CHAPTER 19: SETTLEMENT AND REGULATORY REPORTING

Question 1

The Order Audit Trail System (OATS)

Answer 1

Allows FINRA to effectively review market activity that relates to customer orders within a member firm, to conduct surveillance, and to enforce rules.

Question 2

Records the life of an order from receipt, to routing, to modification if applicable, and cancelation or execution.

Answer 2

Order Audit Trail System (OATS)

Question 3

Is done on a daily basis before the market opens and must be within one second of the National Institute of Standards and Technology (NIST) standard.

Answer 3

Time synchronization

Question 4

OATS transmissions must be reported either on the same day that the order was received or the day that such information first becomes available.

OATS reports must be transmitted _, either in a single submission or in multiple electronic submissions.

Answer 4

OATS transmissions must be reported either on the same day that the order was received or the day that such information first becomes available.

OATS reports must be transmitted daily

Question 5

Defined as any oral, written, or electronic instruction to effect a transaction.

Answer 5

An order as defined by OATS.

Question 6

True or False. Neither the TRF nor the ORF execute trades. However, BOTH are reporting facilities.

Answer 6

TRF is not a system that’s used to report transactions on the floor of the NYSE, which is done by the exchange on the Consolidated Tape

The ORF is used report transactions exclusively in OTC securities that don’t trade on Nasdaq or the other exchange markets.

Both the OTC Reporting Facility and the Trade Reporting Facility make use of the Nasdaq ACT Technology Platform. The two separate and distinct reporting services contract with Nasdaq for the use of its platform. Open hours for both the TRF and the ORF are from 8:00 a.m. to 8:00 p.m.

Question 7

Transactions in
OTC equity securities are reported to the

Answer 7

OTC Reporting Facility (ORF)

Question 8

Transactions of Nasdaq-listed and other exchange-listed securities (NYSE or NYSE American – formerly AMEX) that occur over-the-counter are reported to the

Answer 8

FINRA/Nasdaq Trade Reporting Facility (TRF)

Question 9

is a system that facilitates the reporting and clearing of Nasdaq and OTC transactions by allowing order-entry and market-making firms to enter priced trades.

• This information is then used to report, match, and clear transactions.

Answer 9

Nasdaq’s Automated Confirmation Transaction Technology Platform

Question 10

is a high-speed, electronic system that reports the latest price and volume data on sales of exchange-listed stocks.

Answer 10

Consolidated Tape

The data reflected on the consolidated tape are generated by various market centers, including all National Securities Exchanges and Alternative Trading Systems, and broker-dealers trading off exchanges. Websites that provide updated market information and financial news programs on television often include trade reports from the consolidated tape.

Question 11

was created to provide greater transparency in the corporate bond market.

• it’s not a quotation or an execution system.
• a system that members must use to report transactions in eligible, fixed-income securities
  and the system then disseminates continuous bond sale information.

Answer 11

Trade Reporting and Compliance Engine (TRACE)

TRACE-eligible securities are defined as depository-eligible, U.S. dollar-denominated debt securities such as:
- Investment- and non-investment-grade securities
- Split-rated
- SEC registered debt securities of corporations that are in the U.S. or foreign countries
- Securities issued under the Securities Act of 1933 and purchased or sold according to Rule 144A
- Debt securities issued or guaranteed by either a U.S. government agency or a governmentsponsored enterprise (GSE)
- U.S. Treasury securities

Question 12

_ securities are those that are considered investment-grade by one nationally recognized statistical ratings organization (NRSRO) and non-investment-grade by another NRSRO. Standard and Poor’s, Moody’s, and Fitch are examples of NRSROs.

Answer 12

Split-rated

Securities that are not required to be reported to TRACE include:
- Money-market instruments (with maturities of less than one year)
- Securities issued by foreign governments
- Development bank debt
- Municipal securities
- Debt securities in physical form
- Repurchase agreements (repos)

Question 13

is operated by the MSRB and is open each business day from 7:30 a.m. until 6:30 p.m. Eastern Time.

• Transactions that are reported to the system will be made available to registered securities associations and to other appropriate regulatory agencies in order to assist in compliance and enforcement of MSRB rules.

Answer 13

Real-Time Transaction Reporting System (RTRS) (Rule G-14)

If a broker or dealer uses another agent for reporting purposes, the responsibility for timely and accurate reporting still lies with the firm that executed the trade. Similarly, the reporting dealer that acts as a submitter for another dealer is responsible for ensuring that transaction reporting requirements are met for the items that are under the submitter’s control.

Question 14

When the report is made, the submitter must include the time of the trade, whether it’s a purchase or sale, and the quantity and price so that the dissemination of information can be made on a timely basis. The following transactions are not required to be reported to Real-Time Transaction Reporting System (RTRS):

Answer 14

• Transactions in securities without CUSIP numbers
• Transactions in municipal fund securities
• Inter-dealer transactions that are not eligible for comparison in a clearing agency
  registered with the Commission.

Question 15

the MSRB has established _ as the primary market disclosure service for official statements, other related primary market documents, and market information.

Answer 15

EMMA

The EMMA website can receive documents from issuers and underwriters as well as transaction information from the MSRB’s Real-Time Transaction Reporting System (RTRS).EMMA provides free public access to official statements, trade data, credit ratings, and educational materials and presents it in a manner that’s specifically tailored for retail, non-professional investors who may not be experts in financial or investing matters.

Question 16

DTCC Settlement Rules for settlement of contracts between member firms are established under FINRA’s _.

Answer 16

Uniform Practice Code

Question 17

the _ simply journals the movement of security positions and monies between each clearing firm’s account. This process is referred to as _ settlement.

Answer 17

Depository Trust Clearing Corporation (DTCC)

referred to as Book-Entry Settlement

Question 18

True or False. If a firm intends to use book-entry settlement, all transactions in depository-eligible securities must be settled through a registered securities depository, such as the DTCC or the National Securities Clearing Corporation (NSCC)

Answer 18

True

For locked in (affirmed) stock trades, each firm is actually settling the position with the NSCC—the DTCC subsidiary.

Depository-eligible securities are those that may be deposited at the clearing agency for which ownership can
be transferred through bookkeeping entries rather than through physical delivery of certificates. Cash transfers
are also processed through book entries by the clearing agency, rather than through a bank routing process.

Question 19

rather than receiving physical delivery, _ is linked with DTC and electronically transfers assets (Book-Entry) to
and from the transfer agent and broker dealer. The investor receives periodic statements with dividend or
interest payments and other company documents are mailed directly to the investor.

Answer 19

Direct Registration System (DRS)

Question 20

For corporate securities (stocks and bonds) and municipal securities, the settlement for regular-way transactions is _ business days after the trade date. For Treasury securities and options transactions, settlement
occurs _ business day after the trade date.

Answer 20

For corporate securities (stocks and bonds) and municipal securities (covered under MSRB Rule G-15), the settlement for regular-way transactions is two business days after the trade date (i.e., T + 2). For Treasury securities and options transactions, settlement occurs one business day after the trade date (i.e., T + 1).

Question 21

A _ is completed on the same day as the trade. This option, which requires the agreement of both parties, can be used for any type of security.

Answer 21

A cash settlement is completed on the same day as the trade. This option, which
requires the agreement of both parties, can be used for any type of security.

Question 22

Often, a _ option is used when the seller needs additional time because
of legal requirements, such as the removal of a legend from a stock certificate.

Answer 22

Often, a seller’s option is used when the seller needs additional time because
of legal requirements, such as the removal of a legend from a stock certificate.

Negotiated settlement, but not earlier than three business days after
the trade (i.e., additional time is required)

Question 23

On certain occasions securities are authorized, but not yet issued (e.g., new issues,
spin-offs, etc.) These transactions will settle when the security becomes available for delivery.

Answer 23

Known as When-Issued

Settlement date is determined by the National Uniform Practice Committee

Question 24

Regulation Trequires that customer payment for purchases in cash and margin accounts be made promptly, which typically means by no later than _ business days following regular-way settlement

Answer 24

2 business days following regular-way settlement
(T+4)

Remember, trade settlement refers to the timing of payment and delivery between member firms and is
governed by FINRA’s Uniform Practice Code. The date on which customer payment must be made (Reg.
T payment) is set by the Federal Reserve Board (FRB) and this authority was established under the
Securities Exchange Act of 1934.

Question 25

On stock transactions, certificates must be delivered in multiples of _ shares.

We’re speaking of Paper Certificates NOT book-entry

Answer 25

On stock transactions, certificates must be delivered in multiples of 100 shares.

Question 26

Registered bonds are good delivery if they’re in $_ units or multiples thereof.

We’re speaking of Paper Certificates NOT book-entry

Answer 26

Registered bonds are good delivery if they’re in $1,000 units or multiples thereof.

Additionally, amounts of $100 or multiples aggregating to $1,000 are acceptable, but with no denomination larger than $100,000.

Question 27

True or False. Securities that carry a restrictive legend are not considered to be in good delivery form.

Answer 27

True

Generally, these certificates must have the legend removed, which is the responsibility of the
selling firm. Only a transfer agent has the authority to remove a restrictive legend.

Question 28

True or False. Only a transfer agent has the authority to remove a restrictive legend.

Answer 28

True

However, the transfer agent will not remove the legend unless the client has obtained the consent of the
issuer in the form of an opinion letter that’s created by the issuer’s counsel. The process of cleaning
the certificate (removing the legend) is typically accomplished under Rule 144.

Question 29

DVP/RVP Accounts

Answer 29

At times, a client may use a bank to centralize its bookkeeping when trades are
executed through various firms. The client must provide the identity of the third-party bank. Thereafter, the
brokerage firm is instructed to provide the bank with trade details. The bank will either pay the broker-dealer
for client purchases or send securities to the broker-dealer for client sales. Delivery and payment can be made
as late as 35 days after the trade date and delivery is generally made in book-entry form.

Note

Question 30

Regardless of the account type, a customer’s death requires an RR to follow certain guidelines. If securities or other instruments were registered in the name of the deceased person, they will usually be transferred by the executor or administrator of the estate to the name of the estate. Certain documents are required by the transfer agent before the change may be made. The specific documents will depend on state law, which governs the way a deceased person’s affairs are handled.

These documents could include any or all of the following:

Answer 30

• Notarized copy of the death certificate
• Copy of the will or court appointment (letters testamentary)
• Affidavit of domicile
• State inheritance tax waiver

Remember, if a customer who had granted a power of attorney to another individual subsequently
dies, the power of attorney is automatically terminated.

At times, registered representatives are asked to provide the executor with information regarding the
value of securities for estate tax purposes. If this is the case, the securities are generally valued as of
the date of death or as of an alternative date that’s six months after the date of death.

Question 31

Common stock doesn’t pay a specific annual dividend; instead, the board of directors decides what dividends (if any) the company is able to pay to its common shareholders. Dividends are paid on a per-share basis. As it relates to dividends, there are three important dates that are set by the paying corporation:

Answer 31

▪ Declaration date: the date on which the dividend is authorized. If a company’s board declares a $.10 dividend, its stockholders will receive $.10 for each share that they own.
▪ Payment date: the date on which the declared dividend will be paid. Dividends are usually paid quarterly and are taxable in the year in which they’re paid/received.
▪ Record date: the date on which an investor must officially own the stock to be entitled to receive the dividend.

For example, on December 1, the board of Widgets Inc. declares a dividend of $1 per share that’s payable on January 3 to shareholders of record on December 15. Any person who is on Widget Corporation’s records as a shareholder as of December 15 will receive the $1-per-share dividend on January 3.

Question 32

for a cash settlement trade, the ex-dividend date is

Answer 32

the business day following the record date

Remember, Cash Settlement Trades settle same-day

Question 33

Similar to ex-dividend, for the buyer of stock with a rights offering attached to be entitled to
participate in the rights offering, the trade must have settled on or before the record date.

Answer 33

Note

Question 34

Equity options are typically issued with expirations of up to

Answer 34

Equity options are typically issued with expirations of up to nine months

All equity options expire at 11:59 p.m. Eastern Time (ET), on the third Friday of the expiration month. An expiring option will cease trading at 4:00 p.m. ET on the same business day that it expires (Friday). Although the option doesn’t actually expire until 11:59 p.m., a buyer must express her intent to exercise the option by 5:30 p.m. ET on the same business day that it expires (also Friday).

Question 35

When the OCC receives exercise instructions from the firm that represents the purchaser, it will randomly assign the exercise notice to a broker-dealer whose account shows a short option position that’s identical to the long option position being exercised.

Answer 35

If a broker-dealer receives an assignment notice, it must select a client to whom the notice will be assigned. There are three methods by which this selection may be accomplished—(1) using random selection, (2) using first-in, first-out (FIFO), or (3) using any other method that’s deemed to be fair and equitable. Every member firm must notify its clients as to which method is used and how it will be implemented.

Exercising Options Contracts

An option that has not been exercised by the OCC’s cutoff time will expire worthless. However, at expiration,
an option that’s in-the-money by at least $.01 will be automatically exercised by the OCC.

Question 36

Assignment Due to Exercise

Remember, equity option trades settle on the next business day following
the trade date, or T + 1. On the other hand, since the exercise of an option involves the purchase and sale of
the underlying stock, settlement of an exercised option occurs in two business days (T + 2).

Answer 36

With index options, remember that there’s no physical delivery of shares at the time of exercise. Instead, the writer of the option pays the buyer of the option an amount of cash that’s equal to the difference between the contract’s strike price and index value (the in-the-money amount). This cash amount is due one business day after the option is exercised.

Question 37

Copies of customer confirmations must be retained for _ years

Answer 37

3 years