Broker-dealer registration requirements

Federal and state registration — SEA §15 and USA §201

A broker-dealer operating in interstate commerce answers to two masters: the SEC at the federal level, and each state where its activity triggers state registration. The regimes are parallel but separate — federal registration does not substitute for state registration, and vice versa. One firm, two (or fifty-one) registrations.

Federal registration — SEA §15(a):

• Any BD using "any means of interstate commerce" to effect securities transactions must register with the SEC
• The application is Form BD, filed electronically through the CRD
• SEC registration requires the BD to also become a FINRA member (or an exchange member); FINRA conducts the substantive review of the application
• The BD must satisfy net capital (SEC Rule 15c3-1), customer protection (SEC Rule 15c3-3), books and records (SEC Rules 17a-3/17a-4), and SIPC membership requirements

State registration — USA §201:

• Required in any state where the BD has a place of business or transacts business with state residents (subject to the no-place-of-business exclusion)
• The same Form BD satisfies the state application through CRD; states accept the same filing
• State filing fee and supplemental jurisdictional information are submitted alongside the federal application

And the interaction pattern the Series 63 likes: an out-of-state BD that only deals with in-state institutional investors may need federal registration (interstate commerce is triggered) but not state registration (no-place-of-business exclusion applies). The opposite — state without federal — is rare, because virtually any BD with state-resident customers uses interstate commerce.

Form BD — the application

One form to rule them all: Form BD (Uniform Application for Broker-Dealer Registration) is the centralized application used by the SEC, FINRA, every state, and many other SROs to register broker-dealers. It is filed electronically through the Central Registration Depository (CRD) — file once, register everywhere you check the box.

Information collected on Form BD:

• Identifying information — full legal name, business name, principal place of business, contact information, fiscal year end, organizational form (corporation, partnership, LLC), tax identification number
• Control affiliates and direct owners — persons or entities owning 5% or more of the BD, control affiliates, indirect owners
• Successions — if the BD was formed from a prior entity, the succession is disclosed
• Type of business — product types, customer types, financial industry affiliations
• Disclosure questions — firm-level criminal, regulatory, civil judicial, financial, and bond/insurance matters (parallel to but firm-scoped, not individual-scoped, the Form U4 disclosures)
• Jurisdictions sought — the SEC, FINRA membership, exchanges, and each state in which registration is sought

Form BD amendments: once filed, Form BD must be promptly amended for any material change. There is no single regulatory deadline — the convention is "promptly," and many disclosure events have specific reporting timelines under FINRA membership rules (e.g., 30 days for general changes, faster for major events like a change of control or a triggering disciplinary action). If a question asks for the amendment standard, "promptly" is the word it wants.

USA §202(a) — effectiveness and the 30-day rule

Here's a clock worth circling. Under USA §202(a), an application for BD registration becomes effective at noon on the 30th day after a complete application is filed — automatically — unless one of three things interrupts it:

• The administrator denies the application within the 30-day window (with notice and opportunity for hearing under USA §204), or
• The administrator issues a stop order or proceeding that delays effectiveness, or
• The administrator accelerates effectiveness — some states will grant immediate effectiveness for BDs in good federal/FINRA standing

Notice which way the default runs: registration is presumed approved unless the administrator affirmatively acts within the window. The burden of acting sits on the regulator, not the applicant — a structural point the Series 63 tests directly.

Bonding and minimum financial requirements under USA §202:

• The administrator may require a BD to post a surety bond as a condition of registration
• State minimum financial requirements may be set independently of federal net capital requirements, but cannot impose requirements that conflict with the federal rules
• An out-of-state BD that satisfies SEC requirements is generally deemed to satisfy state minimum financial requirements (a NSMIA-derived federal preemption principle)

Net capital — SEC Rule 15c3-1

SEC Rule 15c3-1 (the Net Capital Rule) requires every registered BD to maintain a minimum amount of liquid net capital at all times — the cornerstone of BD financial responsibility regulation. The logic: a firm holding other people's money must be able to meet its obligations even in a bad week. More customer exposure, higher floor.

Minimum dollar amounts (the basic floor) depend on BD type:

• $250,000 — clearing/carrying BDs (firms that hold customer funds and securities)
• $100,000 — market makers in OTC equity securities (subject to additional formulas based on number of securities)
• $50,000 — introducing BDs that promptly forward customer business to a clearing firm and do not receive customer funds or securities
• $5,000 — BDs that effect only certain limited transactions (mutual fund sales without holding customer funds)

Aggregate indebtedness limit: net capital must equal at least 6 2/3 percent of aggregate indebtedness (the "basic method"), or 2 percent of aggregate debit items (the "alternative method"). Whichever method is used, the BD must never fall below the dollar minimums above.

And the moment a firm slips below its floor, the rule has no mercy:

• The BD must cease operations at once
• The BD must immediately notify the SEC and its designated examining authority (FINRA, or an exchange)
• Continued operation while under-capitalized is a serious violation that can result in immediate sanctions, including license revocation

Customer protection — SEC Rule 15c3-3

Net capital keeps the firm solvent; SEC Rule 15c3-3 (the Customer Protection Rule) keeps the customers' property out of the firm's hands. It protects customer funds and securities held by a broker-dealer, applying most stringently to the firms that actually hold customer assets — clearing and carrying firms — with narrower reach for firms that promptly forward assets to a clearing broker.

Two operational pillars of the Rule:

• Customer Reserve Bank Account — the BD must compute a weekly (or in some cases monthly) reserve formula that compares customer credit items (cash owed to customers) against customer debit items (margin loans). The excess must be deposited in a special account "for the exclusive benefit of customers" at a qualified bank.
• Possession or control of customer securities — fully-paid and excess-margin customer securities must be segregated from firm assets and held in a qualified location (e.g., the BD's own vault, DTC, or another approved depository). This prevents the BD from using customer securities for its own purposes without consent.

Loan consent agreement (cross-reference to margin): a customer can authorize the BD to lend the customer's securities (typically for short selling) by executing a Loan Consent Agreement — the customer-side authorization that takes specific securities out of the 15c3-3 segregation requirement for that customer. Consent is the hinge: without it, customer property stays walled off.

SIPC membership and coverage

The Securities Investor Protection Corporation (SIPC) is a nonprofit, member-funded corporation created by the Securities Investor Protection Act (SIPA) of 1970 — the industry's backstop when a firm itself fails. Every SEC-registered BD that holds customer accounts (other than certain narrowly-exempted categories) must be a member.

What SIPC covers:

• Customer claims against a failed or insolvent BD, up to:
  • $500,000 total per customer (combined securities and cash)
  • $250,000 cash sublimit within that total
• Coverage applies per customer per capacity — an individual account and a joint account, or different beneficial owners, are typically treated as separate customers

What SIPC does NOT cover — and this list writes exam questions:

• Market losses — SIPC is not a guarantor of investment returns or against decline in value
• Commodity futures contracts — covered by the CFTC's parallel regime, not SIPC
• Currency, fixed annuities, and certain alternative investments — outside SIPC's scope
• Unregistered securities — generally not covered

And close the loop with the communications rules: misrepresenting SIPC as deposit insurance or as a guarantee against market losses is a violation of FINRA Rule 2210 and the NASAA Statement of Policy. SIPC is insolvency protection for customer claims against a failed BD — never a return guarantee.

Withdrawal, denial, suspension, and revocation — USA §204

Every registration story has an ending, and BD registration may end in four ways — paralleling the agent regime you'll meet in the next arc. The Series 63 tests the procedural protections attached to each.

• Withdrawal — voluntary termination by the BD. Becomes effective 30 days after filing, unless the administrator institutes a proceeding to deny or revoke registration first.
• Denial — administrator's refusal to grant initial registration. Grounds include false statements on the application, insolvency, statutory disqualification of control persons, lack of qualifications, or a "not in the public interest" finding.
• Suspension — temporary halt of an existing registration, typically for a stated period or pending the outcome of an investigation.
• Revocation — permanent termination of registration by administrative order.

Procedural protections under USA §204 — the due-process rails you know from the Remedies module:

• The administrator may not deny, suspend, or revoke without prior written notice, an opportunity for a hearing, and written findings of fact and conclusions (an ordinary order); a summary order may issue immediately, with a hearing set within 15 days of request
• Emergency cease-and-desist orders may be entered without prior hearing if the administrator finds substantial harm is likely; a hearing must follow promptly
• Most administrative orders are subject to judicial review in state court
• An administrator may also impose lesser sanctions (censure, fines, restitution) without revoking registration