Trading broker and clearing broker dealership
Plaintiffs, seeking to maximize their recoveries, are generally trading broker and clearing broker dealership to cast a liability net over as many potential wrongdoers as possible.
This observation is particularly valid in securities litigation and arbitration where broker-dealers, registered representatives, supervisory personnel, issuers and other parties are routinely joined as a matter of course. In the context of financially distressed or defunct introducing brokers, the plaintiff's search for the deep pocket frequently brings it to the clearing firm's front door. But is a clearing firm an appropriate liability target? Are clearing firms responsible for the alleged wrongdoings of introducing firms and their representatives?
Do some clearing firms create liability for themselves trading broker and clearing broker dealership others do not? Do arbitrators adhere to court-ordained liability standards? Will potential industry rule revisions expand or contract clearing firm liability?
This article generally explores these questions and surveys the current landscape and climate. In a typical securities clearing arrangement, an "introducing broker" formally contracts with a "clearing" or "carrying" broker to complete and settle the securities trades of the introducing broker's customers.
The arrangement benefits the introducing broker, which while providing investment advice through direct contact with its investor customers, may not have the financial resources, net capital, personnel or expertise to clear its own trades. As such, the clearing broker performs numerous back room and administrative functions for the introducing broker, including: The clearing broker typically performs these functions through a "fully disclosed agreement" in which the introducing broker's customer is disclosed to the clearing broker to enable the mailing of trade confirms and account statements.
Clearing arrangements abound within the securities industry. Indeed, they provide a vital resource to many securities dealers who could not otherwise participate in the retail industry. Recent industry statistics reflect that approximately one hundred twenty NYSE clearing firms serve the needs of more than four thousand introducing brokers.
Any views expressed herein do not apply to future cases, which by necessity will turn upon their particular facts and circumstances. Publications Liability Of Clearing Firms: Traditional and Developing Perspectives By: The Role of Clearing Firms.
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