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Steps to Starting Up an Independent Broker-Dealer

If you want to become a broker-dealer, you can either join an existing firm or start your own company. If you choose to work for someone, you may be investing in a management team in which you know very little. Although the workload will likely be more manageable, you'll have less control over the organization and direction of the company.

There are many benefits to starting your own firm, though you should be aware of what's involved. Much like investing in your own startup, a new investment firm requires a lot of work, time, patience, and money. On one hand, you'll have control over the firm; on the other, it's a riskier endeavor that requires much more work.

If you've decided an independent firm is the way to go, here's some guidance on what's involved in achieving and growing a successful broker-dealer firm.

Key Takeaways

  • Opening your own broker-dealer firm can be a rewarding and challenging venture.
  • Ask yourself whether you can afford to sacrifice the capital needed.
  • You'll need to demonstrate experience, line up principals, and file the necessary forms in order to be approved.

Benefits of Starting Your Own Firm

Like any other venture, there are some obvious benefits to going into business for yourself as a broker-dealer. First, there's the absence of bureaucracy that comes with working for someone else. Bureaucracies often lead to more formal and rigid systems that leave little room for innovation, putting rules in place that companies must adhere to strictly.

With your own firm, there's also the potential for significant wealth. You'll eventually need to decide what types of fees you wish to charge. If you decide to take a percentage of assets under management, you'll need a scalable business model, experienced management personnel, and solutions to attract and retain clients. While your income may be capped when working for a firm, there's often greater potential running your own.

If you have sufficient capital, you can decide to acquire an existing operation instead of starting a new firm. Though everything may be organized exactly how you'd like, there is the benefit of having a head start on registrations, market presence, staffing, and operations.

Before You Get Started

Before you start your own broker-dealer firm, there are several questions worth asking to ensure you're on the correct path to creating a successful firm. These questions include but aren't limited to:
  • Do you have sufficient upfront capital to cover start-up costs and fund initial investments?
  • Do you want to acquire an existing firm or create one anew?
  • Are you able to satisfy the registration requirements specific to your geographical location?
  • Who from within your network can help start your firm? These individuals don't necessarily need to be traders or financial advisors.

Creating Your Firm

If you've decided to acquire an existing broker-dealer firm, many of these requirements will already have been satisfied.
If you are starting your own broker-dealer firm and will not operate your company as a sole proprietorship, you must register your firm as an independent company to limit your personal liability. Some of these requirements include (and are discussed more in-depth later in this article):
  • Filing for required business licenses: You must obtain the required licenses from both your local and state regulatory bodies.
  • Opening a company bank account: This account must be separate from any personal accounts, though you may deposit initial investment capital from your personal wealth.
  • Create an operating agreement: An operating agreement outlines the business's financial and functional rules as well as company ownership, member duties, and other administrative delegations. California, Maine, Missouri, and New York legally require new LLCs to keep an operating agreement.
  • Develop contracts with clearing agents: These clearing agents ensure trades settle appropriately and transactions are successful.
  • File necessary regulatory forms:  Financial Industry Regulatory Authority (FINRA) requirements are discussed below.

Registering With Regulatory Bodies

Prior to operations, your broker-dealer firm must be registered with several regulatory bodies. In addition to the agencies below, there may be governing bodies specific to your location that have their own requirements.

The broader regulatory agencies to register with include but are not limited to:

Once approved by FINRA, you must become a member of a self-regulatory organization (SRO) before your order granting registration goes into effect.

Submitting Application Forms

There's a ton of paperwork to file as part of the process of setting up a broker-dealer firm. FINRA outlines a number of requirements. As part of the application process, the forms you must file include but are not limited to the following:

  • Form BD (Broker Dealer): This describes the classification of the business, which states you'll be registered in, and what key external relationships have been created up to this point in the company's formation.
  • Form NMA (New Member Agreement): Often the most strenuous form, this outlines policies, procedures, vendor agreements, LOIs, and specific details about the company.
  • Form BR (Branch Registration): This is a short form outlining the company's offices.
  • Form U4: This form is filed for each employee of the firm. The form outlines their role in the company, their employment history, their professional registrations, and any disciplinary record.

Fingerprinting

No, it's not a TV episode of a crime drama. Every employee for whom you file a U4 must be fingerprinted.

Developing Professional Legitimacy

If you've made it this far, chances are you know what you're doing. However, you must demonstrate proficiency in order to land clients and retain them.

When developing your broker-dealer firm, don't underestimate the value of marketing, branding, and an online presence. Consider which social media platforms will provide your firm with the greatest exposure. Be prepared to distribute marketing and promotional materials to prospective clients.

On the more technical side, consider applying for a variety of broker dealer exams. There are several required credentials in order to obtain your broker-dealer license including successful completion of the following:

  • Series 7 exam (a prerequisite for the Series 24 exam)
  • Securities Industry Essentials (SIE) (a prerequisite for the Series 24 exam)
  • Series 24 exam (General Securities Principal)
  • Series 27 exam (Financial and Operations Principal)

Broker-Dealer License

Broker-dealers are required to hold several credentials, and some credentials have prerequisite exams.

In addition, if you wish to sell additional securities or demonstrate further competency to prospective clients, consider pursuing additional exams.

Drafting Policy Requirements

Broker-dealers are required to assemble and maintain a variety of policies. Several policies include but are not limited to:
  • Anti-Money Laundering Policy: This outlines the steps for vetting customers and monitoring client activity to ensure money laundering does not occur within your firm. This policy must be audited by an independent external auditor each year.
  • Business Continuity Plan: This outlines how the company will operate during unforeseen crises or events.
  • Continuing Education Plan: This outlines how the company will make sure all staff are up-to-date with the most recent compliance and regulation requirements.
  • Employee Trading Policy: This outlines what activities employees are allowed to engage in outside of work in addition to what the firm will do to monitor this activity.

Other Considerations

Broker-dealers are held to a high standard regarding record retention. Firms are required to maintain key data, documents, and a variety of support for many years. In addition, the data must be stored in a specific format and easily distributable to FINRA upon request. Trading data, as well as e-mail and communication data, must be retained.

Broker-dealer firms are required to maintain a fidelity bond. The fidelity bond acts as an insurance policy in excess of the firm's net capital requirement. Broker-dealer firms are also required to have their finances audited annually by a Public Company Accounting Oversight Board-accredited accounting firm.

Net Capital Requirements

FINRA implements net capital requirements that a broker-dealer must have on hand to remain in good standing. The net capital requirements vary based on the company's specific business lines.

Broker-dealers usually implement compliance software solutions. These solutions automatically track and maintain reporting requirements, issue deadline and compliance reminders, and monitor employee trading accounts.

FINRA requires all broker-dealers to designate a Chief Compliance Officer (CCO) to ensure company-wide compliance and regulation. FINRA also requires firms to have a Financial and Operational Principal (FinOp) (via the Series 27 exam) to compile reporting and accounting statements. These positions may be outsourced.

How Long Does It Take to Set Up a Broker-Dealer Firm?

Once you submit your application to FINRA, FINRA must review and process your application within 180 days. It may take a substantial amount of time to accumulate and organize all information required as part of the application process.

Is It Difficult to Become a Broker-Dealer?

The application process to be an independent broker-dealer is arduous. In addition to long application forms, there are a number of requirements that must be met before your firm begins operating, in addition to a number of requirements that must be met once your firm has clients.

How Do I Become an Independent Broker?

There are many requirements to becoming an independent broker-dealer. A great starting place is forming your business. Pursue the appropriate business licenses for your local and state governing bodies. Then, consider pursuing memberships to the various required regulatory bodies, like FINRA and the SEC.

The Bottom Line

All of this information is likely overwhelming. FINRA has a reputation for ongoing requests for documentation and constant back-and-forth communication. However, if you get through the approval process and then plan your work and work your plan, the potential rewards for a successful broker-dealer firm are high.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
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