Quick Answer
Trade confirmations must disclose agent-or-principal capacity on every transaction, plus the commission amount on agency trades. A broker-dealer must disclose any affiliation with the issuer before entering a contract, and disclosure alone never cures an unfair price. This section ties together every disclosure duty from the rest of the unit.
All the compensation methods and rules you have learned converge on one final principle: compensation must be disclosed.
What Must a Trade Confirmation Disclose?
A trade confirmation must be sent to the customer at or before the completion of every transaction. It must disclose:
| Required Disclosure | Details |
|---|---|
| Capacity | Whether the broker-dealer acted as agent or principal |
| Commission amount | For agency transactions, the dollar amount of the commission |
| Other party identity | For agency transactions, the identity of the other party (if requested by the customer) |
For principal transactions, the markup/markdown is embedded in the price and is generally not separately disclosed on the confirmation. However, the fact that the broker-dealer acted in a principal capacity must be disclosed.
Exam Tip: Gotchas
- Trade confirmations must state agent or principal capacity on every transaction. This is a non-negotiable requirement.
When Must a Broker-Dealer Disclose Affiliation With an Issuer?
- 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 | Form ADV Part 2A (Brochure), Item 5 |
What Should You Check on Exam Day?
- Trade confirmations disclose agent or principal capacity on every trade, plus the commission amount on agency trades.
- 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 disclose compensation arrangements in Form ADV Part 2A, Item 5, including any sales compensation like 12b-1 fees or commissions.