Broker-dealers in the securities industry are subject to heavy oversight. This includes oversight from both the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). To operate in the securities industry, broker-dealers must register with both entities, and they must maintain strict compliance with the conditions of registration.
Registration is a multi-step process for broker-dealers, and mistakes made during the process can lead to unnecessary delays and denials. Some mistakes (i.e., misrepresenting information on a registration form) can also lead to immediate SEC or FINRA scrutiny. As a result, broker-dealers must approach the registration process carefully, and they must work with experienced legal counsel to ensure that they do not unnecessarily jeopardize their careers in the securities industry.
Securities Broker-Dealer Registration: An Overview
As the SEC explains, “[m]ost ‘brokers’ and ‘dealers’ must register with the SEC and join a ‘self-regulatory organization,’ or SRO.” In the securities industry, this SRO is typically FINRA. From a federal enforcement perspective, broker-dealer registration serves two fundamental purposes: (i) ensuring that all broker-dealers operating in the United States meet the basic requirements for serving retail investors; and, (ii) ensuring that the SEC and FINRA have a comprehensive list of all individuals who are authorized to sell securities in the U.S. markets.
While the SEC separately defines “brokers” and “dealers,” most securities industry professionals are broker-dealers that satisfy both definitions. As defined by the SEC:
- A securities broker is, “any person engaged in the business of effecting transactions in securities for the account of others.” When acting as brokers, broker-dealers engage in securities transactions as agents for their customers.
- A securities dealer is, “any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise.” However, this definition specifically excludes traders, or individuals who buy and sell securities for their own account, “but not as part of a regular business.”
Investment advisors and securities brokers both fall under the broker-dealer umbrella; and, as a result, both generally have an obligation to register with the SEC and FINRA. For those who are subject to broker-dealer registration, registering is a necessary precursor to recommending, buying, or selling securities. Acting as an unregistered broker-dealer is a serious federal offense that can lead to denial of registration—along with other civil or criminal penalties.
5 Steps In the Securities Broker-Dealer Registration Process
Broadly, the broker-dealer registration process can be broken down into five major steps. However, within each of these steps, there are multiple component processes, and each step presents its own unique challenges and risks for delay or denial. As outlined by the SEC, the five major steps in the securities broker-dealer registration process are:
1. Filing Form BD with the SEC (and Obtaining SEC Approval)
Filing Form BD with the SEC is the first major step in the broker-dealer registration process. As the SEC explains:
“Form BD asks questions about the background of the broker-dealer and its principals, controlling persons, and employees. The broker-dealer must meet the statutory requirements to engage in a business that involves high professional standards, and quite often includes the more rigorous responsibilities of a fiduciary.”
Form BD consists of 28 pages of definitions, questions, and mandatory signatures. By signing Form BD, broker-dealers represent that all information contained in the form is, “current, true, and complete.” Submitting false information to the SEC, even inadvertently, can have serious negative ramifications, and intentionally submitting a false Form BD can potentially lead to criminal prosecution.
Due to Form BD’s length, complexity, and implications, it is advisable for broker-dealers to work with experienced counsel when preparing the form. At Oberheiden P.C., we regularly guide securities broker-dealers through the registration process. We can help you complete Form BD correctly; and, if there are any issues that may jeopardize your registration application (or expose you to SEC scrutiny), we can help you make informed and strategic decisions moving forward.
2. Becoming a Member of FINRA
After submitting Form BD and receiving approval from the SEC, the next step in the registration process is to become a member of FINRA. Receiving approval from the SEC is not enough on its own. Too often, new broker-dealers begin operating after receiving SEC approval—only to find that this has exposed them to regulatory enforcement action and jeopardized their registration application.
Becoming a member of FINRA is a process of its own—a process that FINRA divides into eight steps:
- Step 1: Reserve Your Firm’s Name
- Step 2: Sign up for System Access
- Step 3: Pay Your Application Fees
- Step 4: Meet FINRA’s Standards of Admission
- Step 5: Submit Form BD Online
- Step 6: Mail Hard-Copy Form BD
- Step 7: Submit All Additional Required Forms
- Step 8: Submit Fingerprints
At each step, broker-dealers must meet various requirements, and they must maintain strict compliance with FINRA’s Rules to secure approval. Our lawyers guide broker-dealers through each step of the FINRA registration process as well, helping our clients make informed decisions while communicating with FINRA on their behalf as necessary.
3. Becoming a Member of the Securities Investor Protection Corporation (SIPC)
“Every registered broker-dealer must be a member of the Securities Investor Protection Corporation, or SIPC, unless its principal business is conducted outside of the United States or consists exclusively of the sale or distribution of investment company shares, variable annuities, or insurance.” While becoming an SIPC member is comparatively straightforward when contrasted with submitting Form BD to the SEC and securing FINRA membership, it is nonetheless a critical step in the process that requires a careful and detail-oriented approach.
4. Complying with All Applicable State Registration and Licensing Requirements
In addition to registering at the federal level, broker-dealers must satisfy all state-level registration and licensing requirements as well. Each state has its own securities regulator, and broker-dealers may need to meet various other business licensing and registration requirements. With a nationwide network of senior-level attorneys, we are able to assist broker-dealers with meeting state registration and licensing requirements across the United States.
5. Ensuring that All “Associated Persons” Satisfy the Applicable Qualification Requirements
As explained by the SEC, “[a] broker-dealer must file a Form U-4 with [FINRA] for each associated person who will effect transactions in securities when that person is hired or otherwise becomes associated. Form U-4 is used to register individuals and to record these individuals’ prior employment and disciplinary history.” Filing Form U-4 for each “associated person” is the final major step in the broker-dealer registration process. Here, too, broker-dealers must be extremely careful, as submitting incorrect information regarding an associated person (even if the associated person misrepresented this information) can constitute grounds for denial—and potentially trigger enforcement action for securities fraud.
FAQs: Broker-Dealer Registration with the SEC and FINRA
Do Securities Broker-Dealers Have To Register with the SEC and FINRA?
Yes, broker-dealers in the securities industry must register with both the SEC and FINRA. Registration with the SEC is the first step, as FINRA will not approve a broker-dealer’s membership application without proof that the SEC has approved the broker-dealer’s Form BD.
What Are Some Common Issues During the Broker-Dealer Registration Process?
Numerous issues can arise during the broker-dealer registration process, and these issues can have consequences ranging from unnecessary (and costly) delays to loss of registration eligibility and potential SEC or FINRA enforcement action. Some examples of these issues include:
- Submitting inaccurate or misleading information on Form BD
- Omitting necessary disclosures from Form BD or FINRA Form NMA
- Failing to submit all necessary forms to the SEC and FINRA
- Failing to meet FINRA’s net capital requirements
- Failing to satisfy the SEC’s new fingerprinting requirements
How Do I Complete FINRA Form NMA?
Along with Form BD, FINRA Form NMA (New Member Agreement) is one of the most complex forms broker-dealers must complete during the application process. In addition to completing the form itself, broker-dealers must typically submit various forms of supplemental documentation, including policies, vendor agreements, letters of intent (LOIs), and other compliance and contract documents. Completing Form NMA is challenging, and broker-dealers will typically need to work with experienced legal counsel throughout the process.
Do I Need a Law Firm to Help Me Register with the SEC and FINRA?
While some consulting firms offer assistance with SEC and FINRA registration, we strongly recommend that broker-dealers engage legal counsel. The registration process has several legal implications, and broker-dealers need to address these implications head-on. Furthermore, mistakes during the registration process can potentially trigger SEC or FINRA enforcement action, and experienced legal counsel will have the insights needed to help broker-dealers avoid these mistakes.
Discuss Your Broker-Dealer Registration Application with a Senior Attorney at Oberheiden P.C.
If you have questions about the broker-dealer registration process—or if the SEC or FINRA has denied your broker-dealer registration application—we encourage you to contact us for more information. To speak with a senior attorney at Oberheiden P.C. in confidence, please call 888-680-1745 or request a complimentary initial consultation online today.