Omnibus Account

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.

Wrenbury Global Fund believes a small number of investors are trading in and out of the fund rapidly, but their orders arrive inside the aggregate omnibus account of a large retirement plan intermediary, so the fund cannot see who they are. Under SEC Rule 22c-2, the fund is entitled to:

1. A.Impose a redemption fee of up to 5% on the intermediary entire omnibus positionThe rule permits a redemption fee of up to 2%, charged to the redeeming shareholder and paid to the fund, not a penalty on the intermediary whole position.
2. B.An order requiring the intermediary to convert every omnibus account into individual networked accountsRule 22c-2 does not outlaw omnibus accounts. It gives the fund the information rights it needs to supervise them.
3. C.A written agreement under which the intermediary supplies shareholder tax identification numbers and transaction history on request and enforces the fund restrictions on identified shareholdersCorrect. Rule 22c-2 gives the fund both a look-through right into omnibus activity and the power to have its trading restrictions carried out at the intermediary.
4. D.Report the intermediary to the SEC, which then obtains the shareholder identitiesThe rule is self-executing through contract. The fund obtains the information directly under the required agreement.

Why: Rule 22c-2 requires a fund to have a written agreement with each financial intermediary under which the intermediary will, on request, provide the taxpayer identification numbers and the share purchase, redemption and exchange history of the underlying shareholders, and will execute the fund instructions to restrict or prohibit further purchases or exchanges by a shareholder the fund identifies as violating its frequent trading policy.

Braylock Securities carries several thousand customer positions in the Kelmscott funds. On the Kelmscott transfer agent records these appear as one account in Braylock name, and only Braylock knows which customer owns what. Ainsley Securities instead transmits each customer name and holding to the same transfer agent, which carries them as individual accounts serviced through Ainsley. These two arrangements are, respectively:

1. A.A carrying account and an introducing accountCarrying and introducing describe the relationship between two broker-dealers under a clearing agreement, not the structure of positions at a fund transfer agent.
2. B.An omnibus account and a networked accountCorrect. Omnibus pools the positions under the intermediary name; networking passes customer-level detail through to the transfer agent.
3. C.A networked account and an omnibus accountThese are reversed. The single pooled position in the firm name is the omnibus account.
4. D.A street name account and a wire order accountStreet name and wire order describe how one customer position is held and ordered, not how a firm entire book appears on the transfer agent records.

Why: In an omnibus account the intermediary is the shareholder of record for one pooled position and keeps the underlying sub-accounting itself. In a networked account the intermediary passes customer-level detail to the transfer agent, which maintains individual records while the intermediary continues to service the relationship. The distinction drives who can see individual trading activity and who mails statements and tax forms.