Broker, Dealer, and the Statutory Registration Trigger

The Series 24 starts every registration question with one fact pattern: did the firm act as a broker (agent) or a dealer (principal), and did that activity rise to the level that requires SEC registration? Get the agent-versus-principal distinction wrong and every downstream answer collapses.

Statutory Definitions

The two foundational definitions sit in the Securities Exchange Act of 1934 (SEA):

• A single firm typically acts as both broker and dealer depending on the transaction; the firm registers as a "broker-dealer" (B/D)
• The agent-versus-principal capacity decides which compensation model applies and which disclosure rules attach
• A firm matching a customer order with a counterparty is acting as a broker; a firm that buys securities into inventory and resells them is acting as a dealer

Exam Tip: Gotchas

• The agent-versus-principal split is the single most-tested broker-vs-dealer fact. When a question describes a firm that "buys for inventory and resells", it is acting as a dealer. When the firm "matches buyer and seller" or "executes the trade for the customer", it is acting as a broker.
• Compensation method follows capacity. Brokers earn commissions disclosed on the confirmation; dealers earn the markup or markdown built into the price.

Trader and Bank Exceptions

Not every person who buys and sells securities meets the dealer or broker definition:

• Trader exception: Buying and selling for one's own account that is not part of a regular business (e.g., a private investor or proprietary trading account) is excluded from the dealer definition. The investor is buying for personal investment, not running a securities business.
• Bank exception: Banks performing specified securities activities (trust services, custody, certain networking arrangements with B/Ds) are excluded from the broker definition. This is the source of the "push-out" rules that defined when a bank had to spin off securities activity into a registered B/D affiliate.

Think of it this way: The statute targets people who are "engaged in the business" of effecting transactions. A retiree buying stocks in their own brokerage account is not running a broker-dealer business. A bank running a trust department executing trades for fiduciary accounts is doing bank business, not B/D business. The key phrase the exam tests is "engaged in the business".

Exam Tip: Gotchas

• The trader exception applies only to dealing for the trader's own account. A person buying for someone else (even a relative) is acting as a broker and is not protected by the trader exception.

The Exchange Act Registration Requirement

The trigger that converts the definitions into a duty is the Exchange Act's broker-dealer registration regime:

• Registration mandate: It is unlawful for any broker or dealer to use the mails or any instrumentality of interstate commerce to effect transactions in securities unless registered with the SEC
• Application path: Filed with the SEC
• Form BD requirement: The application must be made on Form BD in accordance with its instructions
• SRO and state membership: Successful applicants must also become a member of at least one self-regulatory organization (SRO) (typically FINRA) and register with applicable states

Exam Tip: Gotchas

• Federal registration alone is not enough. A B/D must also be an SRO member and registered in every state where it has a place of business or transacts a securities business. The same Form BD is used at all three tiers.
• The mails or interstate commerce trigger is broad. Email, phone calls, websites, and even a single solicitation from one state into another all trigger the federal registration requirement. There is no "small firm" or "local activity" exception to federal registration once interstate activity occurs.