broker-dealer
A broker-dealer is a person or entity registered to engage in both broker and dealer activities under the Securities Exchange Act of 1934. The term reflects the particular hybrid role broker-dealers play in the securities industry. As brokers, they transact securities for others, often by buying and selling securities on behalf of clients on a commission basis. As dealers, they buy and sell securities for their own account, and often act as market makers by providing liquidity through quoted buy and sell prices.
Broker-dealers are heavily regulated to ensure market integrity and protect investors. They must register with the Securities and Exchange Commission (SEC) and become members of a self-regulatory organization, such as the Financial Industry Regulatory Authority (FINRA). These regulations require broker-dealers to comply with transparency, disclosure, capital requirements, and recordkeeping rules. Broker-dealers handling client funds or securities must comply with the SEC’s Customer Protection Rule, which requires that banking protocols be adhered to for the protection of client funds. Additionally, broker-dealers are subject to anti-fraud provisions under the Securities Act of 1933, Securities Exchange Act of 1934, among other laws, ensuring fairness and transparency in client transactions.
When broker-dealers provide recommendations to retail clients, they must comply with Regulation Best Interest (Reg BI), which requires them to act in the best interest of the client at the time of the recommendation. This regulation obligates broker-dealers to disclose material conflicts of interest, consider reasonable alternatives, and prioritize the client's interests over their own financial or business motivations. Reg BI represents a heightened standard of conduct aimed at protecting retail investors from conflicts and unsuitable recommendations.
For more information, see: What is a Broker-Dealer?, and 15 U.S. Code § 78c.
[Written in December of 2024 by the Cornell Law School Securities Law Clinic]
Wex