Broker/Dealer Roles – Series 7 Exam

🟦 Broker/Dealer Roles – Series 7 Exam
A must-know topic for mastering financial markets and client relationships.

The Series 7 exam requires a clear understanding of what a broker/dealer (B/D) is—and the critical roles they play in the securities industry. This knowledge is central to grasping market operations, client transactions, and regulatory obligations.

🏦 What Is a Broker/Dealer?

A broker/dealer is a firm or individual engaged in the business of buying and selling securities. They can operate in two distinct capacities:

📌 One firm can act as both a broker and a dealer, but not in the same transaction.

🔄 Broker Role (Agency Capacity)

✅ Acts on behalf of clients
✅ Facilitates trades between buyers and sellers
✅ Paid via commission
✅ Example: You want to buy 100 shares of XYZ; your broker finds a seller and charges you a commission for the service.

Key regulatory point: Brokers owe clients a duty of best execution—getting the best possible price in the market.

🏢 Dealer Role (Principal Capacity)

✅ Trades from its own inventory
✅ Buys low, sells high (similar to a wholesaler)
✅ Earns a markup (when selling) or markdown (when buying)
✅ Example: You sell 100 shares of XYZ; the dealer buys the shares into its inventory and pays you a slightly lower price than market.

Key regulatory point: Dealers disclose their capacity on trade confirmations.

🛠 Other Important Roles of a Broker/Dealer

• Underwriting: Participates in new securities issues, either by buying the issue (firm commitment) or selling on behalf of the issuer (best efforts).
• Market Making: Publishes bid and ask prices to provide liquidity in specific securities.
• Clearing & Settlement: Ensures trades are properly cleared (matched and confirmed) and settled (finalized).

⚖️ Regulatory Oversight

Broker/dealers are regulated by:

• FINRA – enforces rules on conduct and financial responsibility
• SEC – requires B/Ds to register under the Securities Exchange Act of 1934
• SIPC – provides limited protection for customer accounts if a B/D fails

🎯 Exam Focus Areas

Expect scenario-based questions asking you to:

• Identify whether a firm is acting as a broker or dealer in a transaction
• Distinguish between commission and markup/markdown compensation
• Understand market-making activities
• Apply rules for disclosures and confirmations

🚀 Master This Topic with Confidence

Our Series 7 prep course breaks down broker/dealer functions using real-world examples, video lessons, and practice quizzes—with lifetime access.
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Learn it. Apply it. Pass it.