Quick Answer
A written confirmation must go out for every customer transaction no later than settlement date. It discloses whether the firm acted as agent (commission) or principal (markup/markdown), never both, plus trade and settlement dates, security identity, quantity, price, net amount, and accrued interest on debt.
The SEC's trade-confirmation rule and FINRA's customer-confirmation rule set the requirements for what a confirmation must contain and when it must be delivered. Municipal securities transactions follow a parallel MSRB confirmation rule with largely the same core content requirements, covered later in this unit.
What Must Happen After Every Transaction?
- Broker-dealers must send a written confirmation to the customer at or before the completion of a transaction (settlement date)
- A confirmation is required for every transaction in every security executed for or with a customer account
- FINRA's customer-confirmation rule incorporates and supplements the SEC's confirmation requirements
What Information Must Appear on a Confirmation?
Every trade confirmation must include these components:
| Component | Details |
|---|---|
| Trade date | The date the transaction was executed |
| Settlement date | When payment or delivery is due |
| Security identity | Name, CUSIP, or other identifier |
| Quantity | Number of shares or units transacted |
| Price | Per-share or per-unit price |
| Capacity | Whether the firm acted as agent or principal |
| Commission (agent trades) | Dollar amount of commission charged |
| Markup/markdown (principal trades) | Required for corporate and agency debt with non-institutional customers when offsetting trade occurred same day, shown as both a dollar amount and a percentage of the prevailing market price |
| Net amount | Total dollar amount of the transaction |
| Accrued interest (debt securities) | Interest accrued since the last payment date |
| Execution time and TRACE reference (covered corporate/agency debt) | Time of execution shown to the second, plus the TRACE reference information the rule requires |
Exam Tip: Gotchas
- Accrued interest appears on debt confirmations, not equity. If a question asks what must appear on a stock trade confirmation, accrued interest is not one of the answers.
- "Net amount" is the bottom line the customer pays or receives. It includes price, commission or markup, and accrued interest (if applicable).
Agent or Principal: Which Capacity Disclosure Applies?
The capacity disclosure is one of the most frequently tested confirmation topics:
- Agent (broker): The firm matches a buyer and seller and charges a commission. The dollar amount must appear on the confirmation.
- Principal (dealer): The firm trades from its own inventory. It must disclose the markup or markdown on corporate and agency debt for non-institutional customers when the firm traded the same security on the same day (riskless principal transactions).
- A firm cannot act as both agent and principal in the same transaction
Think of it this way: An agent is a matchmaker who connects buyer and seller, earning a commission for the introduction. A principal is a dealer buying from or selling out of its own shelf. You cannot be both the matchmaker and the seller in the same deal.
Exam Tip: Gotchas
- If a question says the firm "charged a commission AND a markup" on the same transaction, that is a violation. A firm cannot act as both agent and principal simultaneously. Commission = agent. Markup = principal.
- Markup disclosure is not always required on principal trades. It only applies to corporate and agency debt, for non-institutional customers, when the firm executed an offsetting trade the same day.
What If the Security Is Callable?
- If the security is callable, the confirmation must identify it as such
- Must indicate the customer may contact the firm for additional call information
When Must the Confirmation Go Out?
- Confirmations must be sent no later than the settlement date
- For mutual fund purchases, prospectus delivery may substitute for certain confirmation elements
- Penny stock transactions require additional confirmation disclosures: the inside bid/ask and share count, broker-dealer compensation, and associated-person compensation. (A separate rule governs the periodic penny-stock account statement, not the confirmation, covered in the next lesson)
Exam Tip: Gotchas
- The deadline is settlement date, not trade date. A confirmation sent the day after execution but before settlement is still on time.
- Mutual fund prospectus delivery can substitute for some confirmation details, but it does not eliminate the requirement entirely.
What Should You Check on Exam Day?
- Confirmation timing: at or before settlement date, for every transaction, every security
- Capacity: agent discloses commission; principal discloses markup/markdown (corporate/agency debt, non-institutional customer, same-day offsetting trade only), shown as both a dollar amount and a percentage of prevailing market price; never both on one transaction
- Covered corporate/agency debt confirmations also show execution time to the second and the required TRACE reference information
- Penny stock confirmations name three specific disclosures: inside bid/ask and share count, broker-dealer compensation, and associated-person compensation
- Accrued interest and markup/markdown appear on debt confirmations; accrued interest never appears on an equity confirmation
- Callable securities must be flagged as callable, with a note that the customer may request more call detail
- Mutual fund prospectus delivery narrows, but does not replace, the confirmation requirement