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Difficulty: MediumBroker-Dealers, Investment Advisers, and Intermediaries

A small financial firm accepts customer orders and manages client relationships but contracts with a larger carrying firm to execute, clear, and settle all trades while maintaining custody of customer assets. Which type of market participant is the small financial firm operating as in this arrangement?

  1. An introducing broker-dealerAnswer
  2. B
    A clearing broker-dealer
  3. C
    A prime broker
  4. D
    A transfer agent

Answer

The small financial firm is operating as an introducing broker-dealer.
An introducing broker-dealer focuses on customer contact and order placement but contracts with a carrying (clearing) firm to hold customer funds and securities, execute and clear trades, and send trade confirmations and account statements.

Step-by-Step Solution

1
Identify the core operational characteristics described in the scenario.
The firm maintains direct customer relationships and accepts orders, but relies on a separate firm to hold custody of funds and execute/clear trades.
Distinguishing between customer-facing functions and back-office clearing/custody determines the firm's regulatory capacity.
2
Apply FINRA rules governing clearing and introducing relationships.
Broker-dealers that introduce customer accounts to a carrying firm under a clearing agreement without holding customer cash or securities are designated as introducing broker-dealers.
Carrying/clearing firms assume responsibility for trade confirmation, trade settlement, and account statement delivery for introduced accounts.

Key Concept

Introducing Broker-Dealer vs. Carrying/Clearing Firm Functions
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Topics

Broker-Dealers, Investment Advisers, and Intermediaries

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