Account Designations and Pre-Time Stamping

Two small rules with sharp edges. One fixes when the account has to be named. The other says pre-time stamping order tickets in connection with block positioning is contrary to the recordkeeping rule.

When Must the Account Designation Go on the Order?

Before any customer order is executed, there must be placed upon the order form or other similar record of the member, for each transaction, the name or designation of the account or accounts for which the order is to be executed.

That is a pre-execution duty and it runs transaction by transaction. It is not satisfied by identifying the account after the fill.

Exam Tip: Gotchas

• The duty attaches before execution, not before entry or before settlement. The name or designation must be on the order form or other similar record by the time the order is executed.
• The rule allows a designation as well as a name. An account number or other designation satisfies it, and the record can name more than one account where the order is for more than one.

Who May Approve a Change in Account Name or Designation?

No change in the account name or names, including related accounts, or designation or designations, including error accounts, shall be made unless the change has been authorized by a qualified and registered principal designated by the member.

That person carries two duties before approving.

• The person must, prior to giving approval of the account designation change, be personally informed of the essential facts relative to the change.
• The person must indicate approval of the change in writing on the order or other similar record of the member.

Two further requirements complete the rule.

• The essential facts relied upon by the person approving the change must be documented in writing and preserved for not less than three years, the first two in an easily accessible place, the period and accessibility the records retention rule sets for its three-year records.
• With respect to any change that takes place prior to execution of the trade, the required approval and documentation must take place prior to execution.

Exam Tip: Gotchas

• Related accounts and error accounts are named in the rule. A move into an error account is a change in designation and needs the same principal approval as any other change.
• Approval and documentation are two separate acts. The principal approves in writing on the order or similar record, and the essential facts relied upon are separately documented in writing and preserved.

When May an Investment Adviser Allocate After the Trade?

Supplementary material allows a narrow exception. Members may accept orders from investment advisers and allow those advisers to make allocations on their orders for the customers on whose behalf the advisers submit the orders, provided that members receive specific account designations or customer names from the advisers by no later than the end of the day on the trade date.

The exception carries several limits.

• It applies only where there is more than one customer for any particular order.
• It applies to outside investment advisers, and to associated persons of a member who provide investment advisory services on behalf of a member acting as an investment adviser.
• In either instance, the investment adviser must be one who is registered under the Investment Advisers Act, or who, but for that Act's registration exemptions or its division of state and federal registration responsibility, would be required to register under it.
• It does not apply to accounts handled by individual registered representatives of members who otherwise exercise discretionary authority over accounts under the discretionary accounts rule.

Nothing in the rule or its supplementary material may be construed as allowing a member knowingly to facilitate the allocation of orders from investment advisers in a manner other than in compliance with both of two things.

• The investment adviser's intent at the time of trade execution to allocate shares on a percentage basis to the participating accounts.
• The investment adviser's fiduciary duty with respect to allocations for those participating accounts, including but not limited to allocations based on the performance of a transaction between the time of execution and the time of allocation.

Exam Tip: Gotchas

• The end of the trade date is the outer limit, not a target. The member must receive specific account designations or customer names no later than the end of the day on the trade date.
• The anti-abuse condition is conjunctive. A member may not knowingly facilitate an allocation that fails either the adviser's percentage-allocation intent at execution or the adviser's fiduciary duty, and performance-based allocation after execution is named as an example.

What Is Pre-Time Stamping and Why Is It a Violation?

The pre-time stamping prohibition is one sentence: pre-time stamping of order tickets in connection with block positioning is contrary to the general recordkeeping rule.

The prohibited act is stamping the ticket before the event the stamp records. A time stamp is a record of when something happened, so a stamp applied in advance records something that has not happened yet and makes the firm's books inaccurate.

Exam Tip: Gotchas

• The prohibition is expressed through the recordkeeping rule. The rule's one sentence declares the practice contrary to the general recordkeeping requirement.
• The named context is block positioning. That is the setting the rule addresses, and the reason is the same one that makes any advance stamp a false record.

What Should You Check on Exam Day?

• Confirm the account name or designation was on the order form or other similar record before execution, for each transaction.
• On a change, look for a qualified and registered principal designated by the member, personally informed of the essential facts, approving in writing on the order or similar record.
• Check the essential facts relied upon were separately documented in writing and preserved.
• For an adviser allocation, confirm more than one customer, an adviser registered or required to register, and designations received by the end of the trade date.
• Treat pre-time stamping of order tickets in connection with block positioning as contrary to the recordkeeping rule.