Dual Registration Broker Dealer Investment Adviser


Iii How To Register As A Broker


A broker-dealer may not begin business until:

  • it has properly filed Form BD, and the SEC has granted its registration
  • it has become a member of an SRO
  • it has become a member of SIPC, the Securities Investor Protection Corporation
  • it complies with all applicable state requirements and
  • its “associated persons” have satisfied applicable qualification requirements.

Hybrid Registered Investment Advisor Registration

A hybrid RIA maintains an affiliation with both a broker-dealer and a registered investment advisory firm. One of the most common hybrid advisor setups is for an advisor to affiliate with an independent broker-dealer and then establish a separate, non-affiliated RIA firm that is fully owned and controlled by the individual advisor. Many independent broker-dealers allow for this arrangement which allows the advisor to have greater independence, control, and financial reward on the advisory side of his or her practice. While a hybrid setup allows an advisor to offer both brokerage and advisory services, it should be noted that this arrangement is generally under greater regulatory scrutiny given the potential conflicts of interest.

It is very important that if you are considering joining an independent broker-dealer that you first confirm that the broker-dealer allows you to have your own independent RIA firm. After this has been confirmed, it may make sense to begin the RIA registration process. The investment advisor registration process is administered at either the state or SEC jurisdiction level. FINRA regulates broker-dealers, but it does not have any regulatory authority over registered investment advisors.

Check Out Your Broker

  • For information regarding broker-dealers, broker-dealer agents and investment advisers call the Departments Consumer Services Office at 275-2677.
  • Check the background of your broker or investment professional by using Financial Industry Regulatory Authority BrokerCheck. FINRA website is also a resource for Investor Alerts and investor education and tools.
  • Check out your commodity broker. A free service from the National Futures Associations Background Affiliation Status Information Center . Whether you are an investor thinking about opening a futures account or an NFA Member contemplating a new business relationship, BASIC can be a valuable resource for you. BASIC contains Commodity Futures Trading Commission registration and NFA membership information and futures-related regulatory and non-regulatory actions contributed by NFA, the CFTC and the U.S. futures exchanges.

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Dual Activity And Affiliations

Most of the 15,000 firms analyzed reported being engaged strictly as an investment adviser or as a broker-dealer without any affiliations with those that provide the complementary service. The number of dually registered firms ranged between 500 and 550 from 2001 to 2006, but they grew substantially in terms of mean reported revenues, expenses, and net incomes over that period.

As firms grow larger, the study found, they tend to engage in a fuller range of services, often by affiliating with other firms. More than one out of every five investment advisers, for example, reported that a related person was a broker-dealer, municipal-securities dealer, or government-securities broker or dealer. Among broker-dealers, about 40 percent either directly or indirectly control, are controlled by, or are under common control with a firm engaged in the securities or investment advisory business.

Requirements Of The Secs Final Regulation Best Interest

Dual Registration Broker Dealer Investment Adviser ...

In Release No. 34-86031 , the SEC provides the core framework of, and a detailed explanation regarding, the final version of Regulation Best Interest.

Henceforth known as Rule 15l-1 , the core of Regulation Best Interest is that broker-dealer will now have a General Obligation that:

A broker, dealer, or a natural person who is an associated person of a broker or dealer, when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer, shall act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker, dealer, or natural person who is an associated person of a broker or dealer making the recommendation ahead of the interest of the retail customer.

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Secs 2018 Proposal To Lift Broker

Last year, on April 18th of 2018, the SEC issued a series of three new proposals, under what it was calling an effort to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships With Investment Professionals, which centered on a new Regulation Best Interest that would lift the existing standard for broker-dealers from FINRA’s current suitability standard to requiring that brokers give recommendations in the best interests of their customers albeit without imposing a full-scale fiduciary duty on broker-dealers to act in the best interests of their customers at all times.

The proposed Regulation Best Interest, and its supporting Form CRS , generated , raising concerns about whether broker-dealer and RIA standards should be fully harmonized , whether Form CRS would really be effective at communicating the differences between broker-dealer and RIA services, costs, and standards of conduct, and/or whether it would be better to scrap Regulation Best Interest altogether and instead simply actively enforce the existing rules that already require broker-dealers offering more-than-just-incidental advice to register as investment advisers anyway.

Disciplinary History Section Of Form Crs

In recent years, there has been a growing regulatory focus on better highlighting the disciplinary history of investment advisers and broker-dealers, especially given recent research showing that there is a high recidivism rate for problem brokers .

Accordingly, Form CRS will have a dedicated new section specifically to provide Disciplinary History disclosures of the RIA or broker-dealer, under the heading Do you or your financial professionals have legal or disciplinary history? In turn, Form CRS will either provide a Yes or No answer, and then provide a link to Investor.gov/CRS for investors to delve further into the firms disciplinary history.

Notably, though, the Disciplinary History section only requires that firms disclose whether they have reportable events or that any of their financial professionals have reportable events. Form CRS will not have a requirement that the individual advisors or brokers disciplinary history be cited on the form instead, to the extent he/she has a reportable event, the firm will answer Yes and the investor is expected to either inquiry further directly, and/or go to the aforementioned online tools to delve further into the disciplinary record of the firm and its advisors or brokers. Alternatively, individuals with a clean disciplinary record will have the option of clarifying that they, personally, do not have any disciplinary events on their record .

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Compliance Obligations Of Regulation Best Interest And Form Crs On Rias

When it comes to Registered Investment Advisers, the new rules of Regulation Best Interest itself are a moot point, since Reg BI is about changing the standard of conduct that applies to broker-dealers and thus, literally, applies only to broker-dealers, not to RIAs. However, Form CRS does apply to both broker-dealers and RIAs, and consequently, the preparation of a new Form CRS in 2020 will become the primary compliance obligation for RIAs under the new rules.

In practice, developing Form CRS for most RIAs will not likely be burdensome, as it will effectively reference material that is already disclosed in greater detail in the Part 2A brochure of Form ADV. In fact, the whole point of Form CRS is to provide a briefer, easier-to-read-and-scan version of disclosures than the existing Part 2A brochure, with a layered approach to disclosure that allows consumers to delve deeper if they wish to . For most firms, the new ADV Part 3 will likely take just a few hours with a compliance consultant to prepare, and delivery can be easily managed by simply pairing it with the delivery of the Part 2A brochure that RIAs are already required to prepare.

Still, though, while Form CRS may slightly shift the focus or more directly highlight certain aspects of the RIAs business practices than was common in the past, substantively most RIAs wont need to change much to comply .

Securities And Exchange Commission Registered Investment Adviser

Broker-Dealers and Investment Advisers

Any person registered with the Securities and Exchange Commission as an investment adviser and who conducts business in California for more than five clients should file a notice with the Department of Financial Protection and Innovation. This notice is to be filed within thirty- days of conducting business in California. Please review the Information to Assist Persons Making a Notice Filing for instructions and additional information in regards to making a notice filing in California.

Note: Reference may be made to the Rules as found in Title 10, Chapter 3, California Code of Regulations . For information concerning the CCR and accessing sections of the CCR referenced on these web pages, click assistance page.

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G Withdrawal From Registration Cancellation Of Registration

When a registered broker-dealer stops doing business, it must file a Form BDW to withdraw its registration with the SEC and with the states and SROs of which it is a member. This form requires the broker-dealer to disclose the amount of any funds or securities it owes customers, and whether it is the subject of any proceedings, unsatisfied judgments, liens, or customer claims. These disclosures help to ensure that a broker-dealer’s business is concluded in an orderly manner and that customers’ funds and securities are protected. In most cases, a broker-dealer must also file a final FOCUS report. Form BDW may also be used by a broker-dealer to withdraw from membership with particular SROs, or to withdraw from registration with particular states, without withdrawing all of its registrations and memberships.

Form BDW is not considered “filed” unless it is deemed complete by the SEC and the SRO that reviews the filing. The SEC may also cancel a broker-dealer’s registration if it finds that the firm is no longer in existence or has ceased doing business as a broker-dealer.

The Dynamics Of Dual Registration

Geoff Lewis | Feb 08, 2006

Not long ago, maintaining dual registrationas a Series 7 commission broker and as a registered investment advisorwas unusual. Mostly, dual registration was regarded as a transitory phase, as financial advisors moved their businesses from commission to completely fee-based .

Now, according to research commissioned by the clearing giant Pershing and conducted by consultants Moss Adams, the dual-registration hybrid is emerging as a viable, long-term business model. There are several reasons for the trend, including the blurring roles of reps as they learn the tricks of the financial-advisory trade.

So, lately, broker/dealers have done a one-eighty on the idea of dual registration, says Philip Palaveev, senior manager of Moss Adams and author of the study. Five years ago, a larger percentage of RIA firms were hybrid, but they had trouble reconciling being a b/d with being fee-based, Palaveev explains. And five years ago, b/ds were not recognizing this as an opportunity.

Operators of independent broker networks are looking at hybrids as a way to keep their reps from moving all the way to RIA. According to Moss Adams, every year some 5 percent to 6 percent of independents move to RIA platforms like Schwab Institutional. Meanwhile, Palaveev notes, pure RIA shops are taking another look at the hybrid model so that they can sell clients a full complement of products, including variable annuities.

Hybrid Firm Facts

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E Requirements Regarding Brokers And Dealers Of Government And Municipal Securities Including Repurchase Agreements

Broker-dealers that limit their activity to government or municipal securities require specialized registration. Those that limit their activity to government securities do not have to register as “general-purpose” broker-dealers under Section 15 of the Act. General-purpose broker-dealers that conduct a government securities business, however, must note this activity on their Form BD. All firms that are brokers or dealers in government securities must comply with rules adopted by the Secretary of the Treasury, as well as SEC rules.

Firms that limit their securities business to buying and selling municipal securities for their own account must register as general-purpose broker-dealers. If, however, these entities are banks or meet the requirements of the intrastate exemption discussed in Part II.D.2. above, they must register as municipal securities dealers. Municipal securities brokers must register as general-purpose broker-dealers unless they qualify for the intrastate exception. See Part II.D.2 above.

Firms that run a matched book of repurchase agreements or other stock loans are considered dealers. Because a “book running dealer” holds itself out as willing to buy and sell securities, and is thus engaged in the business of buying and selling securities, it must register as a broker-dealer.

B Sro Membership And Rule 15b9

Dual Registration Broker Dealer Investment Adviser ...

Before it begins doing business, a broker-dealer must become a member of an SRO. SROs assist the SEC in regulating the activities of broker-dealers. FINRA and the national securities exchanges are all SROs. If a broker-dealer restricts its transactions to the national securities exchanges of which it is a member and meets certain other conditions, it may be required only to be a member of those exchanges. If a broker-dealer effects securities transactions other than on a national securities exchange of which it is a member, however, including any over-the-counter business, it must become a member of FINRA, unless it qualifies for the exemption in Rule 15b9-1. FINRA’s webpage at www.finra.org provides detailed information on the FINRA membership process. You may also wish to consult the web pages of the individual exchanges for additional information.

Firms that engage in transactions in municipal securities must also comply with the rules of the Municipal Securities Rulemaking Board, or MSRB. The MSRB is an SRO that makes rules governing transactions in municipal securities, but, unlike other SROs, it does not enforce compliance with its rules. Compliance with MSRB rules is monitored and enforced by FINRA and the SEC , and the Federal bank regulators and the SEC . You may wish to consult the MSRB’s website at www.msrb.org for additional information, or you can call the MSRB at 797-6600.

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D Brokers And Dealers Generally Must Register With The Sec

Section 15 of the Act generally makes it unlawful for any broker or dealer to use the mails to “effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security” unless that broker or dealer is registered with the Commission in accordance with Section 15 of the Act. There are a few exceptions to this general rule that we discuss below. In addition, we discuss the special registration requirements that apply to broker-dealers of government and municipal securities, including repurchase agreements, below.

1. “Associated Persons” of a Broker-Dealer

We do not differentiate between employees and other associated persons for securities law purposes. Broker-dealers must supervise the securities activities of their personnel regardless of whether they are considered “employees” or “independent contractors” as defined under state law. See, for example, In the matter of William V. Giordano, Securities Exchange Act Release No. 36742 .

2. Intrastate Broker-Dealers

A broker-dealer that conducts all of its business in one state does not have to register with the SEC. The exception provided for intrastate broker-dealer activity is very narrow. To qualify, all aspects of all transactions must be done within the borders of one state. This means that, without SEC registration, a broker-dealer cannot participate in any transaction executed on a national securities exchange.

3. Broker-Dealers that Limit their Business to Excluded and Exempted Securities

Key Differences In Regulations

Investment advisers are also held to a higher legal standard than brokers. In the United States, investment advisers must adhere to the Investment Advisers Act of 1940, which calls on advisers to perform fiduciary duties in regards to their clients accounts.Fiduciary duty, which is legally enforceable under the Advisers Act Sections 206 /, prohibits advisers from employ any device, scheme or artifice to defraud any client or prospective client.

The standard also imposes upon the adviser the affirmative duty of utmost good faith and full and fair disclosure of material facts as part of the advisers duty to exercise loyalty and care. This includes an obligation not to subordinate the clients interests to its own. Due to the importance of this fiduciary conduct, most investment advisers can make investment decisions for their clients without first getting the client’s permission.

Prior to 2011, all investment advisers with $30 million or more assets under management had to register with the U.S. Securities and Exchange Commission , while advisers with less than $25 million needed only to register with their state regulatory body. In 2011, the Dodd-Frank Act increased the minimum assets under management for SEC registration to $110 million.

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General Overview Of The Sec And State Registered Investment Advisor Registration Process

Investment Advisor Representative Registration Requirements :

  • Licensing Requirements: Series 65, Series 66 and Series 7 combined, or CFP, CFA, CIC, ChFC, PFS. Solely holding the Series 7 license may be sufficient to register as a representative with a broker-dealer but will not be sufficient for establishing your own RIA firm.
  • Each investment advisor representative must submit the form U-4 and ADV Part 2B in the relevant state.

General Firm Registration Requirements

  • Payment of all SEC and/or state registration filing fees
  • FINRA Entitlement paperwork
  • In order to file a registered investment adviser application with the SEC or a state, one must first apply to the Financial Industry Regulatory Authority for an account to their WebCRD/IARD on-line system . While RIAs are in no way regulated or supervised by FINRA, the SEC and states uses FINRAs WebCRD/IARD system to process applications.
  • Form ADV 1
  • The Form ADV Part 1 is the on-line component to your Firms registration documentation. Note: The Form ADV Part 1 primarily discloses information about the FIRM. Individual information is primarily disclosed in the Form U4 as detailed below. The Form ADV Part 1 is also the vehicle to upload your Firms Form ADV Part 2A and Form ADV Part 2Bs .
  • Form ADV 2A
  • Form ADV 2B
  • Client Advisory Contract
  • Client Advisory Contract including an investment policy statement that meets the appropriate regulatory authority standards for client advisory contracts..
  • Policies and Procedures Manual
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