Quick Answer
A broker-dealer verifies custody positions by physically counting certificates, comparing those results with its stock record and outside custody records, and resolving differences. A box count alone is not enough: the firm must reconcile positions, record unresolved differences by security and amount, and follow up promptly.
Physical custody records are useful only when they agree with the firm's position records and with the records of organizations holding securities for the firm.
Periodic Physical Counts
- Box count: A periodic physical count of securities certificates held in a broker-dealer's custody.
- The securities-count rule requires periodic counts, examinations, verifications, comparisons, and record entries.
- Reconciliation: A carrying or clearing member compares positions held at clearing corporations, other organizations, or custodians with its books and records, then promptly reports and resolves differences.
Count certificates → compare with internal and outside records → identify differences → report and resolve them promptly
Difference Accounts
- A difference account records unresolved differences following a securities count.
- Each difference is recorded by:
- Security
- Quantity or principal amount
- Long or short position
- Count date
Stock Records and 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 | Purpose |
|---|---|---|
| Box count | Physical certificates | Confirms what is physically in custody. |
| Stock-record verification | Stock record with certificates, depository positions, and outside records | Identifies discrepancies between recorded and held positions. |
| Reconciliation | Firm books with clearing corporation, organization, or custodian records | Reports and resolves differences promptly. |
Exam Tip: Gotchas
- A box count is not complete merely because certificates were counted. The result must be matched with the firm's records.
- A discrepancy requires follow-up. Unresolved items belong in a difference account with the security, amount, position, and count date recorded.