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Difficulty: MediumBroker-Dealers, Investment Advisers, and Intermediaries

Market participants in the financial industry fulfill distinct regulatory roles and operational functions. Which of the following statements accurately describe the regulatory definitions or operational responsibilities of these intermediaries?

  1. Investment advisers owe a fiduciary duty to their clients and are generally compensated through fee-based structures, such as a percentage of assets under management.Answer
  2. Carrying (clearing) broker-dealers maintain custody of customer funds and securities while settling trades on behalf of introducing broker-dealers.Answer
  3. C
    When a broker-dealer executes a customer order from its own inventory as a dealer, it acts in an agency capacity and charges a commission.
  4. D
    The National Securities Clearing Corporation (NSCC) acts as the central depository responsible for custody and book-entry ownership transfers of securities.

Answer

The correct statements are that investment advisers owe a fiduciary duty to clients and are typically compensated through fee-based structures, and that carrying broker-dealers maintain custody of customer funds and securities while settling trades for introducing firms.
The correct choices accurately identify the fiduciary status and fee-based compensation model of investment advisers, as well as the custodial and trade settlement functions performed by carrying broker-dealers for introducing firms.

Step-by-Step Solution

1
Evaluate the regulatory standard and compensation structure of Investment Advisers.
Investment advisers are governed by a fiduciary standard and compensated via fees (e.g., percentage of AUM), distinguishing them from broker-dealers compensated by transaction-based commissions.
Regulatory definitions mandate fiduciary duty for investment advisers.
2
Evaluate the operational role of carrying (clearing) broker-dealers.
Carrying firms hold client assets and execute clearing activities for introducing broker-dealers.
Carrying firms possess net capital and operational capabilities to handle custody and settlement.
3
Analyze dealer vs. broker capacity rules.
Trading from inventory is principal/dealer capacity charging mark-up/mark-down, not agency/broker capacity charging commission.
Firm capacity determines allowable compensation disclosures.
4
Distinguish clearing vs. depository functions within DTCC subsidiaries.
NSCC provides clearance and netting; DTC provides central depository and custody services.
Clearing and depository operations are segregated between NSCC and DTC.

Key Concept

Distinction between broker-dealers, investment advisers, carrying firms, and clearing/depository entities.
Estimated Time:1m 30s
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Topics

Broker-Dealers, Investment Advisers, and Intermediaries

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