Arizona Dealer in Securities Bond

What Is the Purpose of the Dealer in Securities Bond?

Per Arizona Statutes ARS 44-1943, a Dealer in Securities bond is required by the Arizona Corporation Commission (AZCC) for securities dealers to perform licensed operations in the state. The purpose of the bond is to provide financial protection to market buyers and sellers who suffer damage from a securities dealer’s fraudulent behavior.

Who Needs the Dealer in Securities Bond?

All securities dealers engaged in market making in the state of Arizona may need to acquire the surety bond if they are not registered under the Securities Exchange Act of 1934.

As stated in ARS 44-1801, a dealer is defined as a person who engages as an agent or broker in the business of trading securities issued by another person. Also called market makers, dealers execute buy and sell orders on their client’s behalf. 

What Do Surety Underwriters Need to Know About the Dealer in Securities Bond?

Surety underwriters should note that writing this bond contains the risk of a securities dealer committing fraud against clients for financial gain. If disciplinary action occurs and the dealer is unable to pay back any damaged clients, a surety bond would provide compensation.

The risk of writing this bond is mitigated by stringent prerequisites for becoming an SEC-approved securities dealer. Securities dealers must complete six different Uniform Registration Forms and ultimately an application with the Financial Industry Regulatory Authority (FINRA). These forms include submitting fingerprint submissions, audited financial statements, employment history, certification requirements, exams, and various non-disclosure agreements. Any applicant with fraudulent or financially insolvent history would likely be unable to get licensed in the first place, which lessens the risk of writing this bond.

All securities dealers should know the limitations of their lawful duties and should remedy any incidents that may arise with their clients so that the AZCC does not have to get involved in any litigation.

This bond has historically lower loss ratios, but this may be in part due to stricter underwriting standards by the surety industry.

Surety companies may find that an inspection of audited financial statements along with a credit check will be necessary to determine eligibility and rate.

What Do Surety Claims Handlers Need to Know About the Dealer in Securities Bond?

Claim handlers need to be aware that a claim on a principal’s surety bond would come from a financially damaged client resulting from dealer-related fraud. If this instance or any other illegal act (causing financial injury) occurs, the client would start by submitting a complaint through the AZCC website. Once a complaint is filed, the AZCC will investigate. Should the AZCC determine a dealer to be guilty of securities fraud, a bond claim may ensue. 

A timeline for dealing with claims is provided by the Arizona Department of Insurance. To summarize, a surety company has 30 days to begin an investigation of a claim upon receiving a  receipt. Upon receiving a proof of loss receipt, the surety company must deny or confirm a bond payout within 15 days, and, if necessary, a payout must occur within 30 days.

Are There Any Alternatives to the Dealer in Securities Bond?

A securities dealer can avoid the bonding requirement by registering under the Securities Exchange Act of 1934 with the SEC.

How Much Does the Dealer in Securities Bond Cost?

The bond is normally 1-10% of the $25,000 bond limit. Take note that pricing will correspond to the personal credit and financial solvency of the securities dealer. The AZCC may allow a reduced bond amount below $25,000 at their discretion.

How Is the Dealer in Securities Bond Filed?

The bond must be signed by both the surety company and the principal. The surety company must seal the bond form. The bond may be sent via email to the Arizona Corporate Commission Securities Division. Once filed, the bond must stay active so long as the securities dealer conducts operations.

Can the Dealer in Securities Bond Be Cancelled?

Should the bond be cancelled, the surety company will do so and be released of liability following a 90 day cancellation period with the AZCC. This means that the bond will become inactive after 90 days of notifying the AZCC of cancellation. If there is any unearned premium on the bond, that should be refunded back to the principal on pro-rata terms.

Are Dealers in Securities Bonds Renewable?

Yes, the bond is renewable as the bond form is continuous until cancelled by the surety company or the license expires or is revoked. Principals should take note that the bond needs to remain active as long as business operations continue.