Quick Answer
Transactions covered by the federal confirmation rule require agent-or-principal capacity disclosure. Agency confirmations also show the commission unless a written agreement sets non-transaction-based pay. Issuer affiliation must be disclosed before the contract, and disclosure alone never cures an unfair price.
All the compensation methods and rules you have learned converge on one final principle: compensation must be disclosed.
What Must a Trade Confirmation Disclose?
For transactions covered by the Securities Exchange Act's confirmation rule, the confirmation is due at or before completion. That rule excludes U.S. Savings Bonds and municipal securities; municipal confirmations have separate requirements. A covered confirmation must disclose:
| Required Disclosure | Details |
|---|---|
| Capacity | Whether the broker-dealer acted as agent or principal |
| Commission amount | For agency transactions, the amount of the commission or other remuneration the customer pays, unless that pay is set by a written agreement with the customer that is not transaction-based |
| Other party identity | For agency transactions, the name of the other party or a statement that the name will be furnished on the customer's written request |
For principal transactions, a markup is the amount the customer pays above the prevailing market price; a markdown reduces the price paid to a selling customer below that market price. These amounts are embedded in the principal price, but that does not eliminate separate confirmation disclosures where required. Certain principal stock transactions require disclosure of a price differential. The firm's principal capacity must also be disclosed.
Exam Tip: Gotchas
- A confirmation for a transaction covered by the federal rule must state agent or principal capacity. Do not apply that rule's scope to excluded products.
- The commission line has one exception. If the customer pays under a written agreement that is not transaction-based, the confirmation need not show that remuneration. A commission charged per trade is always shown.
- A confirmation never shows the broker-dealer's total profit across its business. It reports facts about this customer's transaction only.
When Must a Broker-Dealer Disclose Affiliation With an Issuer?
- Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, a broker-dealer must disclose to the customer, before entering into any contract, that it is controlled by, controlling, affiliated with, or under common control with the issuer of any security being transacted
- If the disclosure is not initially made in writing, written disclosure must follow at or before the completion of the transaction
Why this matters: If a broker-dealer is selling securities issued by its parent company, the customer needs to know about that relationship before agreeing to the transaction.
Exam Tip: Gotchas
- Affiliation disclosure must come before entering the contract, not after. Written follow-up is allowed, but the initial disclosure must precede the agreement.
Does Disclosure Ever Cure an Unfair Price?
This is the unifying theme of compensation regulation:
- Disclosure of compensation is required across all securities professionals: broker-dealers, agents, investment advisers, and IARs
- However, disclosure alone does not cure unfair pricing
- A commission or markup that is excessive remains a violation even if fully disclosed in advance
Exam Tip: Gotchas
This principle appears repeatedly on the exam. A broker-dealer cannot defend an 8% markup by saying "but I told the customer about it." Disclosure is necessary but not sufficient. The pricing must also be fair and reasonable.
Who Discloses What?
| Professional | Key Compensation Disclosures | Where/When |
|---|---|---|
| Broker-Dealer | Agent/principal capacity, commission amount, affiliations | Trade confirmation; before contract (affiliations) |
| Agent | Cannot split commissions with unregistered persons | Ongoing compliance obligation |
| Investment Adviser | How the adviser is compensated; whether it receives compensation from sources other than the client; whether the adviser or a related person receives sales compensation (such as 12b-1 fees or commissions) for recommending securities | In writing, to the client |
What Should You Check on Exam Day?
- Covered confirmations disclose agent or principal capacity and, on agency trades, the commission amount, unless a written agreement sets non-transaction-based pay. Municipal securities use separate confirmation requirements.
- Affiliation with the issuer must be disclosed before the contract; written follow-up is allowed only if the initial disclosure wasn't already in writing.
- Disclosure never cures unfair pricing. An excessive commission or markup is still a violation even if the customer knew about it in advance.
- Investment advisers must disclose to the client any compensation from non-client sources and any sales compensation, such as 12b-1 fees, that the adviser or a related person receives.