This rule is no longer applicable.
/01 Application
Every carrying agreement between two registered broker-dealers involved in a fully disclosed relationship must address, at a minimum, the seven basic functions enumerated in Rule 382. Each agreement and any changes thereto must be filed with the Exchange for approval.
Omnibus carrying agreements need not conform to paragraphs (b) and (c) of Rule 382 and need to be submitted to the Exchange for approval only when newly executed or if changed.
/02
Basic Functions
Listed below are the seven categories as well as specific functions attendant to each, which generally must be addressed:
(1) opening, approving and monitoring of accounts (obtaining and verifying new account documentation, knowledge of customer and customer investment objectives, new account approval/rejection, review of orders/accounts, supervision of orders/accounts, furnishing of investment advice, handling and supervision of discretionary accounts and handling of accounts for employees or officers of member organizations, self-regulatory organizations and other financial institutions);
(2) extension of credit (Regulation T compliance, maintenance of margin, payment and charging of interest and rehypothecation/lending of securities);
(3) maintenance of books and records (maintenance of stock records, compilation and filing of regulatory reports and maintenance of account documentation/records);
(4) receipt and delivery of funds and securities (delivery/receipt of funds/securities to/from customers, transfer of securities/accounts, compliance with restricted/control stock requirements, payment of dividends and handling of exchange/tender offers, rights and warrants and redemptions);
(5) safeguarding of funds and securities;
(6) confirmations and statements (preparation/transmission of confirmations and statements); and
(7) acceptance and execution of transactions (responsibility to accept/reject orders, responsibility for errors in execution, procedures for proper transmission of orders and for screening orders prior to execution and settlement of contracts).
The above functions are not all inclusive but are representative of functions involved in the conduct of a general securities business.
• At a minimum, each function listed above should , where applicable, be specifically allocated with a clear indication of the extent of responsibility assumed by each party to the agreement.
• Where any mutual responsibility is intended, in respect to any function, that too, should be clearly indicated in the agreement.
• Additional functions that are peculiar to a given relationship should be addressed and allocated.
• Special situations which would justify deletion of any function should be specifically mentioned in a covering letter accompanying the agreement, when it is submitted to the Exchange.
/03
Additional Requirements and Procedures
• To the extent that a particular function is allocated to one of the parties, the other party is to supply that firm with all appropriate data in its possession pertinent to the proper performance and supervision of that function. The agreement should acknowledge this obligation.
• Each organization will be accountable for actual performance of all functions performed by employees and other associated persons as well as for overall supervision of functions and activities performed by it pursuant to any carrying agreement. See Rule 342.
• Each agreement shall specifically provide procedures for handling of customer inquiries and complaints. Where processing of inquiries/complaints is to be accomplished differently from the functional allocation of responsibilities, specific delineation of respective responsibilities of each party must be made in the agreement. Each organization shall establish procedures for handling customer inquiry/complaint functions to be handled by them. Provisions should also be made to ensure such matters are expeditiously routed to the appropriate organization when not so directed by a customer initially.
• Notice shall be given to each new customer of the introducing organization as to the existence of the agreement, upon the opening of an account. Such notice should include a meaningful and understandable disclosure of the allocation of functions and responsibilities which are customer related. New or revised disclosure notices must be submitted to the Exchange for approval.
• Each agreement must specify which organization is to be responsible for customer notification.
/04
Special Considerations
• Member organizations should carefully weigh the capital and other regulatory and practical consequences of the assumption of the functions enumerated in Rule 382. See, specifically, SEA Rules 15c3-1, 17a-3 and 17a-4.
• SEA Rule 17a-3(b) is not to be deemed as precluding a carrying firm from furnishing, and the introducing firm from obtaining and retaining, such books and records as may be necessary for the introducing firm to effectively perform its functions and to satisfy its duty to carry out its supervisory activities for purposes of Rule 342.
/05
Three Party Agreements
• Three party arrangements which usually involve two introducers and one carrying organization may be permitted by the Exchange. However, introduction of a third party into an existing two party arrangement will require a new or amended agreement to be submitted for approval by the carrying organization.
• It is recommended that a single agreement signed by all three parties and reflecting the allocated responsibilities of each be utilized. However, if two separate agreements are used (introducer 1 and introducer 2; introducer 2 and carrying organization), each agreement must reflect the third party and its allocated responsibilities. Member organizations must ensure that the two agreements are consistent.
• A disclosure notice must be sent to customers (Rule 382(c)) explaining the responsibilities allocated to each of the three parties and how their accounts are affected.
