Broker-Dealer Definition & Registration
Understanding the distinction between brokers, dealers, and broker-dealers is fundamental to securities regulation. This knowledge helps differentiate the roles and standards that apply to broker-dealers versus investment advisers.
Definitions
Broker
A broker is any person engaged in the business of effecting transactions in securities for the account of others:
| Characteristic | Details |
|---|---|
| Role | Agent—acts on behalf of customers |
| Compensation | Earns commissions |
| Function | Executes customer orders |
| Risk | Does not take principal risk |
| Inventory | Does not hold securities inventory |
Dealer
A dealer is any person engaged in the business of buying and selling securities for their own account:
| Characteristic | Details |
|---|---|
| Role | Principal—trades for own account |
| Compensation | Earns markup (selling) or markdown (buying) |
| Function | Trades from inventory |
| Risk | Takes principal risk |
| Market Making | May provide liquidity as market maker |
Broker-Dealer
Most firms are registered as both broker and dealer:
| Capability | Requirement |
|---|---|
| Dual Capacity | Can act as agent OR principal |
| Disclosure | Must disclose capacity in each transaction |
| Flexibility | Can execute for customers or trade for own account |
| Registration | Single registration covers both functions |
On the Exam: When a firm acts as a broker (agent), it earns commissions. When acting as dealer (principal), it earns markups/markdowns. The customer must be told in which capacity the firm is acting.
Federal Registration
SEC Registration
All broker-dealers must register with the SEC under the Securities Exchange Act of 1934:
| Requirement | Details |
|---|---|
| Form BD | Uniform Application for Broker-Dealer Registration |
| Filing System | Central Registration Depository (CRD) |
| Notification | Electronic filing, then signed/notarized copy to FINRA |
| Updates | Must amend promptly when information becomes inaccurate |
FINRA Membership
| Requirement | Details |
|---|---|
| SRO Membership | Must join FINRA (or a national securities exchange) |
| Form NMA | New Member Application |
| Approval Required | Cannot conduct business until approved |
| Ongoing Oversight | Subject to FINRA rules and examinations |
Net Capital Requirements
SEC Rule 15c3-1 establishes minimum net capital requirements:
| Type of Firm | Minimum Net Capital |
|---|---|
| Carrying Firm (holds customer funds/securities) | $250,000 |
| Introducing Firm | $50,000 - $100,000 |
| Limited Operations | $5,000 |
| Market Makers | Based on positions held |
Additional Requirements
| Requirement | Purpose |
|---|---|
| SIPC Membership | Securities Investor Protection Corporation |
| Fidelity Bond | Protection against employee dishonesty |
| Written Supervisory Procedures | Compliance framework |
| Anti-Money Laundering Program | SAR filing, customer identification |
State Registration
Requirements
| Element | Details |
|---|---|
| Form BD Filing | Filed with each state through CRD |
| State-Specific Requirements | Some states have additional rules |
| Fees | State registration fees required |
| Notice Filing | Some exemptions for notice filing only |
Effective Registration
- Registration effective when state processes application
- May require additional documentation
- Annual renewal required (typically December 31)
Exclusions from Broker-Dealer Definition
Persons NOT Considered Broker-Dealers
| Exclusion | Reason |
|---|---|
| Agents | Individuals work FOR broker-dealers |
| Issuers | Selling own securities (certain transactions) |
| Banks | Banking activities (with limitations) |
| Isolated Transactions | Not "engaged in the business" |
Bank Exclusion Limitations
The Gramm-Leach-Bliley Act limits bank securities activities:
| Activity | Bank Status |
|---|---|
| Trust Activities | Generally excluded |
| Traditional Banking | Excluded |
| Third-Party Brokerage | Must use broker-dealer affiliate |
| Private Placement Sales | Must "push out" to BD |
Broker-Dealer vs. Investment Adviser
| Feature | Broker-Dealer | Investment Adviser |
|---|---|---|
| Primary Function | Execute transactions | Provide investment advice |
| Compensation | Commissions, markups | Fees (asset-based or fixed) |
| Standard of Conduct | Reg BI (best interest at recommendation) | Fiduciary (ongoing) |
| Federal Registration | SEC + FINRA | SEC or State |
| Primary Regulator | SEC, FINRA, States | SEC or State |
| Disclosure Document | Form CRS | Form ADV Part 2 |
| Customer Relationship | Transactional | Ongoing advisory |
Key Takeaways
- Broker = agent (commissions); Dealer = principal (markups/markdowns)
- Broker-dealers must register with SEC, join FINRA, and register with states
- Form BD is the registration form filed through CRD
- Net capital requirements range from $5,000 to $250,000+ based on activities
- Banks are generally excluded but must "push out" certain securities activities
When a broker-dealer acts as a dealer in a transaction, it:
Broker-dealers must register with:
A "carrying firm" (one that holds customer funds and securities) must maintain minimum net capital of:
15.2 Agent Registration
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