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Difficulty: EasyBroker-Dealers, Investment Advisers, and Intermediaries

A regional broker-dealer accepts investment orders from retail clients and executes their transactions, but it contracts with a separate carrying firm to clear and settle the trades, issue account statements, and hold client funds and securities. In this operational model, which entity classification applies to the regional broker-dealer?

  1. An introducing broker-dealerAnswer
  2. B
    A carrying broker-dealer
  3. C
    A clearing corporation
  4. D
    A self-regulatory organization

Answer

An introducing broker-dealer
The correct answer identifies the firm as an introducing broker-dealer. An introducing firm deals directly with retail clients to open accounts and take orders, but routes trade clearing, settlement, cash/securities custody, and trade confirmation processing to an unaffiliated carrying (clearing) firm.

Step-by-Step Solution

1
Identify the functions performed directly by the regional firm versus the outsourced functions.
The regional firm accepts customer orders and executes trades, but outsources trade clearance, settlement, account statement generation, and asset custody.
Broker-dealers are categorized based on whether they maintain custody of client assets and clear their own transactions.
2
Apply FINRA definitions for broker-dealer functional roles.
Firms that contract with carrying broker-dealers to handle back-office processing and custody are introducing broker-dealers (also known as fully disclosed introducing firms).
This functional division allows smaller firms to focus on client relationships while delegating complex clearing and regulatory safekeeping duties to a carrying firm.

Key Concept

Introducing vs. Carrying Broker-Dealer Roles
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Topics

Broker-Dealers, Investment Advisers, and Intermediaries

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