A fully disclosed clearing arrangement under FINRA Rule 4311 is a partnership between a client-facing broker-dealer (the introducing firm) and a larger broker-dealer (the carrying firm) that handles execution, custody, and back-office work, governed by a written carrying agreement that spells out exactly which firm is responsible for each regulatory duty. The “fully disclosed” piece means the carrying firm sees the identity and holdings of every individual customer, not just a pooled omnibus total. Rule 4311 sets the floor for what the agreement must cover, who must approve it, and what both firms owe their customers along the way.
What the Carrying Agreement Must Allocate
Rule 4311(c)(1) requires the written agreement to assign at least nine categories of responsibility between the two firms:
- Opening and approving accounts
- Accepting orders
- Transmitting orders for execution
- Executing orders
- Extending credit
- Receiving and delivering funds and securities
- Preparing and transmitting trade confirmations
- Maintaining books and records
- Monitoring accounts
Two duties are locked to the carrying firm by rule. It must always safeguard customer funds and securities under SEC Rule 15c3-3, and it must prepare and send customer account statements. The carrying firm can request written FINRA permission to let the introducing firm prepare or send statements on its behalf, but the carrying firm remains responsible for their content.1FINRA. FINRA Rule 4311 – Carrying Agreements
The agreement also has to include a data-sharing clause. Whichever firm is not responsible for a given task has to supply the other firm with the information it needs to do the task properly. If the introducing firm approves accounts and the carrying firm monitors them, the introducing firm must pass along the customer profile data the carrying firm needs to spot suitability concerns or suspicious activity.1FINRA. FINRA Rule 4311 – Carrying Agreements
Beyond the nine mandatory categories, carrying agreements normally cover clearing fees, duration, and termination. Changes to termination clauses count as material modifications that require FINRA’s prior approval.
How the Two Firms Divide the Work in Practice
The introducing firm is the one with the customer relationship. It opens accounts, gathers suitability information, makes recommendations, and handles day-to-day communication. It carries primary know-your-customer responsibility: verifying identity, understanding the client’s finances, and matching recommendations to goals and risk tolerance.
The carrying firm runs the back end. It executes and settles trades, holds custody of cash and securities, generates confirmations and account statements, and maintains the official transaction ledger. The introducing firm keeps records of customer communications, advice, and correspondence. When examiners audit the relationship, they read the carrying agreement to see which firm owns each compliance obligation, so clear allocation up front avoids finger-pointing later.
Credit and Margin
The agreement must specify which firm extends credit, including margin. In most fully disclosed setups the carrying firm extends margin credit because it holds the collateral, and the introducing firm’s role is limited to accepting and transmitting margin requests. Whatever allocation the parties pick, FINRA has to approve it, and both firms remain subject to Regulation T and FINRA’s margin rules regardless of who is formally assigned the duty.1FINRA. FINRA Rule 4311 – Carrying Agreements
The Net Capital Reason to Introduce
Capital efficiency is a major driver. Under SEC Rule 15c3-1, a broker-dealer that does not hold customer funds or carry accounts can operate with minimum net capital as low as $5,000.2eCFR. 17 CFR 240.15c3-1 – Net Capital Requirements for Brokers or Dealers Carrying firms must maintain at least $250,000 in net capital because they hold customer assets. For a small firm, that difference is the business case for introducing instead of self-clearing.
Customer Asset Safeguards
Because the carrying firm holds customer property, SEC Rule 15c3-3 requires it to maintain a Special Reserve Bank Account for the Exclusive Benefit of Customers. That reserve is segregated from the firm’s own assets and cannot be pledged as collateral for the firm’s borrowing. The bank holding it must acknowledge in writing that the funds are held exclusively for customers.3eCFR. 17 CFR 240.15c3-3 – Customer Protection Reserves and Custody of Securities The point of this framework is straightforward: the introducing firm’s customers never chose the carrying firm directly, so the regulatory structure protects their assets independently of that choice.
Getting the Agreement Approved by FINRA
No carrying agreement takes effect until FINRA approves it. Rule 4311(b)(1) puts the submission obligation on the carrying firm, which must submit the agreement before it becomes operative. Material changes to an existing agreement also need prior approval. Silence does not equal consent; the firms need affirmative sign-off.1FINRA. FINRA Rule 4311 – Carrying Agreements
Separately, when a carrying firm takes on a new introducing firm, it must notify FINRA at least 10 business days before it starts carrying that firm’s accounts. The notice identifies the introducing firm by name and CRD number, and FINRA can request additional information during that window.1FINRA. FINRA Rule 4311 – Carrying Agreements
The carrying firm must also run due diligence on every new introducing-firm relationship, looking at financial stability, operational capability, creditworthiness, and reputational risk. FINRA can require specific items during its review. Those due diligence records have to be preserved under SEC Rule 17a-4(b), meaning at least three years with the first two in an easily accessible location.4eCFR. 17 CFR 240.17a-4 – Records to Be Preserved by Certain Exchange Members Brokers and Dealers
There is one practical shortcut. If a carrying firm already has FINRA approval for a standardized agreement template, it can use that template for new relationships with other U.S.-registered broker-dealers without resubmitting. Agreements involving a party that is not a U.S.-registered broker-dealer have to be submitted and approved individually.1FINRA. FINRA Rule 4311 – Carrying Agreements Submissions go through FINRA Gateway.5FINRA. FINRA Gateway Operating under an unapproved carrying agreement is a serious violation that can result in sanctions.
What Customers Must Be Told
When an account is introduced on a fully disclosed basis, the carrying firm must send the customer a written notice explaining the clearing arrangement and how responsibilities split between the two firms, so the customer knows who to contact about errors, missing funds, or account questions. The carrying firm is responsible for the content even if the introducing firm physically delivers it.1FINRA. FINRA Rule 4311 – Carrying Agreements
Ongoing disclosure is required too. If a party to the agreement changes, or the allocation of responsibilities shifts in a material way, customers have to be notified promptly in writing. There is one exception: when accounts transfer through ACATS using an authorized Transfer Instruction Form, or through another process using affirmative or negative response letters, a separate change-of-party notice is not required.1FINRA. FINRA Rule 4311 – Carrying Agreements
FINRA Rule 2267 separately requires every member firm to send customers an annual BrokerCheck notice with the hotline number, website, and availability of the investor brochure. A firm that is party to a carrying agreement under which the carrying firm already sends this annual notice is exempt from sending its own.6FINRA. FINRA Rule 2267 – Investor Education and Protection
Exception Reports
At the start of the relationship, the carrying firm must give the introducing firm a list of all available reports that can help the introducing firm monitor accounts and fulfill its allocated duties. That list is refreshed annually. The introducing firm then requests in writing whichever reports it needs.1FINRA. FINRA Rule 4311 – Carrying Agreements
By July 1 each year, the carrying firm sends the introducing firm’s CEO and chief compliance officer a written summary of what reports were offered, which were requested, and which were actually supplied. A copy also goes to the introducing firm’s designated examining authority. The carrying firm keeps copies of the reports it provides as part of its books and records.1FINRA. FINRA Rule 4311 – Carrying Agreements The annual written inventory exists so neither firm can later claim the data was never asked for or never offered.
Handling Customer Complaints
Rule 4311(g) imposes a specific protocol. The carrying agreement must authorize and direct the carrying firm, upon receiving a written customer complaint about the introducing firm or its personnel, to do two things. It must promptly forward the complaint to the introducing firm and to the introducing firm’s designated examining authority, and it must send the customer a written acknowledgment confirming receipt and identifying where the complaint was forwarded.1FINRA. FINRA Rule 4311 – Carrying Agreements Skipping or delaying either step risks disciplinary action.
Anti-Money Laundering
Both firms keep independent AML obligations. FINRA Rule 3310 requires every member to maintain a written AML program approved by senior management, with policies to detect and report suspicious transactions, internal controls for Bank Secrecy Act compliance, a named AML compliance officer identified to FINRA, and ongoing training.7FINRA. FINRA Rule 3310 – Anti-Money Laundering Compliance Program
Introducing firms that handle customer accounts must have the program independently tested every calendar year. The tester must have working knowledge of the Bank Secrecy Act, cannot be the AML compliance officer, and cannot perform the functions being tested. Firms that neither hold customer accounts nor act as introducing brokers may test every two years instead, but that exception rarely fits a firm operating under a fully disclosed carrying arrangement.7FINRA. FINRA Rule 3310 – Anti-Money Laundering Compliance Program
Record Retention
Both firms preserve records under SEC Rule 17a-4. Core financial records like ledgers and customer account cards must be kept at least six years, with the first two years easily accessible. Written agreements, communications, and operational records require at least three years, again with the first two years easily accessible. Account records relating to the terms and conditions of opening and maintaining a customer account must be kept for six years after the account closes.4eCFR. 17 CFR 240.17a-4 – Records to Be Preserved by Certain Exchange Members Brokers and Dealers The carrying firm can satisfy its exception-report retention duty by keeping either the original report or a re-created copy with the same data elements.1FINRA. FINRA Rule 4311 – Carrying Agreements
What Happens If a Firm Fails
SIPC protects customers against the loss of cash and securities up to $500,000 per account, with a $250,000 sublimit on cash.8Securities Investor Protection Corporation. SIPC FAQs In a fully disclosed arrangement, the failure of the introducing firm usually does not trigger SIPC at all. Customer property sits at the carrying firm, so when the introducing firm goes under, the carrying firm still has the assets and finds a new introducing firm to service those accounts.9U.S. Securities and Exchange Commission. Investor Bulletin – SIPC Protection Part 1 SIPC Basics
SIPC becomes relevant when the carrying firm itself fails. One boundary worth stating plainly: SIPC coverage is not insurance against market losses. It protects only against assets lost because a brokerage firm failed to maintain proper custody. The 15c3-3 reserve, the responsibility allocations in the carrying agreement, and SIPC coverage sit as overlapping layers, each catching what the others might miss.