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Difficulty: HardBroker-Dealers, Investment Advisers, and Intermediaries

A boutique brokerage firm accepts purchase and sale orders from retail clients but contracts with a separate financial entity to hold customer funds and securities, issue account statements, and handle trade settlement under a fully disclosed clearing agreement. In this operational arrangement, which classification best describes the boutique brokerage firm?

  1. Introducing broker-dealerAnswer
  2. B
    Carrying broker-dealer
  3. C
    Transfer agent
  4. D
    Prime broker

Answer

Introducing broker-dealer
The term 'introducing broker-dealer' describes a firm that solicits and accepts customer orders but contracts with a carrying (or clearing) firm to execute, clear, and settle transactions, maintain customer records, and hold client funds and securities under a fully disclosed agreement.

Step-by-Step Solution

1
Analyze the operational setup described in the scenario.
The firm interacts directly with retail customers to take orders, but delegates clearing, settlement, custody, and account statement delivery to another firm.
Regulatory definitions distinguish firms that handle customer accounts directly from those that clear transactions.
2
Match the responsibilities to the appropriate intermediary role under FINRA and SEC definitions.
A firm that introduces customer accounts to a carrying broker-dealer without holding custody or clearing trades itself is an introducing broker-dealer.
Under fully disclosed clearing agreements, the introducing firm maintains the client relationship while the carrying firm acts as custodian and clearing agency.

Key Concept

Introducing Broker-Dealer vs. Carrying/Clearing Firm Operational Roles
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Topics

Broker-Dealers, Investment Advisers, and Intermediaries

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