Definitions of Broker-Dealers

Lesson

Broker-dealers are essential players in the securities market, facilitating transactions between buyers and sellers.

Practice Question #1

Which of the following is NOT a responsibility of a broker-dealer?

A) Providing investment advice for compensation

B) Facilitating securities transactions

C) Ensuring compliance with securities laws

D) Registering with regulatory authorities

Select an option above to see an explanation here.

A) Providing investment advice for compensation is the responsibility of an investment adviser, not a broker-dealer. B) Facilitating securities transactions is a primary function of broker-dealers. C) Ensuring compliance with securities laws is the responsibility of broker-dealers and their principals. D) Registering with regulatory authorities requires broker-dealers to conduct securities business.

Terms

Broker-Dealer:: A person or firm buying and selling securities for their account or on behalf of customers.
Agent:: An individual representing a broker-dealer or issuer in effecting securities transactions.
Principal:: A person responsible for supervising the activities of agents and ensuring compliance with securities laws and regulations.

Practice Question #2

Which of the following is an example of an exempt security?

A) Corporate bonds

B) Municipal bonds

C) Common stock

D) Mutual funds

Select an option above to see an explanation here.

A) Corporate bonds are not exempt securities and must be registered under federal and state securities laws. B) Municipal bonds are exempt securities, as state and local governments issue them. C) Common stock is not an exempt security and must be registered under federal and state securities laws. D) Mutual funds are not exempt securities and must be registered under federal and state securities laws.

Do Not Confuse With

Investment Adviser:: A person or firm that provides investment advice for compensation.
Investment Adviser Representative:: An individual representing an investment adviser in providing investment advice to clients.

Practice Question #3

What is the primary difference between an investment adviser and a broker-dealer?

A) Investment advisers provide advice for compensation, while broker-dealers facilitate securities transactions.

B) Investment advisers facilitate securities transactions, while broker-dealers provide advice for compensation.

C) Investment advisers are exempt from registration requirements, while broker-dealers must register with regulatory authorities.

D) Investment advisers must register with regulatory authorities, while broker-dealers are exempt from registration requirements.

Select an option above to see an explanation here.

A) Investment advisers provide advice for compensation, while broker-dealers facilitate securities transactions. This is the primary difference between the two roles. B) This option reverses the roles of investment advisers and broker-dealers. C) Both investment advisers and broker-dealers must register with regulatory authorities. D) Both investment advisers and broker-dealers must register with regulatory authorities.

Real-World Example

A client approaches a broker-dealer to purchase shares of a particular stock. The broker-dealer executes the trade on behalf of the client, charging a commission for their services. The broker-dealer must adhere to regulations and act in the client's best interest.