Quick Answer
A negotiable check is a written, signed order directing a bank to pay a fixed amount on demand to a named payee or bearer. Firms issue checks through controlled, traceable procedures and maintain check blotters. They must avoid check kiting, unauthorized alterations, and extended check holds. Both members must expedite and coordinate authorized account asset transfers.
Check handling combines basic payment terminology with operational controls. The firm needs to know who directs payment, who pays, who receives it, and whether every issued check can be traced.
Who Are the Parties to a Negotiable Check?
- Negotiable check: A written and signed order directing a bank to pay a fixed amount of money on demand to a named payee or bearer.
| Party | Role |
|---|---|
| Drawer | Writes the check. |
| Drawee | Bank directed to pay the check. |
| Payee | Receives payment. |
Memory Aid:
Picture the check on a three-stop trip: the drawer draws it, the drawee bank pays it, and the payee gets paid.
Exam Tip: Gotchas
- The drawee is the paying bank. The payee receives payment.
How Does the Firm Control and Record Check Issuance?
- Controlled check issuance: Issue checks under firm procedures so each payment is authorized and traceable.
- Check blotter: A record of issued checks used for tracking and reconciliation.
Authorized issuance -> check blotter record -> tracking and reconciliation.
Exam Tip: Gotchas
- A check blotter supports two control functions. It supports both tracking and reconciliation. It is the record of issued checks, not merely a record of checks awaiting payment.
Which Check and Transfer Practices Are Prohibited?
- Check kiting: Improper use of timing differences between financial institutions to create the appearance of available funds.
- Altering checks: Changing a check after issuance without proper authorization.
- Extended check holds: Retaining a customer check without processing it.
- Extended transfer holds: Both members must expedite and coordinate authorized account asset transfers. Failing to process one, or holding it for an extended period, is prohibited.
Exam Tip: Gotchas
- Kiting creates apparent funds, not actual funds. It relies on timing differences between financial institutions.
- An extended check hold is not a neutral delay. The firm must process a customer check without unnecessary delay.
- Authorized transfers require both members to act. Both members must expedite and coordinate authorized account asset transfers.
What Should You Check on Exam Day?
- Identify the drawer, drawee bank, and payee correctly.
- Require controlled, traceable check issuance and a check blotter.
- Recognize kiting and unauthorized alteration as prohibited conduct.
- Recognize an extended hold of a customer check as a prohibited practice.
- Both members must expedite and coordinate authorized account asset transfers.