Definition of a Broker-Dealer

Before you can understand registration requirements, you need to know exactly what the Uniform Securities Act (USA) considers a broker-dealer, and just as importantly, who falls outside the definition entirely.

Statutory Definition

• A broker-dealer is any person engaged in the business of effecting transactions in securities for the account of others (broker capacity) or for its own account (dealer capacity)
• The definition covers firms that buy, sell, or otherwise trade securities as a regular business activity
• A broker executes trades on behalf of customers and earns a commission
• A dealer trades for its own account and earns a markup (on sales to customers) or markdown (on purchases from customers)
• Most firms register as both; they act as broker-dealers

Key distinction: The broker acts for someone else's account; the dealer puts its own capital at risk. A broker acts as an intermediary; a dealer puts its own capital at risk.

Exclusions from the Broker-Dealer Definition

Certain entities are excluded from the broker-dealer (BD) definition entirely. This is stronger than an exemption from registration; these entities are simply not broker-dealers under the USA.

• Issuers are generally excluded from the BD definition when selling their own securities; they are issuers, not broker-dealers
• However, if an issuer also engages in BD activity beyond selling its own offerings, it may need to register

Exam Tip: Gotchas

• Banks are excluded from the broker-dealer definition, but bank holding companies are NOT. A bank holding company that effects securities transactions must register as a broker-dealer.
• "Excluded" means not a broker-dealer at all. "Exempt" means the entity is a broker-dealer but does not have to register. These are different concepts.

The No-Place-of-Business Exclusion

This is one of the most frequently tested concepts for broker-dealer regulation. A person with no place of business in the state is excluded from the BD definition if they effect transactions exclusively with or through:

• Issuers of the securities involved
• Other broker-dealers
• Banks, savings institutions, trust companies
• Insurance companies
• Investment companies (as defined in the Investment Company Act of 1940)
• Employee benefit plans with assets of at least $1 million
• Other financial institutions or institutional buyers

Both conditions must be met:

1. No office in the state, AND
2. Transactions only with institutional-type counterparties listed above

Exam Tip: Gotchas

• The no-place-of-business exclusion requires BOTH conditions. If a firm has no office in the state but solicits even one retail customer, the exclusion is lost and registration is required. Conversely, a firm with any place of business in the state must register regardless of client type.

The logic:

No office in state + only institutional clients = excluded from BD definition

No office in state + any retail client = must register

Any office in state + any client type = must register

Canadian Broker-Dealer Limited Registration

The USA provides a special limited registration for Canadian broker-dealers dealing with clients temporarily in the state.

Requirements for limited registration:

• Properly registered in the home Canadian province
• Member of a Canadian self-regulatory organization (SRO) or stock exchange
• No office in the U.S. state
• Files consent to service of process
• Files appropriate application form and proof of good standing

Key restriction: May only transact business with existing clients who are temporarily in the state (e.g., Canadian "snowbirds" vacationing in the U.S.)

• Canadian BDs with limited registration remain subject to the USA's antifraud provisions
• They cannot solicit new U.S. clients under this provision

Exam Tip: Gotchas

• The Canadian BD limited registration only permits dealing with EXISTING clients temporarily in the state. A Canadian BD cannot use this provision to solicit new U.S. clients. If you see an exam question where a Canadian firm is soliciting new customers, the limited registration does not apply.