Key Takeaways
- A broker effects securities transactions for others and acts as agent.
- A dealer buys and sells securities for its own account and acts as principal.
- Most firms register as both broker AND dealer (broker-dealer).
- Agents are individuals representing broker-dealers; they are NOT separate broker-dealers.
- Banks, issuers, and certain others are excluded from the broker-dealer definition.
- Broker-dealers must register with SEC, FINRA, and states where they conduct business.
- Form BD is filed through CRD for broker-dealer registration.
- Agents register through Form U4 and can only be associated with one BD at a time.
Broker-Dealer Definition and Registration
Understanding the distinction between brokers, dealers, and agents is fundamental to securities regulation.
Key Definitions
Broker
A broker is a person (or firm) engaged in the business of effecting transactions in securities for the account of others.
| Characteristic | Description |
|---|---|
| Capacity | Acts as agent |
| Trades for | Customer's account |
| Compensation | Commissions |
| Disclosure | "Acting as agent" |
| Risk | No principal risk |
Dealer
A dealer is a person (or firm) engaged in the business of buying and selling securities for its own account.
| Characteristic | Description |
|---|---|
| Capacity | Acts as principal |
| Trades for | Own account |
| Compensation | Markups/Markdowns |
| Disclosure | "Acting as principal" |
| Risk | Takes principal risk |
Broker-Dealer
Most firms register as both broker and dealer because they:
- Execute customer orders (broker function)
- Trade from inventory (dealer function)
- Make markets in securities (dealer function)
- Underwrite new issues (dealer function)
Broker vs. Dealer Comparison
| Function | Broker (Agent) | Dealer (Principal) |
|---|---|---|
| Acts for | Customers | Themselves |
| Revenue | Commission | Markup/Markdown |
| Inventory risk | None | Bears risk |
| Best execution | Required | Not applicable |
| Disclosure | Transaction capacity | Transaction capacity |
Same Transaction Example
As Broker: Customer wants to buy 100 shares of XYZ. BD finds seller, executes trade, charges $50 commission.
As Dealer: Customer wants to buy 100 shares of XYZ. BD sells from its own inventory, charges markup over cost.
Agent Definition
An agent is an individual (not a firm) who represents:
- A broker-dealer in effecting securities transactions
- An issuer in certain securities transactions
| Key Points | Details |
|---|---|
| Individual only | Firms cannot be agents |
| Represents BD or issuer | Not independent |
| Also called | Registered representative |
| Registration | Form U4 through CRD |
Agent Exclusions
These individuals are NOT agents:
| Exclusion | Condition |
|---|---|
| Issuer representatives | Selling exempt securities |
| Issuer representatives | In exempt transactions |
| Clerical staff | No sales activities |
| Officers/directors | No sales compensation |
Exclusions from Broker-Dealer Definition
Persons Excluded
| Exclusion | Reason |
|---|---|
| Agents | Represent BDs, not separate entities |
| Issuers | Selling their own securities |
| Banks and trust companies | Separately regulated |
| Savings institutions | Separately regulated |
| Insurance companies | For insurance products only |
Issuer Exclusion Details
An issuer is NOT a broker-dealer when selling its own securities, UNLESS:
- Using underwriters or placement agents
- Engaged in resales (secondary market)
- Compensating employees for sales efforts
Registration Requirements
Broker-Dealer Registration
| Registration Level | Requirements |
|---|---|
| Federal (SEC) | File Form BD |
| Self-Regulatory (FINRA) | Membership required |
| State | Each state where doing business |
Registration Process
| Step | Action |
|---|---|
| 1 | File Form BD through Web CRD |
| 2 | Join FINRA or associate with FINRA member |
| 3 | Register in each state |
| 4 | Obtain required licenses |
Form BD Contents
- Firm identification
- Type of business
- Control persons and ownership
- Disciplinary history
- Financial information
- Other business activities
Agent Registration
| Requirement | Details |
|---|---|
| Form U4 | Filed through CRD |
| Single BD association | One BD at a time |
| State registration | Each state where active |
| Exam requirements | SIE + representative exam |
| Fingerprinting | Background check required |
Places of Business
| Type | Supervision | Activities |
|---|---|---|
| Main Office | Full supervision | All functions |
| OSJ (Office of Supervisory Jurisdiction) | Principal on-site | Order execution, training |
| Branch Office | Regular supervision | Sales, service |
| Non-Branch Location | Periodic review | Limited activities |
OSJ Indicators
A location is an OSJ if it:
- Supervises one or more branches
- Accepts or reviews customer orders
- Reviews customer communications
- Conducts training for registered persons
Exam Tip: A broker acts as AGENT (for others, earns commissions). A dealer acts as PRINCIPAL (for self, earns markup). Know that agents are INDIVIDUALS, not firms.
When a broker-dealer sells securities from its own inventory to a customer, it is acting as:
Which of the following is excluded from the definition of a broker-dealer?
An agent of a broker-dealer may be associated with:
A location where a supervisor reviews and accepts customer orders is classified as:
12.2 Securities Registration
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