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Question

Difficulty: MediumSettlement Dates, Trade Confirmations, and Corporate Actions

Under FINRA and SEC rules, a registered broker-dealer executes a customer transaction in a corporate bond. If the firm acts in an agency capacity when filling this order, which of the following details must be disclosed on the customer's trade confirmation?

  1. The fact that the firm acted as an agent and the exact dollar amount of commission charged on the tradeAnswer
  2. B
    The firm's original inventory cost and the mark-up added to the bond's purchase price
  3. C
    A regular-way settlement date reflecting delivery two business days after the trade date (T+2T+2)
  4. D
    A declaration that the Depository Trust Company (DTC) performed continuous net settlement trade clearing for the order

Answer

The trade confirmation must disclose that the broker-dealer acted in an agency capacity and report the exact amount of commission charged on the transaction.
Under SEC Rule 10b-10 and FINRA confirmation rules, trade confirmations sent at or before completion of a transaction must explicitly state the capacity in which the broker-dealer acted. When a firm acts in an agency (broker) capacity, it acts as a middleman connecting buyers and sellers and must disclose the dollar amount of commission charged to the customer.

Step-by-Step Solution

1
Identify the broker-dealer's capacity in the transaction.
The firm acted in an agency capacity (as a broker/agent), executing the trade on behalf of the client with a third party rather than selling from its own inventory.
Broker-dealer role capacity determines whether the firm charges a commission or a mark-up/mark-down.
2
Determine the required confirmation disclosure for agency trades.
SEC Rule 10b-10 and FINRA rules mandate that when acting as an agent, the broker-dealer must explicitly state its capacity (agent) and disclose the commission charged to the customer.
Transparency in customer charges requires disclosing commission amounts when acting as a broker.

Key Concept

Trade Confirmation Disclosures and Broker-Dealer Capacity Rules
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Topics

Settlement Dates, Trade Confirmations, and Corporate Actions