Chapter 8: Secondary Markets

Question #18 of 20 Question ID: 1269470 A broker-dealer has a line of business restricted solely to the purchase and sale of securities with trade executions being handled by another member firm. Which of the following would best describe this type of firm? A) Market making B) Clearing/carrying C) Prime/executing D) Introducing/fully disclosed

(Answer: D) A fully disclosed introducing broker-dealer is what the word implies—it introduces its customers to a clearing firm. Clearing firms (often referred to as carrying firms) hold their customer's funds and securities as well as those of their correspondent introducing firms. Essentially, the clearing firm acts as the introducing firm's back office. Because the risk associated with holding customer funds and securities is not present, net capital requirements are much lower for introducing firms than they are for self-clearing or carrying broker-dealers. LO 8.c

secondary market transaction

A broker-dealer arranges for a customer's order to be executed on the NYSE. Secondary market transactions are between investors (which is what takes place on the NYSE as well as other exchanges and the OTC market).

Custodian

A person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another is known as a custodian (for example, the custodian for the account of a minor). This is different than a trustee who is a legally appointed entity. By contrast, anyone can open a custodial account for a minor as long as they are themselves an adult.

Agent

Agents act on behalf of others in the marketplace, such as a broker-dealer buying or selling for one of its customers.

Trustee

An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another who has been legally appointed to provide these services. A trustee is legally appointed to manage as a fiduciary assets in a trust.

All of the following are acceptable choices to function as a depository and intermediary for transactions between buyers and sellers of securities except: A) the Depository Trust Company (DTC). B) carrying firms. C) credit unions. D) the National Securities Clearing Corporation (NSCC).

C) Credit Unions. Credit unions cannot serve as a depository or clearing facility for securities transactions.

Carrying firms (those that carry customer accounts, must)

Carrying firms carry customer accounts and must segregate customer funds and securities from that of the firm's and because carrying customer accounts entails some inherent risk, maintain net capital higher than that which would be required for noncarrying firms

Carrying Firm

Carrying firms, or clearing broker-dealers, can execute trades, clear and settle transactions, take custody of customer funds and securities, and handle all back-office tasks, such as sending trade confirmations and statements for themselves as well as for other broker-dealers

Member Firms under FINRA or another SRO

Member firms can offer all types of investment products such as stocks, bonds, mutual funds, and derivatives like options and others (be full service) or limit the products they offer to only a few. They need not adopt proprietary trading into their business model but can if they wish to. Likewise, they need not accommodate doing business with retail customers if they wish to deal only with other industry professionals, such as institutional investors.

Transfer Agent

The transfer agent (often a bank) for a corporation is responsible for ensuring that its securities are issued in the correct owner's name, canceling old and issuing new certificates, maintaining records of ownership, and handling problems relating to lost, stolen, or destroyed certificates. Acting as an intermediary in a trade is the function of the clearing corporation.

Anyone who, as part of their business, gives investment advice for compensation must register as

an investment adviser under the Investment Advisers Act of 1940.

Carrying Firm (Clearing Firm)

(A broker-dealer that accepts funds and securities from customers and its correspondent member firms would most likely be which of the following?) Most firms choose to introduce their customers to another member firm known as a clearing or carrying firm to handle back-office tasks, such as clearing trades, sending trade confirmations, settlement and reporting compliance, trade execution, and custody of customer funds and securities.

Self-Clearing Firms

Self-clearing firms not only clear and settle their own executions (transactions) but can clear the executions of other firms that would be considered introducing or fully disclosed firms. In this light, fully disclosed firms are those that introduce their business to clearing firms. Clearing and settling transactions includes providing any back-office functions needed.

Which of the following is true regarding a member firm operating under Financial Industry Regulatory Authority (FINRA) membership or the membership of another self-regulatory organization (SRO)? A) Member firms may never incorporate proprietary trading into their business model. B) Member firms must always accommodate dealing with retail investors and not limit business to that done with other industry professionals. C) Member firms are required to be full-service broker-dealers. D) Member firms can offer all types of investment products, such as stocks, bonds, mutual funds, options, and others or limit the products they offer to only a few

(Answer: B) Primary market transactions involve the issuer or someone acting on behalf of the issuer, such as an underwriter. Secondary markets are where investors can buy and sell securities to and from one another. The secondary market includes exchanges and the OTC market.

Your broker-dealer, rather than clear its own securities transactions, chooses to introduce its business to another firm that will clear, processes and handle all back-office operations for it. The firm receiving the business is known as

A Carrying Firm. A firm that chooses to introduce its customers' business to another firm to clear and process transactions, as well as handle all back-office tasks such as sending trade confirmations and taking custody of customer funds and securities, is known as an introducing or fully disclosed firm. The firm receiving the business is known as the carrying or clearing firm.

a clearing agent

A clearing agent is an intermediary between the buy and sell sides of a transaction that receives and delivers payments and securities on behalf of both parties. While some broker-dealers are self-clearing (act as their own clearing agent), simply being a broker-dealer doesn't always include being able to provide the services of a clearing agent. (A firm that functions for the purpose of receiving and delivering payments and securities on behalf of both buyer and seller in a securities transaction is) LO 8.c

Introducing Firm

A firm that chooses to introduce its customers' business to another firm to clear and process transactions, as well as handle all back-office tasks such as sending trade confirmations and taking custody of customer funds and securities, is known as an introducing or fully disclosed firm.

a prime brokerage account

A prime brokerage account is one in which a customer (an institution) selects one member to provide custody and financing of securities and executes trades with other firms known as executing brokers. (An institutional investor selects a single Financial Industry Regulatory Authority (FINRA)/NYSE member firm to provide for financing and custody of securities while orders to buy or sell are placed with executing brokers. This is an example of...)