A retail client maintains a brokerage account with an introducing broker-dealer that clears trades on a fully disclosed basis through a carrying (clearing) firm. The customer places an order to purchase corporate bond securities. The carrying firm fills the order directly from its own proprietary account inventory and handles trade confirmation delivery and settlement. Which of the following statements correctly describes the execution capacity and disclosures required for this transaction?
- The carrying firm acted in a dealer (principal) capacity and must disclose its principal capacity and any mark-up on the trade confirmation sent to the client.Answer
- BThe carrying firm acted in a broker (agency) capacity because it executed the trade for an introducing firm's retail customer, requiring a commission disclosure.
- CThe carrying firm functions as the Depository Trust Company (DTC) by performing automated trade comparison and clearance through the National Securities Clearing Corporation (NSCC).
- DFINRA, acting as the primary federal governing agency, guarantees the customer's trade execution and retains ultimate regulatory custody of the securities.
Answer
The carrying firm acted in a dealer (principal) capacity and must disclose its principal capacity and any mark-up on the trade confirmation sent to the client.
When a broker-dealer fulfills a customer's buy order using securities from its own proprietary inventory, it acts in a principal (dealer) capacity. Under federal securities regulations and FINRA rules, the firm must disclose its principal capacity on the customer confirmation and report the transaction with the appropriate mark-up included.
Step-by-Step Solution
Key Concept
Broker-Dealer Execution Capacities (Broker/Agency vs. Dealer/Principal) and Carrying Firm clearing responsibilities