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 ]

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