Broker-Dealers
From Fully-Disclosed to Omnibus Broker-Dealer Registration
Mar 7, 2025
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InnReg
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7 min read
Contents
Are you a fully-disclosed broker-dealer that is considering converting to an omnibus clearing model?
If so, then read through this article to learn the following:
What is an Omnibus Broker-Dealer?
In What Ways Is the Omnibus Broker-Dealer Different from the Fully-Disclosed Broker-Dealer?
What Are the Top 3 Advantages of the Omnibus Broker Dealer Model?
Why Are Many Broker-Dealers Considering Their Conversion to an Omnibus Broker-Dealer?
Can the Omnibus Broker-Dealer Model Be The Key To Your Growth?
Let’s shed more light on the topic.
See also:
InnReg is a global regulatory compliance and operations consulting team serving financial services companies since 2013. If you need assistance with compliance or fintech regulations, click here.
Executive Summary
Smaller broker-dealers are facing intense market pressures at the moment. Fees are declining, and the big players are getting bigger. Digital broker-dealers might wonder whether they made the right move when choosing a fully-disclosed model instead of an omnibus broker-dealer model.
Despite conventional wisdom, it is possible to convert to an omnibus model. Compliance experts can help you navigate the process.
And the result?
New revenue streams and new ways to offer value.
However, firms should be aware that the omnibus broker-dealer model involves significant legal and operational responsibilities. These include custody of customer funds and securities, compliance with capital and reserve requirements, robust record-keeping practices, along with increased regulatory filings and oversight. Additionally, omnibus broker-dealers must establish and maintain their own systems for customer account management, reconciliation, and reporting, which requires substantial investment in technology, processes, and skilled personnel.
What is an Omnibus Broker-Dealer?
Omnibus is a clearing arrangement in which an omnibus broker-dealer carries the positions of the introducing broker’s end-customer trades into a single account. This broker-dealer handles tasks pursuant to an agreement with a clearing broker, such as:
clearance
settlement
execution, and
custody of securities
In an omnibus arrangement, the introducing broker-dealer assumes significant legal responsibilities, including custody of customer funds and securities, compliance with higher capital requirements, maintenance of reserve deposits, and proper record-keeping. While the clearing broker provides certain functions under the contractual agreement, the introducing broker-dealer bears the primary responsibility for these critical areas.
The Omnibus Broker-Dealer Distinction
In practical terms, an omnibus-broker dealer opens an omnibus account with a clearing firm. In this type of account, the omnibus broker-dealer holds and manages the investments, such as stocks and bonds, of its customers, taking on full legal responsibility for their safekeeping, including maintaining compliance with the applicable regulatory requirements.
It is important to note that the omnibus broker-dealer must also comply with regulatory requirements for the custody of funds and securities, which include SEC rules and other obligations as outlined in contractual agreements with the clearing broker.
The Fully-Disclosed Broker-Dealer
In a fully disclosed arrangement, the introducing broker introduces transactions to a clearing firm that handles the clearance, settlement, and custody. The arrangement is called fully-disclosed because the introducing broker is required to disclose all customer-related data to the clearing broke,r including:
personal identifying information (PII),
banking data,
trade details, and
other transaction-relevant information.
Under this model, separate trading accounts are opened in the name of customers at the clearing firm.
The fully-disclosed model undoubtedly allows for a faster and cheaper path to market, and for lower compliance and operational burdens. However, it creates dependencies in how orders are placed, how transactions are cleared and settled, how statements and reports are generated, how compliance is managed, etc.
The fully-disclosed broker-dealer model also narrows down options to a very small set of clearing firms that can handle the business requirements of large-volume digital brokers activity.
What is the Difference Between Fully-disclosed and Omnibus Broker-dealer?
The omnibus broker-dealer is different from the fully-disclosed one mainly because it allows for:
Consolidation of multiple accounts into a single one
Managed trades of more than one customer
Not sharing customer information with the clearing firm
Additionally, the net capital requirements differ significantly: fully-disclosed broker-dealers typically require a minimum of $5,000, while omnibus broker-dealers must maintain at least $250,000 in net capital. This difference highlights the financial demands associated with the omnibus model.
What are Some of the Advantages of the Omnibus Broker-Dealer Model?
In addition to offering the advantages indicated above, the omnibus broker-dealer model also provides:
Greater latitude in finding new revenue streams beyond commissions and fees
The ability to substantially customize the customer experience and internal operational systems and workflows, rather than depending on the few clearing firms that can offer them
More flexible options for integration with other financial services to broaden the range of products to offer to customers
More flexibility to enter B2B deals.
However, these benefits come with increased responsibilities. Omnibus broker-dealers must navigate higher capital requirements, develop and maintain advanced compliance systems, and meet rigorous reporting and regulatory standards.
Why Are Many Broker-Dealers Considering Their Conversion to an Omnibus Broker-Dealer?
Smaller digital broker-dealers are starting to face significant market pressure and revisit their business model. Why? Large incumbent platforms have joined recent innovative broker dealers in offering commission-free trading, and already feature a wide range of investment options from equities to ETFs to alternative assets.
As a result, they are raising the bar for smaller digital broker-dealers to compete for new investors and retain existing ones.
See also:
A Tough Climate for Small Broker-Dealers
These aggressive moves by legacy players may well drive smaller players out of business or foster market consolidation, because they make it very difficult to compete on price. For digital broker-dealers now, the pressure is on. To stay in a fight, they need to find new revenue streams, new pockets of investors, and new ways to offer differentiated value.
One challenge to overcome is the realities of the digital broker-dealer business model. Many went into operation on a fully-disclosed basis, relying on clearing firms to take on a large portion of the technology requirements, compliance and reporting duties, and financial responsibilities.
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Omnibus Broker-Dealer vs. Fully-Disclosed
The exception to this traditional model is the omnibus one, where the introducing broker-dealer executes and clears all of their customers’ trades through one single account at the clearing broker. With the omnibus broker-dealer, the customers’ identities and information do not have to be shared and the omnibus broker will be the one who manages all customer activity.
Rising Interest in the Omnibus Broker-Deal Model, But Concerns Remain
An increasing number of digital broker-dealers are coming to InnReg recognizing they need to break through these constraints to stay ahead of the changing market. For some, converting from a fully-disclosed model to an omnibus broker-dealer can open up significant advantages.
Some in the industry shy away from even considering converting to such a model, or registering as an omnibus broker-dealer in the first place, because of its reputation as a challenging process to implement. The fear is that it may push broker-dealers into unknown territory with recordkeeping and compliance.
However, in our experience as a full-service compliance provider, it is quite feasible to help digital broker-dealers unlock the advantages of an omnibus structure.
Top Three Omnibus Broker-Dealer Advantages
1. Greater latitude in finding new revenue streams beyond commissions and fees.
Omnibus accounts make it easier to derive revenue from sources such as interest on uninvested cash, premium services, including margin lending, and order flow payments.
2. The ability to substantially reduce costs.
You can build out internal recordkeeping capabilities rather than depending on the few clearing firms that can offer them. With a wide range of clearing options to compare, the omnibus basis allows broker-dealers to negotiate a better deal, lowering what is usually the largest part of their operating costs
3. More flexible options for technology integrations and B2B deals.
For example, this flexibility helps a broker-dealer tap into lucrative cross-border investors. They can make arrangements directly with international providers of digital financial services such as other broker-dealers, international fund transfer companies, etc.
Increased Financial and Compliance Obligations
Transitioning to the omnibus broker-dealer model requires a substantial investment in both financial and operational infrastructure. Broker-dealers must comply with the following obligations:
Higher Net Capital Requirements
Omnibus broker-dealers typically face a minimum net capital requirement of $250,000, compared to $5,000 for fully-disclosed models. This 50-fold increase in capital requirements reflects the higher level of responsibility omnibus broker-dealers assume, such as custody of customer assets and managing customer account activities. Additionally, transitioning to an omnibus structure incurs significant financial costs, including:
Increased Insurance Coverage: Firms must obtain higher fidelity bond insurance to protect against fraud and operational risks.
Compliance Infrastructure: Establishing systems for robust compliance with SEC and FINRA regulations demands investment in software, reporting tools, and auditing capabilities.
Regulatory Audits: Frequent audits by regulators require dedicated resources to manage, including external consulting or internal audit teams.
Custody and Compliance Rules
Adherence to SEC Rule 15c3-3 for customer protection, including proper segregation of customer funds and securities, is mandatory.
Comprehensive Record-Keeping
Firms must maintain detailed records for all customer accounts, reconcile transactions, and implement robust reporting mechanisms to meet regulatory standards.
Advanced Technology and Processes
Omnibus broker-dealers need sophisticated internal systems to handle compliance workflows, reporting, and customer account management.
Operational Complexity
Transitioning to the omnibus model involves operational changes that require significant investments and expertise. Unlike fully-disclosed broker-dealers, which rely on clearing firms for back-office functions, omnibus broker-dealers must independently manage key operational tasks such as:
Customer Account Management: Setting up, maintaining, and reconciling customer accounts, including detailed subaccounting for customer funds and securities.
Reconciliation Processes: Regular reconciliation of transactions and balances between internal systems and external clearing firms to ensure accuracy and regulatory compliance.
Reporting and Record-Keeping: Developing systems to generate and store reports that meet regulatory requirements, such as SEC and FINRA guidelines for transaction data, customer communications, and compliance audits.
Technological Infrastructure: Implementing robust IT systems to support these operations, including APIs, cloud-based platforms, and cybersecurity measures.
Personnel Expertise: The transition to an omnibus model necessitates hiring or training skilled professionals in multiple areas, including:
Experts who understand SEC and FINRA regulations, AML requirements, and customer protection rules.
Professionals with experience in identifying and mitigating operational, financial, and reputational risks.
Staff capable of managing complex customer account systems, reconciliation processes, and reporting workflows.
IT specialists to develop, integrate, and maintain systems for compliance, customer management, and cybersecurity.
Investing in specialized talent is essential for successfully navigating the operational and regulatory challenges of the omnibus broker-dealer model.
Custody and Customer Protection Rules
Fully Disclosed Broker-Dealers: These firms rely on their clearing brokers to handle custody and segregation of customer funds and securities, with limited direct responsibility for compliance with SEC Rule 15c3-3.
Omnibus Broker-Dealers: These firms assume direct responsibility for safeguarding customer assets, which involves maintaining the segregation of funds and securities and preparing detailed compliance reports. Reserve deposits must meet SEC requirements, adding to the operational burden.
Audits and Examinations
Fully Disclosed Broker-Dealers: These firms undergo audits that primarily focus on their relationship with the clearing broker, with limited scope around custody and transactional reporting. The clearing broker often bears most of the operational scrutiny.
Omnibus Broker-Dealers: Audits for omnibus firms are broader and include all aspects of custody, compliance, and operations. Regulators review internal controls for customer asset management, subaccounting practices, AML compliance, and reporting accuracy. Firms must provide detailed documentation of reconciliation processes, reserve deposits, and overall compliance programs.
Cost Implications
Transitioning to the omnibus model involves upfront and ongoing costs that must be carefully accounted for:
Technology Investments: Developing or licensing platforms for customer account management, reconciliation, and compliance reporting.
Staffing Costs: Recruiting or training specialized talent to manage compliance, operations, and risk management.
Insurance Premiums: Securing fidelity bonds and other coverage required for regulatory compliance.
Operational Upgrades: Establishing robust back-office functions, including record-keeping and reporting systems.
Consulting and Advisory Services: Engaging external experts to navigate regulatory approvals and implement operational changes
Tax and Accounting Considerations
The omnibus broker-dealer model introduces complexities in tax and accounting practices that require enhanced systems and expertise:
Customer Fund and Securities Tracking: Firms must maintain detailed records of customer funds and securities, ensuring accurate reconciliation and reporting for both operational and tax purposes.
Revenue Recognition: Revenue from diverse sources, such as interest on uninvested funds, premium services, and order flow payments, must be properly accounted for to meet tax and compliance standards.
Regulatory Reporting: Regulatory filings such as FOCUS and Rule 606 reports require precise financial data that aligns with accounting records.
Tax Compliance: Omnibus broker-dealers face additional tax obligations based on their expanded operations, including state reporting obligations.
While the potential for greater control and revenue is significant, these heightened obligations mean firms must carefully assess their readiness before transitioning.
Breaking Through the Four Most Popular Myths About the Omnibus Broker-Dealer
Because of the complexity of registering on an omnibus basis, tapping into these advantages may seem intimidating; there are many misconceptions and exaggerated anxieties about omnibus conversion in the industry.
A practiced hand can guide you through with a more balanced and objective way to think about these concerns about converting to an omnibus structure.
1. Technical Barriers Myth
No doubt, building out new technologies can be a challenge, and the omnibus broker-dealer model requires robust IT systems for customer account management, reconciliation, and compliance reporting. In today's world of Software-as-a-Service and APIs, however, firms can leverage third-party solutions and integration partners to meet these requirements without building a technology stack from scratch. With a strategic approach to technology selection and implementation, operational complexity can be mitigated.
2. Regulatory Risk
Increased regulatory scrutiny does raise the bar in terms of the amount of customer and transaction-level data that broker-dealers must collect. For omnibus broker-dealers, this includes compliance with SEC Rule 15c3-3 for custody and segregation of customer assets, FINRA Rule 3310 for AML programs, and a range of required filings, such as Rule 606 reports. While these requirements can seem overwhelming, a well-structured compliance program can streamline filings and ensure adherence to these heightened standards.
3. The Self-Clearing Myth
The omnibus broker-dealer model is sometimes conflated with the notion of migrating fully to self-clearing. The two are not mutually dependent. As mentioned above, this model allows you to work with more clearing firms because you take on more of the load with middle- and back-office functions. However, if your business were to grow to the scale that self-clearing becomes a financially viable option, a previous migration to the omnibus model ultimately will make that easier.
4. Front Office Focus
A well-designed compliance program mitigates the risk of needing to divert resources from user acquisition and product development. In addition, the world of finance is continuing to evolve into a model where firms can create bundles of services, including outsourcing compliance and non-core back-office processes.
If you engage a reliable outsourced compliance provider with a fully functioning back-office operations facility and knowledge of the latest APIs and cloud-based solutions, all integrated with your user acquisition and client service workflows, there is no loss of focus on excellence in front-office capabilities.
Can the Omnibus Broker-Dealer Model Be Your Life-Line?
For many digital broker-dealers, rethinking the business model will shift quickly from a future consideration to an existential business model decision. If you see the writing on the wall and are struggling to react to a world where no-fee, no-commission trading is the norm, converting to an omnibus broker-dealer may offer you a lifeline.
To sum up our analysis, we offer you the following comparative table.
Fully-Disclosed vs. Omnibus Broker-Dealer
As can be seen on the table, the fully-disclosed broker will generally have lower financial requirements in terms of registration, required capital, technology investment and hiring.
However, the two most significant advantages of the omnibus model are the flexibility to integrate non-brokerage services and the latitude in entering B2B arrangements. Ultimately, they allow the omnibus broker-dealer to offer a comprehensive and tailored solution to its clients, meeting a wider range of their financial needs and fostering stronger client relationships.
Let's have a conversation about which model makes the most sense for your business.
See also:
What Specific Financial Regulations Pertain to Omnibus Broker-Dealers?
Omnibus broker-dealers must comply with a range of FINRA and SEC rules, including:
SEC Rule 15c3-1 (Net Capital Rule): Establishes minimum net capital requirements to ensure financial stability
SEC Rule 15c3-3 (Customer Protection Rule): Mandates the segregation of customer assets to prevent misuse and enhance investor protection
FINRA Rule 3310 (AML Compliance): Requires the development and implementation of a comprehensive anti-money laundering program
SEC Rule 606 (Order Routing Disclosure): Ensures transparency in the routing of customer orders
In addition to these key rules, omnibus broker-dealers are subject to routine audits, transaction reporting requirements, and periodic filings to demonstrate ongoing compliance.
How Can InnReg Help?
InnReg is a global regulatory compliance and operations consulting team serving financial services companies since 2013.
We are especially effective at launching and scaling fintechs with innovative compliance strategies and delivering cost-effective managed services, assisted by proprietary regtech solutions.
If you need help with broker-dealer compliance, reach out to our regulatory experts today:
Published on Dec 30, 2019
Last updated on Mar 7, 2025
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