Prior to conducting business in any state, a broker dealer must be properly registered or exempt from registration in that state. The first test when deciding if the broker dealer must register is determining if the firm has an office in the state. If the firm maintains an office within the state, then it must register with that state. Agents must register in their state of residence even if their firm is located in another state.
Agents must also register in the states where they sell securities or offer to sell securities as well as where they advertise. If the firm does not have an office in the state it may or may not be required to register, depending on whom it does business with. If a broker dealer does not have an office in the state and engages in securities transactions with the general public, then it must register. If a broker dealer with no office in the state conducts business exclusively with any of the following, it is not required to register in that state:
A broker dealer will not be deemed to have a place of business in a state where it does not maintain an office simply by virtue of the fact that the firm's website is accessible from that state so long as the following conditions are met:
It is unlawful for a broker dealer to employ any agent who is not properly registered under the Uniform Securities Act (USA). When determining if an agent must register, you must first look at whom the agent works for. If the agent works for a broker dealer, the agent must register. The only exception is for officers and directors of a broker dealer who have no involvement with customers, securities transactions, or supervision. If the agent works for an exempt issuer, the agent is exempt from registration no matter what security is involved. Exempt issuers are:
Agents are also exempt from registering if they represent an issuer in the sale of an exempt security, such as:
A broker dealer wishing to become registered in a state must first file an application with the state securities administrator. The broker dealer must also pay all filing fees and sign consent to service of process. By signing the consent to service of process, the broker dealer appoints the administrator as its attorney in fact and allows the administrator to receive legal papers for the applicant. Any legal papers received by the administrator will have the same force and effect as if they were served on the broker dealer. All applications must also include:
The firm's registration will become effective at noon 30 days after the initial application has been received or at noon 30 days after the administrator has received the last piece of required information. Registering a broker dealer in a state automatically requires that any officers and directors who act in a sales capacity register as agents in that state.
A broker dealer must be able to meet the minimum capital requirements set forth by the state securities administrator. If the broker dealer is unable to meet this capital requirement, it must post a surety bond to ensure its solvency. Broker dealers that meet the SEC minimum net capital requirements are exempt from USA's capital and surety bond requirements. The amount of the bond required by the administrator for broker dealers who have custody or discretion over client accounts is limited to the amount of capital required by the Securities Exchange Act of 1934. No bond may be required of broker dealers whose capital exceeds the amount of the bond required by the administrator. The administrator may require that an officer or agent of the broker dealer take an exam that may be oral, written, or both.
As the financial services business continues to bring together investment services with other more traditional banking services, it is more common to see brokerage services offered at retail bank locations. Broker dealers who offer investment services at bank branches must follow certain guidelines. The setting in which the broker dealer conducts its business should be separate from where the retail banking business is being conducted, if practical. Broker dealers must disclose to the customer, at or before the time that the customer opens the account, that the deposits are not guaranteed by the FDIC or the financial institution and are subject to the loss of principal. These same disclosures must also appear in all advertising and sales literature issued by the broker dealer operating on the location of other financial institutions. The host financial institution must sign an agreement stating that FINRA and the SEC are allowed to have access to any location where the member conducts its business. The member is required to promptly notify the financial institution if it terminates an associated person for cause.
Most states require that agents successfully complete the Series 63 exam before they may conduct business within their state. In addition to successfully passing the Series 63, agents must also:
While an agent's registration is pending the agent may act in an administrative or support capacity only. The agent may assist with the preparation of research, trade input, and other support functions but may not act in any capacity of an agent.
When an agent changes firms, the agent, former employer, and new employer all must notify the state securities administrator. This is done in most cases quite easily through the Central Registration Depository (CRD) system for all firm and agent information. An agent's termination becomes effective 30 days after notifying the state unless the administrator is in the process of suspending or revoking the agent's registration. The administrator may still revoke an agent's registration for up to one year after the registration has been terminated. If an agent is denied a registration as the result of information received on the agent's form U5 termination notice filed by the agent's previous employer, only the new employer and the agent will be notified of the denial.
If a broker dealer is acquiring another broker dealer, the successor firm must file an application for registration within the state. The successor firm's registration will become effective upon completion of the transaction. The registration fees for the successor firm will be waived.
All state registrations expire on December 31, and all broker dealers, investment advisers, and agents are required to file a renewal application and pay a renewal fee. The consent to service of process does not get refiled with the renewal applications. The consent to service of process remains in effect as long as the registration of the agent or firm is in effect with the state.
A Canadian firm or agent may engage in securities transactions with financial institutions and existing customers without registering under the USA as long as they do not maintain an office within the state. A Canadian broker dealer or agent who is a member in good standing with a Canadian securities regulator is allowed to register through a simplified registration process. The state registration will become effective 30 days after the application has been received with the consent to service process. The Canadian broker dealer must advise the state of any disciplinary action.
It is unlawful for an investment adviser to conduct securities business without being properly registered or exempt from registration. State registration exemptions are provided for investment advisers who:
If a state registered investment adviser with no office in the state advertises to the public the ability to meet and offer investment advisory services with clients in a hotel or other temporary location, the investment adviser is required to register with the state.
An investment adviser will not be deemed to have a place of business in a state where it does not maintain an office simply by virtue of the fact that the firm's website is accessible from that state so long as the following conditions are met:
The National Securities Markets Improvement Act of 1996 eliminated regulatory duplication of effort and established registration requirements for investment advisers. A federally covered investment adviser must register with the SEC and is any investment adviser who:
All federally registered investment advisers must pay state filing fees and notify the administrator in the states in which they conduct business. The state securities administrator may not audit a federally covered investment adviser unless that adviser's principal office is located in that administrator's state. Investment advisers are required to register with the state if they manage less than $100,000,000. Once the investment adviser reaches $100,000,000 in assets under management (AUM), the adviser becomes eligible for federal registration. An investment adviser who manages between $100,000,000 and $110,000,000 may choose to register either with the state or with the SEC. Investment advisers who think that their asset base will exceed $110,000,000 should register with the SEC within 90 days of reaching $110,000,000 in AUM. An adviser applying for federal registration with SEC will file Form ADV and the adviser's registration will become effective within 45 days. Investment advisers who manage $110,000,000 or more must register with the SEC. If a federally covered investment adviser's AUM falls below $90,000,000, the adviser must withdraw its federal registration by filling form ADV-W within 60 days and must be registered with the appropriate states within 180 days. Like most regulations, there are rare exceptions to the rule of when an investment adviser may register with the SEC. The Dodd-Frank Wall Street Reform Act of 2010 increased the AUM for federal registration to its current levels and defined three categories of investment advisers, as follows:
Pension consultants must have at least $200,000,000 AUM to be eligible to become federally registered.
All investment adviser representatives who maintain an office within the state must register within the state. An investment adviser representative is an individual who:
An investment adviser may not employ any representative who is not properly registered. Clerical and administrative employees are not considered representatives and do not need to register. An investment adviser representative who has no place of business in the state and who offers to meet a client in a hotel or other place of convenience is not considered to have an office in the state so long as the representative does not advertise the office and only offers the ability to meet directly to clients.
An investment advisory firm that is required to register with the state must file the following with the state securities administrator before it becomes registered:
State registered investment advisers must maintain a minimal level of financial solvency. Advisers that have custody of customers' cash and securities must maintain minimum net capital of $35,000. Advisers that are unable to meet this requirement may post a surety bond. Deposits of cash and securities will alleviate the surety bond requirement. Advisers are considered to have custody if they have their customers' cash and securities held at their firm or if they have full discretion over their customers' accounts. Full discretion allows the adviser to withdraw cash and securities from customers' accounts without consulting the customer. Advisers who have only limited discretionary authority over customers' accounts need to maintain a minimum of $10,000 in net capital. Advisers with limited discretionary authority may only buy and sell securities for a customer's benefit without consulting the customer; the adviser may not withdraw or deposit cash or securities without the customer's consent. If a state registered investment adviser meets the capital requirements in its home state, it will be deemed to have met the capital requirements in any other state in which the adviser wishes to register, even if the other states have higher net capital or bonding requirements. Should a state registered adviser's net capital fall below the minimum requirement, the adviser must notify the state administrator by the close of the next business day of the adviser's net worth. The adviser must then file a financial disclosure report with the administrator by the end of the next business day. If the adviser has fallen below the net worth requirement the adviser will be required to post a bond to cover any capital deficiency. The amount of the bond will be rounded up to the nearest $5,000. Investment advisers with custody of funds must maintain a positive net worth at all times. Investment adviser representatives are not required to maintain a minimum level of liquidity. Federally registered investment advisers are not required to meet any capital or net worth requirements.
The state securities administrator may require investment adviser representatives, as well as the officers and directors of the firm, to take an exam, which may be oral, written, or both. All registrations become effective at noon 30 days after the application has been filed or at noon 30 days after the last piece of information is received by the administrator. The administrator may require that an announcement of the investment adviser's intended registration be published in the newspaper.
| Requirement | Broker Dealer | Investment Adviser | Agents |
| Net capital | Yes | Yes | No |
| Surety bond | Yes | Yes | Yes |
| Exams | Yes | Yes | Yes |
| Fees | Yes | Yes | Yes |
All advertising and sales literature for an investment adviser must be filed with the state securities administrator. The administrator may require prior approval of:
The following records must be kept by investment advisers for a minimum of five years unless the state securities administrator requires a different period of time:
All investment advisers must keep accurate records relating to the following:
All books and records must be kept for five years readily accessible and for two years at the adviser's office. Records may be kept on a computer or microfiche as long as the data may be viewed and printed.
An investment adviser is required to provide all prospective clients with a brochure or with Form ADV Part 2A and 2B at least 48 hours prior to the signing of the contract or at least at the time of the signing of the contract, if the client is given a five-day grace period to withdraw without penalty. The brochure or Form ADV Part 2 will state:
The NASAA Model Rule regarding direct fee deduction from client accounts, by advisers who use a qualified custodian, requires advisers who automatically deduct fees to have the written authorization from each client to deduct the fees directly from client accounts. An invoice must be sent to the clients detailing the fee as well as the formula for determining the fee. If the fee is based on the value of the account the value of the account at the time the fee is charged must be provided. The statements for client accounts will be sent by the qualified custodian not from the investment adviser. NASAA considers a qualified custodian to be any of the following three entities:
A wrap account is an account that charges one fee for both the advice received as well as the cost of the transaction. All clients who open wrap accounts must be given the wrap account brochure knows as schedule H, which will provide all of the information that is found on Form ADV Part 2. Broker dealers who offer WRAP accounts must be registered as investment advisers. Individuals who receive fee based compensation generated by WRAP fee programs must be registered as investment adviser representatives.