The state of Tennessee recently announced its intention to administratively suspend the registrations of broker-dealers, agents and investment advisers doing business in Tennessee who have not paid the Tennessee Professional Privilege Tax ("Privilege Tax"), an event which could have significant collateral impact on their business.
The Privilege Tax is a $400/year tax assessed on the privilege of holding a Tennessee professional license, and applies to both residents and non-residents.1The tax is due on June 1 of each year, and the Tennessee Department of Revenue recently compiled a list of approximately 2,200 broker-dealers, agents and investment advisers who are more than 90 days delinquent on their payments and provided it to the Tennessee Securities Division ("the Division"). The Division has since announced that in January 2016 it will administratively suspend registrations for those who remain delinquent by holding their annual renewal applications in abeyance.2 Those delinquent on the Privilege Tax will be unregistered until the agent or firm cures the delinquency and provides the Division a tax clearance issued by the Department of Revenue.3
Because tax payment delinquency notices are typically mailed to an agent's home address, broker-dealers may not know of an affiliated agent's delinquent status until after the agent's license is suspended, the implications of which can be serious. Absent an exemption, the Tennessee Securities Act (the "Act") makes it unlawful for broker-dealers, agents and investment advisers to transact securities or advisory business, as applicable, from or in Tennessee without being registered, or for broker-dealers to employ an agent to transact securities business if the agent is not registered as an agent of the broker-dealer in the state.4 Violations of the Act can subject agents and firms to regulatory and/or criminal action.5 Transacting business while unregistered could also subject broker-dealers, agents and investment advisers to civil liability, providing customers with rescission rights.6
Broker-dealers and investment advisers doing business in Tennessee should prioritize this important registration issue. Prior to January 2016, broker-dealers should confirm that each of their agents registered in Tennessee has paid the Privilege Tax. The broker-dealer may want to contact the Division for assistance with identifying its agents who may be delinquent in paying the Privilege Tax, so it can take corrective action before registrations are suspended. Further, broker-dealers should review CRD renewal reports in early January 2016 to determine if any renewal applications have been placed into pending status. Broker-dealers should also consider implementing or revising their written supervisory procedures and systems to address the Privilege Tax, to avoid potential regulatory sanctions for failure to establish and enforce procedures to monitor the registration status of agents. This could include taking control of the payments for all Tennessee-registered agents and/or requiring agents to certify prior to the end of each calendar year that they have satisfied their Privilege Tax obligations.