Broker-dealer

A broker-dealer is a person or firm engaged in the business of buying and selling securities, either for the account of others (as a broker) or for their own account (as a dealer), and is subject to regulatory oversight in the United States.

History

The concept of the broker-dealer has evolved alongside the development of the U.S. securities markets. Traditionally, brokers acted as agents for clients, executing trades on their behalf for a commission, while dealers acted as principals, trading for their own accounts and profiting from the spread between bid and ask prices.

Over time, most securities firms have adopted dual roles as both brokers and dealers, hence the term “broker-dealer.” Regulatory oversight was formalized with the Securities Exchange Act of 1934, which required broker-dealers to register with the Securities and Exchange Commission (SEC).

In February 2024, the SEC adopted new rules that broaden the definition of “dealer,” expanding registration requirements to more market participants, including some previously considered traders.

Products and Services

Broker-dealers provide a range of services, including:

• Executing securities transactions for clients (brokerage)
• Buying and selling securities for their own accounts (dealing)
• Market making and providing liquidity in various securities
• Underwriting new issues of securities
• Offering investment advice and research
• Providing clearing and settlement services
• Prime brokerage services for hedge funds and institutional clients

Broker-dealers are also often involved in trading derivatives, swaps, and futures, and may act as futures commission merchants (FCMs) or introducing brokers (IBs) when engaging in exchange-traded futures.

Regulation


Broker-dealers in the United States must register with the SEC and become members of the Financial Industry Regulatory Authority (FINRA). They are also subject to state regulations (“blue sky laws”) and, in some cases, oversight by the Commodity Futures Trading Commission (CFTC) when dealing in certain derivatives and futures products. Broker-dealers must comply with capital requirements, maintain books and records, and supervise the activities of their personnel.

Who is a “Broker”

Section 3(a)(4)(A) of the Securities Exchange Act generally defines a “broker” broadly as any person engaged in the business of effecting transactions in securities for the account of others.

Sometimes it is easy to determine if someone is a broker. For instance, a person who executes transactions for others on a securities exchange is a broker. However, other situations are less clear. For example, each of the following individuals and businesses may need to register as a broker, depending on several factors:

• “Finders,” “business brokers,” and other individuals or entities that engage in the following activities:
  • Finding investors or customers for, making referrals to, or splitting commissions with registered broker-dealers, investment companies (or mutual funds, including hedge funds) or other securities intermediaries
  • Finding investors for “issuers” (entities issuing securities), even in a “consultant” capacity
  • Engaging in, or finding investors for, venture capital or “angel” financings, including private placements
  • Finding buyers and sellers of businesses (i.e., activities relating to mergers and acquisitions where securities are involved)
• Investment advisers and financial consultants;
• Foreign broker-dealers that cannot rely on Rule 15a-6 under the Act (discussed below);
• Persons that operate or control electronic or other platforms to trade securities;
• Persons that market real-estate investment interests, such as tenancy-in-common interests, that are securities;
• Persons that act as “placement agents” for private placements of securities;
• Persons that market or effect transactions in insurance products that are securities, such as variable annuities, or other investment products that are securities;
• Persons that effect securities transactions for the account of others for a fee, even when those other people are friends or family members;
• Persons that provide support services to registered broker-dealers; and
• Persons that act as “independent contractors,” but are not “associated persons” of a broker-dealer (for information on “associated persons,” see below).

To determine whether any of these individuals (or any other person or business) is a broker, the SEC looks at the activities that the person or business performs. You can find analyses of various activities in the decisions of federal courts and the SEC's no-action and interpretive letters. Here are some of the questions to help individuals determine whether they are acting as a broker:

• Do you participate in important parts of a securities transaction, including solicitation, negotiation, or execution?
• Does your compensation for participation in the transaction depend upon, or is it related to, the outcome or size of the transaction or deal? Do you receive trailing commissions, such as 12b-1 fees? Do you receive any other transaction-related compensation?
• Are you otherwise engaged in effecting or facilitating securities transactions?
• Do you handle the securities or funds of others in connection with securities transactions?

A 'yes' answer to any of these questions indicates that you may need to register as a broker.

Who is a “Dealer”

Unlike a broker, who acts as agent, a dealer acts as principal. Section 3(a)(5)(A) of the Act generally defines a “dealer” as any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise.

The definition of “dealer” does not include a “trader,” a person who buys and sells securities for his or her own account, individually or in a fiduciary capacity, but not as part of a regular business. Individuals who buy and sell securities for themselves are generally considered traders, not dealers.

Sometimes it is easy to tell if someone is a dealer. For example, a firm that advertises publicly that it makes a market in securities is a dealer. Other situations can be less clear. For instance, each of the following individuals and businesses may need to register as a dealer, depending on several factors:

• A person who holds himself out as being willing to buy and sell a particular security continuously;
• A person who runs a matched book of repurchase agreements; or
• A person who issues or originates securities that he buys and sells.

Here are some of the questions an individual can ask themselves to determine whether they are acting as a dealer:

• Do you advertise or otherwise let others know that you are in the business of buying and selling securities?
• Do you do business with the public (either retail or institutional)?
• Do you make a market in, or quote prices for, both purchases and sales of one or more securities?
• Do you participate in a "selling group" or otherwise underwrite securities?
• Do you provide services to investors, such as handling money and securities, extending credit, or giving investment advice?
• Do you write derivatives contracts that are securities?

A 'yes' answer to any of these questions indicates that you may need to register as a dealer.