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Difficulty: MediumBroker-Dealers, Investment Advisers, and Intermediaries

An introducing broker-dealer enters into a fully disclosed clearing agreement with a carrying broker-dealer to handle customer accounts. Under this arrangement, which financial entity is primarily responsible for maintaining custody of customer funds and securities and issuing trade confirmations?

  1. The carrying broker-dealerAnswer
  2. B
    The introducing broker-dealer
  3. C
    The National Securities Clearing Corporation (NSCC)
  4. D
    The Depository Trust Company (DTC)

Answer

The carrying broker-dealer is responsible for maintaining custody of customer funds and securities and issuing trade confirmations under a fully disclosed clearing agreement.
In a fully disclosed clearing relationship, the carrying (clearing) broker-dealer assumes responsibility for post-trade clearing, holding custody of client securities and cash balances, and issuing trade confirmations and periodic account statements directly to retail investors.

Step-by-Step Solution

1
Analyze the operational structure of a fully disclosed clearing relationship between broker-dealers.
An introducing firm contracts with a carrying (clearing) firm to manage back-office processing and custody.
Introducing firms choose not to carry customer accounts to avoid the extensive net capital and operational requirements of carrying firms.
2
Determine which entity holds customer assets and interacts with regulatory custody requirements.
The carrying broker-dealer holds physical and electronic custody of customer securities and cash balances.
Carrying firms maintain higher regulatory net capital to safeguard assets and comply with SEC customer protection rules.
3
Identify the party responsible for sending required customer disclosures, such as confirmations and statements.
The carrying broker-dealer directly issues trade confirmations and monthly/quarterly account statements to retail clients.
Because the carrying firm maintains the accounts and records, regulatory rules place confirmation and statement distribution duties on the carrying broker-dealer.

Key Concept

Carrying (Clearing) Broker-Dealer vs. Introducing Broker-Dealer operational duties
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Topics

Broker-Dealers, Investment Advisers, and Intermediaries

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