Quick Answer
Securities markets include retail, institutional, and accredited investors; broker-dealers acting as broker (agent, commission) or dealer (principal, markup); investment advisers, issuers, underwriters, and municipal advisors. Market infrastructure includes the DTCC, which clears and settles trades, and the OCC, which clears listed options.
With the regulatory framework in place (the SEC at the top, self-regulatory organizations (SROs) enforcing rules, and the Securities Investor Protection Corporation (SIPC) backing customers), you can now understand the participants who operate within this structure.
Investor Types
| Type | Definition | Key Facts |
|---|---|---|
| Retail investors | Individual, non-professional investors | Receive the most regulatory protections |
| Institutional investors | Large entities (pension funds, mutual funds, insurance companies, banks) | Trade in larger volumes; may receive fewer disclosure protections due to their sophistication |
| Accredited investors | Meet specific financial thresholds defined under Regulation D | Can participate in private placements and other exempt offerings |
Accredited investor thresholds:
- Net worth: Over $1 million (excluding primary residence), individually or jointly with a spouse
- Income: Over $200,000 individually (or $300,000 jointly with a spouse) in each of the last two years, with a reasonable expectation of the same in the current year
- Certain professional certifications (Series 7, Series 65, Series 82) also qualify an individual
Exam Tip: Gotchas
- Accredited investor net worth excludes the primary residence. Questions often include home equity in the net worth calculation to see if you subtract it.
Broker-Dealers
A firm registered as a broker-dealer can act in two distinct capacities:
| Capacity | Role | Compensation | Acting As |
|---|---|---|---|
| Broker | Executes trades on behalf of customers | Commission | Agent |
| Dealer | Trades for its own account | Markup (buying from dealer) or markdown (selling to dealer) | Principal |
- Most firms are registered as both broker and dealer
- Must register with the SEC under the Securities Exchange Act of 1934 and become members of the Financial Industry Regulatory Authority (FINRA)
Exam Tip: Gotchas
- Broker = agent = commission. Dealer = principal = markup/markdown. On the SIE, watch for questions that describe the compensation type and ask you to identify the capacity. If the firm earned a commission, it acted as agent (broker). If it earned a markup, it acted as principal (dealer).
Types of Broker-Dealers
| Type | Function |
|---|---|
| Introducing broker | Takes customer orders but does not hold customer funds or securities; clears through another firm |
| Clearing broker | Holds customer assets, executes settlements, and provides back-office functions |
| Prime broker | Provides specialized services to hedge funds and institutional clients (lending, custody, clearing) |
Exam Tip: Gotchas
- An introducing broker does not hold customer funds. It routes orders through a clearing broker, which handles custody and settlement.
Other Key Market Participants
Investment Advisers
- Provide investment advice for compensation
- Generally register with the state below $100 million in assets under management and with the SEC once SEC registration is required (commonly above $110 million)
- The AUM figure belongs to the adviser itself: the registered firm, or an individual running their own advisory business. It is not any single employee's personal book of clients.
- Owe a fiduciary duty to clients: must act in the client's best interest
Exam Tip: Gotchas
- Investment advisers owe a fiduciary duty; broker-dealers making recommendations to retail customers must act in the customer's best interest under Regulation Best Interest (Reg BI). Do not confuse either standard with a full investment-adviser fiduciary relationship.
- The SEC-registration threshold is measured at the adviser level, not the representative level. An investment adviser representative working at the firm does not separately register with the SEC based on the firm's total AUM.
Issuers
- Entities (corporations, municipalities, governments) that create and sell securities to raise capital
- An issuer brings new securities to the market through an offering
Underwriters
- Investment banks that help issuers bring securities to market
- Buy securities from the issuer and resell them to the public
- Broker-dealers must disclose their participation or interest in a primary or secondary distribution
- Payments for market making are prohibited (issuers cannot pay broker-dealers to publish quotations or solicit interest)
Municipal Advisors
- Advise state and local governments on municipal bond issuances and financial products
- Regulated by the Municipal Securities Rulemaking Board (MSRB) (rulemaking) and the SEC (enforcement)
Traders and Market Makers
- Market makers are dealers that stand ready to buy and sell specific securities at all times
- They provide liquidity by maintaining a two-sided market (both a bid price and an ask price)
- Market makers profit from the spread between the bid and ask prices
Custodians and Trustees
- Custodians hold and safeguard financial assets on behalf of clients
- Trustees have a fiduciary responsibility to act in the beneficiary's interest
Transfer Agents
- Maintain records of securities ownership
- Process ownership transfers between buyers and sellers
- Issue and cancel certificates
- Distribute dividends to shareholders
Market Infrastructure
Depositories and Clearing Corporations
| Entity | Full Name | Role |
|---|---|---|
| DTCC | Depository Trust & Clearing Corporation | Provides clearing, settlement, and information services for equities, bonds, and mutual funds |
| OCC | Options Clearing Corporation | Central clearinghouse for all listed options; guarantees performance of options contracts |
- The DTCC was formed in 1999 as a holding company bringing the Depository Trust Company (DTC) and the National Securities Clearing Corporation (NSCC) under common ownership (both continue as subsidiaries)
- The DTCC settles the vast majority of securities transactions in the United States
- The OCC acts as a central counterparty: it stands between the buyer and seller of every options contract, guaranteeing that the contract will be fulfilled
Exam Tip: Gotchas
- The OCC guarantees options contracts, not equity trades. The DTCC handles clearing and settlement for equities, bonds, and mutual funds.
- The DTCC was formed from the merger of the DTC and NSCC. Questions may reference these predecessor organizations.
What Should You Check on Exam Day?
- Can you explain the difference between a broker acting as agent and a dealer acting as principal?
- Do you know the accredited investor net worth and income thresholds?
- Can you state what an introducing broker cannot do that a clearing broker can?
- Do you know the difference between what the DTCC and the OCC each clear?
- Can you explain why an investment adviser owes a fiduciary duty while a broker-dealer follows Regulation Best Interest?