Stock brokers and dealers generally must register with the U.S. Securities
and Exchange Commission (SEC). SEC rules define a stock broker broadly
as any person engaged in the business of effecting transactions in securities
for the account of others. A person may need to register as a broker, depending
on a number of factors:
- Finding investors
or customers for, making referrals to, or splitting commissions with registered
broker-dealers, investment companies (or mutual funds, including hedge
funds) or other securities intermediaries;
- Finding investors
for "issuers" (entities issuing securities), even in a "consultant" capacity;
- Engaging in,
or finding investors for, venture capital or "angel" financings, including
private placements;
- Finding buyers
and sellers of businesses (i.e., activities relating to mergers and acquisitions
where securities are involved).
- Participating
in important parts of a securities transaction, including solicitation,
negotiation, or execution of the transaction.
- Receiving
compensation for participation in the transaction dependent upon, or related
to, the outcome or size of the transaction or deal. Receiving trailing
commissions, such as 12b-1 fees. Other transaction-related compensation.
- Being otherwise
engaged in the business of effecting or facilitating securities transactions.
- Handling the
securities or funds of others in connection with securities transactions.
Unlike a broker, who acts as agent, a dealer acts as principal. SEC
rules define a "dealer" as any person engaged in the business of buying
and selling securities for his own account, through a broker or otherwise.
The definition of "dealer" does not include a "trader," that is, a person
who buys and sells securities for his or her own account, either individually
or in a fiduciary capacity, but not as part of a regular business. Individuals
who buy and sell securities for themselves generally are considered traders
and not dealers.
Some of the factors that are used to determine whether someone needs
to register with the SEC as a dealer include:
- A person who holds himself out as being willing
to buy and sell a particular security on a continuous basis;
- A person who runs a matched book of repurchase
agreements; or
- A person who issues or originates securities that
he also buys and sells.
- Advertising or otherwise letting others know that
you are in the business of buying and selling securities.
- Doing business with the public (either retail
or institutional).
- Making a market in, or quoting prices for both
purchases and sales of, one or more securities.
- Participating in a "selling group" or otherwise
underwriting securities.
- Providing services to investors, such as handling
money and securities, extending credit, or giving investment advice.
- Writing derivatives contracts that are securities.
