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Difficulty: MediumBroker-Dealers, Investment Advisers, and Intermediaries

A retail investor opens a brokerage account with an introducing broker-dealer that operates on a fully disclosed basis with a carrying clearing broker-dealer. Which of the following responsibilities is primarily handled by the carrying firm rather than the introducing firm?

  1. A
    Conducting suitability evaluations and providing investment recommendations directly to the retail client
  2. Maintaining custody of customer funds and securities and issuing trade confirmations and periodic account statementsAnswer
  3. C
    Acting as the central counterparty to clear and net all exchange-traded transactions across institutional participants
  4. D
    Establishing securities industry conduct rules and initiating formal enforcement proceedings against non-compliant firms

Answer

The carrying broker-dealer is responsible for maintaining custody of customer cash and securities, as well as sending trade confirmations and periodic account statements to the investor.
In a fully disclosed clearing agreement, the carrying (or clearing) firm assumes back-office operational responsibilities. This includes holding custody of customer cash and securities, settling transactions, and generating and mailing trade confirmations and account statements directly to the retail customer.

Step-by-Step Solution

1
Analyze the relationship between an introducing broker-dealer and a carrying (clearing) broker-dealer under a fully disclosed clearing agreement.
The introducing firm handles direct customer contact, account opening, and investment recommendations, while back-office clearing and custody are delegated to the carrying firm.
Broker-dealers often separate customer-facing duties from capital-intensive clearing and safekeeping duties.
2
Distinguish operational custody duties from regulatory duties and central clearinghouse operations.
Custody of assets, execution settlement, and statement/confirmation mailing are carrying firm duties.
Federal securities regulations require carrying firms that hold customer assets to issue official confirmations and statements.

Key Concept

Introducing vs. Carrying (Clearing) Broker-Dealer Responsibilities
Estimated Time:1m 0s
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Topics

Broker-Dealers, Investment Advisers, and Intermediaries

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