Quick Answer
A broker-dealer counts its securities, including any held under a repurchase or reverse repurchase agreement, and verifies anything out of its physical possession. Unresolved differences go into a difference account. People with no direct responsibility for the securities or the records must make or supervise the count.
Comparing physical custody records with the firm's position records and the records of organizations holding securities for the firm verifies positions and identifies differences. Differences found during outside-record reconciliation require prompt resolution by both organizations.
What Must a Securities Count Cover?
A broker-dealer subject to the count rule must:
- physically examine and count all securities it holds, including securities that are the subject of a repurchase or reverse repurchase agreement;
- account for securities not in its physical possession, by comparing the supporting detail records with the ledger control accounts;
- verify securities out of its physical possession;
- compare the result with its records; and
- record each unresolved difference in a security count difference account.
The count must be made or supervised by people whose regular duties do not give them direct responsibility for caring for the securities or for making or keeping the records being tested.
The points to know are what the count must cover and who may run it.
Exam Tip: Gotchas
- The counter must be independent of the thing counted. A person who cares for the securities, or who makes or keeps those records, may not make or supervise the count.
What Must Follow a Physical Securities Count?
- Box count: A periodic physical count of securities certificates held in a broker-dealer's custody.
- Difference-account entry: Unresolved differences are entered in a difference account.
Exam Tip: Gotchas
- Prompt joint resolution applies to outside-record differences. Both organizations promptly resolve them.
How Do Stock Records Support Verification?
- Stock record: The broker-dealer's record of securities positions, used to identify securities held and the customers entitled to them.
- Verification: Comparing the stock record with physical certificates, depository positions, and custodian or clearing records to identify discrepancies.
| Step | What is compared or recorded | Required timing and follow-up |
|---|---|---|
| Securities count | All securities held, plus securities out of the firm's possession | By people with no direct responsibility for the securities or the records. |
| Box count | Physical certificates | Confirms what is physically in custody. |
| Verification of positions away | Securities out of the firm's physical possession | Verified as part of the count. |
| Stock-record verification | Stock record with certificates, depository positions, and outside records | Identifies discrepancies between recorded and held positions. |
| Difference-account entry | Each unresolved count difference | Recorded after the count. |
Exam Tip: Gotchas
- A box count is not complete merely because certificates were counted. The result must be matched with the firm's records.
What Should You Check on Exam Day?
- Verify positions that are out of the firm's physical possession.
- Assign the count to people who do not care for the securities and do not make or keep the records being tested.
- Keep physical-count follow-up separate from outside-record reconciliation.
- Confirm that both organizations promptly resolve outside-record differences.