Steps to Becoming a Broker Dealer
Section 15(b) of the Securities Exchange Act of 1934 (the Act) requires registration of any broker-dealer effecting securities transactions by means of interstate commerce unless an appropriate exemption is available. In order to register as a broker-dealer in the United States, an application for registration—called Form BD—must be made to the SEC and a self-regulatory organization (SRO), which, in most instances, will be the Financial Industry Regulatory Authority (FINRA).
Form BD asks questions about the background of the broker-dealer and its principals, controlling persons, employees, affiliates, parent entities and subsidiaries. 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 is filed on FINRA’s Central Registration Database, an online system designed by FINRA and the state regulators to centralize broker-dealer registration. Once filed, the SEC has 45 days to issue an order granting registration or institute a proceeding to determine whether registration should be denied. The SEC does not charge a fee for filing Form BD.
If granted, the SEC’s order does not become effective until an applicant has become a member of an SRO. Most broker-dealers choose to be registered with FINRA. Application for membership in FINRA consists of Form BD, Forms U-4 and U-5, a business plan, copies of agreements with banks, clearing agents and service bureaus, financial information (including sources of capital), a description of the supervisory system and written supervisory procedures, an anti-money laundering program and a description of the firm’s continuing education program. As part of the application process, principal officers and other persons associated with the broker-dealer who would be engaged in the securities or investment banking businesses must register with FINRA, take certain qualifying examinations and be fingerprinted.
FINRA’s evaluation typically takes five to six months from the time the completed application has been filed. However, it can be longer if the appropriate personnel do not pass the registration examinations, if an examiner has concerns about any of the anticipated business lines or if FINRA’s requests for additional information are not responded to in a timely manner. FINRA charges fees for all applications.
In addition to registration with the SEC and membership in an SRO, a broker-dealer and its agents dealing with public customers in any state must register with the securities regulator in the state unless an appropriate exemption is available. During the application process, a broker-dealer may also be required to become a member of the Securities Investor Protection Corporation, obtain a fidelity bond and complete a lost or stolen securities program registration.