Broker-dealer is the securities industry term for a securities brokerage firm. The securities industry is highly regulated, and a new broker-dealer must register with at least three agencies and arrange for the management team to obtain the appropriate high-level securities licensing. It will take six months or longer to receive all of the necessary approvals to run a brokerage firm. You can speed up the process by accomplishing most of the steps simultaneously.
Establish a Corporate Presence
Although setting up a corporation seems like an obvious step, in the case of a new broker-dealer, having the corporate structure allows the business to start the regulatory applications process. A stock brokerage corporation names the officers that will become the brokerage principals and allows the new firm to reserve its name with the Financial Industry Regulatory Authority, or FINRA. The corporation must obtain an accounting system that meets the requirements of the Securities and Exchange Commission and FINRA. The corporation will also need to establish a net capital -- cash in the bank -- to meet capital requirements based on the projected size and business lines of the brokerage firm.
Enroll Principals for Testing and Licensing
FINRA requires a broker-dealer to have at least two registered principals who will manage the brokerage firm. The registration requires applying to FINRA, completing a background check and passing a test covering securities regulations that apply at the brokerage management level. There are different types of principal registrations, depending on the securities the firm will offer, and the principals of a small new broker-dealer firm may need to obtain several of the principal registrations. For a proposed small broker-dealer, the two-principals rule can be waived and the business started with a single registered manager. A waiver request can be filed with FINRA if the established criteria for a single principal are met.
Apply to Federal, State and Regulatory Organization Registration
The owners of a proposed new brokerage firm must apply to register with the SEC, FINRA and the financial regulatory agency for each state in which the broker-dealer will have an office. The SEC requires the completion of the extensive Form BD, which requires background information on the principals, other owners, financial backers and proposed employees. With the approved SEC registration, the business applies to FINRA for membership and with the Securities Investors Protection Corporation to be able to provide the required SIPC insurance to customers.
Establish Clearing Firm Relationship
A broker-dealer uses a clearing firm to process and handle the actual trades placed by the brokerage firms. The level of services provided by the clearing firm depends on the proposed size of the new broker-dealer and how much of the operations the new management team wants to take in house and how much it will farm out. A local brokerage firm will focus on gathering clients and making trades, and the clearing firm leaves management and ownership free to pursue these goals.
- Stockbyte/Stockbyte/Getty Images