Definition of a Broker-Dealer

Understanding who qualifies as a broker-dealer is the foundation for everything else in this unit: registration requirements, supervision obligations, and regulatory jurisdiction all flow from these definitions.

Broker vs. Dealer

The securities industry uses two distinct terms that describe different capacities:

• Broker: Any person engaged in the business of effecting transactions in securities for the account of others (acting in an agent capacity).
• Dealer: Any person engaged in the business of buying and selling securities for their own account (acting in a principal capacity).

Most firms operate in both capacities and are therefore called broker-dealers. When a firm executes a customer's buy order on an exchange, it acts as a broker (agent). When the same firm sells securities from its own inventory to a customer, it acts as a dealer (principal).

• Broker (agent): Acts as an intermediary, matching buyers and sellers for the customer's benefit. Earns a commission.
• Dealer (principal): Trades from the firm's own inventory. Earns a markup (on sales) or markdown (on purchases).

Exam Tip: Gotchas

• The terms "broker" and "dealer" describe capacities, not permanent labels. The same firm can act as a broker on one transaction and a dealer on the next. What matters is whose account the trade is for: the customer's (broker) or the firm's (dealer).

Key Exclusions

Not everyone who touches a securities transaction is a broker-dealer. The following are generally excluded from the definition:

• Agents (individuals): An agent is a natural person (individual) who represents a broker-dealer or issuer in effecting transactions. Agents are registered separately; they are not broker-dealers themselves.
• Issuers: A company selling its own securities is generally not a broker-dealer unless it is regularly engaged in the business of buying and selling its own securities (like a mutual fund).
• Banks: Generally excluded from the broker-dealer definition under federal law. Banks can conduct certain securities activities (such as selling government securities or providing trust services) without registering as broker-dealers.

Exam Tip: Gotchas

• A broker-dealer is the firm; an agent is the individual. These are often confused. A broker-dealer is the entity; an agent is the natural person who acts on behalf of the broker-dealer. Both must register, but they register separately and have different regulatory obligations.
• Banks are excluded from the broker-dealer definition, but not from all securities regulation. They can sell government securities and provide trust services without broker-dealer (BD) registration, but other securities activities may still be regulated.
• An issuer selling its own stock in a one-time offering is not a broker-dealer. However, an issuer that regularly buys and sells its own securities (like a mutual fund company) may be.

Think of it this way: The definitions under USA Section 401 (Uniform Securities Act) boil down to one question: whose account is the trade for? If it is for the customer, the firm is acting as a broker. If it is for the firm's own account, it is acting as a dealer. From there, check whether any exclusion (bank, issuer, agent) applies. If none does, registration is required.