Welcome back.
Today’s topic is Securities Broker Dealers.
Let us start with understanding who are Securities
Broker Dealers?
Securities Broker Dealers do business of sale
and purchase of securities for self or for
its customers.
The securities broker dealers service to both
individuals and institutional customers.
Securities Broker Dealers have different compensation
models based on the services provided by them.
There is a small difference between broker
and dealers of securities.
Well! Securities brokers arrange for the
purchase or sale of stocks, bonds, and other securities on
their customers' behalf.
While, Securities dealers trade in securities on
their own account.
You may note that principal and dealer can
be used interchangeably.
Also, some dealers assist firms in issuing
new securities in the capital markets.
However, certain major banks especially the
investment banks and Financial Institutions
are both brokers and dealers and hence, combined
they are called broker dealers.
Without a brokerage account, an investor can't
trade stocks.
The broker dealers, give the investor access
to the stock exchanges.
Broker Dealers are highly regulated in order
to prevent fraud and mismanagement.
Example, broker dealers in U.S.A are regulated
by the Securities and Exchange Commission.
Also, Broker dealers are required to register
with Financial Industry Regulatory Authority
or FINRA.
You should also know that broker-dealers are
self-regulatory organizations and are subject
to applicable antifraud provisions and rules
under the federal securities laws.
Money Laundering is difficult in securities
industry as cash component is not involved.
The securities industry mostly runs on electronic
transfers.
Hence, use of broker dealers usually happens
in the second stage after the money has been
placed in financial institution and requires
further layering to obscure source of funds.
Some of the largest known broker dealers are,
Fidelity Investments, Charles Schwab, Wells
Fargo Advisors, TD Ameritrade etcetera.
Moving further, do you know who are full service
brokers and who are discount brokers?
Well! A Full-service brokers provide one-on-one
personal services.
Such services include.
1. Research and advise on where to invest,
which stock to purchase and which stock to
sell etcetera.
2. Complete retirement planning Meaning, the
process of determining retirement income goals
and the actions and decisions necessary to
achieve those goals.
3. Tax planning or reduction of the total
tax liability.
4. Estate planning meaning, the preparation
of tasks to manage an individual's asset base
in the event of their death.
5. Personal investment strategy that will
help cover the cost of a child’s education,
a home purchase, or other financial goals.
While a discount broker is a stockbroker who
carries out buy and sell orders at a reduced
commission rate.
Discount brokers carry out only orders at
cheaper costs, Meaning, they typically just
execute orders for their clients.
They do not offer personal consultations,
advice or research on securities.
Going forward let us understand In the context
of a brokerage firm who is a Registered Principal?
Well! Registered Principal would oversee the
sales and trading functions, supervise an
investment firm's regulatory compliance or
its overall operations.
Permitted activities include trading, market
making, underwriting, and advertising.
You may note that sales and advertising literature
must be approved by a principal prior to use.
Individuals involved in investment banking
may also be required to be Registered Principals.
In U.S.A the Financial Industry Regulatory
Authority (FINRA), as well as other regulatory
bodies, requires individuals to pass the FINRA
Series 24 exam on top of the usual exams required
for broker-dealers, such as the FINRA Series
7 before they can become a Registered Principal.
Those who wish to be Registered Options Principals
will need to pass the FINRA Series 4 Exam.
Lets move on to understand what are the vulnerabilities
of Securities Broker Dealers?
1. Securities Broker Dealers can provide opportunities
to quickly carry out transactions across borders
with a relative degree of anonymity of the
investors.
2. Broker dealers do not have to do high levels
of suspicious transaction reporting relative
to say banking industry.
3. Broker dealers often deal in varied products
of securities and product variations of securities
in different jurisdictions.
4. Broker dealers can enable possibility of
Insider trading, market manipulation and securities
related frauds.
5. Broker dealers can convert securities holdings
to cash without significant loss of principal.
6. Broker dealers enable wire transfers to
and from multiple jurisdictions.
7. The high commission provided to employees
of broker dealers lead to employees helping
clients to launder money without detection
for retaining them.
Lastly lets learn about Money Laundering through
Broker Dealers:
1. Broker dealers can enable redeeming a long-term
investment within a short period.
2. Broker dealers can enable change of share
ownership in order to transfer wealth across
borders
3. Broker dealer firms can maintain securities
accounts as nominees or trustees permitting
concealment of the identities of the true
beneficiaries.
4. Broker dealers can be Engaged for market
manipul ation such as “pump & dump” (artificial
inflation of price of security) schemes and
engaging in boiler room operations. A boiler
room is a scheme in which salespeople apply
high-pressure sales tactics to persuade investors
to purchase securities
5. Broker dealers can enable customer accounts
that are used only to hold funds and not for
trading.
6. Broker dealers can help investors in wash
trading meaning enabling customer to do matching
buys and sells in particular securities, which
creates the illusion of trading.
7. Broker dealers can enable customers to
purchase bearer shares and physical securities
in jurisdictions where it is legal to hold
these securities.
Hope you all now have a fair idea about Securities
Broker Dealers and you may now apply this
knowledge to your day to day work.
I will come back with more such structures
in K.Y.C Bytes.
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Stay Tuned.
