Broker-Dealer Formation Process Overview The process of registering a broker-dealer, includes the following steps:
1) Apply for approval of applicant’s name.
2) Fund the application by making a transfer of funds into the Web-CRD account
3) Complete and submit entitlement forms, including Entitlement Forms, notarized Form BD, Member Firm E-Mail Notification Contact Form, and New Member Assessment Report.
4) Access the FINRA Gateway (electronic system for submitting forms) upon approval of Entitlement.
5) Complete and submit Forms U4 and BR for proposed associated persons and locations for the applicant.
6) Complete and submit Form NMA (New Member Application) and all required attachments.
See FINRA New Membership Application Form NMA Guide [September 2008] for more information: http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p038200.pdf
Prerequisites to form a BD FINRA will not permit a prospect of approved firm to use a name so similar to that of an existing member that it will confuse the public. Prior to forming the broker dealer, the applicant should obtain approval of the applicant’s name. See section 2.4 of the Form NMA Guide [September 2008] for more information.
Note: The applicant must not be acting as a broker or dealer until properly registered.
Form BD Requirements The Entitlement Forms and Form BD are paper documents that must be submitted (all at the same time) by mail to FINRA. These are essentially a prerequisite to being able to complete the access the FINRA Gateway and complete the remaining forms.
Funding the FINRA Account The FINRA New Member Application fee is $3000 for introducing firms and $5000 for clearing firms. Additionally, there are filing fees for each associated person and each state in with the applicant and its associated persons will be registered. In addition to the filing fees, there are fingerprint processing fees and qualification examination fees, which also must be considered when determining the amount of funds to transfer to the FINRA account. See the following links for more information:
Registration/Exam Fee Schedule: www.finra.org/RegulatorySystems/CRD/FilingGuidance/p005237 SRO/Jurisdiction Fee and Setting Schedule: www.finra.org/web/groups/reg_systems/documents/regulatory_systems/p005213.pdf Overview of Application Process and Timing After the Form NMA is filed, fingerprint cards must be submitted to FINRA within 10 calendar days. Once FINRA confirms the application has been received the following will take place:
Substantially Complete Review. FINRA will determine whether the NMA is substantially complete. If not, the application feel will be returned less a $350 processing fee. If NMA is substantially complete, the formal application review will begin.
Requests for Additional Information. Within 30 days, FINRA will request any additional information required.
Applicant Responses. Applicant has 60 days to respond to requests for the initial requests for additional information and 30 days to respond to subsequent requests.
Membership Interview. Applicants will be notified in writing of the date, time and location of the interview; who should attend; and additional documentation to bring.
Decision. Once the review process is complete, FINRA will issue a written decision granting or denying membership.
Membership Agreement. The decision (unless it was a denial) will be accompanied by the Membership Agreement.
Membership Effective. The applicant must execute and return the Membership agreement. FINRA will notify the applicant of its effective date.
The application process will depend on a number of items and final approval may range anywhere between 4 and 12 months after starting the process. FINRA is require to process the application within 180 days from the date of its receipt of a substantially complete NMA.
Categories of Broker Dealer Business On the Form BD, the applicant will specify the types of business in which it intends to engage (excluding any category that accounts for less than 1% of annual revenue). Potential business activities include:
1. Exchange member
2. Broker or dealer making inter-dealer markets in corporate securities over-the-counter
3. Broker or dealer retailing corporate equity securities over-the-counter
4. Broker or dealer selling corporate debt securities
5. Underwriter or selling group participant (corporate securities other than mutual funds)
6. Mutual fund underwriter or sponsor
7. Mutual fund retailer
8. U.S. government securities dealer or U.S. government securities broker
9. Municipal securities dealer or Municipal securities broker 10. Broker or dealer selling variable life insurance or annuities
11. Solicitor of time deposits in a financial institution
12. Real estate syndicator
13. Broker or dealer selling oil and gas interests
14. Put and call broker or dealer or option writer
15. Broker or dealer selling securities of only one issuer or associate issuers (other than mutual funds)
16. Investment advisory services
17. Broker or dealer selling tax shelters or limited partnerships in primary distributions or limited partnerships in the secondary market
18. Non-exchange member arranging for transactions in listed securities by exchange member
19. Trading securities for own account
20. Private placements of securities
21. Broker or dealer selling interests in mortgages or other receivables
22. Others (details must be provided)
Licensing Individuals associated with the applicant must have meet qualification requirements. The most typical qualification examination is the comprehensive “Series 7” exam. If individuals want to engage in activities only involving particular types of securities, a specialized examination may be take instead of the Series 7 (e.g. Series 79 for an investment banking professional).
The broker dealer must have at least two supervisory principles. Supervisory personnel must take the Series 24 exam.
Additionally, the broker dealer must name a Financial and Operations Principal (FINOP). Generally, FinOps must take the Series 27 (or the Series 28). Smaller broker-dealers may want to outsource the FINOP.
Capital The net capital required to be maintained by a broker dealer depends on the types of activities of in which the broker dealer is engaged. In general, they are:
Brokers or dealers that carry customer accounts and receive $250,000 or hold funds or securities Dealers that write options or effects more than 10 $100,000 transactions per year for its own investment account Brokers or dealers that introduce customer accounts on a $50,000 fully disclosed basis and receive securities Brokers or dealers engaged in the sale of redeemable shares $25,000 of mutual funds Brokers or dealers that do not receive securities or hold $5,000 funds or securities Market makers $2,500 for each security in which it makes a market (subject to maximum of $1,000,000)
The net capital rule requires firms to value their securities at market prices and to apply to those values a haircut (i.e., a discount) based on each security’s risk characteristics. The haircut values of securities are used to compute the liquidation value of a broker-dealer’s assets to determine whether the broker-dealer holds enough liquid assets to pay all its non-subordinated liabilities and to still retain a “cushion” of required liquid assets (i.e., the “net capital” requirement) to ensure payment of all obligations owed to customers if there is a delay in liquidating the assets. Generally, these calculations are made by the FINOP.
Major Aspects of Form BD Form BD is the Uniform Application for Broker-Dealer Registration. Major sections of Form BD include the following:
Firm name and address
Contact employee
SRO registration
Jurisdiction (State) registration
Legal status
Disclosure reporting of criminal, legal, and disciplinary events
Types of business
Direct owners and executive officers
Indirect owners
Introducing and clearing arrangements
Major Aspects of Form NMA The major sections of the NMA include:
General information (including business plan and proposed business activities and clearing arrangements)
Business lines (which must correspond to types of business on Form BD)
Personnel Net capital and sources of funding
Contractual and business arrangements
Policies and procedures
Facilities
Recordkeeping
Completing the NMA requires completing an business plan, establishing a supervisory structure (including personnel and their professional backgrounds), and completing Written Supervisory Procedures and a Business Continuity Plan. Additionally, business and contractual relationships must be established, such as bond coverage, accountants and audit agreements.
Additional Requirements Every registered broker-dealer must be a member of the Securities Investor Protection Corporation (SIPC). For more information refer to www.sipc.org.
Every state has its own requirements for pa person conducting business as a broker-dealer within that state. Refer to www.nasaa.org for more information.
Broker-Dealer Compliance - Initial & Ongoing The initial Written Supervisory Procedures (WSPs) must be submitted with the NMA and must include procedures that specific to the firm’s proposed lines of business and are reasonably designed to enable the firm to comply with FINRA rules and applicable laws. In addition to the WSPs, the broker dealer must establish an anti-money laundering compliance program and put a business continuity plan in place.
Issues to Consider Carefully According to FINRA, common pitfalls and mistakes in the NMA process include:
Incomplete Business Plan. The business plan must identify all activities proposed by the applicant and must be consistent with the lines of business indentified on Form BD.
Inadequate Written Supervisory Procedures. WSPs must adequately cover the proposed business.
Inadequate Proof of Funding. Sources of funding must be clearly identified and supporting documents must be provided.
Absence of Required Registrations. Personnel must have the required qualifications (including licensing examinations).
Resources SEC’s Guide to Broker Dealer Registration: http://www.sec.gov/divisions/marketreg/bdguide.htm FINRA How to Become a Member – Introduction: http://www.finra.org/Industry/Compliance/Registration/QualificationsExams/MemberFir ms/HowtoBecomeaMember/
FINRA New Membership Application Form NMA Guide: http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p03820 0.pdf
FINRA FAQs: http://www.finra.org/web/groups/industry/@ip/@comp/@regis/documents/industry/p038 809.pdf
Form BD: http://www.sec.gov/about/forms/formbd.pdf
Conclusion The biggest part of completing the broker-dealer registration process is completing Form NMA and all the required attachments. Form NMA requires that the applicant submit a business plan that addresses all of its lines of business, identify proposed personnel and supervisory persons, and develop and submit WSPs. In addition to the Form BD and Forms NMA, a broker dealer applicant must become a member of SIPC and comply with the requirements of state law for those states in which the applicant intends to conduct business.