The National Conference of Commissioners on Uniform State Laws was founded in 1892 to draft statutes that state legislatures could adopt without each one writing its own version from scratch. In the 1950s, the Conference turned its attention to state securities law. It hired Louis Loss, an SEC Associate General Counsel in the 1940s and the author of the six-volume treatise that is still the definitive securities-law reference in American law school libraries.
Loss drafted the Uniform Securities Act of 1956. It was adopted, in some form, by almost every state. Nearly seventy years later, the Series 63 still tests it. The specific sections covered in this chapter (§§201, 202, 203, 204, and 401) are the sections Loss wrote that tell a state Administrator how a broker-dealer gets into business, how it stays in business, and what the Administrator can do if something goes wrong.
Section 1: What Is a Broker-Dealer
Under USA §401(c): "Broker-dealer means any person engaged in the business of effecting transactions in securities for the account of others or for his own account."
A broker-dealer is anyone in the business of buying and selling securities, whether for customers or for the firm's own account. "Person" in the USA includes individuals, corporations, partnerships, associations, trusts, and government subdivisions, so "person" is broader than "human being."
Who Is NOT a Broker-Dealer
The USA excludes four categories of persons from the broker-dealer definition:
- Agents. An agent is always a natural person working for a broker-dealer or issuer. Agents register separately as agents, not as broker-dealers.
- Issuers. A company that sells its own securities is not a broker-dealer for those sales.
- Banks, savings institutions, and trust companies. Excluded by statute. The federal banking carve-out.
- Out-of-state firms with no place of business in the state, if they meet one of two safe harbors.
The Out-of-State Safe Harbor [§401(c)(4)(B)]
A person with no place of business in the state is not a broker-dealer in that state if either of the following is true:
- Safe Harbor A (institutional only): The firm's only customers in the state are other broker-dealers, issuers, banks, savings institutions, trust companies, insurance companies, investment companies, pension or profit-sharing trusts, other financial institutions, or institutional buyers.
- Safe Harbor B (15-offer de minimis): During any 12 consecutive months, the firm directs offers to no more than 15 non-institutional persons in the state, whether or not the offeror or any offeree is then present in the state.
The 15-offer de minimis rule is a favorite exam fact. It is not 15 clients, and it is not 15 trades. It is 15 offers in any 12 consecutive months. Offers count even if they do not turn into sales. (The 16th cold call into the state blows the safe harbor, which makes this one of the few statutes in American law where the consequence of a phone call depends on whether you have already made exactly fifteen other phone calls.)
Section 2: Registration Procedure
Under USA §201(a): "It is unlawful for any person to transact business in this state as a broker-dealer or agent unless he is registered under this act."
Every broker-dealer that does business in the state must register, unless it fits an exclusion. A firm cannot "register later" after the first trade. Registration must be effective before the firm transacts business.
What "Transacting Business" Means
- Maintaining an office in the state
- Soliciting customers in the state
- Accepting orders from customers in the state (whether solicited or unsolicited)
- Executing orders for customers in the state
A firm does not have to have an office in the state to be transacting business there. One phone call to a retail customer in the state can count as transacting business.
Filing the Application
To register, the broker-dealer files an application with the state Administrator. The application is Form BD, filed through the Central Registration Depository (CRD), the system operated by FINRA. Form BD is the same form used to register with the SEC and with FINRA, so one filing covers multiple regulators.
The 30-Day Effective Rule [§202(a)]
"If no denial order is in effect and no proceeding is pending under §204, registration becomes effective at noon of the thirtieth day after an application is filed."
Two things to notice. First, the rule is automatic unless something stops it. Registration becomes effective by operation of law 30 days after filing. The Administrator does not have to take action to make the registration effective. The Administrator has to take action to block it. Second, §202(a) also says the Administrator may, by rule or order, specify an earlier effective date. So the 30-day period is a default maximum, not a floor.
Test tip: "Noon of the 30th day" is the exact phrase. Not midnight. Not 9 a.m. Not the 29th day or the 31st.
What the Administrator May Require
- A consent to service of process (form appointing the Administrator as agent for legal papers)
- A surety bond (see Section 3)
- Exam passage proof for agents
- Payment of a filing fee
- Financial statements and evidence of minimum net capital
Section 3: Surety Bonds and Recordkeeping
Surety Bonds [§202(e)]
The Administrator may require a broker-dealer to post a surety bond as a condition of registration. The bond is not liability insurance for the firm. It is a pool of money that a customer can claim against if the customer wins a civil judgment under USA §410 (the private civil liability section, covered in Chapter 8).
| Number | What it governs |
|---|---|
| $10,000 | Maximum bond amount |
| $25,000 | Net capital threshold: above this, the Administrator may not require a bond |
| 2 years | Statute of limitations for customer bond claims |
The bond covers §410 civil liability claims. It does not cover criminal fines or administrative penalties. The memory tactic is "10 is cap, 25 is exit, 2 is time." Ten thousand max bond. Twenty-five thousand net capital exits the bond requirement. Two years to sue on the bond.
Recordkeeping [§203(a)]
Every registered broker-dealer must make and keep the accounts, correspondence, memoranda, papers, books, and other records that the Administrator prescribes. The USA default retention period is three years, unless the Administrator specifies otherwise for particular types of records.
The USA default is 3 years. SEC Rule 17a-4 imposes longer periods for specific categories of records (some are 6 years, some are life of enterprise plus 3 years). If a Series 63 question asks about the USA retention default, the answer is 3 years. If it asks about SEC Rule 17a-4, the answer could be 6 years or longer. Chapter 4 walks through the 17a-4 tiers in detail.
Inspection and Net Capital [§§203(b), 203(c)]
The Administrator may, by rule, require a broker-dealer to file financial reports and may examine the broker-dealer's books and records inside or outside the state, with or without prior notice, at any reasonable time. The Administrator may also set minimum net capital and other financial responsibility standards, but cannot exceed the federal standards imposed on broker-dealers registered under SEA §15.
Section 4: Denial, Suspension, and Revocation [§204(a)]
This is the biggest section in Chapter 1 by test volume. USA §204(a)(2) lists 11 grounds for denial, suspension, or revocation, labeled (A) through (K). Know them cold.
The 11 Grounds
| # | Ground | Key detail |
|---|---|---|
| (A) | Incomplete or misleading application | Material respect |
| (B) | Willful violation of the Act | Willfulness required |
| (C) | Criminal conviction within 10 years | Any felony OR securities misdemeanor |
| (D) | Court injunction | From securities business |
| (E) | State Administrator order | Current or prior action |
| (F) | Other state or SEC order within 5 years | Federal banking agency counts |
| (G) | Dishonest or unethical practices | NASAA SoP applies (see Chapter 3) |
| (H) | Insolvent | Liabilities exceed assets, or cannot meet obligations |
| (I) | Lack of qualification | Cannot be sole basis if exam passed |
| (J) | Failure to supervise | Agents or IA representatives |
| (K) | Failed to pay filing fee | Denial only; must vacate on cure |
The Two Lookback Periods
Two grounds have specific lookback periods that the exam tests relentlessly. Lock them in.
- Ground (C): 10 years. Misdemeanor conviction is a ground only if it involves securities (or any aspect of the securities business). Felony conviction is a ground regardless of subject matter. A 9-year-old felony for mail fraud is a valid ground even though mail fraud is not a securities offense.
- Ground (F): 5 years. Regulatory orders from another state's securities administrator, the SEC, or a federal banking agency reach back 5 years, not 10.
Test tip: Ten for crimes. Five for regulatory orders. Do not mix them up.
The "Public Interest" Requirement
For every ground except (K), the Administrator must also find that the order is in the public interest. A ground alone is not enough. The Administrator must conclude that taking action is in the public interest.
What the Administrator Cannot Use
The Administrator cannot deny registration solely because:
- The applicant is an out-of-state firm
- The applicant has a competitor already registered
- The applicant charges high commissions (unless it reaches the §1.k markup standard)
- The applicant has few customers
Section 5: Summary Action and Withdrawal
Summary Action [§204(c)]
The Administrator can issue a summary order postponing or suspending a registration pending final determination of a §204 proceeding. A summary order is issued before the hearing, not after. The respondent has the right to a hearing, and the Administrator must schedule it within 15 days of receiving a written request.
Withdrawal From Registration [§204(e)]
A broker-dealer may withdraw from registration by filing a withdrawal request with the Administrator. Withdrawal becomes effective 30 days after the request is filed (or earlier if the Administrator so determines), unless a proceeding under §204 is pending at the time the withdrawal is filed or begins within the 30-day window.
The One-Year Revocation Window After Withdrawal
Even after withdrawal becomes effective, the Administrator retains jurisdiction to institute a revocation or suspension proceeding for 1 year after the withdrawal. A firm cannot use withdrawal as an escape hatch when misconduct is discovered.
If a firm withdraws on January 1 and the Administrator discovers violations on June 1 (still within 1 year), the Administrator can still bring a revocation action even though the firm is technically no longer registered. The consequence matters because the revocation appears on the firm's record. (And more practically, because anyone who has ever worked in compliance knows that the urge to bail out right after a problem surfaces is the urge the statute is designed to frustrate.)
Section 6: Form BD and Amendments
Form BD is the Uniform Application for Broker-Dealer Registration. It is a joint filing used by the SEC, state securities regulators, and FINRA. Filing Form BD through CRD satisfies all three registrations at once for firms that are FINRA members.
What Form BD Contains
- Name of the firm and all predecessor names
- Type of organization and state of formation
- Names and identifying information for all direct and indirect owners and control persons
- Disciplinary history of the firm and its principals
- Financial information (minimum net capital)
- Types of business the firm will conduct
- Places of business (main office and all branches)
- Other business activities of the firm
Form BDW and Amendments
To withdraw registration, the firm files Form BDW, also through CRD. The firm must amend Form BD whenever any information on the form becomes inaccurate. Material amendments must be filed promptly. Form BD is a continuing disclosure document, not a one-time filing.
Section 7: FINRA Rule 3110 Supervision
FINRA Rule 3110 is the federal companion to USA §204(a)(J). It is the rule that makes "failure to supervise" not just a ground for state discipline, but a concrete set of written obligations a firm must meet.
3110(a) Supervisory System
Each FINRA member must establish and maintain a supervisory system reasonably designed to achieve compliance with securities laws and FINRA rules. The system must include:
- Designation of one or more registered principals with supervisory authority
- Designation and registration of each branch office and each Office of Supervisory Jurisdiction (OSJ)
- Designation of appropriately registered principals in each OSJ
- Assignment of each registered person to an appropriately registered representative or principal
- Annual compliance meetings for each registered person
3110(b) Written Supervisory Procedures
Every firm must establish, maintain, and enforce Written Supervisory Procedures (WSPs). WSPs must cover review of securities transactions, correspondence, and internal communications; cover review of customer complaints; identify supervisory personnel by title, registration, location, and responsibilities; and prevent a supervisor from supervising their own activities or reporting to someone they supervise. If the firm does not have WSPs, it is in violation even if no misconduct has occurred. The absence of written procedures is itself the violation.
3110(c) Internal Inspection Schedule
| Location type | Minimum inspection frequency |
|---|---|
| Offices of Supervisory Jurisdiction (OSJs) and supervisory branch offices | At least annually (calendar-year basis) |
| Non-supervisory branch offices | At least every 3 years |
| Non-branch locations | Regular periodic schedule, 3-year presumption |
Written inspection reports must be retained for at least 3 years. OSJ annual, branch triennial. Do not flip them.
3110(e) Investigation of New Hires
Before registering a new associated person, the firm must investigate the person's good character, business reputation, qualifications, and experience. The firm must verify the accuracy of Form U4 information within 30 days of filing and review the applicant's Form U5 from the prior employer within 60 days.
Section 8: Thresholds, Traps, and Memory Tactics
Quantitative Thresholds for Chapter 1
| Threshold | What it governs |
|---|---|
| 15 offers / 12 months | Out-of-state BD de minimis safe harbor |
| Noon of 30th day | Default registration effective date (USA §202(a)) |
| $10,000 | Maximum surety bond amount |
| $25,000 | Net capital exemption from surety bond |
| 2 years | Statute of limitations on bond claims |
| 3 years | USA default recordkeeping period |
| 10 years | Criminal conviction lookback (Ground C) |
| 5 years | Other-state or SEC order lookback (Ground F) |
| 15 days | Summary action hearing after written request |
| 30 days | Withdrawal from registration effective date |
| 1 year | Administrator's revocation window after withdrawal |
| Annual | OSJ and supervisory branch inspection frequency |
| Every 3 years | Non-supervisory branch inspection frequency |
Common Traps
Trap 1: 15 clients vs. 15 offers. The out-of-state BD safe harbor is 15 offers in 12 months, not 15 clients and not 15 sales. The old "15 client" IA private adviser exemption was repealed by Dodd-Frank in 2010 (see Chapter 6) and has nothing to do with the BD rules.
Trap 2: Noon of the 30th day. Not midnight. Not 9 a.m. Not the 29th or the 31st. The Administrator can accelerate, but the default is noon of the 30th.
Trap 3: Misdemeanor scope. A misdemeanor is a denial ground only if it involves securities. A shoplifting misdemeanor is not. A felony for any crime is a ground because any felony qualifies.
Trap 4: Ten for crimes, five for regulators. Ground (C) is a 10-year lookback on convictions. Ground (F) is a 5-year lookback on regulatory orders. Do not mix them.
Trap 5: The Administrator cannot directly fine or imprison. Both require a court. The Administrator can deny, suspend, revoke, and seek court action. Answers claiming the Administrator personally fined or imprisoned someone are usually wrong.
Trap 6: Filing fee is denial only. Ground (K) (failure to pay filing fee) is a ground for denial only, and the order must be vacated on cure. It is not a ground for suspension or revocation.
Trap 7: Withdrawal does not end jurisdiction. The Administrator has a 1-year window to revoke after withdrawal. A Form BDW is not a get-out-of-jail card.
Trap 8: OSJ annual, branch triennial. Do not flip them. OSJs and supervisory branches are inspected at least annually. Non-supervisory branches are inspected at least every 3 years.
Memory Tactics
- 15 offers in 12 months. Out-of-state safe harbor. Offers, not clients.
- Noon of the 30th. Registration effective clock.
- 10 up, 25 out, 2 back. Surety bond: $10,000 max, $25,000 net capital exit, 2 years to sue.
- A through K. Eleven grounds for denial, suspension, or revocation.
- 15 days for hearing, 30 days for withdrawal, 1 year for revocation window. Section 204 clocks.
- OSJ annual, branch triennial. FINRA 3110(c).
Chapter 1 sets up the regulatory framework that Chapter 2 (Broker-Dealer Agents) layers onto the humans who actually do the sales work. Many of the timing rules in Chapter 2 are the same rules you just learned here, applied to individuals rather than firms.