Broker-Dealer Regulation

The whole unit on one sheet: who is a broker-dealer, who is not, how they register, and the exclusions the exam loves.

Which One-Liners Win Points?

• Broker (agent): matches buyers and sellers, no inventory, earns commissions (agency transactions).
• Dealer (principal): trades from own inventory, earns markups/markdowns plus the bid-ask spread (principal transactions).
• A BD cannot act as broker and dealer in the same transaction; commission AND markup on one trade violates the dual-capacity prohibition.
• Market maker: a dealer standing ready to buy and sell a security continuously at quoted prices; acts as principal, provides liquidity.
• Associated person: any partner, officer, director, branch manager, or employee, or any person controlling, controlled by, or under common control with the BD; excludes purely clerical or ministerial staff.
• Excluded from the BD definition: agents (natural persons), issuers, and banks/savings institutions/trust companies.
• Firm commitment = underwriter buys the entire issue (acts as dealer); best efforts = underwriter never takes ownership, sells as much as possible without guaranteeing the full amount (acts as broker).
• No place of business is the gate for both state-registration exclusions.
• Institutional-only exclusion: no office in the state plus clients limited to institutions; one retail client destroys it.
• Snowbird exclusion: no office in the state, servicing an existing client temporarily present whose residence is elsewhere, and the BD must be licensed in a state where it maintains a place of business.
• Register through the Central Registration Depository (CRD) via Form BD; withdraw via Form BDW.

Exam Tip: Gotchas

• Excluded is not the same as exempt. An excluded entity never meets the definition; an exempt entity meets it but is released from registering. Banks are excluded, not exempt.
• Bank holding companies are not automatically excluded; a brokerage subsidiary must register.
• Place of business is the pivot for both state-registration exclusions: open an office in the state and you must register there, no matter how institutional or existing your clients are.

Which Numbers Matter Most?

Exam Tip: Gotchas

• Consent to service of process is filed once at initial registration, never renews, and survives withdrawal or termination.
• A successor firm files its own application (the predecessor may file it on the successor's behalf), owes no new fees until the next renewal, but must file a new consent to service of process.
• BDs meeting the SEC's minimum net capital requirements are exempt from the state's separate capital and surety-bond requirements.
• Withdrawal does not end enforcement. For a full year after withdrawal, the Administrator may bring revocation or suspension proceedings on the statutory willful-violation ground.

One-Breath Recap

A broker-dealer effects securities transactions as agent (commissions) or dealer (markups plus the spread), and can never wear both hats in one trade. Agents, issuers, and banks, savings institutions, and trust companies are excluded from the definition, so they never register. State registration is dodged only with no place of business in the state, either serving institutions exclusively or servicing a snowbird existing client whose residence is elsewhere. Register with Form BD through the Central Registration Depository; registration is effective at noon on the 30th day, expires December 31, and withdrawal leaves the Administrator able to bring willful-violation proceedings for one more year.

Need more than the recap? Read the full Broker-Dealer Regulation unit.