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Table of Contents - Practising Law Institute

Table of Contents - Practising Law Institute

BROKER-DEALER REGULATION

BROKER-DEALER REGULATION PART VIII: Clearing Activities Chapter 24 Clearing Broker Liability and Responsibilities Harry S. Davis & Betty Santangelo § 24:1 Introduction.................................................................. 24-2 § 24:2 The Role of the Clearing Firm in the Brokerage Industry ........................................................................ 24-3 § 24:2.1 Evolution of Responsibilities of Clearing Versus Introducing Brokers—NYSE Rule 382, NASD Conduct Rule 3230............................................... 24-3 § 24:2.2 Regulatory Developments ..................................... 24-6 § 24:2.3 Anti-Money Laundering Obligations of Clearing Brokers ................................................. 24-11 § 24:3 Litigation Exposure of Clearing Firms........................ 24-17 § 24:3.1 Pre-Blech: Most Courts Summarily Rejected a Variety of Customer Claims Against Clearing Brokers................................................................ 24-17 § 24:3.2 In re Blech .......................................................... 24-21 § 24:3.3 Post-Blech Decisions .......................................... 24-22 § 24:3.4 Isolated Victories for Customers [A] of Introducing Firms........................................... 24-30 Breach of Fiduciary Duty/Apparent Authority/ Aiding and Abetting Fraud.................................. 24-30 [B] State Blue Sky Laws ............................................ 24-32 § 24:3.5 Emerging Alternate Theories of Clearing Broker Liability in the Context of a Bankruptcy by the Introducing Firm’s Customer .................. 24-34 [A] Overview of Fraudulent Transfer Law................. 24-34 [B] Gredd v. Bear, Stearns Securities Corp................ 24-38 [C] Additional Cases Reflecting an Emerging Theory of “Transferee” Liability for Clearing Brokers................................................................ 24-52 § 24:3.6 Arbitrations: More Dangerous Ground for Clearing Brokers ................................................. 24-60 § 24:4 Conclusion ................................................................. 24-63 Chapter 25 Clearing Arrangements for Introducing Broker-Dealers Paul B. Uhlenhop & Michael Wise § 25:1 Introduction.................................................................. 25-3 § 25:2 Background of Clearing and Depository Organizations ............................................................... 25-4 xcvi

§ 25:3 Understanding the Arrangement .................................. 25-7 § 25:4 Key Functions of the Clearing Arrangement ................ 25-9 § 25:5 FINRA Rule 4311—Carrying Agreements .................. 25-11 § 25:6 Introducing Broker Capital and Financial Responsibility Requirements, in General.................... 25-14 § 25:6.1 Exchange Act Rules 15c3-1 and 15c3-3.............. 25-14 § 25:6.2 Net Capital Rule Requirements .......................... 25-17 [A] Top Tier Firms That Do Not Have Restrictions [B] on Type of Activity.............................................. 25-17 The Two Most Common Capital Rule Minimum Requirements Used by Introducing Brokers................................................................ 25-17 [C] Additional Alternatives and Provisions............... 25-18 § 25:6.3 Exchange Act Rule 15c3-3: Safeguarding Customer Funds and Securities .......................... 25-19 [A] Table of Contents Mutual Fund, Separate Account and S&L Solicitation Exemption ....................................... 25-19 [B] Special Account Introducing Brokers .................. 25-20 [C] Introducing Brokers ............................................ 25-20 § 25:6.4 Summary ............................................................ 25-20 § 25:7 Proprietary Assets Held by Clearing Firm .................. 25-20 § 25:8 Clearing Deposits and PAIB Agreements.................... 25-21 § 25:9 Check Writing and Local Cashiering .......................... 25-22 § 25:10 Risk Management and ACT....................................... 25-23 § 25:11 AML and OFAC Issues............................................... 25-24 § 25:12 Fair and Accurate Credit Transactions Act of 2003 and Privacy Requirements .......................................... 25-26 § 25:13 Introducing Broker Best Execution ............................. 25-27 § 25:14 Piggybacking Arrangements ........................................ 25-29 § 25:15 Prime Brokerage Arrangements .................................. 25-30 § 25:15.1 Introduction........................................................ 25-30 § 25:15.2 Background ......................................................... 25-31 § 25:15.3 Execution of the Prime Brokerage Agreements ......................................................... 25-34 § 25:15.4 Lack of Appropriate Customer Documentation................................................... 25-35 § 25:15.5 Customer Credit and Suitability Obligations.......................................................... 25-35 § 25:15.6 Executing Broker Risk Control ........................... 25-36 § 25:15.7 Clearing (Prime) Broker Risk Control................. 25-36 § 25:15.8 Extension of Credit on Syndicated and Other Public Offerings ........................................ 25-36 § 25:16 Allocation Between Clearing Firm and Introducing Broker in Connection with Risk Management Controls for Clearing Firms Providing Market Access ......................................................................... 25-37 (Broker-Dealer Reg., Rel. #3, 5/13) xcvii

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