A broker-dealer is an individual or firm that buys and sells securities either for their own account or on behalf of a client. Specifically,
Both brokers and dealers buy and sell securities. The difference between the two is the relationship the individual or firm has with the account for which they are buying or selling securities. When a firm sells securities for its own account, it acts as a principal or dealer. When a firm buys and sells securities on customers’ behalf, it acts as an agent or broker.
What Does a Broker-Dealer Do?
Broker-dealers can be categorized by the services they provide. These include:
Introducing Broker-Dealers
Introducing, or fully disclosed, broker-dealers introduce customer accounts to a clearing firm. It does not hold customer assets, provide safekeeping for customer assets, or settle trades with counterparties. The introducing broker-dealer accepts orders, but a clearing or carrying broker-dealer maintains custody of the securities and issues statements and confirmations.
Clearing Broker-Dealers
A clearing, or carrying, broker-dealer is a member of an exchange acting as the liaison between an investor and a clearing corporation. The role of the clearing corporation is to handle the confirmation, settlement, and delivery of transactions, ensuring that transactions are prompt and efficient. Responsibilities of a clearing broker-dealer include handling orders to buy and sell securities and separation of customer funds and securities in their custody. It also includes maintaining custody of the securities and other assets in the account, which means clearing broker-dealers must maintain higher levels of net capital than an introducing firm.
Prime Brokers
A prime broker is a full-service broker-dealer offering investment banking and securities services to clients with more complex financial needs, such as hedge funds and other large investment clients. These services include securities lending, leveraged trade executions, and cash management. The prime broker also provides concierge-type services such as risk management, capital introduction, securities financing, and cash financing.
Most broker-dealers must register with the Securities and Exchange Commission (SEC) and join a Self-Regulatory Organization (SRO), like FINRA. Buying and selling securities is prohibited until such registration is complete.
Who is Required to Register as a Broker?
Brokers, or agents, buy and sell securities on a customer’s behalf. In the complex securities marketplace, however, this involves several individuals and businesses the SEC requires to register as a broker that might fall within the traditional definition of a broker.
The SEC provides a list of other individuals and businesses that might not be considered a broker but may be required to register as one. This includes:
- an investment adviser or financial consultant
- certain foreign broker-dealers
- a person that operates or controls platforms (electronic or otherwise) to trade securities
- a person marketing real-estate investment interests that are securities
- a placement agent for the private placement of securities
- a person marketing or effecting transactions in insurance products that are securities like variable annuities
- a person effecting securities transactions for the account of others for a fee, even if those other people are friends or family
- a person providing support services to a registered broker-dealer
- a person acting as an independent contractor, but who is not an associated person of the broker-dealer
- a finder, a business broker, and those engaging in:
- finding investors or customers for investment companies or mutual funds and other securities intermediaries and making referrals or splitting commissions with a registered broker-dealer for that service
- finding investment banking clients for a registered broker-dealer
- finding investors for issuers, even if it only in a consulting capacity
- finding investors for venture capital and angel financings (including private placements)
- venture capital or angel financings
- finding buyers and sellers of businesses, including mergers and acquisitions, that involve securities
Who is Required to Register as a Dealer?
Dealers, also referred to as a principal, buys and sells for their own account, representing themselves. As with brokers, who is considered a dealer within the complex securities marketplace can include individuals and business not typically considered a dealer. The SEC provides a list of who is required to register as a dealer, which includes:
- a person offering to buy and sell a particular security on a continuous basis
- a person running a matched book of repurchase agreements
- a person issuing or originating securities that he or she also buys and sells
How to Become a Broker-Dealer
Becoming a broker-dealer requires passing qualification exams to earn the appropriate registrations for a specific position within the securities industry. These qualification exams are designed to ensure individuals working in the securities industry have a minimum level of understanding, expertise, and competence in the securities they will conduct. The exams typically cover a broad range of subjects, including:
- The structure of the securities industry
- Types of securities and their risks
- Regulatory agencies and their functions Industry rules and regulations
- Customer protection
All securities professionals must pass qualification exams to enter the industry. While all new securities professionals must take the Securities Industry Essentials (SIE) Exam, the other series exams are tailored to different roles within the securities industry. In other words, candidates only need to take the exams most relevant to their position. These exams include:
- Securities Industry Essentials (SIE) Exam is an introductory exam new securities professionals must pass to enter the industry. The exam was created by FINRA to reduce redundancies and ease entry into the securities industry. The SIE does not require sponsorship from a FINRA-registered firm, making the exam more accessible to those outside the industry.
- Series 6 is the investment company and variable products representative qualification exam.
- Series 7 is the General Securities (GS) Registered Representative exam.
- Series 63, also known as the Uniform Securities Agent State Law Examination, is a NASAA exam administered by FINRA.
- Series 65 is the Uniform Investment Adviser Law Examination, a NASAA exam administered by FINRA.
- Series 66 combines Series 63 and Series 65 into one, qualifying candidates to work as securities agents and investment adviser representatives (IARs).
Securities Exam Prep from WebCE
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