Stock Brokers and Dealers Law and Legal Definition

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.