Quick Answer
A broker is an agent effecting trades for others (commission); a dealer is a principal trading its own account (markup). Registration runs three tiers (Securities and Exchange Commission, self-regulatory organization, states), all through one Form BD on the Central Registration Depository. FINRA membership adds a New Member Application, and jurisdiction survives withdrawal for two years.
The whole unit on one sheet: the definitions that trigger registration, the three tiers, the forms, FINRA membership, and the sanctions and coverage rules the exam loves.
Broker vs. Dealer and the Registration Trigger
- Broker = agent effecting securities transactions for the account of others; earns a commission.
- Dealer = principal buying and selling for its own account; earns a markup or markdown.
- One firm usually acts as both, registering as a broker-dealer (B/D). Capacity decides compensation and disclosure.
- Trader exception: trading one's own account not as a regular business (a private investor) is excluded from the dealer definition.
- Bank exception: banks doing specified activities (trust, custody, networking) are excluded from the broker definition.
- Trigger: it is unlawful to use the mails or any interstate commerce to effect securities transactions unless registered with the Securities and Exchange Commission (SEC). Federal registration alone is not enough.
Three-Tier Registration and Exemptions
| Tier | Authority | Mechanism |
|---|---|---|
| Federal | SEC (Securities Exchange Act of 1934) | Form BD |
| Self-regulatory (SRO) | FINRA By-Laws | Form BD + Form NMA (New Member Application) |
| State | Blue-sky laws (Uniform Securities Act) | Form BD via CRD, state-by-state |
- One form, three filings: the same Form BD on the Central Registration Depository (CRD) routes to the SEC, the self-regulatory organization (SRO), and the states.
- Foreign broker-dealer exemption: available only for unsolicited transactions or chaperoned institutional business through a U.S.-registered B/D. Direct retail solicitation forces full SEC registration.
- Successor registration: successor files Form BD within 30 days; the predecessor's registration carries the successor for up to 45 days.
The One-Liners That Win Points
- A firm that buys into inventory and resells is a dealer; one that matches buyer and seller is a broker.
- A B/D registered with the SEC but not an SRO member cannot conduct over-the-counter (OTC) business.
- Form BD = entry; Form BDW = withdrawal; Form BR = per-branch registration.
- Every OSJ is a branch office, but not every branch office is an OSJ. Approving new accounts is an OSJ-triggering activity.
- The New Member Application (NMA) applicant bears the burden of proof on every standard; a tie goes to denial.
- A 25% or more single-owner equity change or a material business change triggers a Continuing Membership Application (CMA) with prior approval.
- The investment adviser (IA) exclusion for a B/D needs BOTH prongs: advice solely incidental AND no special compensation.
- Representing SEC registration or SRO membership as government approval or endorsement is a fraudulent practice.
- Securities Investor Protection Corporation (SIPC) covers B/D failure, never market or fraud losses.
Numbers to Lock In
| Item | Value |
|---|---|
| SEC suspension of a B/D | up to 12 months |
| Qualifying-conviction lookback | 10 years |
| Form BDW effective (SEC registration) | 60 days after filing |
| Form BDW effective (SIPC member status) | 6 months after SEC effective date |
| FINRA retention of jurisdiction after withdrawal | 2 years |
| CMA advance filing (material business change) | at least 30 days before |
| CMA equity-ownership trigger | 25% or more (single person or entity) |
| NMA Standards of Admission | 14 |
| Successor files Form BD | within 30 days |
| Predecessor registration carries successor | up to 45 days |
| Form BD amendment ("promptly") | generally 30 days |
| Form BD / organizational records retention | life of the enterprise |
| Most other books and records | 6 years |
| SIPC coverage per customer | $500,000 (including up to $250,000 cash) |
| Major U.S. institutional investor | at least $100 million in assets |
| U.S. institutional investor | $50 million or more in total assets |
Top Gotchas
- The 60-day Form BDW effective period (SEC registration) is separate from the 6-month SIPC member-status delay; both can appear in one question.
- Filing Form BDW does not escape FINRA discipline: jurisdiction survives 2 years for conduct during membership, and a parallel rule reaches associated persons who leave via Form U5.
- "Life of the enterprise" is permanent, not 6 years. Form BD and organizational records outlive every other retention period.
- A bar applies to a person; revocation applies to a firm's registration. The exam swaps the terms.
- Failure to supervise is a stand-alone basis for sanctions, even if the principal never knew of the underlying violation.
- SIPC's $500,000 limit includes the $250,000 cash sublimit: $400,000 cash plus $400,000 securities is covered for only $250,000 cash plus $250,000 securities.
- The misrepresentation prohibition also reaches municipal securities dealers, and the cure is precise wording, not an after-the-fact disclaimer.
- The 25% equity trigger is a single-person or single-entity test; a pool where no one holds 25% does not trigger the CMA.
One-Breath Recap
A broker is an agent trading for others and a dealer is a principal trading its own account, and any firm engaged in that business must register with the SEC before touching interstate commerce. Registration runs three tiers (federal, self-regulatory, and state) all through one Form BD on the Central Registration Depository, with Form BDW handling withdrawal and Form BR each branch. FINRA membership adds the 14-standard New Member Application, a Continuing Membership Application for 25%-or-more ownership and material changes, and a two-year retention of jurisdiction that no withdrawal can dodge, while SIPC automatically covers up to $500,000 per customer for the firm's failure, never for market losses.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Broker-Dealer Registration unit for the complete lesson.