Quick Answer
The FINRA carrying-agreement rule governs agreements between an introducing broker-dealer (BD) and the carrying/clearing BD holding its accounts: the agreement must be written, submitted to FINRA in advance, and allocate functions between the firms. The carrying firm must give FINRA 10 business days' notice before onboarding a new introducing firm's accounts, and must safeguard the funds and securities.
The carrying-agreement rule governs the most common operational structure in retail brokerage: an introducing firm that maintains the customer relationship, and a carrying/clearing firm that handles the back-office operations.
The two firms split responsibility for opening, executing, settling, and safeguarding the customer's account. The carrying-agreement rule codifies how that split must be documented, what FINRA must approve, and what each firm owes its customer.
The Required Written Agreement
Every relationship in which one member carries another's customer accounts on a fully disclosed or omnibus basis must be governed by a written carrying agreement. The agreement is:
- Written (a verbal arrangement does not satisfy the rule)
- Submitted to FINRA in advance for review
- Effective only after FINRA review and acceptance
Fully Disclosed vs. Omnibus
Two clearing-relationship structures fall under the carrying-agreement requirement:
| Structure | How It Works |
|---|---|
| Fully disclosed | Carrying firm holds each individual customer's account in the customer's name; introducing firm provides the customer relationship |
| Omnibus | Carrying firm holds a single account in the introducing firm's name; introducing firm holds the individual customer accounts on its own books |
Fully disclosed is the more common retail structure because it produces a direct legal relationship between the customer and the carrying firm (which the customer notice requirements depend on). Omnibus is more common in institutional and wholesale contexts.
Exam Tip: Gotchas
- The carrying agreement must be written and submitted to FINRA IN ADVANCE. A handshake agreement or a written agreement that the firm starts using before FINRA reviews it violates the carrying-agreement requirement regardless of how the substantive allocation reads.
Allocation of Functions
The agreement must allocate specific functions between the introducing and carrying firms. The list of functions to be allocated includes:
- Opening, approving, and monitoring of accounts
- Extension of credit / margin compliance
- Maintenance of books and records
- Receipt and delivery of funds and securities
- Safeguarding of funds and securities (must be allocated to the carrying firm)
- Confirmations and statements to customers
- Acceptance of orders
- Execution of orders
- Custody and clearance
The Safeguarding Constraint
For a fully disclosed agreement, safeguarding and responsibility for preparing and transmitting account statements must be allocated to the carrying firm. With prior written FINRA approval, the introducing firm may prepare or transmit statements on the carrying firm's behalf. Trade confirmations are separately allocable. Safeguarding cannot be reassigned to the introducing firm within this agreement.
Think of it this way: The carrying firm is the firm that physically (or via depository) holds the customer's stock and cash. The customer-protection possession-or-control discipline lives at that firm. So the carrying firm has to be the one accountable for safeguarding. If the introducing firm tried to take that role, it would not have access to the assets to safeguard them.
Other Allocations Are Negotiable
The other functions (opening accounts, monitoring, recordkeeping, confirmations, order acceptance, execution) can be allocated to either firm based on the structure of the relationship. The agreement must be specific: it cannot say "the firms will allocate as agreed"; it must spell out which firm does each thing.
Exam Tip: Gotchas
- the carrying-agreement requirement requires the SAFEGUARDING-OF-FUNDS-AND-SECURITIES allocation to go to the CARRYING FIRM, not the introducing firm. This cannot be flipped. The carrying firm holds the customer's assets and bears the customer-protection possession-or-control obligation. Any agreement that allocates safeguarding to the introducing firm is invalid under the carrying-agreement requirement.
- Distinguish trade confirmations from account statements. Confirmation duties can be allocated; statement responsibility is assigned to the carrying firm, with the approved on-behalf arrangement described above. Both firms retain the duties applicable to their roles.
Customer Disclosure Document
A disclosure document describing the allocation of responsibilities must be delivered to each customer at account opening. The disclosure must:
- Identify the introducing firm and the carrying firm
- Describe how the two firms divide responsibility for the customer's account
- Identify which firm the customer should contact for various matters
Notice of a Change
After account opening, the customer must be notified promptly and in writing whenever a party to the carrying agreement changes, or the allocation of responsibilities changes in a material way. There is no recurring annual notice: the customer gets the disclosure at account opening, and then a fresh notice only when the arrangement changes.
Exam Tip: Gotchas
- The customer disclosure is delivered AT ACCOUNT OPENING, and again only UPON A CHANGE. The carrying-agreement requirement does not impose a recurring annual notice. An exam answer that says the customer must receive an annual reaffirmation is wrong; the trigger for a new notice is a change to the parties or to the allocation of responsibilities.
Carrying Firm's Due Diligence
The carrying firm must conduct appropriate due diligence on each new introducing firm before agreeing to carry that firm's accounts. Due diligence covers:
- The introducing firm's financial condition
- Its registration and disciplinary history
- Its supervisory and compliance infrastructure
- The reasonableness of its proposed business with the carrying firm
The 10-Business-Day Notice
The carrying firm must give 10 business days advance notice to FINRA before carrying any new introducing firm's accounts. The notice must include:
- The introducing firm's name and CRD number
- A summary of the proposed relationship
The 10-day notice is a gating requirement. The carrying firm cannot start clearing for a new introducing relationship without first filing notice.
Real-world example: A clearing firm signs a carrying agreement with a new introducing firm on day 0. The introducing firm wants to start sending trades on day 5. Even if FINRA has reviewed and accepted the carrying agreement, the carrying firm cannot accept trades from the introducing firm until 10 business days after filing the new-relationship notice. The agreement is approved; the operational gate is the 10-business-day notice.
Exam Tip: Gotchas
- The 10-business-day FINRA notice before carrying a new introducing firm's accounts is a GATING requirement. The carrying firm cannot start clearing for a new introducing relationship without first filing notice and providing the introducing firm's CRD number.
- The notice requires the introducing firm's CRD number, not just its name. The CRD number is FINRA's unique identifier, and the rule requires the carrying firm to provide it as part of the notice.
What Should You Check on Exam Day?
- Can you state which firm must always receive the safeguarding-of-funds-and-securities allocation in a carrying agreement, and why it cannot shift to the introducing firm?
- Do you know how many business days advance notice a carrying firm must give FINRA before carrying a new introducing firm's accounts?
- Can you distinguish a fully disclosed clearing relationship from an omnibus relationship in terms of whose name holds the customer account?
- Do you know when a customer must receive a fresh carrying-agreement disclosure notice after account opening, versus when no notice is required?