ExamFinch.com My Study

Study guide

1.5 Broker-Dealers, Investment Advisers, Dual Registrants, and Unregistered Entities

Practice this exam

Investment Company and Variable Contracts Products Principal Series 26

Track your progress as you read

Finished sections get a check mark.

1 Chapter 1: Registration of the Broker-Dealer and Its Associated Persons

1.1 Broker-Dealer Registration, FINRA Membership, and Firm Filings 1.2 Individual Registration: Forms U4 and U5, Registration Categories, and Exempt Persons 1.3 Pre-Hire Screening, Fingerprinting, and Statutory Disqualification 1.4 Heightened Supervision, Interim Plans, and the Taping Rule 1.5 Broker-Dealers, Investment Advisers, Dual Registrants, and Unregistered Entities

2 Chapter 2: Training, Continuing Education, and Product Knowledge

2.1 Continuing Education (Rule 1240), the Maintaining Qualifications Program, and the Annual Compliance Meeting 2.2 The Investment Company Act of 1940: Classifications, Registration, and Fund Governance 2.3 Mutual Fund Pricing, Redemption, Exchanges, Sales Charges, and Share Classes 2.4 Variable Annuities and Variable Life Insurance: Structure, Charges, and Rule 2320 2.5 Closed-End and Interval Funds, UITs, Money Market Funds, 529 Plans, and Investment Risks

3 Chapter 3: Supervisory System, Conduct Standards, Insider Trading, and Discipline

3.1 The Supervisory System, Written Supervisory Procedures, and Standards of Conduct 3.2 Insider Trading, Information Barriers, and Personal Trading Supervision 3.3 FINRA Investigations, Disciplinary Proceedings, Sanctions, and Exemptions

4 Chapter 4: Communications with the Public

4.1 Communications Categories, Principal Approval, Filing, and Recordkeeping (Rule 2210) 4.2 Content Standards, Investment Company Advertising, and Professional Designations 4.3 Variable Contract Communications, Fund Rankings, Bond Fund Volatility Ratings, and Investment Analysis Tools 4.4 Correspondence and Internal Communications, Social Media, Public Appearances, and Telemarketing

5 Chapter 5: Recommendations, Customer Accounts, and Product Sales Supervision

5.1 Regulation Best Interest, Conflicts, and Form CRS 5.2 Know Your Customer, FINRA Suitability, and Institutional Accounts 5.3 New Accounts, Customer Authority, Discretion, and Order Handling 5.4 Mutual Fund Breakpoints, Share Classes, and Switching Supervision 5.5 Deferred Variable Annuities and the Seven-Business-Day Principal Review 5.6 Prospectuses, Summary Prospectuses, SAIs, and Ongoing Disclosures

6 Chapter 6: Compensation, Outside Activities, and Personal Conduct

6.1 Cash Compensation, Distribution Arrangements, and Conflicts 6.2 Gifts, Gratuities, and Business Entertainment (Rule 3220) 6.3 Training Meetings, Sales Contests, and Non-Cash Compensation 6.4 Referral Payments, Bank Networking, and Unregistered Persons 6.5 Outside Business Activities, Private Securities Transactions, and Rule 3290 Transition 6.6 Outside Accounts, Borrowing and Lending, Account Sharing, and Guarantees

7 Chapter 7: Customer Account Operations, Transfers, and Privacy

7.1 Account Records, Trusted Contacts, Confirmations, and Statements 7.2 Cash Accounts, T+1 Settlement, Regulation T, Extensions, and Freeriding 7.3 ACATS Transfers, Transfer-on-Death Accounts, and Account Changes 7.4 Regulation S-P, Incident Response, Service Providers, and Identity Theft

8 Chapter 8: Anti-Money Laundering, Customer Identification, and Sanctions

8.1 AML Program, Independent Testing, Training, and Governance 8.2 Customer Identification, Due Diligence, and Beneficial Ownership 8.3 SARs, CTRs, OFAC, Information Sharing, and AML Red Flags

9 Chapter 9: Supervisory Controls, Business Continuity, and Regulatory Reporting

9.1 Supervisory Controls, Annual Testing, and CEO Certification 9.2 Business Continuity, Systems Resilience, Cybersecurity, and Vendors 9.3 Rule 4530, FOCUS and Annual Reports, and Customer-Asset Events

10 Chapter 10: Office Classifications, Inspections, and Records

10.1 OSJs, Branches, RSLs, and Inspection Cycles 10.2 Inspection Reports, Independent Review, Signage, and Office Files 10.3 Broker-Dealer Books and Records, Electronic Storage, and Correspondence

11 Chapter 11: Complaints, Arbitration, Mediation, and Expungement

11.1 Customer Complaints, Investigation, Retention, and Reporting 11.2 Predispute Agreements, Arbitration Codes, Eligibility, Panels, and Awards 11.3 Mediation and Customer-Dispute Expungement

12 Chapter 12: Financial Responsibility, Membership Changes, and Investor Protection

12.1 Net Capital, Minimum Tiers, Haircuts, and Early Warning 12.2 Customer Protection, Possession or Control, Reserve Formula, and Exemptions 12.3 New-Product Review and Continuing Membership Applications 12.4 SIPC, Fidelity Bonds, Proxy Materials, and Financial Reports

1.5 Broker-Dealers, Investment Advisers, Dual Registrants, and Unregistered Entities

Key Takeaways Explain This Topic AI

A broker effects securities transactions for others and a dealer buys and sells for its own account (Exchange Act Sections 3(a)(4) and 3(a)(5)); both must register under Section 15 unless an exception applies.

Investment Advisers Act Section 202(a)(11) defines an investment adviser as someone who advises others about securities for compensation as part of a business, but excludes a broker-dealer whose advice is solely incidental to brokerage and who receives no special compensation for it.

Advisers generally register with the SEC under Section 203 once they manage about $100 million or more, while smaller advisers generally register with their home state.

A dual registrant must deliver Form CRS covering both its brokerage and advisory services, in up to four pages, and must disclose the capacity in which it acts for each recommendation.

An associated person's advisory activity outside the member firm is subject to the outside-activity rules, so a principal must know which hat the representative is wearing.

Last updated: September 2026

The outline asks candidates to understand the "differences between registered investment adviser and broker-dealer, broker-dealer and non-broker-dealer, and members and non-members, including registration requirements." These distinctions decide which rules apply, who supervises, and whether a payment is legal.

Brokers and Dealers

The Securities Exchange Act of 1934 defines a broker (Section 3(a)(4)) as any person engaged in the business of effecting transactions in securities for the account of others , and a dealer (Section 3(a)(5)) as any person engaged in the business of buying and selling securities for its own account . A firm acting as both is a broker-dealer. Section 15(a) requires registration with the SEC, and Section 15(b)(8) generally requires membership in a registered securities association (FINRA).

Several categories are carved out or exempted:

Banks. The Exchange Act excludes banks from the broker definition only for specified activities, such as trust and custody functions and networking arrangements in which a registered broker-dealer serves bank customers on bank premises. SEC Regulation R implements those exceptions, including the limits on referral fees paid to bank employees (Section 6.4).

Issuers' employees. SEC Rule 3a4-1 gives a safe harbor for certain associated persons of an issuer who sell the issuer's securities without transaction-based compensation and meet other conditions.

Insurance agents. An agent who sells only fixed annuities and fixed life insurance needs no securities registration, because those products are exempt from the Securities Act under Section 3(a)(8). An agent who sells variable annuities or variable life must be a registered representative of a broker-dealer, because variable contracts are securities.

Investment Advisers

The Investment Advisers Act of 1940 begins with Section 201 , Congress's findings that advisory activities affect interstate commerce and the national securities markets. Section 202(a)(11) defines an investment adviser as any person who, for compensation , engages in the business of advising others about the value of securities or the advisability of buying or selling them, or who issues analyses or reports about securities as part of a regular business. The definition excludes, among others:

  • banks and bank holding companies (with limits);
  • lawyers, accountants, engineers and teachers whose advice is solely incidental to their profession;

broker-dealers whose performance of advisory services is solely incidental to their brokerage business and who receive no special compensation for it ; and

publishers of bona fide general-circulation publications.

Section 203 requires an adviser to register with the SEC unless an exemption applies or the adviser is prohibited from SEC registration. After the Dodd-Frank Act, advisers with less than about $100 million in regulatory assets under management generally register with their state rather than the SEC, and must switch to SEC registration at $110 million . Advisers file Form ADV through the IARD system and deliver the Form ADV Part 2 brochure to clients. Individuals who give advice for a state-registered or SEC-registered adviser generally must qualify as investment adviser representatives under state law, typically with the Series 65 or Series 66 exam.

How the Two Business Models Differ

  • Feature Broker-dealer Registered investment adviser
  • Core activity Executing transactions; recommendations are incidental Ongoing advice for compensation
  • Typical compensation Commissions, sales loads, 12b-1 trails Asset-based or flat advisory fees

Standard for retail recommendations Regulation Best Interest (Section 5.1) Federal fiduciary duty under the Advisers Act

  • SRO FINRA None (SEC or state oversight)
  • Registration form Form BD; Form U4 for individuals Form ADV; state IAR registration
  • Required retail disclosure Form CRS, up to 2 pages Form CRS, up to 2 pages; dual registrants up to 4
  • Dual Registrants and Dual Hats

Many firms that sell mutual funds and variable annuities are also, or are affiliated with, investment advisers. A dual registrant must deliver a single Form CRS describing both brokerage and advisory services, which may run up to four pages . Under Reg BI and the Advisers Act, the representative must also make clear the capacity in which a recommendation is made. When a representative recommends moving a customer from a commission-based brokerage account to a fee-based advisory account, or the reverse, that account-type recommendation is itself covered by Reg BI or the adviser's fiduciary duty.

A registered representative who also gives advice through an unaffiliated investment adviser is engaged in an outside activity. Under current Rules 3270 and 3280, FINRA has treated that activity as requiring prior written notice and, in many cases, supervision as a private securities transaction. FINRA's new Rule 3290 , approved by the SEC on September 15, 2026 but not yet effective as of this writing, will instead treat advice through an unaffiliated adviser as an outside activity requiring prior notice and an upfront assessment. It will not require the firm to supervise or keep records of the advisory transactions (Section 6.5).

Members and Non-Members

Not every broker-dealer is a FINRA member. For example, a firm that trades only on an exchange of which it is a member may qualify for an exception. For packaged products, the member/non-member line matters in three places:

Rule 2040 forbids paying commissions or other transaction-based compensation to anyone who would be required to register as a broker-dealer to receive it. Payments to registered persons must also comply with all securities laws.

Rule 2341(c) limits underwriter discounts to dealers that comply with Rule 2040 and have sales agreements.

Rule 2320(e) requires that variable contracts be sold through other broker-dealers only if they are FINRA members with selling agreements.

Supervisory Red Flags

A representative's business card or website says "financial advisor" plus an RIA's name the firm does not recognize. Check whether an outside advisory relationship was disclosed.

A bank partner offers employees bonuses tied to the number of brokerage accounts opened. That arrangement conflicts with Regulation R's referral-fee limits.

An insurance agency affiliated with the firm pays an unregistered agent part of a variable annuity commission. That payment is barred by Rule 2040 and the variable contract compensation rules.