Jackson Ross PLLC

Overview of Brokers, Dealers, Broker-Dealers, and Related Regulations

Many businesses grow to a certain size and then decide that they would like to drum up capital by selling stock. In order to issue securities such as common stock, businesses must comply with the Securities and Exchange Commission’s (SEC) regulations concerning the sale of securities. Companies that are looking to have their securities listed and publicly traded on a stock exchange typically work with a broker or a broker-dealer.

 

What’s A Broker? What’s a Dealer? What is a Broker-Dealer?

In order to participate in the securities market, interested market participants need to work with an agent or entity that can facilitate their trades on the stock exchange. This can be done by becoming a dealer, working with a broker, or working with a broker-dealer. A company that is interested in participating in the securities market needs to become a client of a broker or broker-dealer, or needs to become a dealer itself.

  • Brokers. A broker acts on behalf of the client, and only on behalf of the client. A broker is effectively an agent for the client, and its job is to help a client effect securities transactions. Brokers facilitate trades on behalf of clients, who pay a small commission to the broker for its services. There are two types of brokers:
    • Full service. A full service broker offers clients financial advice in addition to facilitating trades.
    • Discount. A discount broker only facilitates trades and nothing else.
  • Dealer. A dealer buys and sells securities on its own account and for its own benefit as a business. A dealer acts as a principal in its securities transactions because the dealer is its own client.
  • Broker-dealer. A broker dealer is a marriage between a broker and a dealer – it plays both the role of a broker and a dealer.

 

Brokers, dealers and broker-dealers have certain legal requirements that they must satisfy in order to participate in securities transactions. For instance, broker-dealers are required to:

  • Register as a broker-dealer with the SEC under 15 USC Section 780;
  • Become a member of the Securities Investor Protection Corporation (SIPC), pursuant to 15 USC Section 78ccc;
  • Join a self-regulated organization (SRO) such as FINRA;
  • Comply with all state requirements; and
  • Ensure its associated persons meet applicable qualification requirements.

 

There are a lot of other special rules that must be followed in certain situations. For instance, there are additional regulations concerning:

  • Foreign broker-dealers;
  • Brokers and dealers of government or municipal securities and repurchase agreements;
  • Banks, insurance companies and other financial institutions;
  • Real estate securities; and
  • Transaction-based broker or broker-dealer compensation.

 

Acquiring the services of a broker or broker-dealer, or becoming a dealer, is a big decision for a company, but for many businesses it can be a smart move. Being able to participate in securities transactions can open up many opportunities for a business. By working with a business lawyer who is licensed in or familiar with your company’s jurisdiction of incorporation, you can make sure that you are doing everything that you need to ensure that your company is in compliance with the SEC regulations concerning brokers, dealers and broker-dealers.