Registration and Post-Registration Requirements

Now that you know who qualifies as a broker-dealer, let's examine what they must do to legally operate: both the initial registration process and the ongoing compliance obligations that follow.

What Is the Dual Registration Requirement?

Broker-dealers face a dual registration obligation: they must register at both the federal and state levels:

What Does Federal Registration Require Under the Securities Exchange Act?

• Must register with the SEC by filing Form BD (Uniform Application for Broker-Dealer Registration)
• Must become a member of FINRA (or another self-regulatory organization)
• Subject to SEC and applicable self-regulatory-organization rules, examinations, and enforcement
• Form BD is submitted electronically through the Central Registration Depository (CRD), operated by FINRA. Often confused: EDGAR, the SEC's filing system for corporate filings such as 10-Ks and prospectuses, is a different system and is not used for broker-dealer registration

What Does State Registration Require Under the Uniform Securities Act?

• Must register in each state where they conduct business
• File Form BD at the state level as well
• Pay required state fees
• Consent to service of process: agrees that legal actions can be served on the state administrator
• May be required to meet state net capital and bonding requirements, subject to federal limits; a state cannot impose requirements that differ from applicable federal net-capital standards

No-place-of-business exclusion: a broker-dealer with no place of business in a state need not register there through either of two independent routes:

• Institutional route: all in-state transactions are exclusively with or through the issuer, another broker-dealer, a bank, savings institution, trust company, insurance company, investment company, pension or profit-sharing trust, or another financial institution or institutional buyer
• Existing-customer route: the broker-dealer is registered where it has a place of business and, in the no-office state, deals only with an existing customer who is not a resident of that state

Exam Tip: Gotchas

• Broker-dealers must register BOTH federally (SEC plus FINRA or another applicable SRO) AND at the state level. Unlike investment advisers (who register with either the SEC or the state, but not both), broker-dealers must register with both.
• The institutional and existing-customer routes are independent alternatives. A retail in-state transaction defeats the institutional route, but a qualifying existing nonresident customer may still fit the second route. Having an in-state office defeats both routes.

How Does a Canadian Broker-Dealer Register?

The Act gives a Canadian firm its own narrow pathway, called limited registration. It exists so a Canadian broker-dealer can keep serving Canadian clients who cross the border, without taking on the full weight of state regulation.

The firm must be resident in Canada and have no office or other physical presence in the state.

Which Clients May the Firm Serve?

Only two, and both trace back to Canada:

Beyond those two, the firm may still deal with issuers, other broker-dealers, and institutional buyers, the same counterparties any firm may reach.

What Must the Firm File?

• An application in the form required by the jurisdiction holding its head office
• A consent to service of process
• Evidence of good standing as a broker or dealer in the jurisdiction it trades from
• Proof of membership in a Canadian self-regulatory organization or stock exchange

Registration becomes effective on the 30th day after filing, if no denial order is in effect and no proceeding is pending. Renewals are due before December 1 each year, and the normal broker-dealer and agent fees apply.

What Continuing Duties Apply?

• Keep the provincial or territorial registration and the Canadian self-regulatory-organization membership in good standing
• Produce books and records on the Administrator's request
• Report forthwith any criminal action, finding, or sanction involving fraud, theft, deceit, or misrepresentation
• Tell clients in the state that the firm and its agents are not subject to the Act's full requirements

An agent representing a registered Canadian firm follows the same route: application, consent to service of process, and evidence of good standing.

Exam Tip: Gotchas

• Limited registration is a registration, not an exclusion. Contrast it with the no-place-of-business routes above, which require no filing at all. The Canadian firm files an application, pays a fee, and renews annually.
• The self-regulatory-organization membership condition applies to the firm, not to its agents. The firm must belong to a Canadian self-regulatory organization or stock exchange. The agent needs only good standing in the home jurisdiction.
• A Canadian firm operating within these limits is exempt from everything in the Act except the antifraud provisions and this section itself. Those two are also the only grounds on which its limited registration may be denied, suspended, or revoked.
• The client must come from Canada. Serving a United States resident who happens to hold a Canadian account, or soliciting a new client after they arrive in the state, falls outside the pathway. The pre-existing relationship is what the first route turns on.

What Is Form BD?

Form BD is the uniform registration form used for broker-dealer registration at both the federal and state levels. Key details:

• It is a disclosure document that provides regulators with detailed information about the firm
• Filed electronically through the CRD system
• A signed and notarized copy must also be sent to FINRA

Form BD requires disclosure of:

• Business activities and firm structure
• Ownership and control persons
• Disciplinary history (any felony charges, guilty pleas, or convictions within the past 10 years)
• Securities-related misdemeanor charges or convictions
• License suspensions or revocations
• False statements made to regulators
• Affiliations with other entities

What Books and Records Must Be Kept After Registration?

Once registered, broker-dealers must maintain detailed records under SEC books-and-records requirements: one rule covers what to create, another covers how long to keep it.

What Records Must Be Created Under the Books-and-Records Creation Rule?

Broker-dealers must make and keep current:

• Trade blotters: daily records of all purchases and sales
• General ledgers: accounting records of the firm's financial position
• Customer account records: including name, tax ID, investment objectives, date of birth, employment, and the responsible associated person's signature with a principal's approval or acceptance
• Order tickets: records of every order received
• Written communications: specifically created records related to the firm's business (originals received and copies of items sent are instead preserved under the retention rule below, not created records in themselves)

How Long Must Records Be Kept Under the Books-and-Records Preservation Rule?

Exam Tip: Gotchas

• Two separate books-and-records rules: one says WHAT to create, the other says HOW LONG to keep it. Trade blotters, ledgers, and customer records get created under the creation rule; the preservation rule then sets each record's shelf life.
• The "first 2 years readily accessible" condition is not exclusive to 6-year records. It also applies to the 3-year communications-retention records. The exam may phrase this as an "immediately available" requirement.

What Must a Customer Confirmation Disclose?

The SEC's confirmation rule requires broker-dealers to send a written confirmation to customers at or before the completion of each transaction.

Required disclosures on the confirmation include:

• Date of execution, and time of execution (or, if not stated, the fact that the exact time will be furnished on written request)
• Identity of the security traded
• Quantity and price
• Capacity: whether the firm acted as agent (broker) or principal (dealer)
• Commission (agency transactions); markup or markdown, for the specified principal transactions the rule covers (not automatically every principal trade)
• Settlement date for specified security types
• If acting as principal: must disclose whether the firm was a market maker in the security (not simply "participation")
• Whether the firm receives payment for order flow, but only for transactions where the firm actually receives it
• That the firm (or the firm carrying/clearing the account) is NOT a member of the Securities Investor Protection Corporation (SIPC), only when that's the case; there's no requirement to affirmatively state SIPC membership

The confirmation serves multiple purposes: it is a billing statement, an invoice, a tool for error detection, and a disclosure of potential conflicts of interest between the investor and the broker-dealer.

Exam Tip: Gotchas

• Agent = commission. Principal = markup/markdown. The confirmation must disclose which capacity the firm acted in.
• These disclosures are conditional, not universal. Payment-for-order-flow disclosure applies only when the firm receives it; SIPC disclosure applies only when the firm is NOT a member (silence otherwise); a principal transaction discloses market-maker status, not a generic "participation" statement.

What Should You Check on Exam Day?

• Can you explain why broker-dealers register both federally AND with each state, unlike investment advisers?
• Do you know what Form BD discloses, including the disciplinary lookback period?
• Can you distinguish the books-and-records creation rule (what to keep) from the preservation rule (how long), and state the retention period for trade blotters and ledgers including the "readily accessible" requirement?
• Can you list what a customer confirmation must disclose, including capacity and payment for order flow?
• Can you name the only two client types a Canadian broker-dealer may serve under limited registration, and say why that route is a registration rather than an exclusion?