Carrying Agreement

A retail customer opens an account at an introducing firm whose accounts are carried on a fully disclosed basis. The customer must be notified in writing of the existence of the carrying agreement and of the responsibilities allocated to each firm. Which firm is responsible for the content of that notification?

1. A.The introducing firm, because it opened the account and holds the customer relationship.Wrong. Proximity to the customer is not the test; the rule places the responsibility elsewhere regardless of who sat with the customer.
2. B.The carrying firm, which the rule makes answerable for what that notification says.Correct. The firm holding the assets answers for the accuracy of the disclosure describing the arrangement.
3. C.Whichever firm the carrying agreement designates, since the agreement allocates every function it touches.Wrong. This treats an assignment the rule fixes as though it were one of the negotiable items.
4. D.Neither; the disclosure belongs on the customer's first trade confirmation rather than in a separate notice.Wrong. A confirmation reports a transaction and is not the vehicle the rule specifies for disclosing a carrying arrangement.

Why: FINRA's carrying agreement rule requires that each customer whose account is introduced on a fully disclosed basis be notified in writing, upon the opening of the account, that a carrying agreement exists and how responsibilities are divided under it. The rule then fixes responsibility for the content of that notification on the carrying firm. That placement follows the substance: the notice is largely describing the carrying firm's own custody, clearing and statement obligations, so the firm performing them answers for how they are described. The introducing firm may well hand the document to the customer, but handing over a notice and being responsible for what it says are different things.

Under a fully disclosed carrying agreement, the introducing firm continues to open accounts and determine suitability for its customers, while the carrying firm holds the assets and issues statements. What principle explains this division of responsibilities?

1. A.The division is arbitrary and varies entirely from agreement to agreement with no underlying principle connecting the two sides.Wrong. The division follows a consistent functional principle, not arbitrary agreement-by-agreement choices.
2. B.The carrying firm is always responsible for suitability as well, since it is the firm ultimately holding the customer's assets.Wrong. Suitability responsibility stays with the introducing firm, which has the direct customer relationship, not with the carrying firm.
3. C.The introducing firm is responsible for custody functions too, since it maintains the direct relationship with the customer.Wrong. Custody responsibility sits with the carrying firm, which actually holds the assets, not with the introducing firm.
4. D.Responsibilities are allocated to the firm best positioned to perform them -- the introducing firm handles the customer relationship functions like suitability because it deals directly with the customer, while the carrying firm handles custody and statements because it is the one actually holding the customer's assets.Correct. Responsibilities are functionally allocated to whichever firm is actually positioned to perform each one.

Why: A fully disclosed carrying arrangement divides responsibility functionally rather than arbitrarily. The introducing firm sits across the desk from the customer and gathers the information needed for account opening and suitability, so it retains those relationship-facing responsibilities. The carrying firm is the one actually holding the customer's assets and processing settlement, so custody and account statement obligations sit with it instead. Each function goes to whichever firm is actually positioned to perform it correctly.

An introducing firm and its clearing firm sign a carrying agreement. What must happen so that customers know which firm is responsible for what?

1. A.Nothing; the agreement is a commercial arrangement between the two firms and does not concern customers.Wrong. Customers must be told, since they cannot otherwise tell which firm to approach about a given problem.
2. B.The allocation of functions must be disclosed to the customer in writing, so responsibility for each function is clear.Correct. A customer who does not know which firm holds his assets cannot pursue a problem with them.
3. C.The customer must sign the carrying agreement itself before the account may be opened.Wrong. The customer is not a party to the agreement; the requirement is notification rather than signature.
4. D.The introducing firm must assume responsibility for every function, since it holds the customer relationship.Wrong. The point of the arrangement is that functions are divided, with custody and settlement moving to the carrying firm.

Why: A carrying agreement must allocate the functions each firm will perform, and the customer must be notified in writing of that allocation, typically at account opening and periodically thereafter. The notification matters because the customer deals daily with the introducing firm and may never speak to the clearing firm, yet it is the clearing firm that holds the assets and produces the statements. Without a clear allocation the customer would not know where to direct a complaint about an unexecuted order as opposed to a missing dividend. The agreement is also subject to the firms' regulator, which reviews whether the division of responsibilities leaves no function unassigned.

Corbin Securities is an introducing broker-dealer that clears its business through Larkfield Clearing under a carrying agreement. Under a FULLY DISCLOSED arrangement, as distinguished from an OMNIBUS arrangement:

1. A.The carrying firm knows only the introducing firm and holds all customers within a single aggregate account in the introducing firm's name.Wrong - that describes an OMNIBUS arrangement, the alternative structure.
2. B.The introducing firm takes custody of customer funds and securities and computes its own customer reserve requirement.Wrong. The point of introducing on a fully disclosed basis is that the carrying firm holds the assets and bears the custody and reserve obligations.
3. C.The introducing firm is relieved of suitability and know-your-customer obligations, which transfer to the carrying firm.Wrong. Those obligations remain with the firm that has the customer relationship, whatever the clearing arrangement.
4. D.The carrying firm knows the identity of each customer, holds the accounts in the customers' own names, and issues the confirmations and statements.Correct. Customer-level transparency to the clearing firm is what "fully disclosed" means.

Why: In a fully disclosed relationship, the introducing firm passes customer identities through to the carrying firm. Larkfield opens each account in the individual customer's own name, holds the funds and securities, and issues the confirmations and account statements - typically identifying Corbin as the introducing firm. In an OMNIBUS arrangement the carrying firm sees only Corbin: every customer sits inside a single aggregate account in Corbin's name, and Corbin does its own customer-level recordkeeping. FINRA rules require the carrying agreement to allocate each regulatory responsibility in writing.