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.
Dual Registration Requirement
Broker-dealers face a dual registration obligation: they must register at both the federal and state levels:
Federal Registration (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 FINRA rules, examinations, and enforcement
- Form BD is submitted electronically through the Central Registration Depository (CRD), operated by FINRA
State Registration (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
- Must comply with state net capital requirements and bonding requirements
Exam Tip: Gotchas
- Broker-dealers must register BOTH federally (SEC + FINRA) 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.
Form BD: The Uniform Application
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
Post-Registration: Books and Records
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.
Records That Must Be Created (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 associated person authorization
- Order tickets: records of every order received
- Written communications: correspondence related to the firm's business
How Long Records Must Be Kept (the books-and-records preservation rule)
| Record Type | Retention Period |
|---|---|
| Trade blotters, ledgers, position records | 6 years (first 2 years readily accessible) |
| Employment applications, disciplinary actions | 3 years after termination |
| Written supervisory procedures | 3 years after being superseded |
| Partnership articles, Form BD, licenses | Life of the enterprise |
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.
- 6-year records require the first 2 years to be "readily accessible." The exam may phrase this as an "immediately available" requirement.
Post-Registration: Customer Confirmations
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 and time of execution
- Identity of the security traded
- Quantity and price
- Capacity: whether the firm acted as agent (broker) or principal (dealer)
- Commission or markup/markdown
- Settlement date
- If acting as principal: must disclose the firm's participation in the trade
- Whether the firm receives payment for order flow
- Whether the firm is a member of the Securities Investor Protection Corporation (SIPC)
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.
- If the firm acted as principal, it must separately disclose its participation in the trade. This is an additional requirement beyond stating the capacity.