Administrative Code

Virginia Administrative Code
12/1/2021

Chapter 20. Broker-Dealers, Broker-Dealer Agents and Agents of the Issuer

Part I
Broker-Dealers

21VAC5-20-10. Application for registration as a broker-dealer.

A. Application for registration as a broker-dealer by a FINRA member shall be filed in compliance with all requirements of CRD and in full compliance with forms and regulations prescribed by the commission and shall include all information required by such forms.

B. An application shall be deemed incomplete for registration as a broker-dealer by a FINRA member unless the applicant submits the following executed forms, fee, and information:

1. Form BD.

2. Statutory fee payable to FINRA in the amount of $200 pursuant to § 13.1-505 F of the Act.

3. Evidence of approved FINRA membership.

4. Evidence of at least one qualified agent registration pending on CRD.

5. Any other information the commission may require.

C. Application for registration for any non-FINRA member broker-dealer shall be filed with the commission at its Division of Securities and Retail Franchising or such other entity designated by the commission on and in full compliance with forms prescribed by the commission and shall include all information required by such forms.

D. An application shall be deemed incomplete for registration as a non-FINRA member broker-dealer unless the applicant submits the following executed forms, fee, and information to the commission:

1. Form BD.

2. Statutory fee payable to the Treasurer of Virginia in the amount of $200 pursuant to § 13.1-505 F of the Act.

3. Financial statements required by 21VAC5-20-80.

4. Evidence of exam requirements for principals required by 21VAC5-20-70.

5. Evidence of at least one qualified individual with an agent registration pending with the division on behalf of the broker-dealer.

6. Any other information the commission may require.

E. The commission shall either grant or deny each application for registration within 30 days after it is filed. However, if additional time is needed to obtain or verify information regarding the application, the commission may extend such period as much as 90 days by giving written notice to the applicant. No more than three such extensions may be made by the commission on any one application. An extension of the initial 30-day period, not to exceed 90 days, shall be granted upon written request of the applicant.

Statutory Authority

§§ 12.1-13 and 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 200, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC890040, eff. July 1, 1989; Case No. SEC900034, eff. July 1, 1990; Virginia Register Volume 14, Issue 22, eff. July 1, 1998; Volume 15, Issue 22, eff. July 1, 1999; Volume 17, Issue 20, eff. July 1, 2001; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-20-20. Expiration.

A broker-dealer's registration, and any renewal thereof, shall expire annually at midnight on the 31st day of December, unless renewed in accordance with 21VAC5-20-30.

Statutory Authority

§ 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 201, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC840009, eff. October 5, 1984; Case No. SEC890040, eff. July 1, 1989.

21VAC5-20-30. Renewals.

A. To renew its registration, a FINRA member broker-dealer will be billed by CRD the statutory fee of $200 prior to the annual expiration date. A registration renewal shall be granted as a matter of course upon payment of the proper fee unless the registration was, or the renewal would be, subject to revocation under § 13.1-506 or nonrenewal under § 13.1-505 E.

B. Any non-FINRA broker-dealer shall file with the commission at its Division of Securities and Retail Franchising the following items at least 30 days prior to the expiration of registration:

1. Application for Renewal of a Broker-Dealer's Registration (Form S.A.2) accompanied by the statutory fee of $200.

2. Financial Statements:

a. The most recent certified financial statements prepared by an independent accountant in accordance with generally accepted accounting principles, as promulgated by the American Institute of Certified Public Accountants. "Certified Financial Statements," "Financial Statements" and "Independent Accountant" shall have the same definition as those terms are defined under subsection B of 21VAC5-20-80.

b. If the most recent certified financial statements precede the date of renewal by more than 120 days, the registrant must submit the certified financial statements required by subdivision 2 a of this subsection within 60 days after the date of the financial statements.

c. Whenever the commission so requires, an interim financial report shall be filed as of the date and within the period specified in the commission's request.

Statutory Authority

§§ 12.1-13 and 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 202, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC830011, eff. July 1, 1983; Case No. SEC840009, eff. October 5, 1984; Case No. SEC890040, eff. July 1, 1989; Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 17, Issue 20, eff. July 1, 2001; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-20-40. Updates and amendments.

A. A FINRA member broker-dealer shall update its Form BD as required by Form BD instructions and shall file all such amendments on and in compliance with all requirements of CRD and in full compliance with the regulations prescribed by the commission.

B. Any non-FINRA member broker-dealer shall update its Form BD as required by Form BD instructions and shall file all such amendments with the commission at its Division of Securities and Retail Franchising.

C. All broker-dealers must have at least one agent registered in Virginia as long as the firm maintains its registration.

Statutory Authority

§§ 12.1-13 and 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 203, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC890040, eff. July 1, 1989; Virginia Register Volume 17, Issue 20, eff. July 1, 2001; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-20-50. Termination of registration.

A. When a FINRA member broker-dealer desires to terminate its registration, it shall file Form BDW in compliance with all requirements of CRD and in full compliance with the regulations prescribed by the commission.

B. Any non-FINRA member broker-dealer shall file a Form BDW with the commission at its Division of Securities and Retail Franchising.

Statutory Authority

§ 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 204, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC890040, eff. July 1, 1989; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-20-60. Broker-dealer merger or consolidation.

A. When there is a merger or consolidation of two or more registrants, or the reorganization of a registrant, the surviving or new entity shall amend or file, as the case may be, Form BD (the filing of Form BD requires the payment of a $200 fee) and shall file a copy of the following with the commission at its Division of Securities and Retail Franchising upon its request:

1. The certificate of merger or consolidation.

2. The plan of merger or consolidation.

3. The amended or new charter and by-laws.

4. Any document of explanation.

5. The current financial statements of the surviving or new entity and surety bond, if necessary.

B. Such amendment and/or filing shall be made immediately after the merger or consolidation becomes effective, except that the required financial statements shall be filed within 30 calendar days of the effective date of the merger or consolidation. The registration of the surviving or new entity usually will be granted by the commission on the same date that the merger or consolidation becomes effective. Each agent of the nonsurviving or new entity shall comply with 21VAC5-20-90 before registration as an agent with his new employer becomes effective. Every other agent of the defunct corporation shall comply with 21VAC5-20-90 or 21VAC5-20-130, whichever may be applicable.

Statutory Authority

§§ 12.1-13 and 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 205, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC890040, eff. July 1, 1989; Case No. SEC910057, eff. July 1, 1991; Virginia Register Volume 17, Issue 20, eff. July 1, 2001; Volume 25, Issue 22, eff. July 1, 2009.

21VAC5-20-65. Broker-dealer records retention requirements.

The following requirements apply to every registered broker-dealer as a condition of registration as a broker-dealer under the Act:

1. All of the broker-dealer's records, promptly upon the request of the commission, will be made available for inspection by the commission and reproduction for the commission in an office where the records are maintained;

2. All of the broker-dealer's records or legible copies of the same, or printouts of the same, if automated, pertaining to a securities transaction any part of which occurred or is to occur within the Commonwealth of Virginia will be made available for inspection by the commission in the office of the commission's Division of Securities and Retail Franchising within five days after request of the commission for same;

3. The term "records" as used in this section means and includes all books, papers, documents, tapes, films, photographs, electronic readable format or other materials, regardless of physical form or characteristics that (i) are maintained for recordation or storage of information prepared, used or to be used in connection with a securities transaction or (ii) were used or are to be used in connection with securities transactions;

4. Failure to comply with this section may be considered grounds for the institution of a proceeding to revoke a broker-dealer's registration or for such other penalty prescribed by the Act; and

5. Any broker-dealer subject to a commission investigation may be required to pay the actual cost of the investigation.

Statutory Authority

§§ 12.1-13 and 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Virginia Register Volume 23, Issue 23, eff. July 1, 2007.

21VAC5-20-70. Examinations/qualifications.

A. Broker-dealers registered with the commission that are registered pursuant to § 15 of the Securities Exchange Act of 1934 (15 USC § 78o).

1. All principals of an applicant for registration as a broker-dealer must provide the commission with evidence of passing: (i) the Uniform Securities Agent State Law Examination, Series 63; (ii) the Uniform Combined State Law Examination, Series 66; or (iii) a similar examination in general use by securities administrators which, after reasonable notice and subject to review by the commission, the Director of the Division of Securities and Retail Franchising designates within the two-year period immediately preceding the date of the application.

2. In lieu of meeting the examination requirement described in subdivision 1 of this subsection, at least two principals of an applicant may provide evidence of having passed the General Securities Principal Qualification Exam (Series 24) or at least two principals of an applicant may provide evidence of having passed the Qualification Examination for Principals appropriate to the category of registration as specified by the type of business conducted by the broker-dealer within the two-year period immediately preceding the date of the applications.

Any individual who has been registered in any state jurisdiction as a principal within the two-year period immediately preceding the date of the filing of an application shall not be required to comply with the examination requirements of this section.

For the purposes of this subsection, the term "principal" means any person associated with a broker-dealer who is engaged directly (i) in the management, direction or supervision on a regular or continuous basis on behalf of such broker-dealer of the following activities: sales, training, research, investment advice, underwriting, private placements, advertising, public relations, trading, maintenance of books or records, financial operations; or (ii) in the training of persons associated with such broker-dealer for the management, direction, or supervision on a regular or continuous basis of any such activities.

3. This subsection is applicable only to principals of broker-dealers that are, or intend to forthwith become, registered pursuant to § 15 of the federal Securities Exchange Act of 1934.

B. Broker-dealers registered with the commission that are not registered pursuant to § 15 of the federal Securities Exchange Act of 1934.

1. All principals of an applicant for registration as a broker-dealer must provide the commission with evidence of passing:

a. The Uniform Securities Agent State Law Examination, Series 63; the Uniform Combined State Law Examination, Series 66; or a similar examination in general use by securities administrators which, after reasonable notice and subject to review by the commission, the Director of the Division of Securities and Retail Franchising designates within the two-year period immediately preceding the date of the application;

b. Any additional securities-related examination that the commission deems appropriate in light of the business in which the applicant proposes to engage; and

c. Any individual who has been registered in any state jurisdiction as a principal within the two-year period immediately preceding the date of the filing of an application shall not be required to comply with the examination requirements of this section.

2. This subsection is applicable only to principals of broker-dealers that are not, or do not intend to forthwith become, registered pursuant to § 15 of the federal Securities Exchange Act of 1934.

Statutory Authority

§§ 12.1-13 and 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 206, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC820019, eff. July 1, 1983; Case No. SEC830011, eff. July 2, 1984; Case No. SEC890040, eff. July 1, 1989; Virginia Register Volume 11, Issue 21, eff. July 1, 1995; Volume 13, Issue 25, eff. September 1, 1997; Volume 14, Issue 22, eff. July 1, 1998; Volume 15, Issue 22, eff. July 1, 1999; Volume 17, Issue 20, eff. July 1, 2001; Volume 19, Issue 23, eff. July 1, 2003; Volume 25, Issue 22, eff. July 1, 2009.

21VAC5-20-80. Financial statements and reports.

A. All financial statements required for registration of broker-dealers shall be prepared in accordance with generally accepted accounting principles, as promulgated by the American Institute of Certified Public Accountants.

B. Definitions:

"Certified financial statements" means those financial statements examined and reported upon with an opinion expressed by an independent accountant and shall include at least the following information:

1. Date of report, manual signature, city and state where issued, and identification without detailed enumeration of the financial statements and schedules covered by the report;

2. Representations as to whether the audit was made in accordance with generally accepted auditing standards and designation of any auditing procedures deemed necessary by the accountant under the circumstances of the particular case which may have been omitted, and the reason for their omission; nothing in this section however shall be construed to imply authority for the omission of any procedure which independent accountants would ordinarily employ in the course of an audit for the purpose of expressing the opinions required under this section;

3. Statement of the opinion of the accountant in respect to the financial statements and schedules covered by the report and the accounting principles and practices reflected therein, and as the consistency of the application of the accounting principles, or as to any changes in such principles which would have a material effect on the financial statements;

4. Any matters to which the accountant takes exception shall be clearly identified, the exemption thereto specifically and clearly stated, and, to the extent practicable, the effect of each such exception on the related financial statements given.

"Financial statements" means those reports, schedules and statements, prepared in accordance with generally accepted accounting principles and which contain at least the following information unless the context otherwise dictates:

1. Statement of Financial Condition or Balance Sheet;

2. Statement of Income;

3. Statement of Cash Flows;

4. Statement of Changes in Stockholder's/Partner's/Proprietor's/Member's Equity;

5. Statement of Changes in Liabilities Subordinated to Claims of General Creditors;

6. Schedule of the Computation of Net Capital Under Rule 15c3-1 of the Securities Exchange Act of 1934 (17 CFR 240.15c3-1);

7. Schedule of the Computation for Determination of the Reserve Requirements under Exhibit A of Rule 15c3-3 and Information Relating to the Possession and Control Requirements under Rule 15c3-3 of the Securities Exchange Act of 1934 (17 CFR 240.15c3-3).

"Independent accountant" means any certified public accountant in good standing and entitled to practice as such under the laws of the accountant's principal place of business or residence, and who is, in fact, not controlled by, or under common control with, the entity or person being audited.

1. For purposes of this definition, an accountant will be considered not independent with respect to any person or any of its parents, its subsidiaries, or other affiliates in which, during the period of the accountant's professional engagements to examine the financial statements being reported on the date of the report, the accountant or the firm or a member thereof had, or was committed to acquire, any direct financial interest or any material indirect financial interest; or in which, during the period of the accountant's professional engagements to examine the financial statements being reported on, at the date of the report or during the period covered by the financial statements, the accountant or the firm or a member thereof was connected as a promoter, underwriter, voting trustee, director, officer, or employee.

2. A firm will not be deemed not independent in regard to a particular person if a former officer or employee of such person is employed by the firm and such individual has completely disassociated himself from the person and its affiliates covering any period of employment by the person.

3. For partners in the firm participating in the audit or located in an office of the firm participating in a significant portion of the audit; and in determining whether an accountant may in fact be not independent with respect to a particular person, the commission will give appropriate consideration to all relevant circumstances, including evidence bearing on all relationships between the accountant and that person or any affiliate thereof, and will not confine itself to the relationships existing in connection with the filing of reports with the commission.

"Review of financial statements" means those financial statements reviewed by an independent accountant, and shall include at least the following:

1. Date of report, manual signature, city and state where issued, and identification without detailed enumeration of the financial statements and schedules covered by the report;

2. Representations that the review was performed in accordance with standards established by the American Institute of Certified Public Accountants;

3. Representations that the accountant is not aware of any material modification that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles, other than those modifications, if any, indicated in the accountant's report.

"Unaudited financial statements" means those financial statements prepared in a format acceptable to the commission not accompanied by the statements and representations as set forth in the definitions of "certified financial statements" or "review of financial statements" of this subsection, and shall include an oath or affirmation that such statement or report is true and correct to the best knowledge, information, and belief of the person making such oath or affirmation. The oath or affirmation shall be made before a person authorized to administer the oath or affirmation, and shall be made by an officer of the entity for whom the financial statements were prepared.

C. Requirements for broker-dealers:

1. Every broker-dealer applicant subject to the Securities Exchange Act of 1934 shall file with the commission at its Division of Securities and Retail Franchising upon its request any financial information required to be provided to the SEC, or its designee, under the Securities Exchange Act of 1934.

2. All other broker-dealer applicants not subject to subdivision 1 of this subsection, unless exempted under subdivision 3 of this subsection, shall file financial statements as of a date within 90 days prior to the date of filing its application for registration. The statements need not be audited provided that the applicant shall also file audited financial statements as of the end of the most recent fiscal year end.

3. Those broker-dealer applicants in operation for a period of time less than 12 months, and for which audited financial statements have not been prepared or are not available, and are not registered with the SEC, a national securities association or a national securities exchange, shall be permitted to file financial statements reviewed by an independent accountant provided the following conditions are met:

a. The financial statements shall be as of a date within 30 days prior to the date of filing an application for registration; and

b. The financial statements shall be reviewed by an independent accountant as defined under subsection B of this section and in accordance with the definitions of "financial statements" and "review of financial statements" in subsection B and in accordance with subdivision 3 of this subsection.

Statutory Authority

§§ 12.1-13 and 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 207, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC840009, eff. October, 5, 1984; Case No. SEC890040, eff. July 1, 1989; Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 14, Issue 22, eff. July 1, 1998; Volume 17, Issue 20, eff. July 1, 2001; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-20-85. Limited Canadian broker-dealer registration.

A. A broker-dealer that is resident in Canada and has no office or other physical presence in the Commonwealth of Virginia may, provided the broker-dealer is registered under this section, effect transactions in securities:

1. With or for a person from Canada who is temporarily residing in or visiting the Commonwealth with whom the Canadian broker-dealer had a bona fide business-client relationship before the person entered this Commonwealth; or

2. With or for a person present in this Commonwealth whose transactions are in a Canadian self-directed tax advantaged retirement account of which the person is the holder or contributor.

B. Application for registration as a broker-dealer under this section shall be filed with the commission at its Division of Securities and Retail Franchising or such other entity designated by the commission on and in full compliance with forms prescribed by the commission and shall include all information required by such forms.

C. An application for registration as a broker-dealer under this section shall be deemed incomplete for purposes of applying for registration unless the following executed forms, fee, and information are submitted to the commission:

1. An application in the form required by the jurisdiction in which the broker-dealer maintains its principal place of business.

2. Statutory fee payable to the Treasurer of Virginia in the amount of $200 United States currency pursuant to § 13.1-505 F of the Act.

3. Evidence that the applicant is registered as a broker-dealer in the jurisdiction from which it is effecting the transactions.

4. Evidence that the applicant is a member of a self-regulatory organization or stock exchange in Canada.

5. Any other information the commission may require.

D. A broker-dealer registered under this section shall:

1. Maintain its provincial or territorial registration and its membership in a self-regulatory organization or stock exchange in good standing;

2. Provide the commission upon request with its books and records relating to its business in the Commonwealth of Virginia as a broker-dealer;

3. Immediately notify the commission of any criminal action taken against it or of any finding or sanction imposed on the broker-dealer as a result of any self-regulatory or regulatory action involving fraud, theft, deceit, misrepresentation, or similar conduct;

4. Disclose to its clients in the Commonwealth of Virginia that the broker-dealer and its agents are not subject to the full regulatory requirements of the Act.

E. A broker-dealer's registration under this section, and any renewal thereof, shall expire annually at midnight on the 31st day of December unless renewed in accordance with subsection F of this section.

F. To renew its registration, a broker-dealer registered under this section shall file with the commission at its division the most recent renewal application, if any, filed in the jurisdiction in which the broker-dealer maintains its principle place of business, or if no such renewal application is required, the most recent application filed pursuant to subdivision C 1 of this section along with the statutory fee in the amount of $200 United States currency pursuant to § 13.1-505 F of the Act.

G. A Canadian broker-dealer registered under this section and acting in accordance with the limitations set out in this section is exempt from all other rules applicable to broker-dealers except the anti-fraud provisions of the Act and the requirements set out in this section.

Statutory Authority

§§ 12.1-13 and 13.1-523.1 of the Code of Virginia.

Historical Notes

Derived from Virginia Register Volume 17, Issue 20, eff. July 1, 2001; amended, Virginia Register Volume 19, Issue 23, eff. July 1, 2003; Volume 31, Issue 25, eff. July 31, 2015.

Part II
Broker-Dealer Agents

21VAC5-20-90. Application for registration as a broker-dealer agent.

A. Application for registration as an agent of a FINRA member shall be filed on and in compliance with all requirements of CRD and in full compliance with the forms and regulations prescribed by the commission. The application shall include all information required by such forms.

An application shall be deemed incomplete for registration as a broker-dealer agent unless the applicant submits the following executed forms, fee, and information:

1. Form U4.

2. The statutory fee made payable to FINRA in the amount of $40.

3. Evidence in the form of a FINRA exam report of passing within the two-year period immediately preceding the date of the application: (i) the Uniform Securities Agent State Law Examination, Series 63; (ii) the Uniform Combined State Law Examination, Series 66; or (iii) a similar examination in general use by securities administrators which, after reasonable notice and subject to review by the commission, the Director of the Division of Securities and Retail Franchising designates.

4. Any other information the commission may require.

B. Application for registration for non-FINRA member broker-dealer agents shall be filed on and in compliance with all requirements and forms prescribed by the commission.

An application shall be deemed incomplete for registration as a broker-dealer agent unless the applicant submits the following executed forms, fee, and information:

1. Form U4.

2. The statutory fee in the amount of $40. The check must be made payable to the Treasurer of Virginia.

3. Evidence in the form of a FINRA exam report of passing within the two-year period immediately preceding the date of the application: (i) the Uniform Securities Agent State Law Examination, Series 63; (ii) the Uniform Combined State Law Examination, Series 66; or (iii) a similar examination in general use by securities administrators which, after reasonable notice and subject to review by the commission, the Director of the Division of Securities and Retail Franchising designates.

4. Any other information the commission may require.

C. The commission shall either grant or deny each application for registration within 30 days after it is filed. However, if additional time is needed to obtain or verify information regarding the application, the commission may extend such period as much as 90 days by giving written notice to the applicant. No more than three such extensions may be made by the commission on any one application. An extension of the initial 30-day period, not to exceed 90 days, shall be granted upon written request of the applicant.

Statutory Authority

§§ 12.1-13 and 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 208, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC840009, eff. July 2, 1984; Case No. SEC890040, eff. July 1, 1989; Case No. SEC900034, eff. July 1, 1990; Case No. SEC910057, eff. July 1, 1991; Virginia Register Volume 11, Issue 21, eff. July 1, 1995; Volume 13, Issue 25, eff. September 1, 1997; Volume 15, Issue 22, eff. July 1, 1999; Volume 17, Issue 20, eff. July 1, 2001; Volume 25, Issue 22, eff. July 1, 2009; Volume 29, Issue 20, eff. June 3, 2013; Volume 34, Issue 9, eff. December 1, 2017.

21VAC5-20-95. Employment of an agent by more than one broker-dealer.

A. In accordance with § 13.1-504 B of the Act, an agent may be employed by more than one broker-dealer if all of the following conditions are satisfied:

1. Each employing broker-dealer is under common ownership and control as defined in subsection B of this section or as provided in subdivision C 2 c under 21VAC5-20-330.

2. Each employing broker-dealer is registered in accordance with 21VAC5-20-10.

3. Each employing broker-dealer consents in writing to the employment of the agent by each of the other employing broker-dealers.

4. Each employing broker-dealer agrees to be responsible for the employment activity of the agent.

5. The agent is registered in accordance with 21VAC5-20-90 by and on behalf of each employing broker-dealer.

6. Each employing broker-dealer executes an Agent Multiple Employment Agreement (Form S.A.16), and the executed agreement is filed with the commission at its Division of Securities and Retail Franchising prior to the agent transacting business in Virginia on behalf of such broker-dealer.

7. A new Agent Multiple Employment Agreement is executed and filed with the commission at its Division of Securities and Retail Franchising within 15 days after any information in a current agreement on file with the commission becomes materially deficient, incomplete or inaccurate.

B. The term "common ownership and control" as used in this section means the same individual or individuals possess at least a 50% ownership interest in each employing broker-dealer.

Statutory Authority

§§ 12.1-13 and 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Virginia Register Volume 23, Issue 23, eff. July 1, 2007; amended, Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-20-100. Expiration.

The registration, and any renewals thereof, of a broker-dealer agent shall expire annually at midnight on the 31st day of December unless renewed in accordance with 21VAC5-20-110.

Statutory Authority

§ 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 209, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC830011, eff. July 1, 1983; Case No. SEC840009, eff. October 5, 1984; Case No. SEC890040, eff. July 1, 1989.

21VAC5-20-110. Renewals.

A. To renew the registration or registrations of its broker-dealer agent or agents, a FINRA member broker-dealer will be billed by CRD the statutory fee of $40 per broker-dealer agent. A renewal of registration or registrations shall be granted as a matter of course upon payment of the proper fee or fees unless the registration was, or the renewal would be, subject to revocation under § 13.1-506 of the Code of Virginia.

B. A non-FINRA member broker-dealer shall file with the commission at its Division of Securities and Retail Franchising the following items at least 30 days prior to the expiration of registration.

1. Agents to be Renewed (Form S.D.4.A) accompanied by the statutory fee of $40 for each agent whose registration is to be renewed. The check must be made payable to the Treasurer of Virginia.

2. If applicable, Agents to be Canceled with clear records (Form S.D.4.B).

3. If applicable, Agents to be Canceled without clear records (Form S.D.4.C).

Statutory Authority

§§ 12.1-13 and 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 210, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC840009, eff. October 5, 1984; Case No. SEC890040, eff. July 1, 1989; Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 29, Issue 20, eff. June 3, 2013; Volume 34, Issue 9, eff. December 1, 2017.

21VAC5-20-120. Updates and amendments.

A broker-dealer agent shall amend or update Form U4 as required by the "Amendment Filings" provisions set forth under "How to Use Form U4." All filings shall be made on CRD for agents of FINRA member firms or with the commission at its Division of Securities and Retail Franchising for all other broker-dealer agents.

Statutory Authority

§§ 12.1-13 and 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 211, Case No. SEC890040, eff. July 1, 1989; amended, Virginia Register Volume 17, Issue 20, eff. July 1, 2001; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-20-130. Termination of registration.

A. When a broker-dealer agent terminates his registration with a broker-dealer, or a broker-dealer terminates an agent's registration, the broker-dealer shall file notice of such termination on Form U5 within 30 calendar days of the date of termination. All filings shall be made on CRD for agents of FINRA member firms or with the commission at its Division of Securities and Retail Franchising for all other broker-dealer agents.

B. If an agent learns that the broker-dealer has not filed the appropriate notice, the agent may file notice with the commission at its Division of Securities and Retail Franchising. The commission may terminate the agent's registration if the commission determines that a broker-dealer (i) is no longer in existence, (ii) has ceased conducting securities business, or (iii) cannot reasonably be located.

Statutory Authority

§§ 12.1-13 and 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 212, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC890040, eff. July 1, 1989; Case No. SEC910057, eff. July 1, 1991; Virginia Register Volume 17, Issue 20, eff. July 1, 2001; Volume 25, Issue 22, eff. July 1, 2009; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-20-135. Continuing commission by retiring agents.

The payment of compensation to a registered agent after he terminates his employment with a registered broker-dealer either by retirement, disability, death, or payment to his surviving spouse or other beneficiaries, will not be deemed to be a violation of commission regulations, provided the broker-dealer enters into a bona fide contract with either the retiring agent or the surviving spouse or beneficiaries, and the following conditions are met.

1. The retiring agent must have been continuously employed by or otherwise associated with the firm for a minimum of three years, as of the date of his retirement.

2. The sharing of commissions will be limited to commissions derived from accounts held for continuing customers of the retiring agent regardless of whether customer funds or securities are added to the accounts during the period after retirement.

3. The retiring agent must have demonstrated that he conducted himself in a manner exhibiting appropriate professional conduct. At a minimum, retirees must have been subject to no more than a low incidence of investment-related customer complaints and arbitrations settled or decided for more than $25,000 in the three years prior to the retirement date.

4. If the retiring agent has been subject to such complaints, the firm must have determined that the complaints did not require disciplinary action or heightened supervision, and that the retiree was not at fault for improper sales practices.

5. The retiring agent must not have been subject to a statutory disqualification during the three years prior to retirement.

6. The retiring agent must comply, to the extent applicable, with federal and state securities statutes and regulations, all policies, procedures, and rules of relevant regulatory and self-regulatory bodies, and must certify compliance with the policy at least annually.

7. The broker-dealer must establish parameters for a reasonable time period, not to exceed five years, following retirement and a percentage scale (that is either fixed or decreases the percentage the retiring agent receives each year) regarding the sharing of commissions by the retiring agent and the receiving registered agent.

8. The retiring agent must certify at least annually to the broker-dealer that he has adhered to the requirements and conditions of the agreement.

9. The broker-dealer must contact a representative sample of the account holders including a significant set of high grossing customer accounts subject to the agreement at least annually to confirm that the retiring agent has not provided investment advice or solicited trades in securities in any way. For example, the broker-dealer may contact annually: (i) holders of the top 10 highest grossing client accounts for that year and (ii) holders of one-half of the next 25% highest grossing client accounts.

Statutory Authority

§§ 12.1-13 and 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Virginia Register Volume 25, Issue 22, eff. July 1, 2009.

21VAC5-20-140. Changing connection from one broker-dealer to another.

A broker-dealer agent who changes connection from one broker-dealer to another shall comply with 21VAC5-20-90.

Statutory Authority

§ 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 213, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC840009, eff. July 2, 1984; Case No. SEC890040, eff. July 1, 1989.

21VAC5-20-150. Examination/qualification.

A. An individual applying for registration as a broker-dealer agent shall be required to show evidence of passing within the two-year period immediately preceding the date of the application: (i) the Uniform Securities Agent State Law Examination, Series 63; (ii) the Uniform Combined State Law Examination, Series 66; or (iii) a similar examination in general use by securities administrators which, after reasonable notice and subject to review by the commission, the Director of the Division of Securities and Retail Franchising designates.

B. Any individual who meets the qualifications set forth in subsection A of this section and is registered in any state jurisdiction requiring registration within the two-year period immediately preceding the date of the filing of an application shall not be required to comply with the examination requirement set forth in subsection A of this section, except that the commission may require additional examinations for any individual found to have violated any federal or state securities laws.

C. Any registered agent or agent in the process of applying for registration renewal shall further demonstrate his business knowledge by complying with the applicable continuing education requirements set forth in any of the following:

1. Rule 1250 of the FINRA By Laws, as such provisions existed on October 17, 2011;

2. Rule 345 A of the NYSE Rules, as such provisions existed on July 1, 1995;

3. Rule G-3(h) of the Municipal Securities Rulemaking Board, as such provisions existed on July 1, 1995;

4. Rule 341 A of the NYSE Market Rules, as such provisions existed on May 14, 2012;

5. Rule 9.3A of the Chicago Board of Options Exchange, Inc., as such provisions existed on July 1, 1995; or

6. Article VI, Rule 11 of the Chicago Stock Exchange, Inc., as such provisions existed on July 1, 1995.

Statutory Authority

§§ 12.1-13 and 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 214, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC820019, eff. August 15, 1982; Case No. SEC890040, eff. July 1, 1989; Virginia Register Volume 11, Issue 21, eff. July 1, 1995; Volume 13, Issue 25, eff. September 1, 1997; Volume 15, Issue 22, eff. July 1, 1999; Volume 25, Issue 22, eff. July 1, 2009; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-20-155. Limited Canadian broker-dealer agent registration.

A. An agent of a Canadian broker-dealer who has no office or other physical presence in the Commonwealth of Virginia may, provided the broker-dealer agent is registered under this section, effect transactions in securities as permitted for a broker-dealer registered under 21VAC5-20-85.

B. Application for registration as a broker-dealer agent under this section shall be filed with the commission at its Division of Securities and Retail Franchising or such other entity designated by the commission on and in full compliance with forms prescribed by the commission and shall include all information required by such forms.

C. An application for registration as a broker-dealer agent under this section shall be deemed incomplete for purposes of applying for registration unless the following executed forms, fee, and information are submitted to the commission:

1. An application in the form required by the jurisdiction in which the broker-dealer maintains its principal place of business.

2. Statutory fee payable to the Treasurer of Virginia in the amount of $40 United States currency pursuant to § 13.1-505 G of the Act.

3. Evidence that the applicant is registered as a broker-dealer agent in the jurisdiction from which it is effecting the transactions.

4. Any other information the commission may require.

D. A broker-dealer agent registered under this section shall:

1. Maintain his provincial or territorial registration in good standing;

2. Immediately notify the commission of any criminal action taken against him or of any finding or sanction imposed on him as a result of any self-regulatory or regulatory action involving fraud, theft, deceit, misrepresentation or similar conduct.

E. A broker-dealer agent's registration under this section, and any renewal thereof, shall expire annually at midnight on the 31st day of December unless renewed in accordance with subsection F of this section.

F. To renew the registrations of its agents, a broker-dealer registered under this section shall file with the commission at its division the most recent renewal application, if any, filed in the jurisdiction in which the broker-dealer maintains its principal place of business, or if no such renewal application is required, the most recent application filed pursuant to subdivision C 1 of this section along with the statutory fee in the amount of $40 United States currency pursuant to § 13.1-505 G of the Act.

G. A Canadian broker-dealer agent registered under this section and acting in accordance with the limitations set out in this section is exempt from all other rules applicable to a broker-dealer agent except the anti-fraud provisions of the Act and the requirements set out in this section.

Statutory Authority

§§ 12.1-13 and 13.1-523.1 of the Code of Virginia.

Historical Notes

Derived from Virginia Register Volume 17, Issue 20, eff. July 1, 2001; amended, Virginia Register Volume 19, Issue 23, eff. July 1, 2003; Volume 31, Issue 25, eff. July 31, 2015; Volume 31, Issue 25, eff. July 31, 2015; Volume 34, Issue 9, eff. December 1, 2017.

Part III
Agents of the Issuer

21VAC5-20-160. Application for registration as an agent of the issuer.

A. Application for registration as an agent of the issuer shall be filed on and in compliance with all requirements and forms prescribed by the commission.

B. An application shall be deemed incomplete for registration as an agent of the issuer unless the following executed forms, fee, and information are submitted:

1. Form U4.

2. The statutory fee in the amount of $40. The check must be made payable to the Treasurer of Virginia.

3. Evidence in the form of a FINRA exam report of passing within the two-year period immediately preceding the date of the application: (i) the Uniform Securities Agent State Law Examination, Series 63; (ii) the Uniform Combined State Law Examination, Series 66; or (iii) a similar examination in general use by securities administrators which, after reasonable notice and subject to review by the commission, the Director of the Division of Securities and Retail Franchising designates.

4. Any individual who meets the qualifications set forth in subdivision B 3 of this section and has been registered in any state jurisdiction requiring registration within the two-year period immediately preceding the date of the filing of an application shall not be required to comply with the examination requirement set forth in subdivision B 3 of this section, except that the Director of Securities and Retail Franchising may require additional examinations for any individual found to have violated any federal or state securities laws.

5. Any other information the commission may require.

C. The commission shall either grant or deny each application for registration within 30 days after it is filed. However, if additional time is needed to obtain or verify information regarding the application, the commission may extend such period as much as 90 days by giving written notice to the applicant. No more than three such extensions may be made by the commission on any one application. An extension of the initial 30-day period, not to exceed 90 days, shall be granted upon written request of the applicant.

Statutory Authority

§§ 12.1-13 and 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 215, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC840009, eff. July 2, 1984; Case No. SEC890040, eff. July 1, 1989; Case No. SEC900034, eff. July 1, 1990; Virginia Register Volume 11, Issue 21, eff. July 1, 1995; Volume 13, Issue 25, eff. September 1, 1997; Volume 15, Issue 22, eff. July 1, 1999; Volume 25, Issue 22, eff. July 1, 2009; Volume 26, Issue 6, eff. November 15, 2009; Volume 29, Issue 20, eff. June 3, 2013; Volume 34, Issue 9, eff. December 1, 2017.

21VAC5-20-170. Expiration.

The registration, and any renewals thereof, of an agent of the issuer shall expire annually at midnight on the 31st day of December unless renewed in accordance with 21VAC5-20-180.

Statutory Authority

§ 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 216, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC840009, eff. July 2, 1984; Case No. SEC890040, eff. July 1, 1989.

21VAC5-20-180. Renewals.

An issuer, on behalf of its agent or agents, shall file with the commission at its Division of Securities and Retail Franchising at least 30 days prior to the expiration of registration a registration renewal form (Form S.D.4) accompanied by the statutory fee of $40 for each agent whose registration is to be renewed. The check must be made payable to the Treasurer of Virginia.

Statutory Authority

§ 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 217, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC840009, eff. July 2, 1984; Case No. SEC890040, eff. July 1, 1989; Volume 29, Issue 20, eff. June 3, 2013; Volume 34, Issue 9, eff. December 1, 2017.

21VAC5-20-190. Updates and amendments.

An agent of the issuer shall amend or update his Form U4 as required by the "Amendment Filings" provisions set forth under "How to Use Form U4." Filings shall be made with the commission at its Division of Securities and Retail Franchising.

Statutory Authority

§ 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 218, Case No. SEC890040, eff. July 1, 1989; amended, Virginia Register Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-20-200. Termination of registration.

When an agent of the issuer terminates his registration with an issuer, or an issuer terminates an agent's registration, the issuer shall file notice of such termination on Form U5 within 30 calendar days of the date of termination. Filings shall be made with the commission at its Division of Securities and Retail Franchising.

Statutory Authority

§ 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 219, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC890040, eff. July 1, 1989; Case No. SEC910057, eff. July 1, 1991; Virginia Register Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-20-210. Changing connection from one issuer to another.

An agent of the issuer who changes connection from one issuer to another shall comply with 21VAC5-20-160.

Statutory Authority

§ 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 220, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC840009, eff. July 2, 1984; Case No. SEC890040, eff. July 1, 1989.

21VAC5-20-220. Examination/qualification; waiver of examination requirement.

A. Except as described in subsection B of this section, an individual applying for registration as an agent of the issuer shall be required to provide evidence in the form of a FINRA exam report of passing: (i) the Uniform Securities Agent State Law Examination, Series 63; (ii) the Uniform Combined State Law Examination, Series 66; or (iii) a similar examination in general use by securities administrators which, after reasonable notice and subject to review by the commission, the Director of the Division of Securities and Retail Franchising designates.

B. The commission may, in a registered offering not being made to the general public or in a Small Company Offering Registration, waive the examination requirement for an officer or director of an issuer that is a corporation, or a general partner of an issuer of a limited partnership or a manager of an issuer that is a limited liability company who:

1. Will receive no commission or similar remuneration directly or indirectly in connection with the offer or sale of the issuer's securities; and

2. In the case of a small company offering registration, agrees to deliver to each prospective purchaser of a security to be issued by such issuer, at or before the time the offering document is required to be delivered, a copy of "A Consumer's Guide to Small Business Investments" prepared by NASAA (see CCH NASAA Reports ¶3676) and the application to register the agent is accompanied by an executed Affidavit Regarding Offers of Small Company Offering Registration (SCOR) Securities by Issuer Agents.

Statutory Authority

§§ 12.1-13 and 13.1-523.1 of the Code of Virginia.

Historical Notes

Derived from Rule 221, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC820019, eff. August 15, 1982; Case No. SEC890040, eff. July 1, 1989; Virginia Register Volume 11, Issue 21, eff. July 1, 1995; Volume 13, Issue 25, eff. September 1, 1997; Volume 15, Issue 22, eff. July 1, 1999; Volume 17, Issue 20, eff. July 1, 2001; Volume 19, Issue 23, eff. July 1, 2003; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-20-225. Inspection of records.

Every registered agent of the issuer as a condition of its registration as an agent under the Act hereby agrees and represents that:

1. All of the agent's records, immediately upon the request of the commission, will be made available for inspection by the commission and reproduction for the commission staff in the office where such records are maintained;

2. All of the agent's records (or legible copies, or printouts, if automated) pertaining to a securities transaction any part of which occurred or is to occur within the Commonwealth of Virginia will be made available for inspection by the commission in the office of the commission's Division of Securities and Retail Franchising within 48 hours after request of the commission;

3. The term "records" shall include all books, papers, documents, tapes, films, photographs, electronic readable format of other materials, regardless of physical form or characteristics, that are maintained for the recordation or storage of information prepared, used or to be used in connection with a securities transaction or that were used in connection with securities transactions;

4. Failure to comply with this section may be considered grounds for a proceeding to revoke an agent's registration or other penalty prescribed by the Act; and

5. Any issuer or agent subject to a commission investigation may be required to pay the actual cost of the investigation.

Statutory Authority

§§ 12.1-13 and 13.1-523.1 of the Code of Virginia.

Historical Notes

Derived from Virginia Register Volume 19, Issue 23, eff. July 1, 2003.

Part IV
Broker-Dealer and Agent Regulations

21VAC5-20-230. Notice of civil, criminal, administrative or arbitrational action.

A. An applicant or a registrant shall notify the commission:

1. Within 30 calendar days of the date any complaint, pleading or notice is served or received giving notice of any civil, criminal or administrative charge or any arbitration proceeding or any formal order of investigation, including any such charge, proceeding or order by a self-regulatory organization registered under the Securities Exchange Act of 1934, against the applicant or registrant which directly or indirectly relates to the registration or sale of securities to any activity as a broker-dealer or agent or to any activity in which a breach of trust is alleged.

2. Within 30 calendar days of the date filed, any answer, reply or response to the complaint, pleading or notice referred to in subdivision 1 of this subsection.

3. Within 30 calendar days of the date of any decision, order or sanction rendered, or any appeal filed with respect to such decision, order or sanction, in regard to the complaint, pleading or notice referred to in subdivision 1 of this subsection.

B. A registrant who is a FINRA member broker-dealer or is associated with a FINRA member broker-dealer may file the notification required by subsection A of this section either with the commission's Division of Securities and Retail Franchising or on and in compliance with all requirements of CRD.

C. One copy of any item referred to in subdivision 1, 2 or 3 of this subsection shall be filed with the commission promptly following a request for same.

Statutory Authority

§§ 12.1-13 and 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 300, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC940048, Virginia Register Volume 10, Issue 24, eff. August 1, 1994; Virginia Register Volume 14, Issue 22, eff. July 1, 1998; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-20-240. Books and records of broker-dealers.

Every broker-dealer registered or required to be registered under the Act shall make and keep true, accurate and current, and preserve the books and records relating to its business, as are described in SEC Rules 17a-3 (17 CFR 240.17a-3) and 17a-4 (17 CFR 240.17a-4), or Municipal Securities Rule Making Board (MSRB) Rules G7 and G8.

Statutory Authority

§§ 12.1-13 and 13.1-523.1 of the Code of Virginia.

Historical Notes

Derived from Rule 301, Case No. SEC810005, eff. July 1, 1981; amended, Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 17, Issue 20, eff. July 1, 2001; Volume 19, Issue 23, eff. July 1, 2003.

21VAC5-20-250. (Repealed.)

Historical Notes

Derived from Rule 302, Case No. SEC810005, eff. July 1, 1981; amended, Virginia Register Volume 13, Issue 25, eff. September 1, 1997; repealed, Virginia Register Volume 19, Issue 23, eff. July 1, 2003.

21VAC5-20-260. Supervision of agents.

A. A broker-dealer shall be responsible for the acts, practices, and conduct of its agents in connection with the sale of securities until such time as the agents have been properly terminated as provided by 21VAC5-20-130.

B. Every broker-dealer shall exercise diligent supervision over the securities activities of all of its agents.

C. Every agent employed by a broker-dealer shall be subject to the supervision of a principal designated by such broker-dealer. All principals designated by the broker-dealer shall exercise reasonable supervision over the securities activities of all of the agents under their responsibility.

D. As part of its responsibility under this section, every broker-dealer shall establish, maintain and enforce written procedures, a copy of which shall be kept in each business office, which shall (i) set forth the procedures adopted by the broker-dealer to comply with the Act and regulations, including but not limited to the following duties imposed by this section, and (ii) state at which business office or offices the broker-dealer keeps and maintains the records required by 21VAC5-20-240:

1. The review and written approval by the designated supervisor of the opening of each new customer account;

2. The frequent examination of all customer accounts to detect and prevent irregularities or abuses;

3. The prompt review and written approval by a designated supervisor of all securities transactions by agents and all correspondence pertaining to the solicitation or execution of all securities transactions by agents;

4. The review and written approval by the designated supervisor of the delegation by any customer of discretionary authority with respect to the customer's account to the broker-dealer or to a stated agent or agents of the broker-dealer and the prompt written approval of each discretionary order entered on behalf of that account; and

5. The prompt review and written approval of the handling of all customer complaints.

E. Every broker-dealer who has designated more than one principal pursuant to subsection C of this section shall designate a principal or group of principals, independent from those that conduct direct agent supervision who shall supervise and periodically review the activities of the principals designated pursuant to subsection C of this section.

All principals designated pursuant to subsections C and E shall exercise reasonable supervision over those individuals under their responsibility to ensure compliance with these subsections.

F. Every broker-dealer shall no less often than annually conduct a physical inspection of each business office of the broker-dealer to ensure (i) the agent or agents at the respective business office are in compliance with the statutory provisions of the Act or regulations promulgated by the commission and (ii) the written procedures and compliance requirements of the broker-dealer are enforced.

For purposes of this section, the term "principal" means, but is not limited to, an individual engaged directly in (i) the management, direction, or supervision on a regular or continuous basis on behalf of such broker-dealer of the following activities: sales, training, research, investment advice, underwriting, private placements, advertising, public relations, trading, maintenance of books or records, financial operations; or (ii) the training of persons associated with such broker-dealer for the management, direction, or supervision on a regular or continuous basis of any such activities.

Statutory Authority

§§ 12.1-13 and 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 303, Case No. SEC810005, eff. July 1, 1981; amended, Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Errata, 13:26 VA.R. 3710 September 15, 1997; amended, Virginia Register Volume 19, Issue 23, eff. July 1, 2003; Volume 26, Issue 22, eff. July 1, 2010; Volume 29, Issue 20, eff. June 3, 2013.

21VAC5-20-270. (Repealed.)

Historical Notes

Derived from Rule 304, Case No. SEC810005, eff. July 1, 1981; repealed, Virginia Register Volume 19, Issue 23, eff. July 1, 2003.

21VAC5-20-280. Prohibited business conduct.

A. Every broker-dealer is required to observe high standards of commercial honor and just and equitable principles of trade in the conduct of its business. The acts and practices described in this subsection are considered contrary to such standards and may constitute grounds for denial, suspension, or revocation of registration or such other action authorized by the Act. No broker-dealer who is registered or required to be registered shall:

1. Engage in a pattern of unreasonable and unjustifiable delays in the delivery of securities purchased by any of its customers or in the payment upon request of free credit balances reflecting completed transactions of any of its customers, or take any action that directly or indirectly interferes with a customer's ability to transfer his account; provided that the account is not subject to any lien for moneys owed by the customer or other bona fide claim, including seeking a judicial order or decree that would bar or restrict the submission, delivery or acceptance of a written request from a customer to transfer his account;

2. Induce trading in a customer's account which is excessive in size or frequency in view of the financial resources and character of the account;

3. Recommend to a customer the purchase, sale or exchange of any security without reasonable grounds to believe that the recommendation is suitable for the customer. The reasonable basis to recommend any such transaction to a customer shall be based upon the risks associated with a particular security, and the information obtained through the diligence and inquiry of the broker-dealer to ascertain the customer's investment profile. A customer's investment profile includes the customer's investment objectives, financial situation, risk tolerance and needs, tax status, age, other investments, investment experience, investment time horizon, liquidity needs, and any other relevant information known by the broker-dealer or of which the broker-dealer is otherwise made aware in connection with such recommendation;

4. Execute a transaction on behalf of a customer without authority to do so or, when securities are held in a customer's account, fail to execute a sell transaction involving those securities as instructed by a customer, without reasonable cause;

5. Exercise any discretionary power in effecting a transaction for a customer's account without first obtaining written discretionary authority from the customer, unless the discretionary power relates solely to the time or price for the execution of orders;

6. Execute any transaction in a margin account without securing from the customer a properly executed written margin agreement promptly after the initial transaction in the account, or fail, prior to or at the opening of a margin account, to disclose to a noninstitutional customer the operation of a margin account and the risks associated with trading on margin at least as comprehensively as required by FINRA Rule 2264;

7. Fail to segregate customers' free securities or securities held in safekeeping;

8. Hypothecate a customer's securities without having a lien thereon unless the broker-dealer secures from the customer a properly executed written consent promptly after the initial transaction, except as permitted by Rules of the SEC;

9. Enter into a transaction with or for a customer at a price not reasonably related to the current market price of a security or receiving an unreasonable commission or profit;

10. Fail to furnish to a customer purchasing securities in an offering, no later than the date of confirmation of the transaction, either a final prospectus or a preliminary prospectus and an additional document, which together include all information set forth in the final prospectus, either by (i) hard copy prospectus delivery or (ii) electronic prospectus delivery;

11. Introduce customer transactions on a "fully disclosed" basis to another broker-dealer that is not exempt under § 13.1-514 B 6 of the Act;

12. a. Charge unreasonable and inequitable fees for services performed, including miscellaneous services such as collection of moneys due for principal, dividends or interest, exchange or transfer of securities, appraisals, safekeeping, or custody of securities and other services related to its securities business;

b. Charge a fee based on the activity, value or contents (or lack thereof) of a customer account unless written disclosure pertaining to the fee, which shall include information about the amount of the fee, how imposition of the fee can be avoided and any consequence of late payment or nonpayment of the fee, was provided no later than the date the account was established or, with respect to an existing account, at least 60 days prior to the effective date of the fee;

13. Offer to buy from or sell to any person any security at a stated price unless the broker-dealer is prepared to purchase or sell at the price and under such conditions as are stated at the time of the offer to buy or sell;

14. Represent that a security is being offered to a customer "at a market" or a price relevant to the market price unless the broker-dealer knows or has reasonable grounds to believe that a market for the security exists other than that made, created or controlled by the broker-dealer, or by any person for whom he is acting or with whom he is associated in the distribution, or any person controlled by, controlling or under common control with the broker-dealer;

15. Effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or fraudulent device, practice, plan, program, design or contrivance, which may include:

a. Effecting any transaction in a security which involves no change in the beneficial ownership thereof;

b. Entering an order for the purchase or sale of any security with the knowledge that an order of substantially the same size, at substantially the same time and substantially the same price, for the sale of any security, has been or will be entered by or for the same or different parties for the purpose of creating a false or misleading appearance of active trading in the security or a false or misleading appearance with respect to the market for the security; however, nothing in this subdivision shall prohibit a broker-dealer from entering bona fide agency cross transactions for its customers; or

c. Effecting, alone or with one or more other persons, a series of transactions in any security creating actual or apparent active trading in the security or raising or depressing the price of the security, for the purpose of inducing the purchase or sale of the security by others;

16. Guarantee a customer against loss in any securities account of the customer carried by the broker-dealer or in any securities transaction effected by the broker-dealer with or for the customer;

17. Publish or circulate, or cause to be published or circulated, any notice, circular, advertisement, newspaper article, investment service, or communication of any kind which purports to report any transaction as a purchase or sale of any security unless the broker-dealer believes that the transaction was a bona fide purchase or sale of the security; or which purports to quote the bid price or asked price for any security, unless the broker-dealer believes that the quotation represents a bona fide bid for, or offer of, the security;

18. Use any advertising or sales presentation in such a fashion as to be deceptive or misleading. An example of such practice would be a distribution of any nonfactual data, material or presentation based on conjecture, unfounded or unrealistic claims or assertions in any brochure, flyer, or display by words, pictures, graphs or otherwise designed to supplement, detract from, supersede or defeat the purpose or effect of any prospectus or disclosure;

19. Fail to make reasonably available upon request to any person expressing an interest in a solicited transaction in a security, not listed on a registered securities exchange or quoted on an automated quotation system operated by a national securities association approved by regulation of the commission, a balance sheet of the issuer as of a date within 18 months of the offer or sale of the issuer's securities and a profit and loss statement for either the fiscal year preceding that date or the most recent year of operations, the names of the issuer's proprietor, partners or officers, the nature of the enterprises of the issuer and any available information reasonably necessary for evaluating the desirability or lack of desirability of investing in the securities of an issuer. All transactions in securities described in this subdivision shall comply with the provisions of § 13.1-507 of the Act;

20. Fail to disclose that the broker-dealer is controlled by, controlling, affiliated with or under common control with the issuer of any security before entering into any contract with or for a customer for the purchase or sale of the security, the existence of control to the customer, and if disclosure is not made in writing, it shall be supplemented by the giving or sending of written disclosure at or before the completion of the transaction;

21. Fail to make a bona fide public offering of all of the securities allotted to a broker-dealer for distribution, whether acquired as an underwriter, a selling group member, or from a member participating in the distribution as an underwriter or selling group member;

22. Fail or refuse to furnish a customer, upon reasonable request, information to which the customer is entitled, or to respond to a formal written request or complaint;

23. Fail to clearly and separately disclose to its customer, prior to any security transaction, providing investment advice for compensation or any materially related transaction that the customer's funds or securities will be in the custody of an investment advisor or contracted custodian, in a manner that does not provide Securities Investor Protection Corporation protection, or equivalent third-party coverage over the customer's assets;

24. Market broker-dealer services that are associated with financial institutions in a manner that is misleading or confusing to customers as to the nature of securities products or risks;

25. In transactions subject to breakpoints, fail to:

a. Utilize advantageous breakpoints without reasonable basis for their exclusion;

b. Determine information that should be recorded on the books and records of a member or its clearing firm, which is necessary to determine the availability and appropriateness of breakpoint opportunities; or

c. Inquire whether the customer has positions or transactions away from the member that should be considered in connection with the pending transaction and apprise the customer of the breakpoint opportunities;

26. Use a certification or professional designation in connection with the offer, sale, or purchase of securities that indicates or implies that the user has special certification or training in advising or servicing senior citizens or retirees in such a way as to mislead any person.

a. The use of such certification or professional designation includes the following:

(1) Use of a certification or designation by a person who has not actually earned or is otherwise ineligible to use such certification or designation;

(2) Use of a nonexistent or self-conferred certification or professional designation;

(3) Use of a certification or professional designation that indicates or implies a level of occupational qualifications obtained through education, training, or experience that the person using the certification or professional designation does not have; or

(4) Use of a certification or professional designation that was obtained from a designating or certifying organization that:

(a) Is primarily engaged in the business of instruction in sales or marketing;

(b) Does not have reasonable standards or procedures for assuring the competency of its designees or certificants;

(c) Does not have reasonable standards or procedures for monitoring and disciplining its designees or certificants for improper or unethical conduct; or

(d) Does not have reasonable continuing education requirements for its designees or certificants in order to maintain the designation or certificate.

b. There is a rebuttable presumption that a designating or certifying organization is not disqualified solely for purposes of subdivision 26 a (4) of this subsection, when the organization has been accredited by:

(1) The American National Standards Institute;

(2) The Institute for Credentialing Excellence (formerly the National Commission for Certifying Agencies); or

(3) An organization that is on the U.S. Department of Education's list entitled "Accrediting Agencies Recognized for Title IV Purposes" and the designation or credential issued therefrom does not primarily apply to sales or marketing.

c. In determining whether a combination of words (or an acronym standing for a combination of words) constitutes a certification or professional designation indicating or implying that a person has special certification or training in advising or servicing senior citizens or retirees, factors to be considered shall include:

(1) Use of one or more words such as "senior," "retirement," "elder," or like words, combined with one or more words such as "certified," "chartered," "adviser," "specialist," "consultant," "planner," or like words, in the name of the certification or professional designation; and

(2) The manner in which those words are combined.

d. For purposes of this section, a certification or professional designation does not include a job title within an organization that is licensed or registered by a state or federal financial services regulatory agency when that job title:

(1) Indicates seniority within the organization; or

(2) Specifies an individual's area of specialization within the organization.

For purposes of this subdivision d, "financial services regulatory agency" includes an agency that regulates broker-dealers, investment advisers, or investment companies as defined under § 3 (a)(1) of the Investment Company Act of 1940 (15 USC § 80a-3(a)(1)).

e. Nothing in this regulation shall limit the commission's authority to enforce existing provisions of law;

27. Represent that securities will be listed or that application for listing will be made on a securities exchange or the National Association of Securities Dealers Automated Quotations (NASDAQ) system or other quotation system without reasonable basis in fact for the representation;

28. Falsify or alter so as to make false or misleading any record or document or any information provided to the commission;

29. Negotiate, facilitate, or otherwise execute a transaction on behalf of an investor involving securities issued by a third party pursuant to a claim for exemption under subsection B of § 13.1-514 of the Act unless the broker-dealer intends to report the securities owned and the value of such securities on at least a quarterly basis to the investor;

30. Offer or sell securities pursuant to a claim for exemption under subsection B of § 13.1-514 of the Act without having first verified the information relating to the securities offered or sold, which shall include ascertaining the risks associated with investing in the respective security;

31. Allow any person to represent or utilize its name as a trading platform without conspicuously disclosing the name of the registered broker-dealer in effecting or attempting to effect purchases and sales of securities; or

32. Engage in any conduct that constitutes a dishonest or unethical practice including forgery, embezzlement, nondisclosure, incomplete disclosure or material omissions or untrue statements of material facts, manipulative or deceptive practices, or fraudulent course of business.

B. Every agent is required to observe high standards of commercial honor and just and equitable principles of trade in the conduct of his business. The acts and practices described in this subsection are considered contrary to such standards and may constitute grounds for denial, suspension, or revocation of registration or such other action authorized by the Act. No agent who is registered or required to be registered shall:

1. Engage in the practice of lending or borrowing money or securities from a customer, or acting as a custodian for money, securities or an executed stock power of a customer;

2. Effect any securities transaction not recorded on the regular books or records of the broker-dealer which the agent represents, unless the transaction is authorized in writing by the broker-dealer prior to execution of the transaction;

3. Establish or maintain an account containing fictitious information in order to execute a transaction which would otherwise be unlawful or prohibited;

4. Share directly or indirectly in profits or losses in the account of any customer without the written authorization of the customer and the broker-dealer which the agent represents;

5. Divide or otherwise split the agent's commissions, profits or other compensation from the purchase or sale of securities in this Commonwealth with any person not also registered as an agent for the same broker-dealer, or for a broker-dealer under direct or indirect common control;

6. Engage in conduct specified in subdivision A 2, 3, 4, 5, 6, 10, 15, 16, 17, 18, 23, 24, 25, 26, 28, 30, 31, or 32 of this section;

7. Fail to comply with the continuing education requirements under 21VAC5-20-150 C; or

8. Hold oneself out as representing any person other than the broker-dealer with whom the agent is registered and, in the case of an agent whose normal place of business is not on the premises of the broker-dealer, failing to conspicuously disclose the name of the broker-dealer for whom the agent is registered when representing the dealer in effecting or attempting to effect the purchases or sales of securities.

C. No person shall publish, give publicity to, or circulate any notice, circular, advertisement, newspaper article, letter, investment service or communication which, though not purporting to offer a security for sale, describes the security, for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.

D. The purpose of this subsection is to identify practices in the securities business that are generally associated with schemes to manipulate and to identify prohibited business conduct of broker-dealers or sales agents who are registered or required to be registered.

1. Entering into a transaction with a customer in any security at an unreasonable price or at a price not reasonably related to the current market price of the security or receiving an unreasonable commission or profit.

2. Contradicting or negating the importance of any information contained in a prospectus or other offering materials with intent to deceive or mislead or using any advertising or sales presentation in a deceptive or misleading manner.

3. In connection with the offer, sale, or purchase of a security, falsely leading a customer to believe that the broker-dealer or agent is in possession of material, nonpublic information that would affect the value of the security.

4. In connection with the solicitation of a sale or purchase of a security, engaging in a pattern or practice of making contradictory recommendations to different investors of similar investment objective for some to sell and others to purchase the same security, at or about the same time, when not justified by the particular circumstances of each investor.

5. Failing to make a bona fide public offering of all the securities allotted to a broker-dealer for distribution by, among other things, (i) transferring securities to a customer, another broker-dealer, or a fictitious account with the understanding that those securities will be returned to the broker-dealer or its nominees or (ii) parking or withholding securities.

6. a. In addition to the application of the general anti-fraud provisions against anyone in connection with practices similar in nature to the practices discussed in this subdivision 6, subdivisions (1) through (6) of this subdivision 6 a specifically apply only in connection with the solicitation of a purchase or sale of over the counter (OTC) unlisted non-NASDAQ equity securities except those exempt from registration under 21VAC5-40-50:

(1) Failing to advise the customer, both at the time of solicitation and on the confirmation, of any and all compensation related to a specific securities transaction to be paid to the agent including commissions, sales charges, or concessions.

(2) In connection with a principal transaction, failing to disclose, both at the time of solicitation and on the confirmation, a short inventory position in the firm's account of more than 3.0% of the issued and outstanding shares of that class of securities of the issuer; however, this subdivision 6 of this subsection shall apply only if the firm is a market maker at the time of the solicitation.

(3) Conducting sales contests in a particular security.

(4) After a solicited purchase by a customer, failing or refusing, in connection with a principal transaction, to promptly execute sell orders.

(5) Soliciting a secondary market transaction when there has not been a bona fide distribution in the primary market.

(6) Engaging in a pattern of compensating an agent in different amounts for effecting sales and purchases in the same security.

b. Although subdivisions D 6 a (1) through (6) of this section do not apply to OTC unlisted non-NASDAQ equity securities exempt from registration under 21VAC5-40-50, nothing in this subsection precludes application of the general anti-fraud provisions against anyone in connection with practices similar in nature to the practices discussed in subdivisions D 6 a (1) through (6) of this section.

7. Effecting any transaction in, or inducing the purchase or sale of, any security by means of any manipulative, deceptive, or other fraudulent device or contrivance including the use of boiler room tactics or use of fictitious or nominee accounts.

8. Failing to comply with any prospectus delivery requirements promulgated under federal law or the Act.

9. In connection with the solicitation of a sale or purchase of an OTC unlisted non-NASDAQ security, failing to promptly provide the most current prospectus or the most recently filed periodic report filed under § 13 of the Securities Exchange Act when requested to do so by a customer.

10. Marking any order tickets or confirmations as unsolicited when in fact the transaction was solicited.

11. For any month in which activity has occurred in a customer's account, but in no event less than every three months, failing to provide each customer with a statement of account with respect to all OTC non-NASDAQ equity securities in the account, containing a value for each such security based on the closing market bid on a date certain; however, this subdivision shall apply only if the firm has been a market maker in the security at any time during the month in which the monthly or quarterly statement is issued.

12. Failing to comply with any applicable provision of the FINRA Rules or any applicable fair practice, privacy, or ethical standard promulgated by the SEC or by a self-regulatory organization approved by the SEC.

13. In connection with the solicitation of a purchase or sale of a designated security:

a. Failing to disclose to the customer the bid and ask price, at which the broker-dealer effects transactions with individual, retail customers, of the designated security as well as its spread in both percentage and dollar amounts at the time of solicitation and on the trade confirmation documents; or

b. Failing to include with the confirmation, the notice disclosure contained under 21VAC5-20-285, except the following shall be exempt from this requirement:

(1) Transactions in which the price of the designated security is $5.00 or more, exclusive of costs or charges; however, if the designated security is a unit composed of one or more securities, the unit price divided by the number of components of the unit other than warrants, options, rights, or similar securities must be $5.00 or more, and any component of the unit that is a warrant, option, right, or similar securities, or a convertible security must have an exercise price or conversion price of $5.00 or more.

(2) Transactions that are not recommended by the broker-dealer or agent.

(3) Transactions by a broker-dealer (i) whose commissions, commission equivalents, and mark-ups from transactions in designated securities during each of the preceding three months, and during 11 or more of the preceding 12 months, did not exceed 5.0% of its total commissions, commission-equivalents, and mark-ups from transactions in securities during those months; and (ii) who has not executed principal transactions in connection with the solicitation to purchase the designated security that is the subject of the transaction in the preceding 12 months.

(4) Any transaction that, upon prior written request or upon its own motion, the commission conditionally or unconditionally exempts as not encompassed within the purposes of this section.

c. For purposes of this section, the term "designated security" means any equity security other than a security:

(1) Registered, or approved for registration upon notice of issuance, on a national securities exchange and makes transaction reports available pursuant to 17 CFR 11Aa3-1 under the Securities Exchange Act of 1934;

(2) Authorized, or approved for authorization upon notice of issuance, for quotation in the NASDAQ system;

(3) Issued by an investment company registered under the Investment Company Act of 1940;

(4) That is a put option or call option issued by The Options Clearing Corporation; or

(5) Whose issuer has net tangible assets in excess of $4 million as demonstrated by financial statements dated within no less than 15 months that the broker-dealer has reviewed and has a reasonable basis to believe are true and complete in relation to the date of the transaction with the person, and

(a) In the event the issuer is other than a foreign private issuer, are the most recent financial statements for the issuer that have been audited and reported on by an independent public accountant in accordance with the provisions of 17 CFR 210.2-02 under the Securities Exchange Act of 1934; or

(b) In the event the issuer is a foreign private issuer, are the most recent financial statements for the issuer that have been filed with the SEC; furnished to the SEC pursuant to 17 CFR 240.12g3-2(b) under the Securities Exchange Act of 1934; or prepared in accordance with generally accepted accounting principles in the country of incorporation, audited in compliance with the requirements of that jurisdiction, and reported on by an accountant duly registered and in good standing in accordance with the regulations of that jurisdiction.

E. A broker-dealer or an agent may delay or refuse a transaction or a disbursement of funds that may involve or result in the financial exploitation of an individual pursuant to § 63.2-1606 L of the Code of Virginia.

Statutory Authority

§§ 12.1-13 and 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 305, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC830011, eff. July 1, 1983; Case No. SEC900034, eff. July 1, 1990; amended to renumber by Case No. SEC910057, eff. July 1, 1991; amended, Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 15, Issue 22, eff. July 1, 1999; Volume 17, Issue 20, eff. July 1, 2001; Volume 19, Issue 23, eff. July 1, 2003; Volume 23, Issue 23, eff. July 1, 2007; Volume 24, Issue 21, eff. July 1, 2008; Volume 26, Issue 22, eff. July 1, 2010; Volume 29, Issue 20, eff. June 3, 2013; Volume 31, Issue 8, eff. December 1, 2014; Volume 31, Issue 25, eff. July 31, 2015; Volume 31, Issue 25, eff. July 31, 2015; Volume 33, Issue 12, eff. February 1, 2017; Volume 36, Issue 2, eff. September 16, 2019.

21VAC5-20-285. Customer notice for designated securities.

A. Broker-dealers that solicit the purchase and sale of designated securities shall provide the following notice to customers:

IMPORTANT CUSTOMER NOTICE-READ CAREFULLY

You have just entered into a solicited transaction involving a security which may not trade on an active national market. The following should help you understand this transaction and be better able to follow and protect your investment.

Q. What is meant by the BID and ASK price and the spread?

A. The BID is the price at which you could sell your securities at this time. The ASK is the price at which you bought. Both are noted on your confirmation. The difference between these prices is the "spread," which is also noted on the confirmation, in both a dollar amount and a percentage relative to the ASK price.

Q. How can I follow the price of my security?

A. For the most part, you are dependent on broker-dealers that trade in your security for all price information. You may be able to find a quote in the newspaper, but you should keep in mind that the quote you see will be for dealer-to-dealer transactions (essentially wholesale prices and will not necessarily be the prices at which you could buy or sell).

Q. How does the spread relate to my investments?

A. The spread represents the profit made by your broker-dealer and is the amount by which your investment must increase (the BID must rise) for you to break even. Generally, a greater spread indicates a higher risk.

Q. How do I compute the spread?

A. If you bought 100 shares at an ASK price of $1.00, you would pay $100 (100 shares X $1.00 = $100). If the BID price at the time you purchased your stock was $.50, you could sell the stock back to the broker-dealer for $50 (100 shares X $.50 = $50). In this example, if you sold at the BID price, you would suffer a loss of 50%.

Q. Can I sell at any time?

A. Maybe. Some securities are not easy to sell because there are few buyers, or because there are no broker-dealers who buy or sell them on a regular basis.

Q. Why did I receive this notice?

A. The laws of some states require your broker-dealer or sales agent to disclose the BID and ASK price on your confirmation and include this notice in some instances. If the BID and ASK were not explained to you at the time you discussed this investment with your broker, you may have further rights and remedies under both state and federal law.

Q. Where do I go if I have a problem?

A. If you cannot work the problem out with your broker-dealer, you may contact the Virginia State Corporation Commission or the securities commissioner in the state in which you reside, the United States Securities and Exchange Commission, or FINRA.

B. For the purpose of this section, the term "designated security" shall be defined under 21VAC5-20-280 D 13 c.

Statutory Authority

§§ 12.1-13 and 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Virginia Register Volume 29, Issue 20, eff. June 3, 2013; amended, Virginia Register Volume 31, Issue 8, eff. December 1, 2014.

21VAC5-20-290. Financial responsibility.

A. The term "financial responsibility," as used in § 13.1-505 A of the Act, shall mean that the net capital of an applicant or registrant subject to the Securities Exchange Act of 1934 shall be demonstrated and maintained at a level required by subsection B of this section.

B. For the purpose of demonstrating "financial responsibility," all broker-dealers subject to the Securities Exchange Act of 1934 shall meet and maintain the net capital and ratio requirements as prescribed by Rule 15c3-1 under the Securities Exchange Act of 1934 (17 CFR 240.15c3-1). The net capital and ratio requirements shall be computed in accordance with Rule 15c3-1 under the Securities Exchange Act of 1934 (17 CFR 240.15c3-1).

C. Every broker-dealer subject to the Securities Exchange Act of 1934 shall notify the commission at its Division of Securities and Retail Franchising in writing within three business days should its net capital drop below its net capital requirement and shall immediately take action necessary to establish a net capital in compliance with Rule 15c3-1 of the Securities Exchange Act of 1934.

D. Every broker-dealer not subject to the Securities Exchange Act of 1934 shall file with the commission certified financial statements as defined in subsection B of 21VAC5-20-80 within 60 days of its fiscal year end.

Statutory Authority

§§ 12.1-13 and 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 306, Case No. SEC810005, eff. July 1, 1981; amended, Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 14, Issue 22, eff. July 1, 1998; Volume 17, Issue 20, eff. July 1, 2001.

21VAC5-20-300. Net worth.

A. For broker-dealers not subject to the Securities Exchange Act of 1934, the term "net worth" as used in § 13.1-505 B of the Act shall be computed as total assets minus total liabilities, excluding liabilities of the broker-dealer which are subordinated to the claims of creditors pursuant to a satisfactory subordination agreement as defined in Appendix D of Rule 15c3-1 under the Securities Exchange Act of 1934 (17 CFR 240.15c3-1d).

B. If a broker-dealer applicant or registrant not subject to the Securities Exchange Act of 1934 cannot demonstrate and maintain a net worth in excess of $25,000, the commission shall require the filing of a surety bond on the form prescribed. The amount of the penal sum of the surety bond can be determined according to the following table:

NET WORTH (Rounded to nearest $1)

PENALTY AMOUNT OF SURETY BOND

Less than $5,000

$25,000

5,001-10,000

20,000

10,001-15,000

15,000

15,001-20,000

10,000

20,001-25,000

5,000

C. If the net worth of a broker-dealer registrant not subject to the Securities Exchange Act of 1934 plus the penal sum of its surety bond drops below $25,000, the registrant must so notify the Division of Securities and Retail Franchising in writing within three business days and immediately take action to establish a net worth in excess of $25,000.

Statutory Authority

§§ 12.1-13 and 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 307, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC890040, eff. July 1, 1989; Virginia Register Volume 13, Issue 25, eff. September 1, 1997; Volume 14, Issue 22, eff. July 1, 1998; Volume 15, Issue 22, eff. July 1, 1999.

21VAC5-20-310. Reserve requirements and custody of customer funds and securities.

All broker-dealer applicants and registrants subject to the net capital provisions of 21VAC5-20-290 B shall be required to prepare and maintain such records and accounts as specified in, and to comply in all other respects with, the provisions of Rule 15c3-3 under the Securities Exchange Act of 1934 (17 CFR 240.15c3-3).

Statutory Authority

§ 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 308, Case No. SEC810005, eff. July 1, 1981; amended by Case No. SEC890040, eff. July 1, 1989.

21VAC5-20-320. Clerical or ministerial services.

The phrase "clerical or ministerial services", as used in §§ 13.1-504.1 and 13.1-504.2 of the Act, shall mean any or all of the following:

1. Distributing to customers of the savings and loan association, savings bank or credit union literature that describes the services available from the registered broker-dealer.

2. Providing to customers of the savings and loan association, savings bank or credit union the broker-dealer's account applications and assisting customers in completing such applications.

3. Assisting customers of the savings and loan association, savings bank or credit union in contacting the registered broker-dealer.

4. Assisting customers of the savings and loan association, savings bank or credit union in effecting the transfer of funds into or out of the customers' accounts maintained at such association, bank or credit union.

5. Assisting customers of the savings and loan association, savings bank or credit union in transmitting securities and related documents to the registered broker-dealer, and providing the materials necessary for such transmittal.

Statutory Authority

§ 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Rule 309, Case No. SEC840009, eff. July 2, 1984; amended by Case No. SEC890040, eff. July 1, 1989.

21VAC5-20-330. Model rules for sales of securities at financial institutions.

A. This section applies exclusively to broker-dealer services conducted by broker-dealers and their agents on the premises of a financial institution where retail deposits are taken or through an affiliate of the financial institution.

This section does not alter or abrogate a broker-dealer's obligation to comply with other applicable laws, rules, or regulations that may govern the operations of broker-dealers and their agents, including but not limited to, supervisory obligations. Broker-dealers are responsible for the acts, practices, and conduct of their agents in connection with the offer and sale of securities. Additionally, this section does not apply to broker-dealer services provided to nonretail customers.

B. For purposes of this section, the following terms have the meanings indicated:

"Affiliate" means (i) an entity that a financial institution owns, in whole or in part or (ii) an entity that is a subsidiary of the financial institution's parent company.

"Broker-dealer services" means the investment banking or securities business as defined in paragraph (u) of Article I of the FINRA By-Laws, amended by SR-FINRA-2008-0026, effective December 15, 2008.

"Financial institution" means federal and state-chartered banks, savings and loan associations, savings banks, credit unions, and the service corporations of such institutions located in Virginia.

"Networking arrangement" means a contractual or other arrangement between a broker-dealer and a financial institution by which the broker-dealer conducts broker-dealer services on the premises of the financial institution where retail deposits are taken or through an affiliate of the financial institution.

C. Standards for broker-dealer conduct. No broker-dealer shall conduct broker-dealer services pursuant to a networking arrangement unless the broker-dealer and its agents comply with the following requirements:

1. Setting. Wherever practical, broker-dealer services shall be conducted in a physical location distinct from the area in which the financial institution's retail deposits are taken. In those situations where there is insufficient space to allow separate areas, the broker-dealer has a heightened responsibility to distinguish its services from those of the financial institution. In all situations, the broker-dealer shall identify its services in a manner that clearly distinguishes those services from the financial institution's retail deposit-taking activities. The broker-dealer's name shall be clearly displayed in the area in which the broker-dealer conducts its services.

2. a. Networking arrangements. There shall be a written agreement between the financial institution and its associated broker-dealer that shall, at a minimum, address the areas listed below. The written agreement shall be filed with the commission at its Division of Securities and Retail Franchising at least 90 days prior to its effective date.

(1) A description of the responsibilities of each party, including the features of the sales program and the roles of registered and unregistered personnel;

(2) A description of the responsibilities of broker-dealer personnel authorized to make investment sales or recommendations;

(3) A description of how referrals to associated broker-dealer personnel will be made;

(4) A description of compensation arrangements for unregistered personnel;

(5) A description of training to be provided to both registered and unregistered personnel;

(6) A description of broker-dealer office audits to be conducted by the broker-dealer, including frequency, reports associated with financial institutions and records to be reviewed;

(7) Authority of the financial institution and regulators to have access to relevant records of the broker-dealer and the financial institution in order to evaluate compliance with the agreement; and

(8) A statement identifying whether the broker-dealer will offer or sell securities issued pursuant to an exemption from registration under 21VAC5-45-20 (Regulation D, Rule 506, 15 USC § 77r(b)(4)(D), 17 CFR 230.506).

b. Program management. The program's management of the broker-dealer's networking arrangements shall address and include at a minimum, those items listed below.

(1) A description of relevant referral activities and compensation arrangements;

(2) A description of appropriate training requirements for various classes of personnel;

(3) The scope and frequency of compliance reviews and the manner and frequency of reporting to broker-dealer compliance supervisors and the financial institution compliance management group;

(4) The process of verifying that security purchases and sales are being conducted in accordance with the written networking agreement;

(5) The permissible use of financial institution and broker-dealer customer information, including how compliance with Virginia and federal law and with the broker-dealer's privacy policies will be achieved;

(6) The existence of any potential conflicts of interest between the broker-dealer activities and the financial institution and its affiliates and appropriate disclosure of the conflicts that result from the relationship; and

(7) A description of the method in which the broker-dealer will determine the suitability of the securities for its customers and a description of the supervisory procedures imposed for the offer and sale of securities issued pursuant to an exemption from registration under 21VAC5-45-20 (Regulation D, Rule 506, 15 USC § 77r(b)(4)(D), 17 CFR 230.506).

c. If a financial institution has a networking arrangement with a registered broker-dealer, an affiliate of the financial institution may also be registered as a broker-dealer and may also employ agents that are registered with the broker-dealer with which there is a networking arrangement. If the financial institution's affiliate is a registered broker-dealer, and both the affiliate and the broker-dealer operating under a networking arrangement employs dual agents, both the broker-dealer and the affiliate are equally responsible for the supervision of the agents. The agents must be registered for both the broker-dealer and the affiliate.

3. Customer disclosure and written acknowledgment.

a. At or prior to the time that a customer's securities brokerage account is opened by a broker-dealer on the premises of a financial institution where retail deposits are taken, the broker-dealer or its agents shall:

(1) Disclose, orally and in writing, that the securities products purchased or sold in a transaction with the broker-dealer:

(a) Are not insured by the Federal Deposit Insurance Corporation ("FDIC") or the National Credit Union Administration ("NCUA");

(b) Are not deposits or other obligations of the financial institution and are not guaranteed by the financial institution; and

(c) Are subject to investment risks, including possible loss of principal invested.

(2) Make reasonable efforts to obtain from each customer during the account opening process a written acknowledgment of the disclosures required by subdivision C 3 a (1).

(3) Provide written disclosures that are conspicuous, easy to comprehend and presented in a clear and concise manner.

(4) Disclose, orally and in writing, that the broker-dealer and the financial institution are separate entities, and when mutual funds or other securities are bought through the broker-dealer, the client is doing business with the broker-dealer and not with the financial institution.

(5) Disclose, orally and in writing that the broker-dealer and the financial institution will likely receive compensation as a result of the purchase of securities or advisory services by the client through the broker-dealer.

b. If broker-dealer services include any written or oral representations concerning insurance coverage, other than FDIC insurance coverage, then clear and accurate written or oral explanations of the coverage must also be provided to the customers when such representations are first made.

4. Communications with the public.

a. All of the broker-dealer's confirmations and account statements must indicate clearly that the broker-dealer services are provided by the broker-dealer. Such indication may include the name of the financial institution or any of the financial institution's affiliates, but the name of the broker-dealer shall be in print larger than the name of the financial institution.

b. Advertisements and sales literature that announce the location of a financial institution where broker-dealer services are provided by the broker-dealer or its agents, or that are distributed by the broker-dealer or its agents on the premises of a financial institution, must disclose that securities products: are not insured by the FDIC; are not deposits or other obligations of the financial institution and are not guaranteed by the financial institution; and are subject to investment risks, including possible loss of the principal invested. The shorter logo format described in subdivision C 4 d may be used to provide these disclosures.

c. Recommendations by a broker-dealer or its agents concerning nondeposit investment products with a name similar to that of a financial institution must only occur pursuant to policies and procedures reasonably designed to minimize risk of customer confusion.

d. The following shorter logo format disclosures may be used by a broker-dealer or its agents in advertisements and sales literature, including material published, or designed for use, in radio or television broadcasts, automated teller machine ("ATM") screens, billboards, signs, posters and brochures, to comply with the requirements of subdivision C 4 b provided that such disclosures are displayed in a conspicuous manner:

(1) Not FDIC insured;

(2) No bank guarantee;

(3) May lose value.

e. As long as the omission of the disclosures required by subdivision C 4 b would not cause the advertisement or sales literature to be misleading in light of the context in which the material is presented, the disclosures are not required with respect to messages contained in:

(1) Radio broadcasts of 30 seconds or less;

(2) Electronic signs, including billboard-type signs that are electronic, time and temperature signs and ticker tape signs, but excluding messages contained in such media as television, on‑line computer services, or ATMs; and

(3) Signs, such as banners and posters, when used only as location indicators.

5. Notification of termination. The broker-dealer must promptly notify the financial institution if any agent of the broker-dealer who is employed by the financial institution is terminated for cause by the broker-dealer.

6. Referral fees paid to unregistered financial institution employees. Unregistered financial institution employees may only receive a one-time nominal fee of a fixed dollar amount for each customer referral, and only if the payment is not contingent on whether the referral results in an investment activity or a transaction.

7. Prohibited conduct.

In addition to the provisions of subsections A and B of 21VAC5-20-280, unless otherwise specified herein, broker-dealers and broker-dealer agents offering broker-dealer services in association with a financial institution or an affiliate of the financial institution, pursuant to a networking arrangement, shall not:

(1) Accept or receive compensation directly or indirectly from the financial institution for broker-dealer services provided;

(2) Identify themselves as being affiliated with the financial institution or any of the financial institution's affiliated companies;

(3) Fail to follow the terms of a networking agreement between a financial institution or any affiliated company of the financial institution concerning the offer and sale of securities; and

(4) Use nonregistered employees of the financial institution or any affiliate of the financial institution to solicit investors.

Statutory Authority

§§ 12.1-13 and 13.1-523 of the Code of Virginia.

Historical Notes

Derived from Virginia Register Volume 15, Issue 22, eff. July 1, 1999; amended, Virginia Register Volume 23, Issue 23, eff. July 1, 2007; Volume 29, Issue 20, eff. June 3, 2013.

FORMS (21VAC5-20).

Form BD, Uniform Application for Broker-Dealer Registration, SEC 1490 (rev. 1/2008)

Form BDW, Uniform Request for Broker-Dealer Withdrawal, SEC 122 (rev. 4/2007)

Form S.A. 2, Application for Renewal of a Broker-Dealer's Registration (rev. 10/2017)

Form S.A. 11, Broker-Dealer's Surety Bond (rev. 7/1999)

Form S.D.4, Application for Renewal of Registration as an Agent of an Issuer (2017)

Form S.D.4.A., Agents to be Renewed - Exhibit I (rev. 1974)

Form S.D.4.B., Agents to be Canceled (Records Clear) - Exhibit II (rev. 1974)

Form S.D.4.C., Agents to be Canceled (Without Clear Records) - Exhibit III (rev. 1974)

Rev. Form U4, Uniform Application for Securities Industry Registration or Transfer (rev. 5/2009)

Rev. Form U5, Uniform Termination Notice for Securities Industry Registration (rev. 5/2009)

Forms (21VAC5-20-9999)

Rule 1240 of FINRA By-Laws, Continuing Education Requirements, amended by SR-FINRA-2017‑007, eff. October 1, 2018, Financial Industry Regulatory Authority, Inc.

Rule 345 A of the New York Stock Exchange Rules, Continuing Education for Registered Persons, effective as existed July 1, 1995, New York Stock Exchange, superseded by Financial Industry Regulation Authority, Inc. Rule 1200 Series - Rule, 1240, eff. October 1, 2018

Rule G-3(i) of the Municipal Securities Rulemaking Board, Classification of Principals and Representatives; Numerical Requirements; Testing; Continuing Education Requirements, effective as existed July 1, 1995, Municipal Securities Rulemaking Board

Rule 341A of the New York Stock Exchange Market Rules, Continuing Education for Registered Persons, effective as existed May 14, 2012, New York Stock Exchange.

Rule 9.3A of the Chicago Board Options Exchange, Continuing Education for Registered Persons, effective as existed July 1, 1995, Chicago Board Options Exchange.

Article VI, Rule 11 of the Rules of the Chicago Stock Exchange, Inc., Continuing Education for Registered Persons, effective as existed July 1, 1995, Chicago Stock Exchange, Inc.

FINRA, Rule 2264, Margin Disclosure Statement, amended by SR-FINRA-2011-065, eff. December 5, 2011.

Article I, Paragraph u of FINRA By-Laws, amended by SR-FINRA-2008-0026, eff. December 15, 2008.

Website addresses provided in the Virginia Administrative Code to documents incorporated by reference are for the reader's convenience only, may not necessarily be active or current, and should not be relied upon. To ensure the information incorporated by reference is accurate, the reader is encouraged to use the source document described in the regulation.

As a service to the public, the Virginia Administrative Code is provided online by the Virginia General Assembly. We are unable to answer legal questions or respond to requests for legal advice, including application of law to specific fact. To understand and protect your legal rights, you should consult an attorney.