FAQs

• Registration with FINRA and the SEC is required to operate as a broker-dealer legally. This ensures compliance with federal securities laws and regulations and provides oversight to protect investors.

The registration process involves several steps:

1. Complete and submit Form BD to the SEC.

2. Apply for FINRA membership by submitting Form NMA (New Member Application).

3. Submit required documentation, including business plans, financial statements, and compliance procedures.

4. Pass the pre-membership interview and complete the qualification exams for principals and representatives.

5. Undergo a review and approval process by FINRA, which includes background checks and financial reviews.

• Yes, many broker-dealers choose to outsource compliance functions to specialized firms or consultants. However, the firm remains responsible for ensuring compliance with all regulatory requirements.

• Key personnel must pass qualification exams such as the Series 7 (General Securities Representative Exam) and Series 24 (General Securities Principal Exam). Additionally, the firm must have a qualified Chief Compliance Officer (CCO) and demonstrate sufficient financial and operational capability.

• Yes, many investment advisers may choose to outsource compliance functions to specialized firms or consultants. However, the firm remains responsible for ensuring compliance with all regulatory requirements.

• The registration process can take several months, depending on the application's completeness, the business's complexity, and requests for more information. With GiGCXOs, we will register your broker-dealer in 90 days!

Costs include application fees, membership fees, qualification exam fees, and ongoing compliance costs. Depending on the firm's size and scope, initial registration fees can range from a few thousand to tens of thousands of dollars.

• $7,500 FINRA Application Fee

• $30,000 One-time Broker-Dealer fee by GiGCXOs.*

*Fee is based on application for approval of private placements business line. Increases in business scope may impact pricing.

• Filing annual audited financial statements.

• Maintaining minimum net capital requirements.

• Adhering to recordkeeping and reporting obligations.

• Conducting regular compliance reviews and audits.

• Ensuring all registered representatives meet continuing education requirements.

Yes, broker-dealers can be segregated into two broad categories: those that “carry customer accounts” and those that do not. The term “carry customer accounts” involves maintaining accounts for individuals or other brokers or dealers and also receiving and holding funds and/ or securities.

The term "introducing broker-dealer" describes broker-dealers that do not hold customer funds or securities.

BDs that carry customer accounts are required to maintain net capital of at least $250,000.

Broker-dealers that do not carry customer accounts have minimum regulatory net capital requirements ranging from $5,000 to $100,000.

Yes, they are as follows:

• An introducing broker that introduces their accounts on a fully disclosed basis to a clearing firm will be subject to a minimum net capital requirement of $50,000.

• A prime broker is required to maintain minimum regulatory net capital of $1.5 million.

• BDs that self-clear or clear prime broker transactions on behalf of an introducing executing broker is required to maintain net capital $1 million.

• A carrying BD claiming a (k)(2)(i) exemption, which provides that all transactions between the BD and its customers are conducted through a bank account designated as “Special Account for the Exclusive Benefit of Customers of XYZ BD,” has a minimum net capital requirement of $100,000.

• Dealers are required to maintain net capital of $100,000, and include entities that endorse or write options (other than on a national exchange) or transact more than ten transactions for their own investment account(s) in any one calendar year.

• BDs that only engage in the sale of redeemable shares of mutual funds or interests in an insurance company separate account are subject to a minimum net capital requirement of $25,000.

An introducing broker-dealer serves as the starting point for a firm's regulatory journey in the financial industry. As the broker-dealer expands and diversifies its business operations, it may pursue a change in membership application to enhance its capacity and qualify to become a carrying firm. This evolution allows the broker-dealer to take on additional responsibilities and offer a broader range of services within the regulatory framework.

Annual Financial Audit

• Who Must Conduct It: The audit must be conducted by an independent public accountant registered with the Public Company Accounting Oversight Board (PCAOB).

• What It Includes: The audit covers the broker-dealer’s financial statements, including a balance sheet, income statement, and cash flow statement. The auditor must also provide an opinion on the fairness of these financial statements in accordance with generally accepted accounting principles (GAAP).

• Focus Areas: The audit examines the broker-dealer's financial condition, internal controls, and compliance with the SEC’s net capital requirements.

SEC Cybersecurity Requirements

Regulation S-P (Privacy of Consumer Financial Information)

Requirement: Firms must adopt written policies and procedures reasonably designed to ensure the security and confidentiality of customer records and information.

Key Points:

• Implementing measures to protect against unauthorized access to or use of customer information.

• Providing customers with privacy notices and options to opt out of information sharing.

Regulation S-ID (Identity Theft Red Flags Rule)

• Requirement: Firms must develop and implement a written Identity Theft Prevention Program designed to detect, prevent, and mitigate identity theft in connection with the opening or maintenance of accounts.

• Cybersecurity Implications: The program must include policies and procedures for identifying and responding to red flags that indicate potential identity theft.

SEC's Guidance on Cybersecurity Disclosures

• Requirement: Public companies, including certain broker-dealers and advisers, must disclose material cybersecurity risks and incidents in their filings with the SEC (e.g., Form 10-K, Form 10-Q).

• Key Considerations: Disclosures should cover the nature of the risks, the impact on the company's operations, and any measures taken to address them.

Investment Advisers Act Rule 206(4)-7 (Compliance Program Rule)

• Requirement: Registered investment advisers must adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act.

Cybersecurity Implications: The SEC expects firms to include cybersecurity as a key component of their compliance program, with measures such as:

• Regular assessments of cybersecurity risks.

• Training for employees on cybersecurity practices.

• Incident response planning and periodic testing of cybersecurity measures.

SEC Examinations and Enforcement

• SEC OCIE Cybersecurity Initiatives: The SEC's Office of Compliance Inspections and Examinations (OCIE) conducts examinations to assess the cybersecurity preparedness of broker-dealers and investment advisers. OCIE focuses on areas such as governance, risk management, access controls, data loss prevention, and incident response.

• Enforcement Actions: The SEC has taken enforcement actions against firms that failed to implement adequate cybersecurity measures, especially when such failures led to breaches or other security incidents.

FINRA Cybersecurity Requirements

FINRA Rule 3110 (Supervision)

• Requirement: Broker-dealers must establish and maintain a system to supervise the activities of their employees that is reasonably designed to achieve compliance with applicable securities laws and regulations.

• Cybersecurity Implications: As part of this supervision, firms must have policies and procedures that address cybersecurity risks and ensure that systems and data are adequately protected.

FINRA Rule 4511 (Books and Records)

• Requirement: Broker-dealers must make and preserve records that are necessary to demonstrate compliance with securities laws and regulations.

• Cybersecurity Implications: Firms must ensure that these records are stored securely and that appropriate measures are in place to protect them from unauthorized access or breaches.

Cybersecurity Program and Risk Assessment

• Requirement: While not a specific rule, FINRA expects firms to develop a comprehensive cybersecurity program that includes regular risk assessments, vulnerability testing, and incident response planning.

Elements of a Strong Program:

• Data encryption and access controls.

• Employee training on cybersecurity threats.

• Incident response plans to address potential breaches.

• Regular updates to cybersecurity policies to address emerging threats.

Reporting Cybersecurity Incidents

• Requirement: Firms must report significant cybersecurity incidents to FINRA. This includes breaches that result in customer harm or substantial disruptions to the firm's operations.

• Process: Reporting is typically done through FINRA's Gateway system or via direct communication with FINRA’s Cybersecurity and Business Continuity Planning (BCP) teams.

Yes, there are many choices.

Here are the main categories of advisers covered under the Investment Advisers Act of 1940:

Registered Investment Advisers (RIAs)

• Definition: These are individuals or firms that, for compensation, engage in the business of advising others about securities investments. RIAs must register with the Securities and Exchange Commission (SEC) or state regulatory authorities, depending on the amount of assets they manage and their business operations.

• Key Points: RIAs are subject to the rules and regulations of the Advisers Act, including fiduciary duties, disclosure obligations, and recordkeeping requirements.

Exempt Reporting Advisers (ERAs)

• Definition: These advisers are exempt from full SEC registration but must still file certain reports with the SEC. ERAs typically include advisers to private funds (like hedge funds or venture capital funds) that meet specific criteria.

Types of ERAs:

• Private Fund Advisers: Advisers solely to private funds and have less than $150 million in assets under management (AUM) in the United States.

• Venture Capital Fund Advisers: Advisers solely to venture capital funds, regardless of the amount of assets under management.

• Key Points: ERAs are not required to adhere to all the requirements of fully registered advisers but must still comply with some reporting and anti-fraud provisions.

State-Registered Advisers

• Definition: Advisers who manage less than $100 million in assets and do not meet other criteria for SEC registration must register with state securities regulators instead of the SEC.

• Key Points: State-registered advisers are regulated by state securities authorities, and their obligations can vary depending on the state.

Institutional Investment Advisers

• Definition: These are advisers who provide services exclusively to institutional clients, such as banks, insurance companies, mutual funds, or pension funds.

• Key Points: Depending on the clients and the nature of their services, these advisers may qualify for certain exemptions from registration under the Advisers Act.

Pension Consultants

• Definition: Advisers who provide investment advice to employee benefit plans, government plans, or church plans, typically related to the selection or monitoring of investment options or the design of the plan.

• Key Points: Pension consultants who manage $200 million or more in client assets must register with the SEC.

Family Office Advisers

• Definition: These are advisers that provide services exclusively to a single family and its associated entities. They manage the wealth and investments of ultra-high-net-worth families.

• Key Points: Family offices that meet certain criteria are exempt from registration under the Advisers Act.

Internet-Based Advisers

• Definition: These advisers primarily deliver advice to clients over the internet, often using automated tools or platforms (also known as robo-advisers).

• Key Points: Internet-based advisers must register with the SEC if they have clients in multiple states or manage significant assets.

Foreign Private Advisers

• Definition: Advisers that have no place of business in the United States, fewer than 15 U.S. clients, and less than $25 million in AUM attributable to U.S. clients may be exempt from registration.

• Key Points: Foreign private advisers are not required to register with the SEC but must adhere to certain restrictions and cannot hold themselves out as an investment adviser in the U.S.

Charitable Advisers

• Definition: Advisers who provide investment advice exclusively to charitable organizations, trusts, or endowments.

• Key Points: Depending on their operations, charitable advisers may qualify for certain exemptions under the Advisers Act.

Advisers to Registered Investment Companies

• Definition: These are advisers who manage mutual funds, exchange-traded funds (ETFs), or other investment companies registered under the Investment Company Act of 1940.

• Key Points: Advisers to registered investment companies must register with the SEC and comply with additional regulatory requirements under both the Advisers Act and the Investment Company Act.

Municipal Advisers

• Definition: These advisers provide advice to municipalities regarding the issuance of municipal securities, investment of proceeds from those securities, or other financial products.

• Key Points: Municipal advisers are subject to registration and regulatory requirements under the Dodd-Frank Act, in addition to the Advisers Act.