A Boston broker-dealer hires a new rep who just left a commercial bank. He starts taking customer orders on Monday. By Wednesday, the state Administrator issues a cease and desist. The firm assumed FINRA registration covered the state, and that the rep's bank background was harmless. Both assumptions were wrong. Under the Uniform Securities Act, agents are licensed by each state separately from the firm, and prior employment triggers Form U4 disclosure. One missed filing can shut down a whole branch.
A broker-dealer is any person engaged in the business of effecting transactions in securities for the account of others or for its own account. "Person" here is broad: corporations, partnerships, LLCs, sole proprietors, trusts, even governments. The phrase "engaged in the business" matters. A one-off transaction does not make you a BD, but regular, repeated transactions do, even if securities are not your primary line of work.
The key tests are activity-based, not size-based. A small firm executing trades for two clients is a BD.
Common mistakes
- Treating the snowbird exclusion as covering year-round residents. The "existing client temporarily in the state" rule requires the client be present only temporarily. A Wisconsin resident who has been a New York firm's client for 10 years is not covered.
- Assuming federal registration covers state registration. Passing the SIE and Series 7, registering with FINRA, and having a CRD number does not register an agent in any state. Each state where the agent solicits or transacts must approve the U4. The state Administrator can deny even though FINRA approved.
- Confusing the issuer-representative exclusion with a blanket exemption for issuer employees. The exclusion attaches to the security sold, not to who employs the seller. Selling an issuer's common stock makes the seller an agent. Selling the same issuer's commercial paper does not. The product determines the answer.
Bottom line
- A broker-dealer is any person in the business of effecting securities transactions for others or its own account; the four statutory exclusions are agents, issuers, banks, and out-of-state firms with no in-state office
- The out-of-state BD exclusion requires no place of business in the state plus contact only with other BDs, institutional investors, or temporarily present existing clients (snowbirds)
- An agent is always a natural person, never an entity; representing an issuer only in specified exempt securities or exempt transactions removes you from the agent definition
- Both BD registration (Form BD) and agent registration (Form U4) are filed through CRD and become effective at noon on the 30th day if no proceeding is pending
Exam shortcut
Person + activity test for BD status. If the entity is a "person" (any organizational form) and is "engaged in the business" (regular, repeated transactions, not isolated), and it is effecting securities transactions for others or for its own account, then it is a BD unless one of the four exclusions applies. Memorize the four exclusions: agent, issuer, bank, out-of-state with no in-state office and only permitted counterparties.
The full lesson (about 4,731 words, 32 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- C3
- C4
- D5
- D6
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