Sec what is a broker 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:.

If you are doing, or may do, any of the activities of a broker or dealer, you should find out whether you need to register. Information on the broker-dealer registration process is provided below. Please be sure to include your telephone number.

You are also welcome to consult with our office , by telephone or by email to info beamlaw. If you are already engaged in the business and are not yet registered, you should cease all activities until you are properly registered.

For further information, please see Part II. D and Part III, below. There are a few exceptions to this general rule that are addressed below. There are also special registration requirements that apply to broker-dealers of government and municipal securities, including repurchase agreements, below.

See , for example, In the matter of William V. Another common misconception is the use of a corporation by an associated person to operate a branch office.

This arrangement is not a legitimate structure, as the rules and regulations do not allow unregistered entities to receive commission income on behalf of a registered representative. An unregistered entity that receives commission income in this situation must register as a broker-dealer. See , for example, letter re: Birchtree Financial Services, Inc. September 22, However, unregistered entities may provide administrative services to broker-dealers and associated persons, and may be compensated for that service.

Associated persons and broker-dealers considering such arrangements are advised to do so with counsel. The matters involve not only the securities laws, which are complex enough, but state and federal tax issues as well. April 2, A broker-dealer that conducts all of its business in one state does not have to register with the SEC. State registration is another matter. See Part III, below.

The exemption provided for intrastate broker-dealer activity is very narrow. To qualify, all aspects of all transactions must be done within the borders of one state.

This means that, without SEC registration, a broker-dealer cannot participate in any transaction executed on a national securities exchange or Nasdaq. Also, information posted on the Internet that is accessible by persons in another state would be considered an interstate offer of securities or investment services that would require Federal broker-dealer registration.

A word about municipal and government securities. There is no intrastate exception from registration for municipal securities dealers or government securities brokers and dealers. E, below. For example, a person who sells securities that are exempt from registration under Regulation D of the Act must nevertheless register as a broker-dealer.

Issuers whose activities go beyond selling their own securities, however, need to consider whether they would need to register as broker-dealers. This includes issuers that purchase their securities from investors, as well as issuers that effectively operate markets in their own securities or in securities whose features or terms can change or be altered.

Some issuers offer dividend reinvestment and stock purchase programs. Under certain conditions, an issuer may purchase and sell its own securities through a dividend reinvestment or stock purchase program without registering as a broker-dealer. Although Regulation M 1 replaced Rule 10b-6 and superseded the STA Letter, the staff positions taken in this letter regarding the application of Section 15 a of the Exchange Act remain in effect.

See 17 CFR The SEC generally uses a territorial approach in applying registration requirements to the international operations of broker-dealers. Under this approach, all broker-dealers physically operating within the United States that induce or attempt to induce securities transactions must register with the SEC, even if their activities are directed only to foreign investors outside of the United States.

In addition, foreign broker-dealers that, from outside of the United States, induce or attempt to induce securities transactions by any person in the United States, or that use the means or instrumentalities of interstate commerce of the United States for this purpose, also must register. This includes the use of the internet to offer securities, solicit securities transactions, or advertise investment services to U. Foreign broker-dealers that limit their activities to those permitted under Rule 15a-6 of the Act, however, may be exempt from U.

Foreign broker-dealers that wish to rely on this exemption should review Securities Exchange Act Release No. See also letters re: Securities Activities of U. In addition, in April , the Division of Market Regulation staff issued responses to frequently asked questions concerning Rule 15a-6 in relation to Regulation AC. Regulation AC is discussed in Part V. B, below. Broker-dealers that limit their activity to government or municipal securities require specialized registration.

General-purpose broker-dealers that conduct a government securities business, however, must note this activity on their Forms BD. Form BD is discussed below. All firms that are brokers or dealers in government securities must comply with rules adopted by the Secretary of the Treasury, as well as SEC rules. Firms that limit their securities business to buying and selling municipal securities for their own account municipal securities dealers must register as general-purpose broker-dealers.

If, however, these entities are banks or meet the requirements of the intrastate exemption discussed in Part II. Municipal securities brokers must register as general-purpose broker-dealers. Firms that run a matched book of repurchase agreements or other stock loans are considered dealers. Note: Banks, thrifts, and other financial institutions should be aware that the Commission has proposed changes to rules that may affect them.

The GLBA amended the Exchange Act, and banks now have certain targeted exceptions and exemptions from broker-dealer registration. Currently, as a result of Commission rulemaking, banks are undergoing a phase-in period for compliance with the new law. The bank exemptions only apply to banks, and not to related entities.

It is important to note that exemptions applicable to banks under the Exchange Act, as amended by the GLBA, are not applicable to other entities, including bank subsidiaries and affiliates, that are not themselves banks.

As such, subsidiaries and affiliates of banks that engage in broker-dealer activities are required to register as broker-dealers under the Act. Also, banks that act as municipal securities dealers or as government securities brokers or dealers continue to be required to register under the Act. The SEC has granted thrifts savings associations the same status as banks through its rules. As such, thrifts now have certain targeted exceptions and exemptions from broker-dealer registration.

As with banks, it is important to note that exemptions applicable to thrifts are not applicable to other entities, including subsidiaries and affiliates that are not thrifts. As such, subsidiaries and affiliates of thrifts that engage in broker-dealer activities are required to register as broker-dealers under the Act.

The exemptions applicable to banks under the Exchange Act and thrifts under Commission rules do not apply to other kinds of financial institutions, such as credit unions.

The SEC staff, however, has permitted certain financial institutions, such as credit unions, to make securities products available to their customers without registering as broker-dealers. Under a networking arrangement, financial institutions can share in the commissions generated by their referred customers, under certain conditions.

The financial institution engaging in such networking must be in strict compliance with applicable law and Commission staff guidance. See , for example, letter re: Chubb Securities Corporation November 24, and NASD Rule applicable to broker-dealers that enter into networking arrangements with banks, thrifts, and credit unions. The SEC staff has permitted insurance agencies to make insurance products that are also securities such as variable annuities available to their customers without registering as broker-dealers under certain conditions.

These arrangements are designed to address the difficulties of dual state and federal laws applicable to the sale of these products. Through networking arrangements, insurance agencies can share in the commissions generated by their referred customers under certain conditions. Insurance agencies engaging in such networking must be in strict compliance with applicable law and Commission staff guidance. September 28, Those interested in structuring such an arrangement should contact private counsel or the SEC staff for further information.

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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Brokers Stock Brokers. What Is a Broker-Dealer? Key Takeaways A broker-dealer is a financial entity that is engaged with trading securities on behalf of clients, but which may also trade for itself.

A broker-dealer is acting as a broker or agent when it executes orders on behalf of its clients, and as a dealer or principal when it trades for its own account. There are thousands of broker-dealers comprising two broad categories: a wirehouse, which sells its own products, or an independent broker-dealer, which sells products from outside sources.

Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. No later than seven 7 calendar days after the occurrence of the relationship defined under Section As a condition for continuing registration, registered salesmen and AP shall: Report any change in the information provided in the application forms.

As a condition for continuing registration, registered salesmen and AP shall: Report any change in the information provided in the application form. In Electronic Format. On or before the 15th of March of the following year. Written complaints received from the client and the action taken thereon by the Broker Dealer. Every 15th day of the month covering the period as of the end of the preceding month. List of directors, officers, salesmen and employees together with their respective photos taken within six 6 months, with designations and specimen signatures.

Minimum commission rates charged by the broker dealer. Inform in writing the hiring of trainees by the broker dealer. This "locate" must be made and documented prior to effecting the short sale. Market makers engaged in bona fide market making are exempted from the "locate" requirement. For instance, with limited exception, Regulation SHO requires brokers and dealers that are participants of a registered clearing agency to take action to "close-out" failure-to-deliver positions "open fails" in threshold securities that have persisted for 13 consecutive settlement days.

Closing out requires the broker or dealer to purchase securities of like kind and quantity. Until the position is closed out, the broker or dealer and any broker or dealer for which it clears transactions for example, an introducing broker may not effect further short sales in that threshold security without borrowing or entering into a bona fide agreement to borrow the security known as the "pre-borrowing" requirement.

Creating uniform order marking requirements for sales of all equity securities. This means that a broker-dealer must mark orders as "long" or "short. Regulation M is designed to protect the integrity of the securities trading market as an independent pricing mechanism by governing the activities of underwriters, issuers, selling security holders, and other participants in connection with a securities offering.

These rules are aimed at preventing persons having an interest in an offering from influencing the market price for the offered security in order to facilitate a distribution. Rule of Regulation M generally prohibits underwriters, broker-dealers and other distribution participants from bidding for, purchasing, or attempting to induce any person to bid for or purchase, any security which is the subject of a distribution until the applicable restricted period has ended.

An offering's "restricted period" begins either one or five business days depending on the trading volume value of the offered security and the public float value of the issuer before the day of the offering's pricing and ends upon completion of the distribution.

Rule contains various exceptions that are designed to permit an orderly distribution of securities and limit disruption in the market for the securities being distributed. In addition, the following activities, among others, may be excepted from Rule , if they meet specified conditions:. Rule of Regulation M prohibits issuers, selling security holders, and their affiliated purchasers from bidding for, purchasing, or attempting to induce any person to bid for or purchase, any security which is the subject of a distribution until after the applicable restricted period.

Rule of Regulation M governs passive market making by broker-dealers participating in an offering of a Nasdaq security. Rule of Regulation M governs stabilization transactions, syndicate short covering activity, and penalty bids.

Rule of Regulation M prevents manipulative short sales prior to pricing an offering by prohibiting the purchase of offering securities if a person sold short the security that is the subject of the offering during the Rule restricted period. The rule contains exceptions for bona fide purchases, separate accounts, and investment companies.

The SEC and the courts interpret Section 10 b and Rule 10b-5 under the Act to bar the use by any person of material non-public information in the purchase or sale of securities, whenever that use violates a duty of trust and confidence owed to a third party.

Section 15 f of the Act specifically requires broker-dealers to have and enforce written policies and procedures reasonably designed to prevent their employees from misusing material non-public information.

Because employees in the investment banking operations of broker-dealers frequently have access to material non-public information, firms need to create procedures designed to limit the flow of this information so that their employees cannot use the information in the trading of securities.

Broker-dealers can use these information barriers as a defense to a claim of insider trading. Such procedures typically include:.

NASD Rule provides that "no person associated with a member shall participate in any manner in a private securities transaction" except in accordance with the provisions of the rule. To the extent that any such transactions are permitted under the rule, prior to participating in any private securities transaction, the associated person must provide written notice to the member firm as described in the rule.

If compensation is involved, the member firm must approve or disapprove the proposed transaction, record it in its books and records, and supervise the transaction as if it were executed on behalf of the member firm.

Other conditions may also apply. In addition, private securities transactions of an associated person may be subject to an analysis under Exchange Act Section 10 b and Rule 10b-5, as well as the broker-dealer supervisory provisions of Section 15 f described in Part V.

Regulation AC or Regulation Analyst Certification requires brokers, dealers, and persons associated with brokers or dealers that publish, distribute, or circulate research reports to include in those reports a certification that the views expressed in the report accurately reflect the analyst's personal views. The report must also disclose whether the analyst received compensation for the views expressed in the report.

If the analyst has received related compensation, the broker, dealer, or associated person must disclose its amount, source, and purpose. Regulation AC applies to all brokers and dealers, as well as to those persons associated with a broker or dealer that fall within the definition of "covered person.

The SRO rules impose restrictions on analyst compensation, personal trading activities, and involvement in investment banking activities. The SRO rules also include disclosure requirements for research reports and public appearances. Broker-dealers that are members of national securities exchanges are subject to additional regulations regarding transactions they effect on exchanges. For example, except under certain conditions, they generally cannot effect transactions on exchanges for their own accounts, the accounts of their associated persons, or accounts that they or their associated persons manage.

Exceptions from this general rule include transactions by market makers, transactions routed through other members, and transactions that yield to other orders. Exchange members may wish to seek guidance from their exchange regarding these provisions. Section 11 d 1 of the Act generally prohibits a broker-dealer that participates in the distribution of a new issue of securities from extending credit to customers in connection with the new issue during the distribution period and for 30 days thereafter.

Sales by a broker-dealer of mutual fund shares and variable insurance product units are deemed to constitute participation in the distribution of a new issue. Therefore, purchase of mutual fund shares or variable product units using credit extended or arranged by the broker-dealer during the distribution period is a violation of Section 11 d 1. However, Exchange Act Rule 11d permits a broker-dealer to extend credit to a customer on newly sold mutual fund shares and variable insurance product units after the customer has owned the shares or units for 30 days.

Section 11 d 2 of the Act requires a broker-dealer to disclose in writing, at or before the completion of each transaction with a customer, whether the broker-dealer is acting in the capacity of broker or dealer with regard to the transaction.

Regulation NMS addresses four interrelated topics that are designed to modernize the regulatory structure of the U. Regulation NMS also updates and streamlines the existing Exchange Act rules governing the national market system previously adopted under Section 11A of the Exchange Act, and consolidates them into a single regulation. Broker-dealers that are exchange specialists or Nasdaq market makers must comply with particular rules regarding publishing quotes and handling customer orders.

These two types of broker-dealers have special functions in the securities markets, particularly because they trade for their own accounts while also handling orders for customers. These rules, which include the "Quote Rule" and the "Limit Order Display Rule," increase the information that is publicly available concerning the prices at which investors may buy and sell exchange-listed and Nasdaq National Market System securities. The Quote Rule requires specialists and market makers to provide quotation information to their self-regulatory organization for dissemination to the public.

The quote information that the specialist or market maker provides must reflect the best prices at which he is willing to trade the lowest price the dealer will accept from a customer to sell the securities and the highest price the dealer will pay a customer to purchase the securities. A specialist or market maker may still trade at better prices in certain private trading systems, called electronic communications networks, or "ECNs," without publishing an improved quote.

This is true only when the ECN itself publishes the improved prices and makes those prices available to the investing public. Thus, the Quote Rule ensures that the public has access to the best prices at which specialists and market makers are willing to trade even if those prices are in private trading systems.

Limit orders are orders to buy or sell securities at a specified price. The Limit Order Display Rule requires that specialists and market makers publicly display certain limit orders they receive from customers.

If the limit order is for a price that is better than the specialist's or market maker's quote, the specialist or market maker must publicly display it. The rule benefits investors because the publication of trading interest at prices that improve specialists' and market makers' quotes present investors with improved pricing opportunities. For purposes of the regulation, an alternative trading system or ATS is any organization, association, person, group of persons, or system that constitutes, maintains, or provides a marketplace or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as defined in Rule 3b under the Exchange Act.

Further, for purposes of the regulation, an ATS may not set rules governing the conduct of subscribers other than with respect to the use of the particular trading system , or discipline subscribers other than by exclusion from trading.

To the extent that an ATS or the sponsoring broker-dealer seeks to establish conduct or disciplinary rules, the entity may be required to register as a national securities exchange or obtain a Commission exemption from exchange registration based on limited trading volume.

In order to acquire the status of an ATS, a firm must first be registered as a broker-dealer, and it must file an initial operation report with respect to the trading system on Form ATS at least 20 days before commencing operation. The initial operation report must be accurate and kept current.

The Commission does not issue approval orders for Form ATS filings; however, the Form ATS is not considered filed unless it complies with all applicable requirements under the Regulation. Regulation ATS contains provisions concerning the system's operations, including: fair access to the trading system; fees charged; the display of orders and the ability to execute orders; system capacity, integrity and security; record keeping and reporting; and procedures to ensure the confidential treatment of trading information.

An ATS must also comply with any applicable SRO rules and with state laws relating to alternative trading systems and relating to the offer or sale of securities or the registration or regulation of persons or entities effecting securities transactions. Finally, an ATS may not use in its name the word "exchange," or terms similar to the word "exchange," such as the term "stock market.

Most broker-dealers that effect transactions in "penny stocks" have certain enhanced suitability and disclosure obligations to their customers. Penny stocks include the equity securities of private companies with no active trading market if they do not qualify for one of the exclusions from the definition of penny stock.

Before a broker-dealer that does not qualify for an exemption 9 may effect a solicited transaction in a penny stock for or with the account of a customer it must: 1 provide the customer with a risk disclosure document, as set forth in Schedule 15G, and receive a signed and dated acknowledgement of receipt of that document from the customer See Rule 15g-2 ; 2 approve the customer's account for transactions in penny stocks, provide the customer with a suitability statement, and receive a signed a dated copy of that statement from the customer; and 3 receive the customer's written agreement to the transaction See Rule 15g The broker-dealer also must wait at least two business days after sending the customer the risk disclosure document and the suitability statement before effecting the transaction.

In addition, Exchange Act Rules 15g-3 through 15g-6 generally require a broker-dealer to give each penny stock customer:. Broker-dealers, including foreign broker-dealers registered with the Commission and unregistered broker-dealers in the United States, must comply with Regulation S-P, See 17 CFR Part even if their consumers are non-U. These notices must be clear and conspicuous, and must accurately reflect the broker-dealer's policies and practices.

Before disclosing nonpublic personal information about a consumer to a nonaffiliated third party, a broker-dealer must first give a consumer an opt-out notice and a reasonable opportunity to opt out of the disclosure. There are exceptions from these notice and opt-out requirements for disclosures to other financial institutions under joint marketing agreements and to certain service providers. There also are exceptions for disclosures made for purposes such as maintaining or servicing accounts, and disclosures made with the consent or at the direction of a consumer, or for purposes such as protecting against fraud, reporting to consumer reporting agencies, and providing information to law enforcement agencies.

In addition, it includes a safeguards rule that requires a broker-dealer to adopt written policies and procedures for administrative, technical, and physical safeguards to protect customer records and information. Further, it includes a disposal rule that requires a broker-dealer other than a broker-dealer registered by notice with the Commission to engage solely in transactions in securities futures that maintains or possesses consumer report information for a business purpose to take reasonable measures to protect against unauthorized access to or use of the information in connection with its disposal.

Broker-dealers offering certain types of accounts and services may also be subject to regulation under the Investment Advisers Act. See Section a 11 of the Investment Advisers Act.

In general, a broker-dealer whose performance of advisory services is "solely incidental" to the conduct of its business as a broker-dealer and that receives no "special compensation" is excepted from the definition of investment adviser. Thus, for example, a broker-dealer that provides advice and offers fee-based accounts i. Finally, under the same proposed rule, a broker-dealer that is registered under the Exchange Act and registered under the Investment Advisers Act would be an investment adviser solely with respect to those accounts for which it provides services that subject the broker-dealer to the Investment Advisers Act.

Pursuant to the rules of self-regulatory organizations, broker-dealers are required to arbitrate disputes with their customers, if the customer chooses to arbitrate. See e. The purpose of this rule is to require a broker-dealer to have at all times enough liquid assets to promptly satisfy the claims of customers if the broker-dealer goes out of business. Under this rule, broker-dealers must maintain minimum net capital levels based upon the type of securities activities they conduct and based on certain financial ratios.

Broker-dealers that do not clear and carry customer accounts can operate with lower levels of net capital. This rule protects customer funds and securities held by broker-dealers. Under the rule, a broker-dealer must have possession or control of all fully-paid or excess margin securities held for the account of customers, and determine daily that it is in compliance with this requirement.

The broker-dealer must also make periodic computations to determine how much money it is holding that is either customer money or obtained from the use of customer securities. If this amount exceeds the amount that it is owed by customers or by other broker-dealers relating to customer transactions, the broker-dealer must deposit the excess into a special reserve bank account for the exclusive benefit of customers.

This rule thus prevents a broker-dealer from using customer funds to finance its business. Broker-dealers must make and keep current books and records detailing, among other things, securities transactions, money balances, and securities positions.

They also must keep records for required periods and furnish copies of those records to the SEC on request. These records include e-mail. Broker-dealers also must file with the SEC periodic reports, including quarterly and annual financial statements. The annual statements generally must be certified by an independent public accountant. In addition, broker-dealers must notify the SEC and the appropriate SRO 12 regarding net capital, recordkeeping, and other operational problems, and in some cases file reports regarding those problems, within certain time periods.

This gives us and the SROs early warning of these problems. Certain broker-dealers must maintain and preserve certain information regarding those affiliates, subsidiaries and holding companies whose business activities are reasonably likely to have a material impact on their own financial and operating condition including the broker-dealer's net capital, liquidity, or ability to conduct or finance operations.