Registrations of Persons - Broker-Dealer Definition and Exclusions

A broker-dealer is ANY person OR entity that acts in the BUSINESS of securities transactions either for its own account (dealer), or for others (broker). If the person/entity enacting securities transactions has a physical address (office, or any established place of business) where he/she conducts business, the person/entity is a broker-dealer. If the person in question only trades principal accounts (the person's own account), it is still a broker-dealer.
Remember: Agent/Broker/Commission and Principal/Dealer/Markup. An agent makes trades on behalf of others and a principal trades for its own account and is compensated by a markup.

From the Uniform Securities Act, drafted by the NCCUSL:

"Broker-dealer" means a person engaged in the business of effecting transactions in securities for the account of others or for the person's own account. The term does not include:

  1. An agent;
  2. An issuer;
  3. A bank or savings institution
  4. A person who has no place of business in the state if:

    1. He effects transactions in the state exclusively with or through
      1. The issuers of the securities involved on the transactions,
      2. Other broker-dealers, or
      3. Banks, savings institutions, trust companies, insurance companies, investment companies(as defined in the Investment Company Act of 1940), pension or profit sharing trusts, or other financial institutions or institutional buyers, whether acting for themselves or as trustees or,

    2. The person is licensed properly in the state in which the firm maintains a place of business (not in this state) and the only business the firm does in this state is with an existing customer of the firm who is not a resident of this state.

Remember that under the USA, the term "person" has a very broad meaning and that, when acting as a broker, the securities firm is making transactions for the accounts of others. When acting as a dealer, the firm is transacting business for its own account and inventory. Here's an easy way to remember: Just do your ABCs.

Agent/Broker/Commission and Principal/Dealer/Markup. An agent makes trades on behalf of others and a principal trades for its own account and is compensated by a markup.

Exam Tips and Tricks

For the Series 63 exam, it is quite often just as important to know what is not included in definitions as what the definition is. This is where the questions often get tricky. This is the first instance in which we see what "a bank is not" - we will see several other instances of this nature. Banks are very frequently exempted from the USA. Take note of this pattern.

Broker-Dealer: Summary of Exclusions

  • A broker-dealers or person with no physical address (the law says "no place of business") in the state, doing business with another broker-dealer or financial institution that DOES have a physical address, is generally excluded from registration. This is often considered an "institutional exemption." Recognize this as a pattern that repeats in the Uniform Securities Act.

  • Persons that have three or fewer customers (not including issuers and "bona fide" exempt such as institutions and pre-existing customers) are often exempt.
Exam Tips and Tricks
Series 63 Exam Flash Card - Broker-Dealer
Go down this list of items when trying to decide whether a person/entity is a broker-dealer requiring registration:
1. Is the legal person/entity effecting securities transactions (excluding financial institutions, pensions and trusts) in an agency or principal capacity? If yes, the entity/person MUST register.
2. Does the person/entity have a physical address in the state in which it is effecting transactions? If yes, the entity/person MUST register with the Administrator.
3. Is the person/entity located out of state, with no address within the state where the transactions are effected? Is the person/entity conducting business solely with issuers, broker-dealers, federally regulated financial institutions, and/or pre-existing customers who are vacationing in the state? If yes, the entity/person in question DOES NOT have to register with the Administrator.

Broker Dealer: Initial Registration
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