Chapter 3 Answers and Explanations

1. D – None of these choices. When a broker-dealer acts in its “broker” capacity, it acts as the go-between for its customer and someone else interested in buying or selling a security. This stands in contrast to when a firm acts in its “dealer” capacity and buys, sells, or trades for its own account.

2. C – An investment adviser. Being an investment adviser by itself does not disqualify someone from also being a broker-dealer. In fact, many broker-dealers also act in this capacity. When this is the case, dual registration is required. A broker-dealer’s agent, an issuer, and banking institutions are excluded from the definition of a broker-dealer, among other exceptions.

3. A – I and II. When a firm acts as a dealer, the only two parties exchanging securities or cash are the firm and its customer. Acting as a dealer means that the firm is buying or selling for its own account, instead of acting as a go-between for their client and another investor.

4. C – No non-institutional clients in that state. Broker-dealers with zero clients (not counting exempt clients like other broker-dealers, investment companies, etc.) are not required to register if the broker-dealer does not actually have an office in that state. The five-client rule applies to investment adviser registration, as does the level of assets under management.

5. A – Completing a Form ADV. Broker-dealers are not necessarily required to fill