Definition of a Securities Broker & Dealer
A securities broker buys and sells securities on behalf of clients, while a securities dealer buys and sells securities on behalf of himself or his firm. A securities broker-dealer performs both of these functions and is subject to special regulation.
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Brokers
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A broker executes orders on behalf of his client, dealing primarily in secondary market transactions (the buying and selling of stock that has already been released into the market prior to the sale). Registration requirements for brokers were established by the Securities Exchange Act of 1934, which places brokers under the supervision of the Securities Exchange Commission (SEC). A securities broker is subject to fiduciary duties of care and loyalty to his client; a broker who sells securities with an intent to defraud his client acts in violation of SEC Rule 10b-5.
Dealers
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A securities dealer executes trades for himself or his firm. A dealer is empowered to hold securities himself or sell them to other clients or firms. Note that some definitions of "dealer" display more latitude than others; many federal securities statutes define "dealer" to include brokers. A dealer's status is not changed by the fact that he acts through a broker of his own. Although securities dealers are not as heavily regulated as brokers, they are still subject to some SEC requirements.
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Broker-Dealers
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Securities professionals or their firms who perform broker and dealer functions are known as "broker-dealers." Broker-dealers are considered "accredited investors" under federal security regulations dealing with private placements. Broker-dealers must register as such with the SEC (unless they conduct all activities within a single state), and with each individual state in which they transact business, unless they qualify for certain exemptions. Registration must take place before any brokering or dealing activity occurs; legal advice is advisable to determine whether one plans to engage in broker-dealer activity.
FINRA
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Broker-dealers are regulated by the Financial Industry Regulatory Authority (FINRA). FINRA is empowered to bring enforcement actions against broker-dealers. FINRA also maintains the Central Registration Depository system (CRD). The CRD contains the employment history, qualifications and disciplinary histories of more than half a million securities professionals. Registration for the CRD requires broker-dealers to file an application, pay a filing fee and consent to service of process.
SEC Registration Exemptions
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Certain broker-dealers are exempted from SEC registration requirements. Among the numerous SEC-exempted entities are those that deal only in commercial paper, bankers' acceptances and commercial bills; original issuers of securities; and foreign broker-dealers who engage in only those transactions enumerated by SEC Rule 15a-6. Again, securities broker-dealers are strongly advised to seek legal advice before assuming that they are covered by one of these exemptions.
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