Recordkeeping Rules - Settlement of Transactions and Delivery of Securities

Settlement of Transactions

This section covers transaction settlements, which is the date that ownership of a security changes from the seller to the buyer. It also refers to the date that the buyer must pay for and the seller must deliver the securities to the broker-dealer. Regular way transactions settle on the third business day after the trade date, which is referred to as T+3. Most securities, including stocks and corporate bonds, settle this way. However, U.S. government securities have a regular way settlement of T+1. Some transactions can be specified to settle on the same day as the trade. These are referred to as a cash trades.

There are several exceptions to these settlement rules:

SEC Rule 15c6-1 - Settlement Cycle
One of the exceptions to the T+3 rule is for contracts for the sale for cash of securities that are priced after 4:30pm Eastern time on the date such securities are priced and that are sold by an issuer to an underwriter pursuant to a firm commitment, underwritten offering registered under the Securities Act of 1933. They can also be sold to an initial purchaser by a broker-dealer participating in such offering, provided that a broker or dealer does not effect or enter into a contract for the purchase or sale of such securities that provides for payment of funds and delivery of securities later than the fourth business day after the date of the contract, unless otherwise expressly agreed to by the parties at the time of the transaction.

NASD (now kown as FINRA) 2830 m - Prompt Payment for Investment Company Shares
Members (including underwriters) that engage in direct retail transactions for investment company shares shall transmit payments received from customers for such shares, which such members have sold to customers, to payees (i.e., underwriters, investment companies or their designated agents) by (a) the end of the third business day following a receipt of a customer's order to purchase such shares or by (b) the end of one business day following receipt of a customer's payment for such shares, whichever is the later date.

Members that are underwriters and that engage in wholesale transactions for investment company shares shall transmit payments for investment company shares, which such members have received from other members, to investment company issuers or their designated agents by the end of two business days following the receipt of such payments.

Delivery of Securities

NASD (now known as FINRA) Rule 11310 - Book-Entry Settlement
A member shall use the facilities of a securities depository for the book-entry settlement of all transactions in depository-eligible securities with another member or a member of a national securities exchange or a registered securities association.

A member shall not effect a delivery-versus-payment or receipt-versus-payment transaction in a depository-eligible security with a customer unless the transaction is settled by book-entry using the facilities of a securities depository.

This rule requires broker-dealers to deliver securities using book-entry settlement, which is an electronic system of custody, transfer and settlement that does not use the physical security certificates. It allows shares to move electronically through the Depository Trust Corporation (DTC) system and allows fast and accurate transfers of securities with simultaneous cash settlement. Book-entry settlement can be used only when the securities are listed in the customer's name but registered to the broker-dealer.

NASD (FINRA) Rule 11320 - Dates of Delivery
This rule spells out the delivery dates for regular-way and cash settlement, and defines delivery to be made at the office of the purchaser on the appropriate date.

NASD (FINRA) Rule 11330 - Payment
The party making delivery shall have the right to require the purchase money to be paid upon delivery by certified check, cashier's check, bank draft or cash.

Confirmation of Transactions and Account Statements
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