Broker-dealers (introducing, clearing, prime), investment advisers, municipal advisors, issuers and underwriters

Follow the function

A broker effects securities transactions for others as an agent. A dealer trades for its own account as a business, acting as principal. A broker-dealer can do both. Agency business commonly involves a commission; principal business commonly involves a markup or markdown.

Brokerage services

An introducing broker-dealer develops customer relationships and accepts orders while arranging for another firm to carry accounts and clear transactions. A clearing or carrying broker-dealer handles settlement, custody, and account records under the firms' agreement. Introducing business does not eliminate the introducing firm's customer responsibilities.

A prime broker typically serves institutional clients such as hedge funds, combining custody, financing, securities lending, and consolidated reporting. A client may execute through several brokers while its prime broker coordinates settlement and account services. Execution and prime brokerage need not occur at the same firm.

Advice and municipal business

An investment adviser generally provides advice about securities as a business for compensation, including portfolio advice or management, and owes fiduciary duties to clients. One organization may conduct both brokerage and advisory business; identify its capacity. Legal exclusions and exemptions affect registration, so a label or fee arrangement alone does not determine status.

A municipal advisor advises a municipal entity or obligated person about municipal financial products or municipal securities issuance, including structure, timing, and terms. An obligated person is committed to supporting payment on the securities. A municipal securities dealer instead buys and sells municipal securities for its own account as a business. An underwriter acting in its underwriting capacity is distinct from the municipal advisor advising the issuer.

Raising capital

The issuer creates and issues securities to raise capital. An underwriter helps distribute an offering to investors. In a firm commitment, the underwriter purchases the issue for resale and bears unsold-inventory risk. In best efforts, it acts as a selling agent without committing to purchase the unsold portion.

For exam questions, identify the function, the client, and whose account is involved.