Chapter 2. Brokerage Office Procedures & Back Office Operations - D. Violations

If the customer fails to pay for the purchase within the five business days allowed, the customer is in violation of Regulation T. As a result, the brokerage firm will “sell out” and freeze the customer’s account. On the sixth business day following the trade date, the brokerage firm will sell out the securities that the customer failed to pay for. The customer is responsible for any loss that may occur as a result of the “sell out” and the brokerage firm may sell out shares of another security in the investor’s account in order to cover the loss. The brokerage firm will then freeze the customer’s account, which means that the customer must deposit money up front for any purchases they want to make in the next 90 days. After the 90 days have expired, the customer is considered to have reestablished good credit and may then conduct business in the “regular way” and take up to five business days to pay for their trades. A customer may get an additional five business days to pay for the trade by requesting an extension. An extension request must be submitted to the NYSE or FINRA before the expiration of the fifth business day. A broker dealer may ignore a call for cash of $1,000 or less.

Clearly Erroneous Reports

If a registered representative reports the execution of a trade to a customer and that report is clearly an error, then that report is not binding on the agent or the firm. The customer must accept the trade as it actually occurred, not as it was erroneously reported so long as the transaction was in line with the terms of their order. A reporting error usually occurs verbally. However, occasionally the terms of the trade may be printed incorrectly on the customer’s confirmation. If the terms of the trade are reported incorrectly on the customer’s confirmation the firm will send the customer a corrected confirmation with the terms of the trade as the actually occurred by mail or email depending on how the customer elects to receive confirmations. If a trade is executed and the trade is posted to the wrong account the posting error will be corrected through the “cancel and rebill” process. Posting the trade to the wrong customer account or wrong account type such as cash or margin are typical errors. The cancel and rebill of the trade will generate confirmations for both accounts and all corrections must be approved by a principal.

Execution Errors

If a transaction is executed away from a customer’s limit price or is executed for too many shares of stock, the customer in not obligated to accept the transaction. A trader or a registered representative who identifies or is informed of an execution error should immediately inform their principal of the error. All firms are required to maintain an “error account” to correct execution errors. The error account will be used to correct errors in price, quantity and type of execution (purchased shares that should have been sold or sold shares that should have been purchased). All trades corrected though the error account must be approved by a principal of the firm. The principal of the firm must monitor the error account closely to ensure that it is not being used by traders to hide losses or by registered representatives to hide customer losses.

Unconfirmed Trades

While most transactions are automatically confirmed between the buying and selling firms through the DTCC some trades are still input manually for comparison. It is during this process where the details of the trade reported or input by one party may differ from the details of the trade recognized by the confirming party. These cases can result in trades being unconfirmed. If the firm receiving the details of the trade does not know the terms of the trade as reported there is an open trade or a “DK”. The confirming party is required to contact the reporting party by telephone promptly advising them that they do not know the terms of the trade as reported. This phone contact can often lead to a resolution of the unrecognized terms. The issues that may have resulted in the DK may have been a simple input error or “typo” If however the terms of the trade remain unrecognized by the confirming party the confirming party is required to send a written notice return receipt requested to the reporting party within one business day. The reporting broker dealer is then required to send the confirming broker dealer a written notice questioning if a trade did in fact occur between the two parties for the security in question within four business days. If the confirming broker dealer believes that a trade took place but under different terms and conditions it must once again contact the reporting party by phone and send the reporting party a written notice within one business day failing to confirm the trade details as reported.

Series 99 Textbooks and Software

A. Introduction: General Supervision


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