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Difficulty: MediumBroker-Dealers, Investment Advisers, and Intermediaries

Match each financial entity or operational capacity with its corresponding regulatory role and compensation structure.

  • Broker acting in an Agency CapacityExecutes customer orders by matching buyers and sellers, receiving a disclosed commission.
  • Dealer acting in a Principal CapacityFills customer orders from its own inventory, charging a markup or markdown.
  • Registered Investment Adviser (RIA)Owes a fiduciary duty to clients and receives fee-based compensation for investment advice.
  • Carrying (Clearing) Broker-DealerHolds customer funds and securities, clears and settles transactions, and issues account statements.

Answer

Broker acting in an Agency Capacity pairs with executing customer orders for a disclosed commission; Dealer acting in a Principal Capacity pairs with filling orders from inventory for a markup or markdown; Registered Investment Adviser pairs with providing investment advice under a fiduciary duty for fee-based compensation; Carrying Broker-Dealer pairs with holding customer funds, clearing transactions, and issuing statements.
Each market intermediary is matched accurately according to FINRA and SEC definitions: Brokers act as agents for commissions; Dealers act as principals trading inventory for markups/markdowns; RIAs act as fiduciaries earning fee-based compensation; and Carrying Firms provide trade clearance, custody, and statement reporting services.

Step-by-Step Solution

1
Identify broker-dealer execution capacities and their associated compensation mechanisms.
Agency capacity corresponds to broker execution for a commission without taking inventory risk. Principal capacity corresponds to dealer execution from firm inventory for a markup or markdown.
FINRA rules require firms to clearly disclose the capacity in which they acted on customer trade confirmations.
2
Differentiate Investment Adviser roles from Broker-Dealer trade execution roles.
Registered Investment Advisers provide advice for fee-based compensation under a fiduciary duty.
Under the Investment Advisers Act of 1940, providing advice for special compensation triggers investment adviser regulation and fiduciary standards.
3
Determine the operational responsibilities of a carrying (clearing) broker-dealer.
Carrying firms perform trade clearance, settlement, account statement distribution, and hold custody of customer assets.
Carrying broker-dealers maintain back-office infrastructure to support their own accounts as well as introducing broker-dealers.

Key Concept

Distinguishing market participant capacities, regulatory obligations, compensation models, and clearing functions under U.S. securities regulations.
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Topics

Broker-Dealers, Investment Advisers, and Intermediaries

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