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Question

Difficulty: MediumBroker-Dealers, Investment Advisers, and Intermediaries

An investor places an order with a full-service financial firm to purchase shares of a publicly traded corporation. The firm executes the trade by matching the investor's buy order with a sell order from another market participant without taking the securities into its own inventory, and charges the investor a fee for facilitating the transaction. In what capacity did the firm act, and how is its compensation categorized?

  1. The firm acted in an agency capacity as a broker and received a commission.Answer
  2. B
    The firm acted in a principal capacity as a dealer and received a mark-up.
  3. C
    The firm acted as a clearing depository entity and received a transaction netting fee.
  4. D
    The firm acted in a primary market capacity as an underwriter and received issuer proceeds.

Answer

The firm acted in an agency capacity as a broker and received a commission.
When a firm acts as a middleman connecting a buyer and a seller without taking ownership of the security into its proprietary inventory, it acts in an agency (broker) capacity. The fee charged to the client for facilitating this execution is legally classified as a commission.

Step-by-Step Solution

1
Analyze the firm's role in trade execution.
The firm matched a buyer with a seller without buying or selling securities from its own proprietary inventory.
Trading on behalf of others without taking inventory risk defines agency (broker) activity.
2
Determine the legal capacity and compensation model.
Firms operating as brokers/agents charge commissions for their execution services.
Under FINRA and SEC rules, agency transactions require commission disclosure on the customer trade confirmation.

Key Concept

Broker vs. Dealer Capacity and Compensation
Estimated Time:1m 0s
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Topics

Broker-Dealers, Investment Advisers, and Intermediaries

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