As an adviser, you will send client trades to broker-dealers, share offices with their agents and perhaps work for one. Every one of those firms faces three questions under state law: is it a broker-dealer, must it register here, and what may the state demand once it does?
States license the businesses that handle investors' orders and money, so the law has to separate a business from a customer. The Uniform Securities Act (USA), the model state law the Series 65 tests, draws that line in Section 401(c).
Who is a broker-dealer? Any person, whether a firm or an individual, in the business of effecting securities transactions for others or for its own account. Section 401(j) defines "person" broadly. It covers individuals, corporations, partnerships, associations, certain trusts and even governments.
The compound name joins two roles:
- Broker: A broker acts as agent for a customer, executing the customer's order with someone else and earning a commission.
- Dealer: A dealer acts as principal, selling from or buying into its own inventory and earning a markup or markdown.
Common mistakes
- Counting trades to find a dealer: A 400-trade-a-year investor is still an ordinary investor. Ask whether the person runs a securities business, not how often the person trades.
- Putting a clock on the snowbird exclusion: Answer choices offering 30 days misstate the Act. Residence decides, and a customer who moves in ends the exclusion immediately.
- Letting a state raise the SEC's numbers: A state net capital, bond or record-retention requirement above the SEC's is preempted. A firm whose net capital exceeds the Administrator's requirement owes no bond at all.
Bottom line
- A broker-dealer is any person in the business of effecting securities trades for others (broker) or its own account (dealer); an ordinary investor who trades often is not one (USA Section 401(c)).
- Agents, issuers, banks, savings institutions and trust companies are excluded, as is a firm with no in-state place of business dealing only with issuers, broker-dealers or institutional buyers, or with an existing customer residing elsewhere; no day limit applies, and...
- Section 201-A lets a Canadian firm with no physical presence, registered at home and in a Canadian SRO or exchange, serve prior clients temporarily in the state and persons from Canada trading Canadian self-directed retirement plans; effective on the 30th...
- Registration needs an application, consent to service of process and fee; it takes effect at noon of the 30th day absent a denial order or pending proceeding, covers partners, officers and directors acting as agents, and expires December 31 unless...
Exam shortcut
Run every "must this firm register?" stem in order: is the person in the business, does an exclusion fit, and if not, register. On out-of-state stems, find two facts only: an office in the state and the customer's current residence. Treat any day count as a planted distractor.
The full lesson (about 4,710 words, 31 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- D32
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