1.5 Broker-Dealers, Investment Advisers, Dual Registrants, and Unregistered Entities

The outline asks candidates to understand the "differences between registered investment adviser and broker-dealer, broker-dealer and non-broker-dealer, and members and non-members, including registration requirements." These distinctions decide which rules apply, who supervises, and whether a payment is legal.

Brokers and Dealers

The Securities Exchange Act of 1934 defines a broker (Section 3(a)(4)) as any person engaged in the business of effecting transactions in securities for the account of others, and a dealer (Section 3(a)(5)) as any person engaged in the business of buying and selling securities for its own account. A firm acting as both is a broker-dealer. Section 15(a) requires registration with the SEC, and Section 15(b)(8) generally requires membership in a registered securities association (FINRA).

Several categories are carved out or exempted:

• Banks. The Exchange Act excludes banks from the broker definition only for specified activities, such as trust and custody functions and networking arrangements in which a registered broker-dealer serves bank customers on bank premises. SEC Regulation R implements those exceptions, including the limits on referral fees paid to bank employees (Section 6.4).
• Issuers' employees. SEC Rule 3a4-1 gives a safe harbor for certain associated persons of an issuer who sell the issuer's securities without transaction-based compensation and meet other conditions.
• Insurance agents. An agent who sells only fixed annuities and fixed life insurance needs no securities registration, because those products are exempt from the Securities Act under Section 3(a)(8). An agent who sells variable annuities or variable life must be a registered representative of a broker-dealer, because variable contracts are securities.

Investment Advisers

The Investment Advisers Act of 1940 begins with Section 201, Congress's findings that advisory activities affect interstate commerce and the national securities markets. Section 202(a)(11) defines an investment adviser as any person who, for compensation, engages in the business of advising others about the value of securities or the advisability of buying or selling them, or who issues analyses or reports about securities as part of a regular business. The definition excludes, among others:

• banks and bank holding companies (with limits);
• lawyers, accountants, engineers and teachers whose advice is solely incidental to their profession;
• broker-dealers whose performance of advisory services is solely incidental to their brokerage business and who receive no special compensation for it; and
• publishers of bona fide general-circulation publications.

Section 203 requires an adviser to register with the SEC unless an exemption applies or the adviser is prohibited from SEC registration. After the Dodd-Frank Act, advisers with less than about $100 million in regulatory assets under management generally register with their state rather than the SEC, and must switch to SEC registration at $110 million. Advisers file Form ADV through the IARD system and deliver the Form ADV Part 2 brochure to clients. Individuals who give advice for a state-registered or SEC-registered adviser generally must qualify as investment adviser representatives under state law, typically with the Series 65 or Series 66 exam.

How the Two Business Models Differ

Dual Registrants and Dual Hats

Many firms that sell mutual funds and variable annuities are also, or are affiliated with, investment advisers. A dual registrant must deliver a single Form CRS describing both brokerage and advisory services, which may run up to four pages. Under Reg BI and the Advisers Act, the representative must also make clear the capacity in which a recommendation is made. When a representative recommends moving a customer from a commission-based brokerage account to a fee-based advisory account, or the reverse, that account-type recommendation is itself covered by Reg BI or the adviser's fiduciary duty.

A registered representative who also gives advice through an unaffiliated investment adviser is engaged in an outside activity. Under current Rules 3270 and 3280, FINRA has treated that activity as requiring prior written notice and, in many cases, supervision as a private securities transaction. FINRA's new Rule 3290, approved by the SEC on September 15, 2026 but not yet effective as of this writing, will instead treat advice through an unaffiliated adviser as an outside activity requiring prior notice and an upfront assessment. It will not require the firm to supervise or keep records of the advisory transactions (Section 6.5).

Members and Non-Members

Not every broker-dealer is a FINRA member. For example, a firm that trades only on an exchange of which it is a member may qualify for an exception. For packaged products, the member/non-member line matters in three places:

• Rule 2040 forbids paying commissions or other transaction-based compensation to anyone who would be required to register as a broker-dealer to receive it. Payments to registered persons must also comply with all securities laws.
• Rule 2341(c) limits underwriter discounts to dealers that comply with Rule 2040 and have sales agreements.
• Rule 2320(e) requires that variable contracts be sold through other broker-dealers only if they are FINRA members with selling agreements.

Supervisory Red Flags

• A representative's business card or website says "financial advisor" plus an RIA's name the firm does not recognize. Check whether an outside advisory relationship was disclosed.
• A bank partner offers employees bonuses tied to the number of brokerage accounts opened. That arrangement conflicts with Regulation R's referral-fee limits.
• An insurance agency affiliated with the firm pays an unregistered agent part of a variable annuity commission. That payment is barred by Rule 2040 and the variable contract compensation rules.