Operations, Supervision, and Financial Responsibility
Operations: The Introducing Broker Model, Settlement, and Customer Assets
The introducing broker model
An introducing broker opens and services customer accounts but does not carry them. A written agreement with a carrying broker allocates responsibilities: the carrying firm holds assets, clears and settles trades, sends confirmations and statements, and extends margin credit; the introducing broker handles order entry, customer service, and supervision. Because the introducing broker does not hold customer funds, it generally avoids the reserve-account and possession-or-control obligations that apply to carrying firms.
Settlement and credit
US equities settle T+1, next business day, for regular-way trades. Regulation T governs initial margin, generally 50% for equities, and the carrying firm monitors maintenance. Free credit balances are customer money, not working capital; the firm cannot use them for its own purposes.
Other operational duties
Customer account transfers move through ACAT. Anti-money-laundering duties include a written AML program, customer identification, suspicious activity reporting, and OFAC screening. SIPC protects customers of failed firms, but not against market losses.
Traps
Questions test T+1 versus the old T+2, who sends the confirmation, the carrying firm, and whether an introducing broker may hold a customer check, generally no, it must be forwarded. Another trap is treating a free credit balance as firm cash.
Worked example
A customer buys 100 shares on Monday; regular-way settlement is Tuesday. The introducing broker transmits the order and the carrying firm confirms and settles it.
Supervision and Financial Responsibility: The FINOP's Accountability
Supervisory system
FINRA Rule 3110 requires a written supervisory system, written supervisory procedures, and designated principals responsible for each area. Supervision must be reasonably designed to achieve compliance and includes review of correspondence and transactions, branch office inspections, and an annual compliance meeting. The FINOP is a registered principal with specific responsibility for financial reporting, net capital, reserve computations, and recordkeeping; that responsibility cannot be delegated away, although tasks can be.
Financial responsibility duties
The FINOP monitors net capital under Rule 15c3-1, customer protection under Rule 15c3-3, early-warning notices under Rule 17a-11, and the annual audit under Rule 17a-5. The firm must also maintain a fidelity bond and pay SIPC assessments. When a threshold is crossed, net capital below 120% of the minimum, AI above 12:1, a reserve deficiency, or a material internal-control weakness, notice to regulators is required promptly and is separate from routine filings.
Traps
A favorite trap is the delegate-and-forget answer: the FINOP may assign work but remains accountable. Another is confusing a 17a-11 early-warning notice with a 15c3-3 deficiency notice; both may apply, but the 15c3-3 notice is immediate.
Worked example
Net capital drops to 118% of the minimum on a Tuesday. The firm must notify the SEC and FINRA under Rule 17a-11 at once and file the required report, even if the FOCUS report is not due for weeks.