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. The USA's definitions section both defines the term and lists every statutory exclusion in one place.

What Makes a Firm a Broker-Dealer?

• 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

One trade, one capacity: A broker-dealer does both jobs as a business, but acts in only one capacity on any given trade: agent (commission) or principal (markup or markdown), never both on the same trade.

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

Who Is Excluded from the Broker-Dealer Definition?

Certain persons 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.

If an issuer also engages in BD activity beyond selling its own offerings, that additional activity may need separate analysis for registration.

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 statute names four categories in one clause: agents, issuers, banks/savings institutions/trust companies, and the no-place-of-business person described next. Don't limit "excluded" to just the institutional entities.

When Does No Place of Business Exclude a Firm?

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 by either of two independent routes. The statute joins them with "or," so only one needs to be satisfied.

Route A: Institutional-only transactions

The person has no place of business in the state and effects transactions in the state exclusively with or through:

• The issuers of the securities involved in those transactions
• Other broker-dealers
• Banks, savings institutions, trust companies
• Insurance companies
• Investment companies (as defined in the Investment Company Act of 1940)
• Pension or profit-sharing trusts
• Other financial institutions or institutional buyers (whether acting for themselves or as trustees)

Route B: Existing out-of-state customer (the "snowbird" route)

The person has no place of business in the state and:

• Is licensed under the securities act of a state where it does maintain a place of business, AND
• In this state, offers and sells only to a person who is an existing customer of the firm whose residence is not in this state (the state where the firm has no office)

Note on the $1 million figure: Unlike the investment adviser registration exemption, the broker-dealer exclusion sets no dollar threshold on pension or profit-sharing trusts. The $1 million employee-benefit-plan floor is an IA rule; do not import it here.

Exam Tip: Gotchas

• There are two routes, not one set of cumulative conditions. Route A (institutional-only) and Route B (existing out-of-state customer) are alternatives. A firm that fails Route A's "exclusively" test may still be excluded under Route B, and vice versa.
• Route B expressly permits a retail individual. A firm licensed at home with no office in the visited state may serve an existing customer who is only passing through, so long as that customer does not reside in the no-office state. For that retail client, being a new customer or one who lives in the no-office state breaks Route B. A retail client, new or existing, was never eligible for Route A in the first place, since Route A requires the counterparty to be institutional. A new institutional counterparty, by contrast, does not break Route A.
• Any place of business in the state means registration is required, regardless of client type.

The logic:

No office in state + only institutional clients = excluded (Route A)

No office in state + licensed at home + existing customer who resides elsewhere = excluded (Route B)

No office in state + a new or resident retail client = must register

Any office in state = no-place-of-business exclusion unavailable, so the firm must register unless a separate exclusion applies (for example, it is itself a bank or an issuer selling its own securities)

How Does Canadian Broker-Dealer Limited Registration Work?

The USA provides a special limited registration for Canadian broker-dealers serving a narrow set of Canadian-connected clients.

Requirements for limited registration:

• Registered as a broker or dealer in good standing in the Canadian jurisdiction from which it effects transactions into the state (files evidence of this)
• Member of a Canadian self-regulatory organization (SRO) or stock exchange
• No office or other physical presence in the state
• Files consent to service of process
• Files the application form required by the jurisdiction of its head office (states coordinate around the home-province form rather than a separate U.S. form)
• Renews before December 1 each year
• Becomes effective on the 30th day after filing, unless made effective earlier, so long as no denial order is in effect and no proceeding is pending against the applicant

Who the firm may transact with: two independent categories of person from Canada (plus a separately permitted institutional business, noted below):

• A Canadian BD acting within these limits is exempt from every other requirement of the Act, except the antifraud provisions and the requirements of this Canadian-registration section itself
• Because of that exemption, its registration can be denied, suspended, or revoked only for breaching the antifraud provisions or this section, not for the general grounds discussed later in this unit
• Beyond those two categories, the firm may also transact with or through issuers, other broker-dealers, and institutional buyers (a full institutional business), and as otherwise permitted by the Act
• What it cannot do is solicit ordinary new retail U.S. clients under this provision

Ongoing duties once registered under this section, the firm must:

• Maintain its provincial or territorial registration and SRO or exchange membership in good standing
• Provide the Administrator, on request, with its books and records relating to its in-state business
• Promptly inform the Administrator of any criminal action, or any finding or sanction from a self-regulatory or regulatory action involving fraud, theft, deceit, or misrepresentation
• Disclose to its clients in the state that it and its agents are not subject to the full regulatory requirements of the Act

Exam Tip: Gotchas

• "Existing clients temporarily in the state" covers only category (1). Category (2) reaches a person who actually resides in the state and requires no pre-existing relationship, so long as the transactions sit in a Canadian self-directed tax advantaged retirement plan. Do not treat temporary residence or a prior relationship as universal requirements.
• A Canadian BD still cannot use this provision to solicit ordinary new retail U.S. clients. If an exam question has a Canadian firm soliciting ordinary new U.S. retail customers, the limited registration does not apply. Note this does not shut off institutional business, which the Act permits separately.
• The firm must tell its clients in the state that it and its agents are not subject to the Act's full regulatory requirements.

What Should You Check on Exam Day?

• Confirm which capacity a transaction describes: agency (broker, commission) or principal (dealer, markup/markdown). A firm never does both on the same trade.
• Run the four-category exclusion list from memory: agents, issuers, banks/savings institutions/trust companies, and no-place-of-business persons. Bank holding companies stay in.
• For a no-office fact pattern, check both routes (institutional-only, and existing out-of-state customer) before concluding registration is required. They are alternatives, not cumulative conditions.
• For a Canadian broker-dealer fact pattern, separate the two client categories (temporary resident with a prior relationship vs. resident retirement-plan holder with none), and remember the December 1 renewal date and the ongoing duty to disclose limited-registration status.