Quick Answer
A broker acts for others (commission), a dealer acts for its own account (markup or markdown), and most firms are both. Broker-dealers register both federally (Securities and Exchange Commission plus a self-regulatory organization) and in every state where they do business, keep detailed books and records, confirm every trade, and supervise their agents.
This page covers broker-dealer status, exclusions, underwriter and market-maker roles, registration, and supervision.
What Makes a Firm a Broker-Dealer?
- Broker: effects transactions in securities for the account of others (agent capacity), earns a commission.
- Dealer: as a regular business, buys and sells securities for its own account (principal capacity), earns a markup (on sales) or markdown (on purchases); an ordinary investor trading their own account is not a dealer.
- Most firms do both and are called broker-dealers; the label describes the capacity on a given trade, not a permanent title.
Who Is Excluded From the Definition?
- Agents, issuers selling their own securities (no frequency test), and banks, savings institutions, and trust companies under the Uniform Securities Act. Federal law instead gives banks activity-specific exceptions.
What Makes a Firm an Underwriter?
- An underwriter purchases from an issuer with a view to distribution, offers or sells for an issuer in a distribution, or participates in such an undertaking; excludes a person whose interest is limited to a usual and customary seller's commission.
- Firm commitment: underwriter buys the entire issue, bearing the risk of unsold shares.
- Best efforts: underwriter acts as agent, never purchases the shares, so unsold shares remain with the issuer (issuer bears risk).
- The managing underwriter forms the underwriting syndicate; selling group members distribute shares for a concession, taking on no syndicate purchase liability, which only syndicate members bear.
Who Are Market Makers and Associated Persons?
- Market maker: a dealer willing to buy and sell for its own account on a regular or continuous basis, maintaining a two-sided market (both a bid AND an ask) at publicly quoted prices, earning the spread, unlike a regular dealer's trading profit; not an absolute guarantee a counterparty is always available.
- Associated person: any partner, officer, director, or employee of a broker-dealer, plus anyone controlling, controlled by, or under common control with it; excludes employees whose functions are SOLELY clerical or ministerial.
How Does a Broker-Dealer Register and Stay Registered?
- Dual registration: broker-dealers register BOTH federally (SEC plus self-regulatory-organization membership) AND in every state where they do business (unlike investment advisers, who register with one or the other), subject to a no-place-of-business exclusion (institutional-only transactions, or an existing nonresident customer).
- Those two routes are independent alternatives, not a single test. A retail in-state transaction defeats the institutional route, yet a qualifying existing nonresident customer may still fit the second one. An in-state office defeats both.
- Books-and-records creation rule: make and keep current trade blotters, general ledgers, customer account records, order tickets, and specifically created communication records; originals received and copies of items sent are instead preserved under the retention rule.
- Confirmation rule: send a written confirmation at or before completion of each trade, disclosing date and time of execution (or notice it's available on request), security, quantity, price, capacity (agent, or principal and whether a market maker), commission (agency) or markup/markdown (specified principal transactions), and settlement date (for specified security types).
- Payment-for-order-flow disclosure applies only when received; SIPC disclosure applies only when the firm is NOT a member.
What Does Supervision Require?
- Branch office inspections on a tiered cycle: offices of supervisory jurisdiction (OSJs) and branches supervising non-branch locations at least annually, other non-supervisory branch offices at least every three years, reasonably designed to detect and prevent violations, including handling of written customer complaints.
- A registered principal must supervise each OSJ; a non-OSJ branch may instead use a registered representative or a principal.
- A broker-dealer can be liable for an agent's violation without knowledge of the misconduct if it lacked reasonable supervisory procedures.
Which One-Liners Win Points?
- Banks are excluded from the broker-dealer definition under the USA; federal law gives them activity-specific exceptions instead, not a blanket exclusion.
Which Numbers Matter Most?
| Item | Value |
|---|---|
| Disciplinary lookback disclosed on the uniform application | past 10 years (felony charges, guilty pleas, convictions) |
| Trade blotters, ledgers, position records | 6 years (first 2 years readily accessible) |
| Originals of communications received, copies sent | 3 years (first 2 years readily accessible) |
| Employment applications, disciplinary actions | 3 years after termination |
| Written supervisory procedures | 3 years after being superseded |
| Partnership articles, uniform application, licenses | life of the enterprise |
| Branch office inspections | OSJs and supervising branches at least annually; other, non-supervisory branches at least every 3 years |
Which Gotchas Trip Students Up?
- "First 2 years readily accessible" isn't exclusive to 6-year records; it also applies to 3-year communications records (the exam may phrase this as "immediately available").
One-Breath Recap
A broker effects trades for others for a commission, a dealer trades its own account for a markup or markdown, and most firms do both, so the label describes the capacity on a given trade; agents, issuers, banks, savings institutions, and trust companies are excluded. Underwriters bring new securities out under firm commitment (the underwriter bears the risk), best efforts (the issuer does), or all-or-none, a type of best efforts. Market makers quote two-sided on a regular basis, and associated persons are everyone but the solely clerical. Broker-dealers register federally and in every state where they do business, keep books on set retention schedules, confirm trades in writing, and supervise. Supervision means a designated principal at each office of supervisory jurisdiction, written procedures established, maintained, and enforced, advertising approved before use, and tiered branch inspections.
Need more than the recap? Read the full Broker-Dealer Regulation unit.