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Record-Keeping After Client Accounts Transfer

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I'm looking to buy a small broker-dealer. The seller informed me that the clients have all transferred their accounts out (which is fine with me). However, it's my understanding that I have to retain the client information. The seller says that since the clients have closed their accounts, and since the firm would be under new ownership, there's no reason for me to have the client information since the clients can't sue me for any wrongdoing that allegedly occurred when he owned the company. He was also concerned with violating the privacy rules. Can you shed any light on this?

— D.J., Virginia

I would expect an aggrieved customer to include the firm in a lawsuit regardless of who owns it, since the company would remain in existence. In any event, Section 17a-3 of Securities Exchange Act of 1934 ("the '34 Act") requires broker-dealers to make and keep certain records. Section 17a-4 sets out the time limits for maintaining those records. Specifically, Section 17a-4(c) says that, "Every...broker and dealer...shall preserve for a period of not less than six years after the closing of any customer's account any account cards or records which relate to the terms and conditions with respect to the opening and maintenance of the account."

Furthermore, Section 17a-4(e)(5) requires broker-dealers to maintain for six years after the account is closed, the information required pursuant to Section 17a-3(a)(17). In fact, Section 17a-3(a)(17) requires broker-dealers to keep records of the client's name, tax ID number, address, phone number, date of birth, employment status (including occupation and whether the customer is an associated person of a member, broker or dealer), annual income, net worth (excluding value of primary residence), and investment objectives. The section also requires the firm to keep records indicating that the broker-dealer has furnished the clients a copy of the account record with all that information.

Finally, 17a-3(a)(17) also requires broker-dealers to keep records of address or name changes, changes in the account's investment objectives, records indicating that the customer was given a copy of the client agreement and, if an account is a discretionary account, "a record containing the dated signature of each customer or owner granting the authority and the dated signature of each natural person to whom discretionary authority was granted."

The seller would not be disclosing non-public information to a third party by leaving that information with the firm since the firm is already in possession of that information.

My partner and I own an SEC-registered RIA firm. Originally, my partner owned it as a sole proprietorship but when I bought into it more than three years ago we converted it to an LLC. At the time, I had my Series 7 and 66 licenses. We have to transition to state registration now but I've been told I have to take the Series 65 exam and register as an investment advisor representative. Why would I need to take another exam and why do I need to register as an individual now?

— F.M., via e-mail

There's a difference between the requirement to having to take the exam versus the requirement to register as an IAR. While an individual may be exempt from having to take an exam (for example, if they have a combination of the Series 7 and 66 licenses), that does NOT mean that person would be exempt from having to register as an IAR of a firm. In your case, the fact that the firm is SEC registered combined with the fact that the SEC itself does not register individual IARs, I think, may have caused some confusion on your part. In addition, in your particular state, a sole proprietor was not required to register as an IAR since the owner and the firm were, in essence, one and the same. This may have added to the confusion.

However, when the firm became an LLC, the individuals who were going to provide advisory services to clients should have registered as IARs. When someone registers as an IAR, the IARD system automatically opens a window if they are required to take an exam and the individual has 120 days to take and pass the exam.

As noted, while there are exemptions from having to take the exam, that doesn't mean the person is exempt from having to register as an IAR. In your case you had the Series 7 and 66, which could have provided a waiver from having to take the Series 65 exam. However, those licenses lapse if you have not been registered for two years. Consequently, I believe that you need to take the Series 65 exam. Note that there may be disciplinary ramifications from the state if it's noticed that you've been operating while unregistered, and I strongly suggest you consult with an attorney.


Alan J. Foxman is an attorney with the law offices of Rita G. Dew, P.A.
and a senior consultant with National Compliance Services, Inc.
in Delray Beach, Fla. He can be contacted at: 
this email address.

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