Broker-Dealer
A broker-dealer is a financial firm that buys and sells securities for its customers (broker) and for its own account (dealer), regulated by FINRA and the SEC.
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Exam Tip
Broker = agent (commission). Dealer = principal (markup). B-D does both.
What is a Broker-Dealer?
A broker-dealer (B-D) is a firm that engages in the business of buying and selling securities. The "broker" function is executing trades for customers; the "dealer" function is trading for the firm's own account.
Broker vs. Dealer
| Function | Role | Compensation |
|---|---|---|
| Broker (Agent) | Acts for customers | Commissions |
| Dealer (Principal) | Trades own account | Markup/Markdown |
Types of Broker-Dealers
| Type | Description |
|---|---|
| Full-Service | Research, advice, wide product range |
| Discount | Execution only, lower fees |
| Online/Self-Directed | Electronic platforms, lowest cost |
| Introducing | Takes orders but clears through another firm |
| Clearing | Processes and settles trades |
Regulatory Requirements
- SEC Registration - Must register with Securities and Exchange Commission
- FINRA Membership - Must be a FINRA member
- State Registration - Register in each state of operation
- Net Capital Requirements - Minimum capital requirements
- Books and Records - Extensive recordkeeping
Key Personnel
| Role | License Required |
|---|---|
| Registered Representative | SIE + Series 6 or 7 |
| Principal | Series 24, 26, or 27 |
| Operations | Series 99 |
| Compliance | Various |
Suitability vs. Fiduciary
Broker-dealers are held to a suitability standard (not fiduciary), though Regulation Best Interest (Reg BI) enhanced obligations in 2020.
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FINRA
FINRA (Financial Industry Regulatory Authority) is a self-regulatory organization that oversees broker-dealers and their registered representatives, administering qualification exams and enforcing securities rules.
SEC (Securities and Exchange Commission)
The SEC is the U.S. federal agency responsible for enforcing securities laws, regulating securities markets, and protecting investors from fraud and market manipulation.
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