Everything You Need to Know About Broker-Dealers

The applicant should give a detailed overview of the Firm. This should include a detailed explanation of the products being sold and the business lines being requested (A list of FINRA business lines is attached to this article). Additionally, the applicant needs to provide details of the ownership structure, the types of customers they anticipate, and the compensation of the registered representatives and any technology that they anticipate utilizing for the anticipated business lines.

The applicant needs to provide a detailed description of the qualifications of the proposed Supervisors as well as the Licenses and Registrations being requested. In this Section, the applicant should describe the Supervisory System including a list of the proposed supervisors, number of offices, the number of proposed representatives, and how they are qualified to supervise the lines of business as well as the number of registered representatives being requested.

The applicant needs to show that they have the ability to comply with securities laws and equitable principles of trade. Under FINRA Rule 1014(a)(3)(a) through (e), the applicant needs to show that they are not subject to any of the following:

• A state or federal authority or self-regulatory organization has taken permanent or temporary adverse action with respect to a registration or licensing determination regarding the Applicant or an Associated Person;
• An Applicant's or Associated Person's record reflects a sales practice event, a pending arbitration, or a pending private civil action;
• An Applicant or Associated Person is the subject of a pending, adjudicated, or settled regulatory action or investigation by the Commission, the Commodity Futures Trading Commission, a federal, state, or foreign regulatory agency, or a self-regulatory organization; an adjudicated, or settled investment-related private civil action for damages or an injunction; or a criminal action (other than a minor traffic violation) that is pending, adjudicated, or that has resulted in a guilty or no contest plea or an Applicant, its control persons, principals, registered representatives, other Associated Persons, any lender of 5% or more of the Applicant's net capital, and any other member with respect to which these persons were a control person or a 5% lender of its net capital is subject to unpaid arbitration awards, other adjudicated customer awards, or unpaid arbitration settlements;
• An Associated Person was terminated for cause or permitted to resign after an investigation of an alleged violation of a federal or state securities law, a rule or regulation there under, a self-regulatory organization rule, or industry standard of conduct;
• a state or federal authority or self-regulatory organization has imposed a remedial action, such as special training, continuing education requirements, or heightened supervision, on an Associated Person.
• The applicant may overcome the issues noted above if the show that if approved, the Firm and its associated persons are capable of complying with industry rules, regulations, laws, and observing high standards of commercial honor and just and equitable principles of trade. The Firm will further establish heightened supervisory procedures and special educational programs for any Associated Person whose records reflect:
  1. Disciplinary actions involving sales practice abuse;
  2. Customer complaints; or
  3. Arbitrations that were resolved adversely to the Associated Person. Further details concerning any heightened supervision requirements are contained in the Firm’s Written Supervisory Procedures.

Filing for a new Broker Dealer is essentially the same process except for a) you will have to wait to get approval before conducting any transactions (4-6 months) b) All of the items have to be done from scratch (Fidelity bond, SIPC etc.)

Any contractual business relationships which are need to run the Broker Dealer need to be in place as well. Any agreements such as a clearing agent, email retention, banking relationship, compliance personnel etc.

Facilities: A copy of a lease agreement showing adequate space where the Firm’s business will be conducted is necessary as well.

Communications & Operational Systems: Any equipment needed to conduct the operations of the Firm such as telephones, computers, trading systems, software, secure storage for the Firm’s books, and records all need to be in place as well.

Adequate Net Capital: Running a Broker Dealer is not like a typical business. There are minimum Net capital rules which need to be met prior to becoming a Member as well as on an ongoing basis. Upon application, the applicant needs to show that they have at least 12 months’ worth of operational expenses in the bank and show a full breakdown to FINRA of all of the costs associated with operations as well as projected revenue. (A sample pro-forma financial is attached to this article).

Additionally, any capital which is used to fund the Broker Dealer needs to be able to show where the funds originated from. FINRA requires that applicants show the bank statements from the source bank account as well as 3 months prior statements from the source account. It should be noted that only an owner can fund the Broker Dealer.

Financial Controls: The applicant needs to show that they have a qualified Financial Operations Principal (Series 27 Licensed) and that the mythology of GAAP accounting prescribed by the regulators is being used. A detailed description of who has access to the bank accounts and how transactions are recorded, supervised and safeguarded are required.

Written Supervisory Procedures: The applicant must show that it has Written Supervisory Procedures ("WSPs") that include Written supervisory control procedures, Anti-money laundering procedures, Financial control procedures, Internal operating procedures, and Internal control procedures. The WSPs contain a Designation of Principals identifying the principals responsible for each area and type of business sought in the Application. Further, the WSPs describe the identification of the principal/supervisor responsible for conducting the subject procedure, a description of the specific procedure that is to be conducted by the principal/supervisor a statement as to when or how often the specific procedure is to be conducted and a statement as to how the Applicant will evidence the fact that the procedure has been conducted.

Supervisory Structure: A chart delineating the supervisors, their qualifications, and their responsibilities needs to be included as well.

Maintenance of Books and Records: A detailed explanation of how all of the Firm’s records required under SEC Rule 17a-3 will be maintained, reviewed, supervised, and stored.

Continuing Education: A continuing education plan needs to be presented indicating how the applicant intends to educate its personnel on an ongoing basis pursuant to the continuing education rules.

Accordion Content: FINRA Staff will conduct a check of the Applicants regulatory history to ascertain whether or not there is any information indicating that there is a concern that the Applicant is a bad actor who may not abide by or seek to circumvent the regulatory rules.

FINRA requires that all of the supporting documents such as Operating Agreements, Corporate Formation Documents, Agreements etc are consistent with applicable federal securities laws.