The U.S. Securities and Exchange Commission has separate definitions for broker and dealer, although the two terms are typically used synonymously. A broker is anyone who conducts securities transactions on behalf of others. A dealer buys and sells securities for their own account, through a broker or otherwise. Anyone can perform the activities of a broker or dealer so long as they comply with SEC regulations.
Becoming a Broker-Dealer
Broker-dealers must register with the Securities and Exchange Commission before transacting business. First you must fill out a Form BD, which serves as the formal application to become a broker-dealer. The form can be found through the SEC's website, sec.gov. The broker-dealer must then join a self-regulating organization, or SRO, an organization that regulates securities trading. An example of an SRO is the National Association of Securities Dealers. Every broker-dealer must then join the Securities Investor Protection Corporation, which protects investors in the event a broker-dealer fails. Finally, the broker-dealer must abide by all state regulations file forms with the SEC for all employees or associates who will be conducting securities transactions
Rules of Conduct
Broker-dealers are expected to deal fairly with clients. This includes disclosing conflicts of interest, charging reasonable prices, and executing orders promptly. In addition, broker-dealers must recommend investments that are suitable for their clients and are to execute orders under terms that benefit the customer's best interest. Broker-dealers are expected to inform clients of transactions and are strictly forbidden from engaging in insider trading, private securities transactions, and disclose short sales.
Financial Requirements
Broker-dealers are required to meet certain financial standards by the SEC. Broker-dealers must maintain a minimum of liquid assets - either greater than $250,000 or 2 percent of aggregate debit claims. The SEC also requires accurate accounting records and safeguard customer funds and securities.
Examinations and Inspections
Broker-dealers are required to be examined by the SEC and their self-regulating organization. SROs generally inspect new broker-dealers after six months. Inspectors from the SEC can inspect a broker-dealer's books at any time. Examinations are done to ensure that securities broker-dealers are complying with SEC regulations.
