FINRA Rule 4311 Explained: Carrying Agreements
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Understanding FINRA Rule 4311 is essential for firms involved in carrying agreements, as it outlines the responsibilities of those handling customer accounts, whether fully disclosed or omnibus.
This guide will describe key elements of Rule 4311, clarify its implications, and provide insights for maintaining compliance. From due diligence to contractual responsibilities, you will learn everything you need to know to navigate the regulatory framework confidently.
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What Is FINRA Rule 4311?
FINRA Rule 4311 governs the formal agreements between “introducing” firms and “carrying” (or clearing) firms, setting the standards for managing customer accounts. These agreements assure regulatory compliance, protect customers, and define each party's responsibilities.
This rule applies to fully disclosed and omnibus account arrangements, providing transparency, accountability, and risk mitigation.
Agreements with FINRA Member Carrying Firms
Introducing firms may only partner with carrying firms that are FINRA members. These firms are responsible for managing customer accounts either:
On a Fully Disclosed Basis: Customer details are known to the carrying firm
On an Omnibus Basis: Customer accounts remain consolidated and managed by the introducing firm, and customer details are not known to the carrying firm
When introducing firms act as intermediaries to help other introducing firms access clearing services, the carrying firm must be notified and provided with the identities of all other introducing firms.
FINRA Approval and Material Changes
Carrying agreements and any material changes to them must be pre-approved by FINRA. Material changes include, but are not limited to:
Changes to allocated responsibilities,
Changes to termination clauses applicable to the introducing firms,
Changes to the terms or provisions affecting the liability of the parties,
The addition of new parties, including a new introducing or carrying firm or a “piggyback” arrangement.
Carrying firms can use standardized agreements that are pre-approved by FINRA for US-registered brokers or dealers, but agreements involving non-US-registered brokers or dealers require individual FINRA approval.
Advance Notice for New Introducing Firms
Carrying firms must notify FINRA at least 10 business days before beginning a new relationship with an introducing firm. This notice includes the firm's name, CRD number, and any additional information FINRA requires.
Due Diligence Requirements
Before entering into a carrying agreement, carrying firms must evaluate the introducing firm's financial, operational, credit, and reputational risk that the arrangement will have upon the carrying firm. FINRA has also suggested the following items be reviewed during the due diligence investigation:
Inquiring into the introducing firm’s business model and product mix,
Proprietary and customer positions,
FOCUS and similar reports,
Audited financial statements,
Complaint & disciplinary history.
This due diligence investigation assists the carrying firm in better understanding the operations and activities of the Introducing firms. Carrying firms must document this process and retain records compliant with SEC Rule 17a-4(b).
Specific Responsibilities when Accounts will be Carried On a Fully-Disclosed Basis
Carrying agreements must specify, at a minimum, responsibilities for:
Account opening and approval
Acceptance of orders
Transmission of orders for execution
Execution of orders
Extension of credit
Receipt & delivery of funds and securities
Preparing and delivering trade confirmations
Maintaining books and records
Monitoring of accounts
Carrying firms should be expressly allocated the responsibility of safeguarding funds and securities and preparing and transmitting statements to customers. With prior written approval of FINRA, introducing firms may be authorized by the carrying firm to prepare and transmit statements to customers on the carrying firm’s behalf.
Customer Notifications
When accounts are introduced on a fully disclosed basis, customers must receive written notification explaining the existence of the carrying agreement along with each firm's responsibilities. If the agreement materially changes or any of its parties change, customers must be promptly informed in writing.
In some instances, such as account transfers via ACATS, notification to customers is not required.
Handling of Customer Complaints
Carrying firms must forward any customer complaints about the introducing firm directly to the introducing firm and its designated examining authority (DEA).
Additionally, they must notify customers in writing that they have shared the complaint with the introducing firm and its DEA. FINRA may exempt affiliated firms from this requirement in certain circumstances.
Reports and Recordkeeping
Carrying firms must update the list of reports made available to introducing firms annually and must retain records of requested and supplied reports to meet regulatory requirements.
Use of Negotiable Instruments
Introducing firms may issue negotiable instruments (e.g., checks) on behalf of carrying firms, provided that:
Written Supervisory Procedures (WSPs) are in place and are satisfactory to the carrying firm
The process complies with SEC Rule 15c3-3
Account Identification Requirements
The carrying agreement must require introducing firms to maintain customer and proprietary accounts to allow the carrying firm and FINRA to distinguish between accounts from different introducing firms.
Insight from the Experts
"An intense due diligence process is a regulatory requirement and a powerful first line of defense against operational and reputational risks when entering into business."
What Is the Purpose of FINRA Rule 4311?
FINRA Rule 4311 establishes a clear and structured framework for the relationships between introducing and carrying firms, promoting transparency, accountability, and investor protection. By setting industry-wide standards for these agreements, the rule safeguards customer assets, reduces risks, and provides regulatory compliance.
The purposes of Rule 4311 can be outlined as follows:
Protect Customer Assets: Customer funds and securities are safeguarded by carrying Firms as required by SEC Rule 15c3-3.
Clarify Roles and Accountability: Defines responsibilities between Introducing and carrying Firms to reduce errors and establish accountability.
Promote Regulatory Oversight: Requires FINRA approval for agreements and changes, providing transparency and compliance.
Improve Efficiency Operations: Simplifies processes between firms, improving service and reducing inefficiencies.
Build Customer Confidence: Informs customers about agreements to foster trust and transparency.
Mitigate Risks: Mandates due diligence on introducing firms to mitigate financial and reputational risks.
Standardized Industry Practices: Provide consistency in carrying agreement structures across the industry.
Encourage Risk Management: Requires updates, notifications, and proactive oversight to address risks early.
Support Regulatory Coordination: Aligns complaint handling and reviews with DEAs and other regulators.
Strengthen Financial Systems: Establishes secure, efficient, and compliant operations for firms and investors.
Example 2
Addressing Complaints and Revising Agreements
A carrying firm manages accounts for an introducing firm under an existing carrying agreement. The introducing firm decides to act as an intermediary, helping another firm access clearing services through the carrying firm.
To comply with Rule 4311, the carrying firm revises the agreement to include the new introducing firm and submits the changes to FINRA for approval. The carrying firm also conducts due diligence on the new firm, reviewing its financial stability and operational structure. Additionally, the carrying firm implements a process to handle customer complaints that includes notifying customers in writing and forwarding complaints to the appropriate parties.
This example highlights how Rule 4311 promotes transparency and accountability, even when agreements evolve to include new parties.
Note: The practical examples are fictional and created solely to enhance understanding of FINRA Rule 1210. They are not based on actual events or individuals and should not be interpreted as real-life scenarios.
Insight from the Experts
"Establishing clear responsibilities within agreements is essential for fostering successful collaborations. By removing ambiguities, we can promote compliance and a positive and productive partnership while safeguarding both parties from potential penalties."
Frequently Asked Questions About FINRA's Carrying Agreements Rule
Understanding how FINRA Rule 4311 is applied in real-world situations can provide valuable insights into compliance and regulatory expectations. Below are examples of violations and cases that illustrate the consequences of non-compliance and the importance of adhering to the rule's requirements.
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