Broker-dealer firms are, simply put, what make the financial industry go ‘round.
Their services power the global economy by facilitating capital flow, enhancing liquidity, promoting price discovery, and providing market access for investors.
The United States capital markets are the deepest, most dynamic, and most liquid in the world. The US equity markets alone have a market cap of 52 trillion dollars, or 61% of the global total as of February 2024, according to Visual Capitalist. Not surprisingly, having a US broker dealer license can be a valuable asset.
The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) regulate broker-dealers in the US. The broker-dealer registration process can seem daunting at first but the consequences of engaging in broker-dealer activity without the requisite licenses can result in legal trouble with the regulatory authorities.
This blog post will provide a general guide to broker dealer registration in the US, depict the services and benefits of a broker-dealer and introduce the broker dealer chaperoning service for foreign financial institutions. Note, however, that this is not to be construed as legal advice, and that firms should consult with an attorney regarding their specific situation.
But first,
What is a Broker Dealer in the US?
A US broker-dealer is a financial institution that is licensed to buy and sell securities on behalf of clients (as a broker) and for their own account (as a dealer). The term combines two key functions within the securities industry:
- Broker: Acts as an agent for clients in executing buy or sell orders. Brokers earn a commission or fee for this service. Their primary role is to facilitate transactions between buyers and sellers in the financial markets.
- Dealer: Acts as a principal, buying and selling securities for their own account. Dealers make a profit from the spread between the bid (buy) and ask (sell) prices. They may also hold an inventory of securities to facilitate trading and provide liquidity in the market.
Broker-dealer functions and services
Broker-dealers execute trades, provide liquidity, and offer a wide array of services to investors.
Beyond transaction execution, broker-dealers offer advisory services, providing investment recommendations, financial planning, and portfolio management. They also underwrite new issues of securities, lend funds for margin trading, and offer custodial services.
Additionally, many broker-dealers provide online trading platforms, research and analysis, and educational resources to empower investors with the tools and knowledge needed for informed decision-making.
Who needs to be registered as a broker-dealer?
Anyone engaged in the business of buying or selling securities for themselves or others must be registered as a broker-dealer.
This requirement applies to individuals or firms that execute trades on behalf of clients, facilitate securities transactions, or act as intermediaries in the trading process. Registration is mandatory for entities participating in underwriting new securities issues, market making, and providing investment advice in conjunction with securities transactions. This includes traditional brokerage firms, independent financial advisors, and even trading platforms. It is essential for individuals and companies engaged in transaction-based compensation to understand the complex rules regarding broker-dealer registration with the SEC.
Broker-dealer registration requirements
To become a registered broker-dealer in the United States, firms and individuals must comply with specific regulatory requirements, which include:
- Exchange Act Registration: Section 15(a)(1) of the Exchange Act mandates that any broker or dealer using the mail or any other method of U.S. interstate commerce (such as telephone, email, or website) to effect transactions or to solicit the purchase or sale of securities must register with the SEC.
- Self-Regulatory Organization (SRO) Membership: Besides SEC registration under the Exchange Act, broker-dealers are required to join an SRO. The Financial Industry Regulatory Authority, Inc. (FINRA) serves as the primary SRO for U.S. broker-dealers.
- State Registration: Every U.S. state and territory has its own registration requirements for individuals conducting securities business as broker-dealers or on behalf of broker-dealers within their jurisdiction. For instance, Utah’s broker-dealer and related personnel licensing requirements are detailed in Sections 61-1-3(1) and (2) of the Utah Uniform Securities Act.
- Associated Persons of Broker-Dealers: Certain “associated persons” of a broker-dealer must register as “representatives” and/or “principals” with FINRA (and possibly other SROs) and as “agents” or “salespersons” under state securities laws.
- Net capital requirements: you’ll need to meet minimum net capital requirements set by the SEC and FINRA, which, depending on your specific business, could range. The minimum net capital requirements for registering a broker-dealer in the US are set by the SEC’s Rule 15c3-1. Net capital requirements can range from $5,000 to many millions. Services of a consultant that can help with FINRA registration are somewhere in the range of $40,000 to $60,000
- Written Supervisory Procedures (WSP): Broker-dealers must establish comprehensive Written Supervisory Procedures to ensure all activities comply with regulatory standards and are properly supervised.
- Anti-Money Laundering (AML) Program: Broker-dealers are required to implement an Anti-Money Laundering Program that includes customer identification, monitoring of transactions, and reporting of suspicious activities to prevent financial crimes.
- Business Continuity Plan (BCP): A Business Continuity Plan must be in place for broker-dealers to ensure that critical business operations can continue during and after significant disruptions.
- Employee Trading Policy: Broker-dealers need an Employee Trading Policy to regulate the personal trading activities of their employees, preventing conflicts of interest and ensuring compliance with securities laws.
- Beneficiaries: Broker-dealers must disclose detailed information about all direct and indirect owners and beneficiaries to ensure transparency and compliance with regulatory requirements.
- Organizational Structure: Broker-dealers are required to document their organizational structure, detailing the roles, responsibilities, and hierarchy within the firm to support effective governance and regulatory compliance.
US broker dealer registration can take several months or up to a year, although the exact duration can vary depending on the complexity of the application and the responsiveness of the regulatory authorities. An example of a timeline can be found in this Medium article.
A good first step is to put together a business plan including executive bios and proposed activities. Focus mainly on the technical business lines from a regulatory standpoint, the customer onboarding process, external partnerships, and the flow of customer securities and funds. This can be used as a blueprint to help prepare the other materials for your application.
Broker-dealer registration: Application forms
- Form BD: This is the primary application form that must be submitted to the SEC for broker-dealer registration. It requires detailed information about the firm’s business, ownership, and regulatory history.
- Form U4: This form is used to register associated persons (representatives and principals) with FINRA and other SROs. It collects information about the individual’s background, including employment and disciplinary history.
- FINRA New Member Application (NMA): In addition to the SEC’s Form BD, firms seeking FINRA membership must complete the NMA, which involves a comprehensive review process including a detailed business plan, supervisory procedures, and financial statements.
- Form BR: This form is used to register branch offices of the broker-dealer with FINRA and relevant state securities regulators. It provides information about the locations and operations of the branch offices.
- State-Specific Registration Forms: Individual states may have additional forms or specific requirements for broker-dealer registration. These forms vary by state and must be completed to comply with local regulations.
- Form ADV (if applicable): If the broker-dealer also provides investment advisory services, they may need to register as an investment adviser and submit Form ADV to the SEC or state securities regulators.
FINRA exams for getting a broker-dealer license
To obtain a broker-dealer license, firms must ensure they have at least two General Securities Principals and one Financial and Operations Principal (FINOP), unless they are a sole proprietorship, in which case only one General Securities Principal is required.
To qualify as a General Securities Principal, individuals must pass the Series 24 exam, which has prerequisites including the Securities Industry Essentials (SIE) exam and the Series 7 exam.
The Series 27 exam qualifies individuals to oversee the financial and operational responsibilities of the broker-dealer.
Additionally, depending on the firm’s business activities and roles, other exams may be necessary. To sit for any of these exams, except the SIE, candidates must be sponsored by a broker-dealer. Preparing for these exams requires substantial study time, and while the exams themselves are not particularly engaging, they are a crucial part of the licensing process. Many new firms start with the required Series 24 principals and often outsource their Series 27 responsibilities.
Chief Compliance Officer (CCO)
FINRA requires every broker-dealer to designate a Chief Compliance Officer (CCO). The CCO is tasked with developing, implementing, and overseeing the broker-dealer’s compliance program to ensure adherence to all regulatory requirements.
Financial and Operations Principal (FINOP)
FINRA also requires broker-dealers to choose a Financial and Operations Principal (FINOP). The FINOP is responsible for managing the financial and operational aspects of the broker-dealer’s business, ensuring regulatory capital requirements are met and accurate financial records are maintained.
Record retention
Under SEC Rule 17a-4, broker-dealers are required to retain various types of records, such as emails, trading records, customer account information, and financial documents, for specified periods, ranging from several years to the life of the firm. Retained data must be stored in Write Once Read Many (WORM) format and must be accessible by a Designated Third Party (D3P) that can provide it to FINRA upon request.
Broker dealer registration costs
Registering as a broker-dealer involves fees that firms must consider as part of the application process. Readers are encouraged to go to FINRA’s website for updates on costs. Below is an overview of the fees associated with broker-dealer registration:
- Membership Fees: New member application fees range from $7,500 to $55,000, depending on the size of the applicant firm and its intended activities. Additional surcharges may apply for firms engaging in clearing and carrying activities, mergers, material changes, ownership changes, transfers of assets, and acquisitions.
- General Registration Fees: Registration fees for initial Form U4 filings and amendments are $125 per filing. Additional fees may apply for disclosure processing, late disclosures, terminations, and late terminations.
- Branch Office Registration Fees: Branch office initial registration fees and system processing fees are $75 each per branch office.
- Qualification Exam Fees: Fees for qualification examinations vary depending on the exam, but range from $60 to $350, and are listed separately by FINRA.
- Renewal Fees: Renewal fees for broker-dealers encompass annual renewal fees for firm, individual and branches and are calculated based on several factors which are detailed on FINRA’s website.
The Membership Interview and Technology Demo
The Membership Interview is a crucial step in the broker-dealer registration application process, conducted by FINRA to evaluate the applicant firm’s preparedness to operate in the securities industry in the US.
During this interview, FINRA reviews the firm’s business plan, supervisory procedures, compliance programs, financial condition, and the qualifications of its principals and associated persons.
As part of the Membership Interview, the firm must also conduct a Technology Demo, demonstrating its technological systems and platforms for executing trades, managing customer accounts, monitoring compliance, and safeguarding data.
This comprehensive assessment ensures that the firm meets all regulatory requirements and is equipped to maintain operational integrity and protect investor interests.
Broker-dealer registration exemption for foreign institutions
Did you know that there is a way for foreign firms to avoid the whole broker-dealer registration process altogether?
Under SEC Rule 15a-6, you can hire a licensed US chaperone that will allow your financial institution to operate in the States without registering as a broker-dealer, all while still being compliant with the SEC and FINRA. Employing an experienced 15a-6 chaperone can safeguard your firm from potential legal issues you may encounter in the US. Not only that, but you will have access to expert guidance on how to navigate the intricacies of the US capital markets.
Introducing MPX’s Broker-Dealer Chaperoning Services
If you wish to navigate the registration process with trustworthy guidance, you can hire the professional services of Marco Polo Exchange (MPX). With over 100 clients from 50 countries, this technology company is at the forefront of transforming regulatory compliance and market access within the financial sector and will answer every question your firm may have about engaging in broker-dealer activities inside the US financial market.
MPX has streamlined the 15a-6 chaperoning process through our state-of-the-art platform, MPX Passport.
Passport enables foreign financial institutions to quickly and easily remain compliant by providing comprehensive regulatory and back-office solutions that ensure a smooth, compliant, and efficient experience. Passport is provided for foreign financial institutions that work within a 15a-6 chaperoning agreement with Marco Polo Securities Inc., MPX’s broker-dealer subsidiary.
Key Features of MPX Passport
- Regulatory Compliance: Ensure full compliance with SEC Rule 15a-6 through a comprehensive suite of tools designed to meet U.S. securities laws.
- Workflow Management: Manage all aspects of your business operations, including deal placements, trading blotters, research reports, and client interactions, in one centralized platform.
- Distribution Capabilities: Seamlessly distribute your investment products to U.S. institutional investors through a compliant and efficient electronic environment.
- Advanced Analytics: Gain insights into your market performance and client relationships with customizable dashboard tools and detailed reporting features.
Benefits of Using MPX Passport
- Real-Time Tracking: Monitor all U.S. marketing activities in real time.
- Compliance Management: Ensure all interactions comply with SEC Rule 15a-6 requirements.
- Data Insights: Access detailed summary information and management dashboards for better business oversight.
Conclusion
In conclusion, navigating the broker-dealer registration process in the United States can be complex and time-consuming, but it is a critical step for any firm seeking to participate in the dynamic U.S. capital markets.
By understanding the requirements set forth by the SEC and FINRA, including registration, compliance, supervisory procedures, and net capital requirements, firms can ensure they meet regulatory standards and avoid potential legal issues.
For foreign institutions, leveraging the broker-dealer chaperoning services under SEC Rule 15a-6 offers a streamlined path to accessing U.S. markets without the full registration burden. MPX’s Broker-Dealer Chaperoning Services, facilitated through the MPX Passport platform and provided by Marco Polo Securities, Inc., the broker-dealer affiliate of MPX, provide comprehensive regulatory and back-office solutions, ensuring compliance and operational efficiency.
Whether you are a domestic firm embarking on the registration journey or a foreign institution seeking U.S. market access, understanding and adhering to these regulatory requirements is essential.
Consulting with legal experts and utilizing professional services like those offered by MPX can provide valuable guidance and support throughout the process, helping your firm to achieve its business objectives while maintaining compliance in the highly regulated U.S. financial landscape.