Stockbrokers, who are more often referred to as registered representatives, are driven to successfully align clients with suitable investments. They generally start as salaried employees while developing their client base and then are moved to a commission-based pay structure as their sales increase.
There’s been a strong emergence of independent broker-dealer firms, many of which have weathered and even thrived in the stormy economic climate of recent years. These “indie” firms can be very appealing to up and coming registered reps who love working in finance, but who are looking for a less conventional work environment with a firm they can feel personally vested in. Even registered reps that work for major firms like Edward Jones, Citigroup, and Merrill Lynch, have the ability to essentially function as their own boss. They spend time networking with family and friends, meeting with potential clients, and building their book of business as they work to establish their client base.
According to the American Association of Retired Persons (AARP), there are some 70 million baby boomers entering or planning for retirement. They represent the majority of the investing public and hold control over 80% of personal financial assets and more than 50% of discretionary spending power in the United States. Even as investors have become more cautious and restrained in recent years, this presents one of the best opportunities in history for responsible and prudent stockbrokers who will be needed to help position these Americans for a comfortable retirement.
The broker-dealer firms that stockbrokers represent look for prospects that are at the same time tenacious and well educated, and most will only consider hiring candidates who hold degrees. Having an education rooted in business will provide stockbrokers with the knowledge-base employers are looking for, so most pursue majors in business-related fields and hold either MBAs or four-year degrees in economics, finance, or business administration.
The curriculum for business and finance majors will include classes in economics, which serve to provide an understanding of the financial markets. Understanding how markets move in response to global events and other factors helps brokers make reasoned decisions and develop investment strategies that take advantage of market fluctuations so as to capitalize on up turns and protect clients from losses during down turns.
Sales courses are particularly important, as selling is a registered representative’s primary function. These courses will help students build on interpersonal skills while learning ethical sales protocols.
Stockbroker Information By State
- District of Columbia
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
According to a 2010 study conducted by Investment News, the broker-dealers that employed the most registered representatives were LPL Financial, Lincoln Financial Network, and Ameriprise Financial Services. Together, these three firms employed over 25,000 registered representatives in 2010. LPL had close to 5,000 reps that each managed between $100,000 and $500,000, and close to 1,000 reps that each managed over half a million.
Registered reps begin their careers by pursuing sponsorship through broker-dealer firms so as to be eligible to attempt exam(s) required to buy and sell securities. Sponsorship in this regard simply means that these firms take candidates in as employee prospects and cover the costs associated with their exams.
This sequence of seeking employment before demonstrating competency through examination is quite unique to the securities industry. This highlights how important it is for stockbrokers to hold degrees and to establish industry contacts. Open positions can be found through traditional sources like job postings and employment fairs, but many stockbrokers network with former classmates and professors with industry connections so as to be recommended for open positions.
The U.S. Securities and Exchange Commission (SEC) requires that all “associated persons” of a broker-dealer become registered with the commission. State Securities Commissions also require stockbrokers to be registered in their jurisdictions. Associated persons include all employees, directors, partners, or other individuals associated with a broker-dealer, including stockbrokers sponsored by the firm.
The sponsoring broker-dealer firms process SEC and state registration on behalf of their sponsored registered representatives when they submit Form U-4 (if the sponsoring firm is a FINRA member) or Form U-10 (if the sponsoring firm is not a FINRA member). These forms are submitted through an electronic Central Registration Depository (CRD) system managed by the Financial Industry Regulatory Authority (FINRA). When the SEC approves registration, applicants can then schedule to take the required exams.
Registered representatives take the fully comprehensive Series 7 General Securities Representative Examination, which addresses a broad spectrum of investment vehicles:
- Stocks and bonds
- Real estate investment trusts
- Collateralized mortgage obligations
- Direct participation programs, such as real estate programs, oil and gas programs, and S corporation offerings
- Investment company products like mutual funds, municipal securities and municipal fund securities
- U.S. government bonds
- Variable contracts such as annuities
Registered reps trading exclusively in specific vehicles may be instructed to take exams geared toward those particular products. For example, a representative that will concentrate specifically on selling commodities futures would be instructed to take the Series 3 exam, and those trading only mutual funds and other variable contracts would take the Series 6.
Most state Securities Commissions require that stockbrokers operating in their state pass the Series 63 Uniform Securities Agent State Law Examination, which concentrates on state securities laws. The Series 63 is required by all state and jurisdiction Securities Commissions other than Colorado, District of Columbia, Florida, Louisiana, Maryland, New Jersey, Ohio, Puerto Rico, and Vermont.
The exam addresses topics including the regulation of state-registered and SEC-registered investment advisers (IAs), regulation of investment adviser representatives (IARs), regulation of broker-dealers and their registered representatives, and regulation of securities and issuers. The Series 63 also tests participants’ knowledge of ethics and fiduciary obligations concerning client and prospect communications, compensation of securities agents and firms, and conflicts of interest.
Upon securing sponsorship and passing all necessary exams as determined by their state regulatory agency and broker-dealer firm, registered reps will get a first-hand introduction to the securities business through on-the-job training. This will likely consist of sitting with a fellow registered rep, listening to their sales calls and attending client meetings with them. Often newly hired reps will gather together for group training sessions and classroom instruction that will cover sales protocols and the specific securities the firm offers.
In addition to sales skills and product knowledge, on-the-job training will lend insight into the broker-dealer firm’s investment philosophy and how the firm expects their representatives to conduct business.
How to Register a Broker-Dealer Firm
The term Broker-dealer typically refers to a firm, but can be used to describe an individual proprietor acting as principal of an independent broker-dealer firm. Broker-dealers participate in the trading of securities in two distinct capacities. When trading from their own accounts they are acting as dealer, and when trading on behalf of their clients, they are acting as broker.
When acting as dealers by trading with the firm’s cash reserves, these firms are buying and selling to create an additional profit center within the organization. This is completely unrelated to their retail brokerage business, which involves working with the general public. While acting as a broker, the firm sells public security offerings like corporate stocks, municipal securities, and mutual funds directly to retail investors.
While many broker-dealer firms are divisions of larger organizations like insurance companies, investment or commercial banks and investment companies, there are many independent broker-dealers that have been very successful by refining expertise in specific industries like biomedical science or technology. By becoming experts in specific industries, these smaller “indie” firms can better assess the value of a company within that industry and better determine how its stock is likely to perform.
Establishing a new a broker-dealer firm consists of registering with the Securities and Exchange Commission and the state Securities Commissions of all states in which the firm will do business, joining a self regulatory organization, and joining the Securities Investor Protection Corporation, all of which is described here in detail.
Joining a Self-Regulatory Organization
The Securities and Exchange Commission requires that broker-dealers join a self-regulatory organization (SRO), which is done in tandem with SEC and state Securities Commission registration.
These SROs effectively regulate the activities of broker-dealer firms and their representatives under the auspices of the SEC. The largest of these SROs is the Financial Industry Regulatory Authority (FINRA). Broker-dealers are not required to join FINRA specifically. In fact, some security exchanges, like the New York Stock Exchange, also function as self-regulatory organizations by requiring membership and enforcing the dictates of the SEC.
To become a member of FINRA, firm principals must first submit Entitlement Forms, designate a Super Accountant Administrator (SAA), and obtain approval for the proposed firm name. This is done by sending a written request for firm name approval along with a hard copy of the entitlement form to FINRA Attn: Registration and Disclosure Department 9509 Key West Avenue Rockville, MD 20850 Facsimile: (301) 216-3710
Principals of new firms must also submit hard copies of the following:
- Notarized Form BD
- Super Account Administrator Entitlement Form
- Member Firm Email Notification Contact Form
- New Member Assessment Report
When these forms are processed and approved, the designated Super Account Administrator will be emailed a user name and password that will allow them access to the FINRA firm Gateway. The remaining steps would then be completed electronically through the Central Registration Depository (CRD).
Principals will then set up and fund the CRD general account to pay the application, examination, state, and SEC registration fees associated with registering the firm and its representatives. These fees will usually be less than $500 for each representative and $3,000 to register the firm as a FINRA member.
Principals of new firms will then submit the following:
- Form NMA (New Membership Application), along with any required attachments
- Form BR for each of the firm’s branch offices
- Form U-4 for each representative of the firm
Some broker-dealers must become members of specialized agencies depending on the products they offer. These agencies are often themselves FINRA affiliates. For examples, firms that plan to offer municipal securities must become members of the Municipal Securities Rulemaking Board (MSRB).
State and Federal Registration
Although FINRA membership is not required, their web based Central Registration Depository (CRD) system is used by all SROs, the SEC, and state Securities Commissions for processing registration. Non FINRA-Members will still need to gain access to the CRD to process SEC and state registration. This is done in the same manner as it is with FINRA-members by submitting hard copy Entitlement Forms and a Notarized Form BD to the address noted above.
Registration with the SEC is automatic when submitting Form BD, however, boxes corresponding to each state and applicable SRO must be selected. Each state Securities Commission will be automatically notified of the firm’s intent to register.
When entitlement is approved, the firm’s designated Super Account Administrator (SAA) will be emailed with a user name and password that will allow them access to the FINRA firm Gateway. This will allow them to set up and fund the Central Registration Depository (CRD) to cover state registration fees and finalize registration with each state’s Securities Commission. Each state’s registration fees will then be distributed to the appropriate state electronically through the CRD.
Broker-dealers must also register each branch office with the SEC and the respective state’s Securities Commission by filing Form BR. A branch office is defined as any physical location where the firm’s associates conduct securities transactions. This is done when submitting form BR.
Joining the Securities Investor Protection Corporation (SIPC)
Non-bank broker-dealers that conduct their principal business within the United States must become members of the Securities Investor Protection Corporation (SIPC). Broker-dealer firms that exclusively sell mutual funds, variable annuities, insurance and government securities, or furnish investment advice to investment companies or insurance companies are exempt from becoming SIPC members. Broker-dealers automatically become members of SIPC upon successful registration with the SEC.
Additional Requirements for Broker-dealer Firms
Associated individuals of a firm, including partners, directors, salespersons, and general employees, must submit fingerprints to the U.S. Attorney General, which is generally handled through FINRA when other registration material is submitted. Exceptions include firms that deal only with variable annuities or mutual funds or representatives who do not sell securities.
Broker-dealer firms are required to implement anti-money laundering programs, as mandated by the Bank Secrecy Act. This requirement is intended to prevent money laundering, especially for terrorist organizations. Policies and procedures aimed to prevent money laundering activities through the purchase and sale of securities must be put in place by the firm. Broker-dealer employees and registered representatives are trained to identify suspicious activity as it relates to money laundering, such as purchases of securities through foreign bank accounts, customers who wish to engage in transactions that lack business sense with no supporting reasoning, clients who do not seemed concerned with the risk associated with a particular transaction, or transactions that are structured to be just under $10,000, which is the amount of a single transaction that would normally trigger SEC reporting.