Difference between mortgage agent and broker individual marketplace

Any material change in the control persons of a mortgage broker must be reported to the Commissioner at least 30 calendar days before the change. Each new control person must submit to a background investigation in the manner provided in NRS B. A new control person may not participate in the management of a mortgage broker until the person is approved by the Commissioner.

A change of control of a mortgage broker is not effective until the change of control is approved by the Commissioner. A transfer, sale or conveyance of outstanding voting stock or ownership interest in a mortgage broker that will result in the cumulative transfer, from the date upon which the license of the mortgage broker was issued, of 25 percent or more of the outstanding voting stock or ownership interest in the mortgage broker is deemed to constitute a change of control.

At least 15 days before a person acquires stock or ownership in a mortgage broker as a result of a transfer that constitutes a change of control, the mortgage broker shall make a written application to the Commissioner for approval of the change of control. The application must include, without limitation: a The name and percentage of ownership of each person who has obtained or is obtaining stock or ownership resulting in a cumulative transfer of 25 percent or more of the outstanding voting stock or ownership interest in the mortgage broker; and b A personal interrogatory and a complete set of fingerprints of each such person or, if the applicant is not a natural person, each control person of the applicant, in a form prescribed by the Commissioner, and written consent authorizing the Commissioner to forward the fingerprints to the Central Repository for Nevada Records of Criminal History for submission to the Federal Bureau of Investigation for its report in the manner provided in NRS B.

The Commissioner will conduct an investigation of each application submitted pursuant to subsection 3 to determine whether the requirements necessary for licensure pursuant to this chapter and chapter B of NRS are met. A mortgage broker who wishes to change the location of his or her principal office or branch office must file a request with the Commissioner, return his or her original license for a principal office or branch office to the Commissioner and submit any additional information required by the Commissioner.

A mortgage broker may not change the location of his or her principal office or a branch office until the Commissioner has approved the transfer and issued a new license reflecting the change in location. A mortgage broker may not surrender his or her license or close his or her principal office or a branch office until: a The mortgage broker has returned his or her original license; and b The Commissioner has approved the surrender or closure.

The request for approval of the surrender of the license or closure of the principal office of the mortgage broker or a branch office must contain the following information: a The status of any incomplete applications for mortgage loans and the manner in which the loans will be finalized; b An accounting of any trust account maintained by the mortgage broker and the plan for distribution of money in the account; c If the mortgage broker is servicing any loans made or arranged by the mortgage broker under his or her license as a mortgage broker, a listing of those loans and the plan for transferring those loans to another mortgage servicer; d If any mortgage agent associated with or employed by the mortgage broker has been terminated pursuant to subsection 3 of NRS B.

The Commissioner may require the person acquiring stock or ownership in a mortgage broker pursuant to subsection 2 to meet the requirements of the S. Mortgage Licensing Act, including, without limitation, submitting information to the Registry. Except as otherwise provided in subsection 2, the Commissioner will annually charge and collect a fee for supervision from each mortgage broker. The amount of the fee for supervision will be calculated pursuant to subsection 2.

The Commissioner will annually bill each mortgage broker for the fee for supervision. The fee for supervision must be paid within 30 calendar days after the date of the invoice. Any payment received after that date must include a penalty of 10 percent of the fee plus an additional 1 percent of the fee for each complete month, or portion of the last month, that the fee is not paid. The Commissioner may charge a fee equivalent to the estimated or actual fee charged to the Division for the time of an attorney required in any examination, investigation or hearing conducted pursuant to chapter B of NRS.

The Commissioner will bill each mortgage broker upon the completion of the activity for the fee established in subsection 3. The fee must be paid within 30 calendar days after the date of the invoice. Except as otherwise provided in this subsection, any payment received after that date must include a penalty of 10 percent of the fee plus an additional 1 percent of the fee for each complete month, or portion of the last month, that the fee is not paid.

The Commissioner may waive the penalty for good cause. Upon written request by a mortgage broker, the Division will provide an accounting of the time billed to the mortgage broker pursuant to this subsection. Failure of a mortgage broker to pay the fee required in subsection 1 or 3 as provided in this section constitutes grounds for the imposition of any discipline authorized pursuant to NRS B. Has not paid all fees, fines and assessments owed to the Division or this State; 2.

Is not properly registered with the Registry; 3. Fails to provide any required annual financial statements or reports of condition to the Division or Registry; or 4. Fails to provide any other item required by federal or state law or regulation. Each mortgage broker shall pay to the Division an annual assessment as required pursuant to NRS F. The Division will bill each mortgage broker for the assessment.

The assessment must be paid within 30 calendar days after the date the bill is received. A charge of 10 percent of the assessment will be imposed on any mortgage broker whose assessment is received by the Division after the date on which the assessment is due. The Commissioner or his or her designee may: a Require the mortgage broker to produce, for the purposes of the examination, audit or investigation, all documents: 1 Relating to business conducted by the mortgage broker pursuant to this chapter or chapter B of NRS; 2 Required to be kept by the mortgage broker pursuant to any federal or state law or regulation; or 3 Related to the operation of the business of the mortgage broker or any affiliated business that conducts business activities which are directly related to the business of the mortgage broker; and b Inspect and copy any documents which are in the possession, control or custody of the mortgage broker and which are related to business conducted pursuant to this chapter or chapter B of NRS.

The Commissioner will incorporate such an audit report in the report of examination, report of investigation or other writing of the Commissioner. Is not proven solely by a decrease in income from any previous period if the mortgage broker remains profitable; and 2. May be shown by material receivables or payables to related parties, material off-balance sheet commitments, contingent liabilities or other identified concerns related to the deterioration of net worth or liquidity.

The mortgage broker will be subject to close regulatory supervision, and the examiner will recommend disciplinary action against the mortgage broker to the Commissioner. The examiner will recommend disciplinary action against the mortgage broker to the Commissioner. Not more than 30 days after the completion of an examination of a mortgage broker, the examiner that performed the examination shall prepare a draft report of the examination and provide the draft report to appropriate personnel of the Division.

The draft report must include only: a Facts that are contained in the files, books, records or other documents of the mortgage broker that were examined by the examiner; b Facts that are contained in statements made by officers or agents of the mortgage broker or other persons that the examiner interviewed concerning the mortgage broker; and c Conclusions and recommendations that are reasonably supported by the facts that are included in the draft report, including, but not limited to, the rating given to the mortgage broker pursuant to NAC B.

Not more than 15 days after the draft report of an examination is received by the Division, the Commissioner or his or her designee will deliver to the mortgage broker who was examined: a A copy of the draft report; and b Notice that the mortgage broker has not more than 30 days, unless the Commissioner, for good cause, allows a longer period, to review the draft report and submit to the Commissioner, in writing, any comments regarding or objections to matters contained in the draft report.

If the findings of the initial draft report are supported by the findings of the examiner after completion of the reopened examination, the mortgage broker is responsible for the costs attributable to the reopened examination pursuant to NRS B. Pursuant to NRS B. If the examination and report reveal that a mortgage broker is operating in violation of this chapter, chapter B of NRS or a previous order of the Commissioner, the Commissioner may order the mortgage broker to take any action the Commissioner deems necessary or appropriate to correct the violation.

The Commissioner may, for good cause, extend any period specified in this section that is applicable to an examiner, the Commissioner or his designee for an additional period of not more than 15 days. Each mortgage broker shall submit, for each month, on a form approved by the Commissioner, a report on the volume of loans arranged in that month. If the mortgage broker is performing loan servicing and maintains any accounts described in subsection 4 of NRS B.

The monthly report must be submitted to the Commissioner by the 15th day of the month following the month for which the report was made. If no loans were arranged in that month, the report must state that fact. If, on the last day of any month, a debtor has failed to make two or more consecutive payments in accordance with the terms of the loan, a mortgage broker who is performing loan servicing and maintains any accounts described in subsection 4 of NRS B.

If the mortgage broker is not servicing any loans in which a debtor has failed to make two or more consecutive payments in accordance with the terms of the loan, the monthly report required pursuant to subsection 1 must state that fact. The mortgage broker must comply with the provisions of subsection 2 each month until: a The debtor or his or her designee remedies the delinquency in payments and any default; or b The lien securing the loan is extinguished.

The Commissioner may refuse to renew the license of a mortgage broker who has not submitted a monthly report required by subsection 1 for 1 or more of the preceding 12 months. The term includes, without limitation: 1. For a loan secured by a dwelling, a file that includes, but is not limited to, the following documents, if applicable to the type and purpose of the loan: a The real estate sales contract; b Escrow instructions; c The preliminary title report; d The loan application, including, but not limited to, any attachments or supplements; e An appraisal report or any other independent assessment of the value of the mortgaged property; f Any verification of representations made by the consumer on the application for a mortgage; g A credit report; h Any commitments made by the lender to the consumer, including, but not limited to, a commitment to guarantee the consumer a certain interest rate and a commitment to fund the loan; and i Any disclosures required by state or federal law.

For a loan secured by commercial property, a file that must include all the items required pursuant to subsection 1, if applicable. For a loan brokered to a private investor, a file that must include all the items required pursuant to subsection 1, if applicable, and any additional documents or disclosures required pursuant to this chapter, chapter B of NRS or federal law, including, but not limited to: a The original documents subject to the provisions of NAC B. For a loan funded by the mortgage broker, a file that must include all the items required pursuant to subsection 1 and all closing documentation, including, but not limited to, a recorded or confirmed deed of trust, the title insurance policy, the note, the hazard insurance policy and any subsequent assignment to additional investors.

Assignments to private investors must comply with all documentation requirements of this chapter and chapter B of NRS. The mortgage broker shall retain records of all his or her completed mortgage transactions for a period of at least 4 years after the date of the last activity relating to the transaction. The mortgage broker shall retain applications for mortgages that were denied or withdrawn for a period of at least 1 year or as otherwise required by federal law.

Except as otherwise provided in NAC B. A mortgage broker shall retain a copy of the documents described in subsection 1 and shall retain in his or her files a statement from the private investor, on a form provided by the Division, acknowledging that: a The private investor received the documents, or that the private investor waived in writing the right to receive the documents; b The decision to make the loan was made after the private investor had the opportunity to receive and review the documents; and c The private investor continues to meet the minimum financial requirement set forth in NAC B.

If the loan is made, the mortgage broker shall retain in his or her files and provide to the private investor: a A copy of the promissory note; b A recorded copy of the deed of trust securing the loan; and c A copy of the policy of title insurance on the property securing the loan. If the loan is made, the mortgage broker shall retain in his or her files: a A copy of a policy of fire insurance which is adequate to cover the replacement costs of all improvements on the property securing the loan, including an endorsement naming the private investor as the insured, when applicable; and b If the borrower is not a natural person, a copy of its statement authorizing the loan.

The mortgage broker shall store his or her original notes, if retained, in a fireproof container or room. The mortgage broker shall provide a copy of the appraisal or independent assessment of the value of the mortgage property required pursuant to NRS B. The calculation: 1. A broker-dealer must comply with relevant state law as well as federal law and applicable SRO rules.

Timeframes for registration with individual states may differ from the federal and SRO timeframes. As such, when deciding to register as a broker-dealer, it is important to plan for the time required for processing Federal, state, and SRO registration or membership applications.

Duty to update Form BD. A registered broker-dealer must keep its Form BD current. Thus, it must promptly update its Form BD by filing amendments whenever the information on file becomes inaccurate or incomplete for any reason.

Prohibited Broker-Dealer Names. Title 18, Section of the United States Code makes it a criminal offense to use the words "National," "Federal," "United States," "Reserve," or "Deposit Insurance" in the name of a person or organization in the brokerage business, unless otherwise allowed by federal law. Further, a broker-dealer name that is otherwise materially misleading would become subject to scrutiny under Exchange Act Section 10 b , and Rule 10b-5 thereunder, the general antifraud rules, and any other applicable provisions.

If a broker-dealer restricts its transactions to the national securities exchanges of which it is a member and meets certain other conditions, it may be required only to be a member of those exchanges. If a broker-dealer effects securities transactions other than on a national securities exchange of which it is a member, however, including any over-the-counter business, it must become a member of FINRA, unless it qualifies for the exemption in Rule 15b FINRA's webpage at www.

You may also wish to consult the web pages of the individual exchanges for additional information. You may wish to consult the MSRB's website at www. SIPC Membership Every registered broker-dealer must be a member of the Securities Investor Protection Corporation, or SIPC, unless its principal business is conducted outside of the United States or consists exclusively of the sale or distribution of investment company shares, variable annuities, or insurance.

Telephone: , fax: , or visit SIPC's website at www. State Requirements Every state has its own requirements for a person conducting business as a broker-dealer within that state. Each state's securities regulator can provide you with information about that state's requirements.

You can obtain contact information for these regulators from the North American Securities Administrators Association, Inc. Associated Persons Section 3 a 18 ; Rule 15b The Act defines an "associated person" of a broker-dealer as any partner, officer, director, branch manager, or employee of the broker-dealer, any person performing similar functions, or any person controlling, controlled by, or under common control with, the broker-dealer.

A broker-dealer must file a Form U-4 with the applicable SRO for each associated person who will effect transactions in securities when that person is hired or otherwise becomes associated. Form U-4 is used to register individuals and to record these individuals' prior employment and disciplinary history. An associated person who effects or is involved in effecting securities transactions also must meet qualification requirements.

These include passing an SRO securities qualification examination. Many individuals take the comprehensive "Series 7" exam. If individuals engage only in activities involving sales of particular types of securities, such as municipal securities, direct participation programs limited partnerships or mutual funds, they may wish to take a specialized examination focused on that type of security, instead of the general securities examination. There is also a special exam for assistant representatives, whose activities are limited to accepting unsolicited customer orders for execution by the firm.

Supervisory personnel, and those who engage in specialized activities such as options trading, must take additional exams that cover those areas. These examinations require the Series 7 exam as a prerequisite. You can obtain copies of Form U-4, as well as information on securities qualification examinations, from an SRO. FINRA's website at www. Also note that individual states have their own licensing and registration requirements, so you should consult with the applicable state securities regulators for further information.

Note: If you hold a series license, you must be properly associated with a registered broker-dealer to effect securities transactions. It is not sufficient merely to hold a series license when engaging in securities business. If you hold a series license and wish to start an independent securities business, or otherwise wish to effect securities transactions outside of an "associated person" relationship, you would first need to register as a broker-dealer.

Successor Broker-Dealer Registration Rules 15b, 15Ba, and 15Ca A successor broker-dealer assumes substantially all of the assets and liabilities, and continues the business, of a registered predecessor broker-dealer. A successor broker-dealer must file a new Form BD or, in special instances, amend the predecessor broker-dealer's Form BD within 30 days after such succession.

The filing should indicate that the applicant is a successor. See also, the instructions to Form BD. This form requires the broker-dealer to disclose the amount of any funds or securities it owes customers, and whether it is the subject of any proceedings, unsatisfied judgments, liens, or customer claims.

These disclosures help to ensure that a broker-dealer's business is concluded in an orderly manner and that customers' funds and securities are protected. Form BDW may also be used by a broker-dealer to withdraw from membership with particular SROs, or to withdraw from registration with particular states, without withdrawing all of its registrations and memberships. The SEC may also cancel a broker-dealer's registration if it finds that the firm is no longer in existence or has ceased doing business as a broker-dealer.

Federal law permits firms already registered with either the SEC or the CFTC to register with the other agency, for the limited purpose of trading security futures, by filing a notice. Specifically, firms registered as general purpose broker-dealers under Section 15 b of the Act may "notice" register with the CFTC. Section 15 b 12 of the Act provides a limited exception to this notice registration requirement for certain natural persons who are members of security futures exchanges.

However, futures commission merchants or introducing brokers that conduct a business in securities other than security futures must be registered as general-purpose broker-dealers. Broker-dealers must also comply with many requirements that are designed to maintain high industry standards. We discuss some of these provisions below.

Antifraud Provisions Sections 9 a , 10 b , and 15 c 1 and 2 The "antifraud" provisions prohibit misstatements or misleading omissions of material facts, and fraudulent or manipulative acts and practices, in connection with the purchase or sale of securities. Duty of Fair Dealing Broker-dealers owe their customers a duty of fair dealing. This fundamental duty derives from the Act's antifraud provisions mentioned above. Under the so-called "shingle" theory, by virtue of engaging in the brokerage profession e.

Based on this important representation, the SEC, through interpretive statements and enforcement actions, and the courts, through case law, have set forth over time certain duties for broker-dealers. These include the duties to execute orders promptly, disclose certain material information i. SRO rules also reflect the importance of fair dealing. These rules generally require broker-dealers to observe high standards of commercial honor and just and equitable principles of trade in conducting their business.

The exchanges and the MSRB have similar rules. Suitability Requirements Broker-dealers generally have an obligation to recommend only those specific investments or overall investment strategies that are suitable for their customers. The concept of suitability appears in specific SRO rules such as NASD Rule and has been interpreted as an obligation under the antifraud provisions of the federal securities laws.

Under suitability requirements, a broker-dealer must have an "adequate and reasonable basis" for any recommendation that it makes. Reasonable basis suitability, or the reasonable basis test, relates to the particular security or strategy recommended. Therefore, the broker-dealer has an obligation to investigate and obtain adequate information about the security it is recommending. A broker-dealer also has an obligation to determine customer-specific suitability.

In particular, a broker-dealer must make recommendations based on a customer's financial situation, needs, and other security holdings. This requirement has been construed to impose a duty of inquiry on broker-dealers to obtain relevant information from customers relating to their financial situations and to keep such information current. SROs consider recommendations to be unsuitable when they are inconsistent with the customer's investment objectives.

Duty of Best Execution The duty of best execution, which also stems from the Act's antifraud provisions, requires a broker-dealer to seek to obtain the most favorable terms available under the circumstances for its customer orders. This applies whether the broker-dealer is acting as agent or as principal. The SRO rules also include a duty of best execution. For example, FINRA members must use "reasonable diligence" to determine the best market for a security and buy or sell the security in that market, so that the price to the customer is as favorable as possible under prevailing market conditions.

Customer Confirmation Rule Rule 10b and MSRB rule G A broker-dealer must provide its customers, at or before the completion of a transaction, with certain information, including: the date, time, identity, price, and number of shares involved; its capacity agent or principal and its compensation for agency trades, compensation includes its commission and whether it receives payment for order flow; 5 and for principal trades, mark-up disclosure may be required ; the source and amount of any third party remuneration it has received or will receive; 6 other information, both general such as, if the broker-dealer is not a SIPC member and transaction-specific such as the yield, in most transactions involving debt securities.

A broker-dealer may also be obligated under the antifraud provisions of the Act to disclose additional information to the customer at the time of his or her investment decision. Disclosure of Credit Terms Rule 10b Broker-dealers must notify customers purchasing securities on credit about the credit terms and the status of their accounts. A broker-dealer must establish procedures for disclosing this information before it extends credit to a customer for the purchase of securities.

A broker-dealer must give the customer this information at the time the account is opened, and must also provide credit customers with account statements at least quarterly. Restrictions on Short Sales Regulation SHO A "short sale" is generally a sale of a security that the seller doesn't own or for which the seller delivers borrowed shares. Regulation SHO was adopted in to update short sale regulation in light of numerous market developments since short sale regulation was first adopted in Some of the goals of Regulation SHO include: Establishing uniform "locate" and "close-out" requirements in order to address problems associated with failures to deliver, including potentially abusive "naked" short selling.

Locate Requirement: Regulation SHO requires a broker-dealer to have reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due before effecting a short sale order in any equity security. This "locate" must be made and documented prior to effecting the short sale. Market makers engaged in bona fide market making are exempted from the "locate" requirement. For instance, with limited exception, Regulation SHO requires brokers and dealers that are participants of a registered clearing agency to take action to "close-out" failure-to-deliver positions "open fails" in threshold securities that have persisted for 13 consecutive settlement days.

Closing out requires the broker or dealer to purchase securities of like kind and quantity. Until the position is closed out, the broker or dealer and any broker or dealer for which it clears transactions for example, an introducing broker may not effect further short sales in that threshold security without borrowing or entering into a bona fide agreement to borrow the security known as the "pre-borrowing" requirement.

Creating uniform order marking requirements for sales of all equity securities. This means that a broker-dealer must mark orders as "long" or "short. Trading During an Offering Regulation M Regulation M is designed to protect the integrity of the securities trading market as an independent pricing mechanism by governing the activities of underwriters, issuers, selling security holders, and other participants in connection with a securities offering.

These rules are aimed at preventing persons having an interest in an offering from influencing the market price for the offered security in order to facilitate a distribution. Rule of Regulation M generally prohibits underwriters, broker-dealers and other distribution participants from bidding for, purchasing, or attempting to induce any person to bid for or purchase, any security which is the subject of a distribution until the applicable restricted period has ended.

An offering's "restricted period" begins either one or five business days depending on the trading volume value of the offered security and the public float value of the issuer before the day of the offering's pricing and ends upon completion of the distribution. Rule contains various exceptions that are designed to permit an orderly distribution of securities and limit disruption in the market for the securities being distributed.

Rule of Regulation M governs passive market making by broker-dealers participating in an offering of a Nasdaq security. Rule of Regulation M governs stabilization transactions, syndicate short covering activity, and penalty bids.

Rule of Regulation M prevents manipulative short sales prior to pricing an offering by prohibiting the purchase of offering securities if a person sold short the security that is the subject of the offering during the Rule restricted period. The rule contains exceptions for bona fide purchases, separate accounts, and investment companies.

Restrictions on Insider Trading The SEC and the courts interpret Section 10 b and Rule 10b-5 under the Act to bar the use by any person of material non-public information in the purchase or sale of securities, whenever that use violates a duty of trust and confidence owed to a third party. Section 15 f of the Act specifically requires broker-dealers to have and enforce written policies and procedures reasonably designed to prevent their employees from misusing material non-public information.

Because employees in the investment banking operations of broker-dealers frequently have access to material non-public information, firms need to create procedures designed to limit the flow of this information so that their employees cannot use the information in the trading of securities. Broker-dealers can use these information barriers as a defense to a claim of insider trading.

Such procedures typically include: training to make employees aware of these restrictions; employee trading restrictions; isolation of certain departments; and limitations on investment bank proprietary trading. Restrictions on Private Securities Transactions NASD Rule provides that "no person associated with a member shall participate in any manner in a private securities transaction" except in accordance with the provisions of the rule. To the extent that any such transactions are permitted under the rule, prior to participating in any private securities transaction, the associated person must provide written notice to the member firm as described in the rule.

If compensation is involved, the member firm must approve or disapprove the proposed transaction, record it in its books and records, and supervise the transaction as if it were executed on behalf of the member firm. Other conditions may also apply. In addition, private securities transactions of an associated person may be subject to an analysis under Exchange Act Section 10 b and Rule 10b-5, as well as the broker-dealer supervisory provisions of Section 15 f described in Part V.

Analysts and Regulation AC Regulation AC or Regulation Analyst Certification requires brokers, dealers, and persons associated with brokers or dealers that publish, distribute, or circulate research reports to include in those reports a certification that the views expressed in the report accurately reflect the analyst's personal views.

The report must also disclose whether the analyst received compensation for the views expressed in the report. If the analyst has received related compensation, the broker, dealer, or associated person must disclose its amount, source, and purpose.

Regulation AC applies to all brokers and dealers, as well as to those persons associated with a broker or dealer that fall within the definition of "covered person. The SRO rules impose restrictions on analyst compensation, personal trading activities, and involvement in investment banking activities. The SRO rules also include disclosure requirements for research reports and public appearances.

Trading by Members of Exchanges, Brokers and Dealers Section 11 a Broker-dealers that are members of national securities exchanges are subject to additional regulations regarding transactions they effect on exchanges. For example, except under certain conditions, they generally cannot effect transactions on exchanges for their own accounts, the accounts of their associated persons, or accounts that they or their associated persons manage.

Exceptions from this general rule include transactions by market makers, transactions routed through other members, and transactions that yield to other orders. Exchange members may wish to seek guidance from their exchange regarding these provisions. Extending Credit on New Issues; Disclosure of Capacity as Broker or Dealer Section 11 d Section 11 d 1 of the Act generally prohibits a broker-dealer that participates in the distribution of a new issue of securities from extending credit to customers in connection with the new issue during the distribution period and for 30 days thereafter.

Sales by a broker-dealer of mutual fund shares and variable insurance product units are deemed to constitute participation in the distribution of a new issue. Therefore, purchase of mutual fund shares or variable product units using credit extended or arranged by the broker-dealer during the distribution period is a violation of Section 11 d 1. However, Exchange Act Rule 11d permits a broker-dealer to extend credit to a customer on newly sold mutual fund shares and variable insurance product units after the customer has owned the shares or units for 30 days.

Section 11 d 2 of the Act requires a broker-dealer to disclose in writing, at or before the completion of each transaction with a customer, whether the broker-dealer is acting in the capacity of broker or dealer with regard to the transaction. The "Order Protection Rule" requires trading centers to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the execution of trades at prices inferior to protected quotations displayed by other trading centers, subject to an applicable exception.

To be protected, a quotation must be immediately and automatically accessible. The "Access Rule" requires fair and non-discriminatory access to quotations, establishes a limit on access fees to harmonize the pricing of quotations across different trading centers, and requires each national securities exchange and national securities association to adopt, maintain, and enforce written rules that prohibit their members from engaging in a pattern or practice of displaying quotations that lock or cross automated quotations.

The "Market Data Rules" update the requirements for consolidating, distributing, and displaying market information. In addition, amendments to the joint industry plans for disseminating market information modify the formulas for allocating plan revenues among the self-regulatory organizations and broaden participation in plan governance. Regulation NMS also updates and streamlines the existing Exchange Act rules governing the national market system previously adopted under Section 11A of the Exchange Act, and consolidates them into a single regulation.

Order Execution Obligations Rules of Regulation NMS Broker-dealers that are exchange specialists or Nasdaq market makers must comply with particular rules regarding publishing quotes and handling customer orders. These two types of broker-dealers have special functions in the securities markets, particularly because they trade for their own accounts while also handling orders for customers.

These rules, which include the "Quote Rule" and the "Limit Order Display Rule," increase the information that is publicly available concerning the prices at which investors may buy and sell exchange-listed and Nasdaq National Market System securities. The Quote Rule requires specialists and market makers to provide quotation information to their self-regulatory organization for dissemination to the public.

The quote information that the specialist or market maker provides must reflect the best prices at which he is willing to trade the lowest price the dealer will accept from a customer to sell the securities and the highest price the dealer will pay a customer to purchase the securities. A specialist or market maker may still trade at better prices in certain private trading systems, called electronic communications networks, or "ECNs," without publishing an improved quote.

This is true only when the ECN itself publishes the improved prices and makes those prices available to the investing public. Thus, the Quote Rule ensures that the public has access to the best prices at which specialists and market makers are willing to trade even if those prices are in private trading systems.

Limit orders are orders to buy or sell securities at a specified price. The Limit Order Display Rule requires that specialists and market makers publicly display certain limit orders they receive from customers. If the limit order is for a price that is better than the specialist's or market maker's quote, the specialist or market maker must publicly display it.

The rule benefits investors because the publication of trading interest at prices that improve specialists' and market makers' quotes present investors with improved pricing opportunities. For purposes of the regulation, an alternative trading system or ATS is any organization, association, person, group of persons, or system that constitutes, maintains, or provides a marketplace or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as defined in Rule 3b under the Exchange Act.

Further, for purposes of the regulation, an ATS may not set rules governing the conduct of subscribers other than with respect to the use of the particular trading system , or discipline subscribers other than by exclusion from trading. To the extent that an ATS or the sponsoring broker-dealer seeks to establish conduct or disciplinary rules, the entity may be required to register as a national securities exchange or obtain a Commission exemption from exchange registration based on limited trading volume.

In order to acquire the status of an ATS, a firm must first be registered as a broker-dealer, and it must file an initial operation report with respect to the trading system on Form ATS at least 20 days before commencing operation. The initial operation report must be accurate and kept current. The Commission does not issue approval orders for Form ATS filings; however, the Form ATS is not considered filed unless it complies with all applicable requirements under the Regulation.

Regulation ATS contains provisions concerning the system's operations, including: fair access to the trading system; fees charged; the display of orders and the ability to execute orders; system capacity, integrity and security; record keeping and reporting; and procedures to ensure the confidential treatment of trading information. An ATS must also comply with any applicable SRO rules and with state laws relating to alternative trading systems and relating to the offer or sale of securities or the registration or regulation of persons or entities effecting securities transactions.

Finally, an ATS may not use in its name the word "exchange," or terms similar to the word "exchange," such as the term "stock market. Penny Stock Rules Rules 15g-2 through 15g-9, Schedule 15G Most broker-dealers that effect transactions in "penny stocks" have certain enhanced suitability and disclosure obligations to their customers. Penny stocks include the equity securities of private companies with no active trading market if they do not qualify for one of the exclusions from the definition of penny stock.

Before a broker-dealer that does not qualify for an exemption 9 may effect a solicited transaction in a penny stock for or with the account of a customer it must: 1 provide the customer with a risk disclosure document, as set forth in Schedule 15G, and receive a signed and dated acknowledgement of receipt of that document from the customer See Rule 15g-2 ; 2 approve the customer's account for transactions in penny stocks, provide the customer with a suitability statement, and receive a signed a dated copy of that statement from the customer; and 3 receive the customer's written agreement to the transaction See Rule 15g The broker-dealer also must wait at least two business days after sending the customer the risk disclosure document and the suitability statement before effecting the transaction.

These notices must be clear and conspicuous, and must accurately reflect the broker-dealer's policies and practices. Before disclosing nonpublic personal information about a consumer to a nonaffiliated third party, a broker-dealer must first give a consumer an opt-out notice and a reasonable opportunity to opt out of the disclosure.

There are exceptions from these notice and opt-out requirements for disclosures to other financial institutions under joint marketing agreements and to certain service providers. There also are exceptions for disclosures made for purposes such as maintaining or servicing accounts, and disclosures made with the consent or at the direction of a consumer, or for purposes such as protecting against fraud, reporting to consumer reporting agencies, and providing information to law enforcement agencies.

In addition, it includes a safeguards rule that requires a broker-dealer to adopt written policies and procedures for administrative, technical, and physical safeguards to protect customer records and information. Further, it includes a disposal rule that requires a broker-dealer other than a broker-dealer registered by notice with the Commission to engage solely in transactions in securities futures that maintains or possesses consumer report information for a business purpose to take reasonable measures to protect against unauthorized access to or use of the information in connection with its disposal.

Investment Adviser Registration Broker-dealers offering certain types of accounts and services may also be subject to regulation under the Investment Advisers Act. See Section a 11 of the Investment Advisers Act. In general, a broker-dealer whose performance of advisory services is "solely incidental" to the conduct of its business as a broker-dealer and that receives no "special compensation" is excepted from the definition of investment adviser.

Thus, for example, a broker-dealer that provides advice and offers fee-based accounts i. Finally, under the same proposed rule, a broker-dealer that is registered under the Exchange Act and registered under the Investment Advisers Act would be an investment adviser solely with respect to those accounts for which it provides services that subject the broker-dealer to the Investment Advisers Act.

See e. Net Capital Rule Rule 15c The purpose of this rule is to require a broker-dealer to have at all times enough liquid assets to promptly satisfy the claims of customers if the broker-dealer goes out of business. Under this rule, broker-dealers must maintain minimum net capital levels based upon the type of securities activities they conduct and based on certain financial ratios.

Broker-dealers that do not clear and carry customer accounts can operate with lower levels of net capital. Use of Customer Balances Rule 15c Broker-dealers that use customers' free credit balances in their business must establish procedures to provide specified information to those customers, including: the amount due to those customers; the fact that such funds are not segregated and may be used by the broker-dealer in its business; and the fact that such funds are payable on demand of the customer.

Customer Protection Rule Rule 15c This rule protects customer funds and securities held by broker-dealers. Under the rule, a broker-dealer must have possession or control of all fully-paid or excess margin securities held for the account of customers, and determine daily that it is in compliance with this requirement. The broker-dealer must also make periodic computations to determine how much money it is holding that is either customer money or obtained from the use of customer securities.

If this amount exceeds the amount that it is owed by customers or by other broker-dealers relating to customer transactions, the broker-dealer must deposit the excess into a special reserve bank account for the exclusive benefit of customers. This rule thus prevents a broker-dealer from using customer funds to finance its business. Required Books, Records, and Reports Rules 17a-3, 17a-4, 17a-5, 17a 11 Broker-dealers must make and keep current books and records detailing, among other things, securities transactions, money balances, and securities positions.

They also must keep records for required periods and furnish copies of those records to the SEC on request. These records include e-mail. Broker-dealers also must file with the SEC periodic reports, including quarterly and annual financial statements. The annual statements generally must be certified by an independent public accountant. In addition, broker-dealers must notify the SEC and the appropriate SRO 12 regarding net capital, recordkeeping, and other operational problems, and in some cases file reports regarding those problems, within certain time periods.

This gives us and the SROs early warning of these problems. Risk Assessment Requirements Rules 17h-1T and 17h-2T Certain broker-dealers must maintain and preserve certain information regarding those affiliates, subsidiaries and holding companies whose business activities are reasonably likely to have a material impact on their own financial and operating condition including the broker-dealer's net capital, liquidity, or ability to conduct or finance operations.

Broker-dealers must also file a quarterly summary of this information. This information is designed to permit the SEC to assess the impact these entities may have on the broker-dealer. These include: submitting to Commission and SRO examinations; participating in the lost and stolen securities program; complying with the fingerprinting requirement; maintaining and reporting information regarding their affiliates; following certain guidelines when using electronic media to deliver information; and maintaining an anti-money laundering program.

The appropriate SRO generally inspects newly-registered broker-dealers for compliance with applicable financial responsibility rules within six months of registration, and for compliance with all other regulatory requirements within twelve months of registration. A broker-dealer must permit the SEC to inspect its books and records at any reasonable time. Lost and Stolen Securities Program Rule 17f-1 In general, all broker-dealers must register in the lost and stolen securities program.

The limited exceptions include broker-dealers that effect securities transactions exclusively on the floor of a national securities exchange solely for other exchange members and do not receive or hold customer securities, and broker-dealers whose business does not involve handling securities certificates. Broker-dealers must report losses, thefts, and instances of counterfeiting of securities certificates on Form XF-1A, and, in some cases, broker-dealers must make inquiries regarding securities certificates coming into their possession.

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