A broker-dealer that accepts customer orders and relationships but does not carry customer accounts, instead relying on a clearing firm for execution, custody, and back-office functions, while retaining independent supervisory and regulatory responsibilities that cannot be delegated away.
Practice questions using Introducing Broker
Original questions written against the published FINRA and NASAA exam content outlines — not actual exam questions. Every choice is explained.
An introducing broker-dealer assumes its clearing firm handles all Regulation SHO locate obligations for its customers' short sale orders, based on a general impression rather than any specific written agreement between the two firms addressing the allocation of that responsibility. A principal at the introducing firm is asked whether this is an adequate basis for the assumption. What should she conclude?
A.The assumption is adequate, since clearing firms are always responsible for Regulation SHO locate obligations on introduced business.Wrong. Clearing firms are not always automatically responsible; allocation depends on the actual agreement between the firms.
B.The assumption is adequate as long as the clearing firm has a general reputation for handling locates for its introducing brokers.Wrong. A general reputation is not a substitute for a documented agreement establishing where the obligation actually sits.
C.The allocation of locate responsibility should be established through a clear, documented agreement, not assumed based on a general impression.Correct. A documented agreement is needed to confirm the allocation of locate responsibility between the firms.
D.The assumption is adequate because locate responsibility always remains with the introducing firm regardless of any clearing arrangement.Wrong. Responsibility can be allocated to the clearing firm by agreement; it does not always remain with the introducing firm.
Why: Responsibility for satisfying the locate requirement can be allocated between an introducing firm and its clearing firm, but that allocation should be established through a clear, documented agreement; an unwritten, general impression about which firm is responsible does not adequately establish or confirm where the obligation actually sits.
A firm acting as an introducing broker routes all customer orders to its affiliated market maker for execution. A principal is asked whether this arrangement is automatically permissible because the market maker is an affiliate. What should she explain?
A.No, because introducing brokers are exempt from best execution obligations entirelyWrong. Introducing brokers are not categorically exempt from best execution obligations.
B.Yes, routing to an affiliated market maker automatically satisfies best execution obligationsWrong. This is the exact trap the question describes; affiliation does not substitute for the required ongoing execution-quality review.
C.No, the firm must still conduct regular and rigorous review of execution quality comparing the affiliate to other available marketsCorrect. Best execution obligations apply regardless of an affiliate relationship with the executing venue.
D.Yes, but only if the affiliate discloses its ownership relationship with the firm to customersWrong. Disclosure of the affiliate relationship does not substitute for the required comparative execution-quality review.
Why: Routing to an affiliate does not exempt the firm from its best execution obligation. The principal must confirm the firm still conducts the required regular and rigorous review of execution quality for orders routed to the affiliate, comparing it to other available markets, rather than assuming the affiliate relationship alone justifies the routing.
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