Financial Broker

First Requirement: Definition of the Financial Broker and the Nature of the Profession

Regulatory By-law No. (35), in Article (1/Fourteenth), defined the “financial broker” as follows:

“The foreign legal person who engages in the purchase and sale of securities and commodities on behalf of the clients of a licensed Iraqi brokerage company.”

From the definition above, it is clear that the financial broker is the company that holds full authority to manage clients’ orders and execute them, and to safeguard their funds in special escrow (trust) accounts. It is not merely an introducer or a marketer; rather, it is an executive entity with high financial solvency (as the by-law stipulates that the capital of the entity practicing financial brokerage must not be less than one billion dinars) in order to cover trading risks.

This broker receives buy and sell orders from the local investor, then forwards them for actual execution in global markets through its approved channels (the foreign broker), while bearing legal and financial liability before the Iraqi client.

Second Requirement: The Legal Problem in Drafting the Definition

Upon careful examination of the legal wording of the by-law, it becomes evident that inserting the word “foreign” into the core definition of the financial broker in Paragraph (Fourteenth) raises a problem in understanding the legislative text. It appears that what is intended is the “legal person” without adding the qualifier “foreign”, for the following legal and substantive reasons:

The definition conflicts with the capital requirement (the financial criterion): Article (3) of the by-law provides that the minimum capital of the “financial broker” must not be less than (1,000,000,000) one billion Iraqi dinars. From both a legal and practical standpoint, the Iraqi legislator cannot impose a capital requirement denominated in the national currency (the dinar) on a foreign entity (such as an American or European company). Specifying capital in the national currency is a condition that applies exclusively to companies incorporated within Iraq.
Duplication and repetition with the definition of the foreign broker: The by-law included an independent and clear definition of the “foreign broker” in Paragraph (Twelfth), describing it as: “the external broker with whom the brokerage company deals…”
If the “financial broker” were also a foreign person (as stated in the literal definition), we would end up with two different definitions for the same foreign entity, which is legislative redundancy inconsistent with the precision required in legal texts.
Contradiction with the licensing structure (Article 1/Third): The by-law defined the “financial brokerage company” (the licensed parent entity) as “the licensed legal person who carries out the following activities (the financial broker, the broker for its own account, …)” without requiring that this person be foreign.

Third Requirement: Points of Distinction Between the Financial Broker and the Introducing Broker

To clarify the legal position of the financial broker, it is necessary to explain the essential differences between it and the introducing broker, which can be summarized under three main dimensions: financial, functional, and procedural.

Financial Differences: Solvency and Capital

The financial criterion is the most prominent point of difference, as the legislator imposed strict requirements on the financial broker due to the risk inherent in its position:

Financial broker: Article (3) stipulates that its capital must not be less than (1,000,000,000) one billion Iraqi dinars. The reason for this elevated threshold (more than three times) is its need to cover execution risks and the possibility of exposure in its financial positions.
Introducing broker: The legislator required capital of only (300,000,000) three hundred million Iraqi dinars, because it does not bear direct market risks; rather, its risks are limited to the operational and marketing side.

Functional Differences: Custody of Funds and Execution

Financial broker (the executing party): It has the legal authority to open special “escrow (trust) accounts” for clients, receive funds from them, and execute buy and sell orders directly (or through the foreign broker). Thus, it acts as both an “investment custodian” and an “executor” at the same time.
Introducing broker (the marketer): It is prohibited from receiving clients’ funds or holding them in its bank accounts. Its role is limited to linking/introducing, as the client deposits funds directly with the foreign broker or the financial broker, which makes it a broker that is “empty-handed” with respect to third-party funds.

Scope of Legal Liability

Financial broker: It bears full contractual liability toward the client for the execution of trades and the safety of the funds deposited with it, and it is considered a direct counterparty to the client in the event of a dispute regarding execution or balances.
Introducing broker: Its liability is limited to “exercising due care” in selecting the foreign broker and introducing it truthfully. It is not liable for losses resulting from market trading unless there is fraud or misrepresentation in the information it provided.

Conclusion

In the end, we observe that all financial professions regulated by the by-law (whether an introducing broker or a financial broker) are subject to the same administrative conditions and rules. All of them are obligated to provide expertise, integrity, and compliance systems, including anti-money laundering measures, according to the same standards.

The only difference between them lies in the financial amounts. The legislator required a lower amount for the introducing broker because its role is limited to marketing, while requiring a higher amount for the financial broker because its risks and responsibilities are greater. The same applies to the rest of the professions.

For tailored guidance on financial brokerage regulation and liability, contact Osama Tuma for Legal Services and Advisory — a trusted law firm in Iraq.