Carrying Agreements

the carrying-agreement requirement is the rule that 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 requirement 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:

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

The most important allocation rule is that safeguarding of funds and securities must be allocated to the carrying 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 and will not be accepted by FINRA.

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.
• The list of allocated functions is broad and includes order acceptance, execution, confirmations, and statements. A customer dispute over a confirmation goes to whichever firm the agreement allocates that function to. The exam may probe scenarios where one firm gets named on the customer-facing complaint but the agreement allocated that function to the other firm.

Customer Disclosure Document

A disclosure document describing the allocation of responsibilities must be delivered to each customer at account opening and on annual reaffirmation. 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

Annual Reaffirmation

The annual reaffirmation requirement ensures that customers stay current on the relationship. Customers who opened accounts years ago and may have forgotten the structure receive an annual reminder of who does what and which firm holds their assets.

Exam Tip: Gotchas

• The customer disclosure must be delivered AT ACCOUNT OPENING and ANNUALLY thereafter. A one-time disclosure at opening does not satisfy the carrying-agreement requirement. The annual reaffirmation is a separate continuing obligation.

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.

Annual Customer Notice (Safekeeping Identification)

Beyond the account-opening disclosure, the carrying firm must annually provide each customer with a notice identifying the safekeeping institution and the firm responsible for safeguarding the customer's assets. This is a separate continuing obligation from the introducing-firm relationship disclosure:

• Names the firm holding the customer's assets (typically the carrying firm itself or its depository)
• Identifies the firm with the customer-protection possession-or-control responsibility
• Reaffirms the customer-protection chain

Exam Tip: Gotchas

• The carrying firm has TWO annual customer-notice obligations: (1) reaffirming the carrying-agreement allocation under the carrying-agreement requirement, and (2) identifying the safekeeping institution and the firm responsible for safeguarding the customer's assets. Both are annual; both are separate; both are the carrying firm's responsibility.