Broker-dealer: Overview, definition, and example
What is a broker-dealer?
A broker-dealer is a financial entity or individual that buys and sells securities on behalf of clients (acting as a broker) or for its own account (acting as a dealer). Broker-dealers play a critical role in the securities markets by facilitating transactions, providing investment advice, and offering underwriting services. They are typically registered and regulated by authorities such as the Securities and Exchange Commission (SEC) in the U.S.
Why is a broker-dealer important?
Broker-dealers are important because they provide liquidity and efficiency to the securities markets by connecting buyers and sellers. For investors, they offer expertise, access to financial markets, and execution of trades. For businesses, broker-dealers assist in raising capital through activities like underwriting and issuing securities.
Regulatory oversight ensures that broker-dealers operate transparently and fairly, protecting clients and maintaining the integrity of financial markets.
Understanding a broker-dealer through an example
Imagine an investor wants to purchase 100 shares of a publicly traded company. The investor contacts a broker-dealer, who executes the trade on the investor’s behalf, ensuring the transaction is completed at the best available price. In this scenario, the broker-dealer acts as a broker.
In another example, a broker-dealer underwrites an initial public offering (IPO) for a startup. The broker-dealer purchases the securities from the issuing company and sells them to investors. Here, the broker-dealer acts as a dealer by trading securities for its own account.
An example of a broker-dealer clause
Here’s how a broker-dealer clause might appear in a financial agreement:
“The Parties acknowledge that [Insert Broker-Dealer Name] is acting as a broker-dealer in connection with the transactions contemplated herein. The Broker-Dealer is registered under applicable securities laws and shall execute all trades in compliance with applicable regulations. The Parties further agree that any fees or commissions payable to the Broker-Dealer shall be disclosed in advance and agreed upon by the Parties.”
Conclusion
A broker-dealer is a key participant in the financial markets, facilitating transactions, providing investment services, and raising capital for businesses. For investors, they offer expertise and market access, while for businesses, they provide essential services like underwriting and distribution of securities. Including a clear broker-dealer clause in agreements ensures transparency, compliance with regulations, and alignment of expectations between all parties involved.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.