Confirmations

Two rules sit on top of each other here. The SEC confirmation rule sets the federal content and the timing. FINRA's customer confirmation rule points at that federal rule and then adds five more items of its own. A trader who knows only one of the two will miss half the disclosures a confirmation carries.

What Does a Confirmation Have to Do, and When?

The customer confirmation rule binds a member. At or before the completion of any transaction in any security effected for or with an account of a customer, the member must give or send that customer written notification, the confirmation, in conformity with the requirements of the SEC confirmation rule.

The SEC confirmation rule sets the same timing and binds any broker or dealer. It makes it unlawful to effect for or with an account of a customer any transaction in, or to induce the purchase or sale by such customer of, any security unless the firm gives or sends that written notification at or before completion of the transaction.

The two differ in reach on their face. The SEC rule covers any security other than U.S. Savings Bonds or municipal securities. FINRA's rule says "any security" and names no carve-out, but the Exchange Act bars FINRA rules on a broker-dealer's municipal securities transactions.

The SEC rule's Preliminary Note carries two clauses, and the second matters more. The first says the section requires broker-dealers to disclose specified information in writing to customers at or before completion of a transaction.

The second says the requirement that particular information be disclosed is not determinative of a broker-dealer's obligation, under the general antifraud provisions of the federal securities laws, to disclose additional information at the time of the customer's investment decision.

Exam Tip: Gotchas

• The federal rule reaches inducement as well as execution. It is unlawful to effect a customer transaction or to induce the customer's purchase or sale without the notification. An answer that describes the trigger as execution alone states only half the rule.
• The two confirmation rules do not have the same product reach on their face. U.S. Savings Bonds and municipal securities sit outside the SEC rule. FINRA's rule names no carve-out, but the Exchange Act bars FINRA rules on municipal securities transactions.

Which Definitions Does the SEC Confirmation Rule Supply?

Four of the rule's definitions decide who and what it reaches.

Two more definitions carry weight on the disclosure side. A national market system (NMS) stock takes the meaning in Regulation NMS definitions, which make an NMS stock any NMS security other than an option.

Payment for order flow is the second, and the rule writes both ends of it. It means any monetary payment, service, property or other benefit that results in remuneration, compensation or consideration to a broker or dealer from any broker or dealer, national securities exchange, registered securities association or exchange member, in return for the routing of customer orders by that broker or dealer to any broker or dealer, national securities exchange, registered securities association or exchange member for execution.

That definition then gives an open example list, "including but not limited to" research, clearance, custody, products or services; reciprocal agreements for the provision of order flow; and adjustment of a broker or dealer's unfavorable trading errors.

The same list continues with offers to participate as underwriter in public offerings; stock loans or shared interest accrued on them; and discounts, rebates or any other reductions of or credits against a fee, expense or other financial obligation of the routing firm that exceed that fee, expense or obligation.

Exam Tip: Gotchas

• The payment for order flow definition names a source list and a destination list. The benefit must come from one of the four named venue types and be paid for routing orders to one of those same four types. Dropping the destination half narrows the term.
• The debt security definition is scoped to three paragraphs. It governs the odd-lot, callable-debt and dollar-price disclosures only. Reading it as the rule's general definition of debt misstates its reach.

When Is a Transaction Completed for Confirmation Timing?

The SEC confirmation rule does not define completion itself. It sends you to the SEC's transaction completion definitions, and that rule gives four moments rather than one. Which applies turns on whether the customer bought or sold, and on whether the customer moved before being asked.

Exam Tip: Gotchas

• A customer who pays early moves the completion moment. The default purchase branch keys on payment. The early-payment branch keys on delivery instead, so a firm that has already been paid has not completed the transaction until the security reaches the account.

What Base Content Must a Confirmation Carry, as Agent or as Principal?

The federal rule enumerates its content paragraph by paragraph, and several paragraphs offer the firm an alternative wording rather than the fact itself.

Exam Tip: Gotchas

• The written-request language is text the confirmation carries on its face. It is a substitute wording the firm prints, not something a customer's request triggers. A confirmation showing neither the time nor that substitute is deficient even though nobody has asked.
• The market-maker flag has a carve-out inside it. A principal must say whether it is a market maker in the security, other than by reason of acting as a block positioner, so block positioning alone does not make the firm a market maker for this disclosure.

What Extra Content Does a Debt Confirmation Carry?

Three further paragraphs apply to debt, and the rule splits them by how the trade was priced.

• Callable debt. On any transaction in a debt security subject to redemption before maturity, a statement that it may be redeemed in whole or in part before maturity, that such a redemption could affect the yield represented, and the fact that additional information is available upon request.
• Priced on a dollar price. Where a debt transaction is effected exclusively on the basis of a dollar price, the dollar price at which it was effected, and the yield to maturity calculated from that dollar price.
• Priced on yield. Where a debt transaction is effected on the basis of yield, the yield at which it was effected, including the percentage amount and its characterization, for example current yield, yield to maturity or yield to call. Where it was effected at yield to call, add the type of call, the call date and the call price.
• Priced on yield, continued. Also give the dollar price calculated from that yield, and, if effected on a basis other than yield to maturity where the yield to maturity is lower than the represented yield, the yield to maturity as well as the represented yield.

When May a Firm Send Periodic Statements Instead of a Confirmation?

The rule lets a firm effect transactions for or with a customer's account without giving or sending the written notification only if all three of its conditions hold.

• First, the transaction type. Among the transactions the rule names are those effected pursuant to a periodic plan or an investment company plan.
• Second, the statement. The firm gives or sends the customer, within five business days after the end of each quarterly period for investment company and periodic plans, a written statement.
• What the statement discloses. Each purchase or redemption effected for or with, and each dividend or distribution credited to or reinvested for, the account during the month; the date of the transaction; and the identity, number and price of any securities purchased or redeemed in each transaction.
• The rest of the statement content. The total number of shares of those securities in the account; any remuneration received or to be received; and that any other required information follows on written request. It may be delivered to some other person the customer designates for distribution to the customer.
• Third, the notice. The customer is provided with prior notification in writing disclosing the intention to send that written information in lieu of an immediate confirmation.

Separately, a firm must give or send information a customer requests under the rule within 5 business days of receiving the request; provided that where the information pertains to a transaction effected more than 30 days before the firm receives the request, the firm has 15 business days.

Exam Tip: Gotchas

• The request-response deadline triples on an older trade. Five business days is the base. A request about a transaction effected more than 30 days earlier gets 15 business days instead.

What Does FINRA's Customer Confirmation Rule Add?

Beyond pointing at the federal content, FINRA's rule adds five items of its own. The first two sit in its disclosure paragraph.

• Settlement date. On any transaction in an NMS stock as Regulation NMS definitions define it, or any security subject to the reporting requirements of FINRA's OTC Reporting Facility rules, other than direct participation programs as the OTC equity definitions define them, the confirmation must show the settlement date of the transaction.
• Callable equity. On any transaction in a callable equity security, the confirmation must disclose that the security is a callable equity security, and that a customer may contact the member for more information concerning the security.

The rule prints that carve-out once, at the end of both branches. The OTC equity definitions define that term as a program providing for flow-through tax consequences regardless of the structure of the legal entity or vehicle for distribution.

That definition then names its own exclusions: real estate investment trusts; tax qualified pension and profit sharing plans and individual retirement plans under the Internal Revenue Code; tax sheltered annuities; and any company, including separate accounts, registered pursuant to the Investment Company Act.

Exam Tip: Gotchas

• Settlement date is a FINRA item, not a federal one. The SEC confirmation rule's content list does not require it, so a confirmation owed under that rule alone need not show it.
• The callable-equity disclosure has two limbs. Saying the security is callable is only the first. The confirmation must also tell the customer it can contact the member for more information.

When Must the Confirmation Show a Mark-Up or Mark-Down?

A confirmation must include the member's mark-up or mark-down, calculated in compliance with the fair prices and commissions rule and expressed as a total dollar amount and as a percentage of the prevailing market price, where both of two conditions hold.

• The trade. The member is effecting a transaction in a principal capacity in a corporate or agency debt security with a non-institutional customer.
• The offset. The member purchased or sold the security in one or more offsetting transactions in an aggregate trading size meeting or exceeding the size of that customer sale or purchase, on the same trading day as the customer transaction.

The offset condition carries a look-through. Where any such offsetting transaction occurs with an affiliate of the member and is not an arms-length transaction, the member must look through to the time and terms of the affiliate's transaction with a third party in the security when deciding whether the condition is met.

Two exceptions remove that mark-up disclosure. The first applies where the customer transaction was executed by a principal trading desk functionally separate from the principal trading desk within the same member that executed the member purchase or member sale.

It has a second limb joined by and. The member must also have had in place policies and procedures reasonably designed to ensure that the functionally separate principal trading desk through which the member purchase or member sale was executed had no knowledge of the customer transaction.

The second applies where the member acquired the security in a fixed-price offering and sold it to non-institutional customers at the fixed offering price on the day the securities were acquired.

A separate requirement does not move with those exceptions, and it applies to all transactions in corporate or agency debt securities with non-institutional customers.

The member must provide on the confirmation a reference, and a hyperlink if the confirmation is electronic, to a FINRA-hosted web page carrying Trade Reporting and Compliance Engine (TRACE) publicly available trading data for the specific security that was traded, in a format FINRA specifies, along with a brief description of the type of information available on that page.

FINRA's guidance provides a narrow URL exception: if a security otherwise subject to the rule had no assigned CUSIP number at the time of the trade, the security-specific URL is not required. This exception does not remove the execution-time disclosure.

The member must also provide the execution time of the customer transaction, expressed to the second.

Exam Tip: Gotchas

• The two mark-up exceptions do not remove the separate debt disclosures. The URL has its own rare no-CUSIP exception; the execution time remains required for covered debt trades with non-institutional customers.
• The functionally separate desk exception has two limbs joined by and. Separation of the desks is not enough. The member must also have had policies and procedures reasonably designed to ensure that the functionally separate desk through which the member purchase or member sale was executed had no knowledge of the customer transaction.

Which Definitions Decide Whether Those Debt Disclosures Apply?

FINRA's rule defines four terms for itself, and they are what decide whether the mark-up disclosure and the TRACE reference are owed at all.

FINRA's fixed-income confirmation guidance limits mark-up and mark-down disclosures to TRACE-eligible securities required to be reported to TRACE and excludes the broader Securitized Product category from that requirement. These limits do not remove the general duty to send a customer confirmation.

The customer account information rule names three categories of institutional account. The first is the account of a bank, savings and loan association, insurance company or registered investment company.

The second is the account of an investment adviser registered either with the SEC under the Investment Advisers Act or with a state securities commission, or any agency or office performing like functions. The third is the account of any other person, whether a natural person, corporation, partnership, trust or otherwise, with total assets of at least $50 million.

Those three categories are also set out in the unit on meeting obligations to customers regarding orders.

Exam Tip: Gotchas

• Non-institutional is defined by negation. The money test is total assets of at least $50 million, so an individual below it is non-institutional. The mark-up figure needs more than that status: a principal capacity trade in a corporate or agency debt security, offset the same trading day in an aggregate size meeting or exceeding the customer's.
• A restricted corporate bond only qualifies if it moved through the institutional resale safe harbor. The definition conditions the term on that sale route, so a restricted security sold another way is outside it.

What Must a When-Issued Confirmation Contain?

When-issued and when-distributed contracts get their own confirmation rule on top of everything above. Each party to the transaction must send a written "when, as and if issued" or "when, as and if distributed" confirmation or comparison in the same form as the Sample Form the when-issued contracts rule sets out, and pursuant to the requirements of the three other Uniform Practice Code rules that paragraph names.

That confirmation or comparison shall, at a minimum, contain three items:

• An adequate description of the security and the plan, if any, under which the security is proposed to be issued or distributed
• Designation of FINRA as the authority which shall rule upon the performance of the contract
• Provision for marking the contract to the market

Exam Tip: Gotchas

• The three-item list is a floor, not a ceiling. The rule says the confirmation shall at a minimum contain them, so a firm adding further terms has not broken it. An answer describing the list as exhaustive misreads the words.
• The when-issued confirmation names FINRA as the decider. Designating FINRA as the authority that rules on performance of the contract is one of the three mandatory items, not an optional courtesy the parties may drop.

What Should You Check on Exam Day?

• Confirm the confirmation went out at or before completion, then work out which of the four completion moments the facts trigger; early payment or early delivery moves it.
• Read a written-request phrase as text printed on the confirmation itself. Its absence is a defect even where the customer never asked for the underlying fact.
• On a debt trade, ask how it was priced. Dollar-price and yield-priced trades take different disclosures.
• On a principal trade in a corporate or agency debt security with a non-institutional customer, confirm the same-trading-day offset in an aggregate trading size meeting or exceeding the customer's before expecting a mark-up figure.
• For covered debt trades, confirm execution time to the second even if a mark-up exception applies. Also check the TRACE reference and electronic hyperlink unless the security had no CUSIP assigned when traded.