Broker-dealer

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Broker Dealer Regulation

SEC Staff - Study on Investment Advisers and Broker-Dealers

SEC Final Rule: Risk Management Controls for Brokers or Dealers with Market Access

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A broker is an individual who is paid a commission for executing customer orders, or a firm (or individual) that brings together buyers and sellers but does not take a position in the asset to be exchanged. An individual can be either a floor broker who executes orders on the floor of the exchange, or an upstairs broker who handles retail customers and their orders. A broker who specializes in stocks, bonds, commodities, or options acts as an agent and must be registered with the exchange where the securities are traded.

Broker-dealer is the broad term for those who do customer business in the securities industry. However, the Securities and Exchange Commission better defines and details who is a broker and who is a dealer:

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 clearly 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 a number of 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).

In order 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 actually performs. You can find analyses of various activities in the decisions of federal courts and the SEC 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 of the transaction?
• 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 the business of 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,” that is, a person who buys and sells securities for his or her own account, either individually or in a fiduciary capacity, but not as part of a regular business. Individuals who buy and sell securities for themselves generally are 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 obviously 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 a number of factors:

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

Here are some of the questions individual can ask of 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.