Glossary
Broker-dealer
A firm registered with the SEC and FINRA that trades securities for customers (broker) and for its own account (dealer).
A broker-dealer is a firm that buys and sells securities both as an agent for customers and as a principal for its own account. The two roles are defined in the US Securities Exchange Act of 1934: a broker executes trades for others, while a dealer trades from its own inventory. Most firms do both, so regulators use the combined term. Every brokerage account an American investor opens is held at a broker-dealer.
How it is regulated
A broker-dealer must generally register with the SEC and join FINRA, the self-regulatory organization that writes and enforces day-to-day conduct rules and examines member firms. Key obligations include:
- Net capital requirements, so the firm can absorb losses.
- Customer protection rules that keep customer cash and fully paid securities separate from the firm's own.
- Best execution (FINRA Rule 5310), requiring reasonable diligence to get customers the most favorable available terms.
- Regulation Best Interest, in force since June 2020, which requires firms to act in a retail customer's best interest when making a recommendation.
Broker-dealer versus adviser
A broker-dealer is not the same as a registered investment adviser, which owes clients a fiduciary duty across the whole relationship and is usually paid an ongoing fee. Many firms are registered as both, and their representatives may wear either hat depending on the account. A firm's Form CRS, a short relationship summary, explains which services and duties apply.