Books, Records, Confirmations and Statements

Confirmations

SEC Rule 10b-10 requires that a broker-dealer give or send a written confirmation to the customer at or before completion of the transaction — in practice, at or before settlement.

The confirmation must disclose the date and time of the transaction, or a statement that the time will be furnished on request; the identity, price and number of shares or units; whether the firm acted as agent for the customer, as agent for another person, as agent for both, or as principal; the capacity-dependent compensation — the commission if acting as agent, or the markup or markdown in the circumstances the rule specifies; whether payment for order flow was received, with details available on request; the yield on a debt security and how it was calculated; whether a debt security is callable and that further call information is available; and the settlement date.

For a debt security, the yield disclosure is substantive rather than formal. As lesson 3.2 established, a premium bond must be shown at the lower of yield to call or yield to maturity, and MSRB Rule G-15 imposes the parallel requirement for municipal securities along with disclosure of the dollar price, the capacity, any credit or liquidity enhancement, and whether the security is subject to the alternative minimum tax.

FINRA Rule 2232 governs customer confirmations and, for certain retail transactions in corporate and agency debt, requires disclosure of the member's markup or markdown from the prevailing market price expressed both in dollars and as a percentage. That requirement exists because a markup buried in a net price is otherwise invisible.

Rule 15g-6 requires additional monthly account statements for penny stock customers showing the estimated market value of their positions.

Account statements

FINRA Rule 2231 requires a member to send an account statement at least quarterly to each customer with a security position, money balance or account activity during the period. In practice firms send monthly statements to accounts with activity.

The statement must show all positions and money balances and all activity since the last statement, identify the introducing and clearing firms where applicable, and carry a legend advising the customer to promptly report any inaccuracy or discrepancy and providing contact details.

Statements and confirmations go to the customer at their address of record. Sending them to a third party requires the customer's written instruction, and a duplicate to a third party requires the customer's written consent. Holding mail is permitted only for a limited period and only at the customer's written request, with specified conditions.

A change of address requires notification to the customer at both the old and new addresses, which exists to catch an unauthorized redirection.

Any customer complaint about a statement must be handled under the complaint rules covered in the next lesson.

Retention

SEC Rule 17a-3 specifies the records that must be made; Rule 17a-4 specifies how long they are preserved. The periods that appear on the exam:

Six years: blotters, general ledgers, stock records, customer account records including the account information required by FINRA Rule 4512, and records of associated persons' compensation. Six years is the period for the records that describe the firm's overall business and its customer relationships.

Three years: order tickets, confirmations, trial balances, communications received and sent relating to the business, advertising and sales literature, records of written customer complaints, powers of attorney and trading authorizations, and the associated person's employment application. Three years is the period for records of individual transactions and communications.

Lifetime of the firm plus three years after termination: articles of incorporation or partnership agreements, minute books and stock certificate books.

Records must generally be kept in an easily accessible place for the first two years of any period.

MSRB Rules G-8 and G-9 set the parallel requirements for municipal securities activity — G-8 for the records to be made and G-9 for their preservation.

The practical exam approach: six years for the firm's books and the customer account record; three years for tickets, confirms and communications. When a question names a record, ask whether it describes the relationship or a single event.

Privacy and customer protection

Regulation S-P implements the privacy provisions of the Gramm-Leach-Bliley Act for broker-dealers.

It requires an initial privacy notice to a customer no later than when the customer relationship is established, and an annual notice thereafter, describing the categories of non-public personal information collected and disclosed and the categories of third parties who receive it.

It requires an opt-out notice and a reasonable opportunity to opt out before disclosing non-public personal information to a non-affiliated third party — with exceptions, including disclosures necessary to process a transaction the customer requested, disclosures to service providers under a confidentiality agreement, and disclosures required by law or made to regulators.

And its safeguards rule requires written policies and procedures addressing administrative, technical and physical safeguards for customer records and information, and, under later amendments, a response programme for unauthorized access with customer notification.

Separately, SEC Rule 15c3-3 — the customer protection rule — requires a broker-dealer to maintain physical possession or control of fully paid and excess margin securities of customers, and to maintain a special reserve bank account for the exclusive benefit of customers holding cash the firm owes them beyond what customers owe the firm. Its purpose is that customer property survives the firm's failure, and it is the operational counterpart to SIPC: SIPC covers what is missing, and 15c3-3 exists so that as little as possible is missing.

Rule 15c3-1, the net capital rule, requires a broker-dealer to maintain minimum liquid net capital, for the same underlying reason.