Broker-Dealer

The FINRA broker-dealer license is required for firms and individuals engaged in the buying and selling of securities, ensuring compliance with regulatory standards. It involves passing qualifying exams and adhering to strict guidelines to protect investors and maintain market integrity.

Overview

Services Provided

  • Buying and selling securities on behalf of customers (as a broker)

  • Trading securities for their own account (as a dealer)

  • Offering investment advice

Capital Requirements

  • The Customer Protection Rule requires broker-dealers to safely manage customer funds and securities. Firms must verify daily that they hold enough of these assets and deposit any excess into a special reserve account solely for customer benefit, preventing the use of these funds for the business.

Transaction Limitations

  • Firms regulated by FINRA must adhere to strict trading rules that prevent market manipulation, insider trading, and other unethical practices. Transactions must be transparent and meet reporting obligations.

Safeguarding Requirements

  • Client funds under a Broker Dealer licence are safeguarded by strict FINRA rules. Firms are required to segregate client funds from their operational funds, ensuring that customer assets are protected from financial difficulties within the firm. Additionally, these funds are protected by SIPC insurance.

Jurisdictional Limitations

  • The Broker Dealer licence under FINRA applies within the United States. Firms looking to expand internationally must seek additional regulatory approvals. FINRA ensures that Broker Dealers comply with US securities laws and cannot offer services outside their jurisdiction without meeting local regulations.

Legal & Regulatory Framework

  • FINRA Rules

  • SEC Rules and Regulations

  • Securities Act of 1933

  • Securities Exchange Act 1934

  • Trust Indenture Act of 1939

  • Investment Company Act of 1940

  • Investment Advisers Act of 1940

  • Sarbanes-Oxley Act of 2002

  • Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

  • Jumpstart Our Business Startups Act of 2012

Key Restrictions

  • Broker Dealer firms are restricted from engaging in insider trading, fraudulent activities, or conflicts of interest. Firms must adhere to strict limits on proprietary trading, ensuring that client interests are prioritised over the firm‚ own profit motives.

Regulatory authorisation process

  • The Securities and Exchange Commission (SEC) usually assesses a complete application within 45 days. However, firms must also be accepted by the Self-Regulatory Organization (SRO), which may take longer in assessing the applicant firm.

  • FINRA, has established the New Member Application (NMA) fees, which range from $7,500 to $55,000, depending on the size of the firm.

Exemptions & exclusions

  • Exempt bodies

    Intrastate broker-dealers

    Issuers managing their own securities

    Foreign broker-dealers complying with Rule 15a-6

  • Excluded activities

    Dealing exclusively within one state without using national securities exchanges.

    Transacting only in exempted securities such as, government bonds (this exemption is narrowly scoped).

    Selling securities directly related to an issuer's operations without being a regular dealer.

Regulatory Updates

Loading...

Deep dive into Broker-Dealer

Introduction

  • Discover the benefits of registering as a broker-dealer under the Financial Industry Regulatory Authority (FINRA) in the United States. Broker-dealers play a crucial role in the securities market by facilitating trades, underwriting new issues, and providing investment advice. By becoming authorised, firms are equipped with the regulatory framework needed to operate confidently in the dynamic U.S. financial markets. This recognition not only enhances a firm’s credibility but also ensures adherence to stringent compliance standards, safeguarding investor interests.

Definition

  • A broker-dealer is a firm or individual that buys and sells securities on behalf of clients as well as for its own accounts. Broker-dealers are pivotal in the financial markets as they facilitate trading activities, provide investment services, and ensure market liquidity. They operate under strict regulatory oversight, primarily from the FINRA, to ensure fair trading practices and protect investor interests. Broker-dealers must meet comprehensive financial, ethical, and reporting requirements, making them trusted intermediaries in the securities market.

Additional Information (Services)

  • Buying and selling securities (broker role): Facilitating transactions by purchasing or selling securities on behalf of clients in the financial markets.

  • Trading securities (dealer role): Engaging in transactions by buying and selling securities for the firm's own account to support market liquidity or profit generation.

  • Offering investment advice: Providing clients with personalised recommendations on securities and financial strategies based on their goals and risk tolerance.

Additional Information (Legal & Regulatory Framework)

  • FINRA Manual: Governs the behaviour of brokerage firms and professionals, ensuring they comply with securities laws and protect investors.

  • SEC Rules and Regulations: Enforces federal securities laws through its partnership with FINRA, ensuring firms comply with national standards.

  • Securities Act of 1933: Governs the issuance of new securities and ensures that FINRA members provide full and fair disclosure to protect investors from fraud.

  • Securities Exchange Act 1934: Establishes the framework for regulating securities exchanges, broker-dealers, and FINRA as a self-regulatory organisation (SRO), ensuring that FINRA enforces rules to prevent market manipulation and fraud.

  • Trust Indenture Act of 1939: Ensures that bond issuances by FINRA-regulated firms meet specific standards to protect bondholders.

  • Investment Company Act of 1940: Regulates mutual funds and investment companies to ensure that FINRA members managing these funds comply with ethical and legal standards.

  • Investment Advisers Act of 1940: Regulates investment advisers and requires FINRA members offering advisory services to act in the best interest of their clients.

  • Sarbanes-Oxley Act of 2002: Strengthens corporate governance and accountability for publicly traded companies, which FINRA members must adhere to when offering investment services.

  • Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010: Implements stricter financial regulations following the 2008 crisis, impacting how FINRA members manage risk and compliance.

  • Jumpstart Our Business Startups (JOBS) Act of 2012: Eases securities regulations for smaller businesses, and FINRA enforces compliance to ensure transparency and investor protection when these firms raise capital.

Links

Additional Information (Key Restrictions)

  • Suitability Obligations: Under FINRA rules, broker-dealers must ensure that any recommendations made to clients are suitable based on the client's financial situation, investment objectives, and risk tolerance. This rule aims to protect investors from unsuitable investment recommendations.

  • Restricted Firm Obligations: FINRA rules imposes specific obligations on firms designated as "Restricted Firms" due to a significant history of misconduct. These firms must maintain a deposit in a segregated account and comply with additional operational restrictions to mitigate risks to investors.