Registration of Broker-Dealers

When registration is required

A broker-dealer must register in a state if it transacts business there. The Act's jurisdictional test turns on where an offer is made or accepted: an offer is made in a state if it originates there or is directed to and received there.

That produces the classic exam scenarios. A firm in State A calling a customer in State B is transacting business in State B. A newspaper published in State A and circulated principally there does not make an offer in State B merely because a copy is read there. A television or radio broadcast originating outside the state is not an offer made in the state.

The exclusions from the definition of broker-dealer, which are exclusions from the requirement rather than exemptions granted:

An agent, an issuer, and a bank, savings institution or trust company are not broker-dealers at all.

A person with no place of business in the state whose transactions there are exclusively with issuers, other broker-dealers, or institutional buyers — banks, savings institutions, trust companies, insurance companies, investment companies, pension or profit-sharing trusts and other financial institutions or institutional buyers — is not a broker-dealer in that state.

A person with no place of business in the state who is licensed in the state where they maintain a place of business, and who offers and sells in this state only to a person who is an existing customer whose residence is not in this state, is not a broker-dealer in that state.

The second exclusion is the snowbird provision: a firm may continue to serve an existing customer who is temporarily in another state without registering there. Note its two conditions — no place of business in the state, and the customer must be an existing customer who does not reside there.

Having a place of business in the state defeats both exclusions. An office, a branch, or a person regularly conducting business from a location in the state means registration.

The application and effectiveness

A broker-dealer applies by filing an application with the Administrator together with a consent to service of process.

The consent to service of process appoints the Administrator as the applicant's attorney to receive service of process in any action arising out of the applicant's securities activity in the state. It is filed once, with the initial application, and remains in effect — it is not refiled annually. That is a testable detail.

The application contains what the Administrator requires by rule: the applicant's form and place of organization; its proposed method of doing business; the qualifications and business history of the applicant and of any partner, officer, director or controlling person; any injunction, administrative order, conviction of a securities-related misdemeanor, or conviction of any felony; and the applicant's financial condition and history. In practice this is the Form BD.

The Administrator may require an applicant to publish an announcement of the application in a newspaper, may require a minimum net capital, and may require a surety bond — though the Act limits the state's ability to impose net capital or bonding requirements higher than the federal ones.

If no denial order is in effect and no proceeding is pending, registration becomes effective at noon of the thirtieth day after the application is filed. The Administrator may specify an earlier date by rule or order, and may defer effectiveness until noon of the thirtieth day after the filing of an amendment.

Registration of a broker-dealer automatically constitutes registration of any agent who is a partner, officer or director, or a person occupying a similar status. Those individuals do not file separate applications.

Registrations expire on December 31 and are renewed annually with a fee.

After registration

Section 203 imposes continuing obligations.

Every registered broker-dealer and investment adviser must make and keep the accounts, correspondence, memoranda, papers, books and other records the Administrator prescribes by rule — subject, for broker-dealers, to the limits federal law places on state recordkeeping requirements. NASAA has issued no model rule on broker-dealer books and records for that reason, and the exam therefore tests SEC and FINRA record rules in this area rather than state ones.

Registrants must file the financial reports the Administrator requires.

All records are subject to reasonable periodic, special or other examinations by the Administrator, within or outside the state, as the Administrator considers necessary. The Administrator may charge for the cost of examinations.

The Administrator may require the filing of any prospectus, pamphlet, circular, form letter, advertisement or other sales literature addressed or intended for distribution to prospective investors, unless the security or transaction is exempt or is a federal covered security.

And the supervision obligation matters: a broker-dealer that has failed reasonably to supervise its agents or employees to assure compliance is subject to an order against the firm itself. FINRA Rule 3110 sets the parallel federal standard, requiring written supervisory procedures, designated supervisors, office inspections and review of correspondence. Failure to supervise is a firm-level violation even where the underlying misconduct was an individual's.

Denial, suspension and revocation

The Administrator may deny, suspend or revoke a registration, or bar or censure a registrant or its officers, only on two findings taken together: that the order is in the public interest, and that one of the enumerated grounds applies.

Both are required. The public interest finding is not a formality — the official commentary notes that requiring it in every case emphasizes that not every minor or technical infraction warrants an order.

The enumerated grounds include: an application that was incomplete in a material respect or materially false or misleading; a willful violation of the act, a rule or order under it, or of the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, the Investment Company Act of 1940 or the Commodity Exchange Act; conviction within the past ten years of any felony or of a misdemeanor involving a security or any aspect of the securities business; being enjoined from securities activity; being the subject of another Administrator's order; engaging in dishonest or unethical practices in the securities business; insolvency; lack of qualification on the basis of training, experience and knowledge; failure reasonably to supervise; and failure to pay the filing fee — for which only a denial order may be entered, and which must be vacated once corrected.

One provision is regularly tested and easy to state wrongly: the Administrator may not enter an order solely on the basis of lack of experience if the applicant is qualified by training or knowledge or both. Inexperience alone is not a ground.

No order may be entered without prior notice to the applicant or registrant — and to the employer or prospective employer if the registrant is an agent — an opportunity for a hearing, and written findings of fact and conclusions of law. That three-part requirement is one of the most reliably tested provisions in the Act.

Cancellation is different from revocation and is not punitive. The Administrator may cancel a registration or application if the registrant is no longer in existence, has ceased to do business, is subject to an adjudication of mental incompetence or the control of a guardian, or cannot be located after reasonable search.

Withdrawal becomes effective thirty days after receipt of the application, unless a proceeding is pending or is instituted within those thirty days. And the Administrator retains jurisdiction: even after a withdrawal has taken effect, a revocation or suspension proceeding may be instituted within one year, with the order entered as of the last date on which registration was effective. Withdrawing does not escape a pending problem.