Chapter 10.6

Question 1

Order Tickets

Answer 1

Must be prepared upon receipt of the order, prior to the execution of the transaction. Commissions are not included on order tickets.

Question 2

Trade Errors

Answer 2

If a trade execution is erroneously reported to the customer, the customer must pay the actual price, not the erroneously reported price. If an RR is given a bad report, he should contact his supervisor immediately.

• If a customer mistakenly purchases the wrong security, the B/D must sell the security purchased in error and buy the correct one. The customer is liable for any loss on the trade.
• It is an improper use of a firm’s error account to accommodate customers who are fully to blame for their trade errors.

Question 3

Once an order as been entered and/or executed, any change to the order requires what?

Answer 3

Written approval of the branch manager or supervisor prior to the change taking place.
-Any order cancellation and re-bill must be reviewed and approved by a registered supervisor or operations manager in the branch office

Question 4

When a RR receives a sell order from a customer, the RR must:

Answer 4

• Determine the physical location of the securities to be sold
• Be sure that the customer can make delivery within 3 business days
• Be sure that the securities are in good deliverable form
• The order ticket would be marked “sell long”

**The RR’s name is not indicated on an order ticket

Question 5

Sell Limits and Buy Stops

Answer 5

Are always entered above the current market price of the stock and will not be executed unless the market moves up to or above the price indicated in the order

Question 6

Buy Limits and Sell Stops

Answer 6

Are always entered below the current market price of the stock and will not be executed unless the market moves down to or below the price indicated in the order

Question 7

If an adjustment is required for cash dividends:

Answer 7

Buy Limit and Sell stop open order prices will be reduced by the dollar amount of the dividend and will be rounded down to the next lowest minimum quote variation.

Question 8

Requirements for open orders to buy or sell a security that are subject of a reverse split:

Answer 8

Requires that all open orders must be cancelled

Question 9

If an adjustment is reported as being erroneous, the following information is necessary:

Answer 9

• The transaction disputed must be clearly identified
• There must be an obvious error in the terms of the transaction
• The price in question is smaller than the pre-established minimum threshold

Question 10

Information that Firms and RR’s should inform customers about prices/orders:

Answer 10

• Stop prices are not guaranteed execution prices
• Stop orders may be triggered by a short-lived, dramatic price change
• Sell stop orders may exacerbate price declines during times of extreme volatility
• Placing a “limit price” on a stop order may help manage some of the risks associated with stop orders
• Changing market conditions can impact stop and limit orders and their execution status

Question 11

How long must B/D’s maintain a record of customer order tickets?

Answer 11

3 years

Question 12

Cash Sweep Account

Answer 12

An account where a client’s cash balance is put into a bank account rather than put into a Money Market account, generally to earn more interest. If a B/D uses a cash sweep account the following disclosures are required:

• The time when the program is implemented
• That the firm uses this type of program at the time the customer opens a new account
• If changes are made to an existing program

**Annual disclosures are not required

Question 13

Priority of customer orders

Answer 13

Customer orders always have priority over firm or proprietary orders. If a proprietary order were executed before a customer order, the member firm must correct the trade.

**If a firm executes an order for the firm that would have satisfied a customer’s limit order, the firm must execute the customer’s limit order at the same or better price.

Question 14

Free-riding

Answer 14

A customer must pay for the purchase of a stock before the customer can be paid for the sale of the same security. If a customer was paid for a sale before paying for the purchase of the same security, it is called “free-riding” and is a violation of Federal reserve rules

Question 15

RR’s with discretionary authority over several customer accounts

Answer 15

Would not be allowed to enter “block” orders for such accounts and later allocate the shares to the discretionary accounts.

**Investment advisors would be allowed to enter “block” orders and then allocate shares to their customer accounts.

Question 16

Clearly Erroneous Trade

Answer 16

Means the terms of a transaction are clearly erroneous when there is an obvious error in any term, such as price, number of shares or at the unit of trading or ID of a security when declaring a transaction.

Question 17

Orders from investment advisers

Answer 17

B/D’s are allowed to accept orders from investment advisers as a “block” order when the order is for more than 1 client of the IA and if the B/D receives specific account names and designations of customers by noon of the next business day from the I/A.

Question 18

Trade confirmations

Answer 18

• Must be sent out to customers at or before the completion of any transaction in any security. Such confirmation must disclose the settlement date of the transaction and disclose if the security is callable. Copies of customer confirmations must be kept for 3 years, the first 2 in a readily accessible location.
  
  • *This requirement does not apply to Direct Participation Programs.
• Confirmations must show the capacity in which the B/D acted.
  
  • The confirmation must also show the commission paid to the B/D if it acted in a broker capacity and
  • The net price to the customer if it acted in a principal capacity
  • If the B/D makes a market in the security, that must be disclosed in the confirmation
• Confirmation will include the date and time of the trade or that the time will be furnished upon written request
• Confirmation does not have to disclose the exchanges that the firm is a member of
• Confirmations must indicate if the security is a callable security
• If a customer asks her RR to send confirmations to her I/A, a written request from the customer is required
  
  • Partner or branch office manager approval is not required
• When trade comparisons between B/D’s do not match, a DK(Don’t know) notice is sent to the confirming B/D.

Question 19

When must customers receive customer account statements?

Answer 19

• Monthly if there has been any activity in the account.

- Quarterly if there has been no activity.

Question 20

What must customer account statements have on them?

Answer 20

Must disclose the current securities positions in the account, any and all money & debit balances, and any activity such as a margin interest, interest, and dividend payments. The statements would not be required to show the original price paid for the securities or year to date income in the account.

Question 21

Discrepancy in customer statement

Answer 21

Member firms must include a statement in the customer’s account statement that the customer must report promptly to the member firm any discrepancies found in the account statement.
-If customers receive their account statements electronically, the disclosures to report any discrepancies on the statement must be on the same screen as the account statement.

Question 22

Customer statement requirements for Direct Participation Programs and Unlisted Real Estate Trusts securities

Answer 22

A member firm is required to include in customer account statements a per share estimated value of a direct participation program or unlisted real estate investment trust security using either of the following methodologies:

- Net Investment: At any time before 150 days following the 2nd anniversary of breaking escrow, the member may include a per share estimated value reflecting the "net investment"
- Appraised Value: At any time, the member may include a per share estimated value reflecting an appraised valuation disclosed in the issuer report, which, in the case of DPPs subject to the investment company act of 1940, shall be consistent with the valuation requirements of the 1940 act and the rules thereunder or, in the case of all other DPPs and Reits, shall be:
         - Based on valuations of the assets and liabilities of the DPP or REIT performed at least annually, by, or with the material assistance or confirmation of, a 3rd party valuation expert or service; and
         - Derived from a methodology that conforms to standard industry practice.

Question 23

Disclosures on a customer statement that provides a “net investment” per share estimated value for a DPP or REIT security

Answer 23

Needs to disclose, prominently and in proximity to disclosure of distributions and the per share estimated value of the following statements:

“Important - part of your distribution includes a return of capital. Any distribution that represents a return of capital reduces the estimated per share value shown on your account statement.”

Question 24

Estimated Annual Income and Estimated Yield

Answer 24

Figures that are used by B/Ds who are attempting to give their clients an idea of what a security can be expected to yield or pay out in the form of dividends or interest. The figures are “estimated”, so there is as certain level of projection involved that does not always accurately reflect current circumstances in relation to securities.

Question 25

Examples of when Estimated annual income and estimated Yield figures may not be accurate

Answer 25

• Securities that only pay dividends or interest when able
• Securities or issues that are currently in default
• Securities nearing maturity
• Securities where special one-time dividends were paid on top of “regular” dividend payments, where the inclusion of the one-time dividend may mislead customers into believing that the estimated annual income for the upcoming year will be higher than during previous “regular” intervals

Question 26

Real estate investment trusts

Answer 26

Companies that manage a portfolio of real estate to earn profits for their shareholders. REITs are generally formed to invest in real estate which produce revenue from rental income. REITS:

• Issue shares of common stock which are publically traded
• Are managed by a board of trustees
• Are not investment companies or Limited Partnerships
• Do not provide investors with write-offs
• Are not classified as derivatives