Broker (Dealer)

A “Broker” is the name given to somebody that represents (works for) a Broker-Dealer firm. Brokers sell securities to consumers and are remunerated via a commission based on the dollar value or volume of transaction business written.

Brokers do not have a fiduciary responsibility but have to adhere to Finra Rule 2111 which is commonly referred to as the “Suitability rule”. There are 3 angles from which a brokers transaction for his client must be “suitable”.

• Reasonable-basis suitability requires a broker to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors.  Reasonable diligence must provide the firm or associated person with an understanding of the potential risks and rewards of the recommended security or strategy.
• Customer-specific suitability requires that a broker, based on a particular customer’s investment profile, has a reasonable basis to believe that the recommendation is suitable for that customer. The broker must attempt to obtain and analyze a broad array of customer-specific factors to support this determination.
• Quantitative suitability requires a broker with actual or de facto control over a customer’s account to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, is not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile.

The second headline set of rules that Brokers must adhere to is FINRA Rule 5310. The “best execution” rule requires that, in any transaction for or with a customer or a customer of another broker-dealer, a member and persons associated with a member shall use reasonable diligence to ascertain the best market for the subject security. Again, this does not equate to a fiduciary duty of care- simply that the broker must transact the business efficiently in all circumstances.

The firm for which the broker works, the Broker-Dealer (BD) may act in differing capacity for client trades.

1) Agency: The BD acts as intermediary for the transaction between the client and a third party buyer/seller
2) Principal: The BD transacts directly with the client using its own stock inventory

For agency business the firm will charge a commission and/or fees. For Principal business they will mark-up or mark-down the stock being transacted.

Mr. Client calls his broker to buy 10,000 shares of Amazon stock.

His broker works for a BD firm in Mr. Client’s home state. The broker informs Mr. Client that he can make the trade at Mr. Client’s desired price using stock from the firms inventory of Amazon stock, and that the firm will be acting in a Principal capacity for the trade, meaning that Mr. Client will pay for the transaction by paying a marked-up price for the stock. The broker provides this disclosure in writing in advance of the trade and receives approval from Mr. Client to make the trade.