effective during any period when the agent is not associated with a particular broker-dealer registered under the act or a particular issuer.

That single sentence produces most of the exam's agent questions.

An agent who resigns on Friday and starts at a new firm on Monday is not registered over the weekend and may not transact business.

An agent whose firm's registration is revoked is not registered either, because there is no registered firm to be associated with.

An agent cannot register independently and carry the registration to whichever firm they choose.

When an agent begins or terminates a connection with a broker-dealer or issuer, or begins or terminates the activities that make them an agent, both the agent and the firm must promptly notify the Administrator. The obligation is on both.

Registration of a broker-dealer automatically registers any agent who is a partner, officer or director. Everyone else applies.

An agent's registration, like a firm's, becomes effective at noon of the thirtieth day after filing absent a denial order or pending proceeding, and expires on December 31.

The grounds for denial, suspension and revocation are the same as for a firm — a public interest finding plus an enumerated ground, with prior notice, an opportunity for hearing and written findings. And note the specific procedural protection in the Act: where the registrant is an agent, notice goes to the employer or prospective employer as well as to the agent.

The uniform forms

The Form U4 — the Uniform Application for Securities Industry Registration or Transfer — is the application the firm files in the Central Registration Depository. It is the same form that requests the qualification exams, and it serves both FINRA and state registration.

It asks for identifying information, residential and employment history, and a long set of disclosure questions covering criminal charges and convictions, regulatory actions, civil judicial matters, customer complaints, terminations, bankruptcies within the last ten years, outstanding judgments and liens, and compromises with creditors.

The U4 must be kept current. Amendments are required for changes of residential address, for new disclosure events, and for outside business activities, on short deadlines. The obligation is continuing, not annual.

The consequences of getting this wrong are disproportionate to the underlying facts. Filing misleading information or omitting it is itself a violation, and it is grounds for denial, suspension or revocation under the Act's provision for an application that was incomplete in a material respect or materially false or misleading. Careers have ended over the omission where the underlying disclosure would not have ended them.

The Form U5 — the Uniform Termination Notice — is filed by the firm within thirty days of an agent's departure, and it states the reason for termination. That statement follows the agent in CRD and is visible to every firm that considers hiring them.

Much of what both forms disclose becomes public through BrokerCheck.

Two rules about an agent's own conduct

Two FINRA rules the NASAA study guide names specifically as testable, both about the agent as an individual rather than about their customers.

Outside accounts. FINRA Rule 3210 requires an associated person, before opening or otherwise establishing an account at another financial institution in which securities transactions can be effected and in which they have a beneficial interest, to obtain the prior written consent of their employing member. The executing member must notify the employing member in writing and, on written request, transmit duplicate confirmations and statements. The rule also reaches accounts in which the associated person has a beneficial interest held in someone else's name, which is the part people miss.

The purpose is supervision: a firm cannot detect front running, insider trading or undisclosed conflicts in its own people's trading if that trading happens somewhere it cannot see.

Payments to unregistered persons. FINRA Rule 2040 prohibits a member or associated person from paying compensation, fees, concessions, discounts, commissions or other allowances to any person that is not registered as a broker-dealer but is required to be, or to any person that is suspended or barred. Transaction-based compensation to an unregistered finder is the classic violation, and the analysis turns on whether the recipient's activity required registration.

Related, and covered fully in Module 3: outside business activities require prior written notice to the firm under FINRA Rule 3270, and private securities transactions require prior written notice under Rule 3280 — with written approval and supervision where selling compensation is involved.