Understanding Broker Dealer Operations On The Series 99 Exam
and become an Operations Professional
One of the keys to passing the series 99 exam is to make sure that you have a complete understanding of how broker dealer operations will be tested on the Series 99 Exam. This article which was produced from material contained in our series 99 textbook and will help you master the material so that you pass the series 99 exam.
Understanding Broker Dealer Operations on the Series 99 Exam
Prior to executing a customer’s order, the representative must fill out the appropriate order ticket and present it to the trading department or wire room for execution. All order tickets will include:
- Buy or Sell
- Name of security
- Number of shares or bonds
- Account name and number
- Account type, i.e. cash or margin
- Price and time limits if any
- Solicited or unsolicited
- Discretionary authority exercised or discretionary authority not exercised, if applicable
- Time stamp when entered, executed, changed, or canceled
Executing an Order
An important part of executing a customer’s order lies in the operational procedures that route the order to the markets and handle trade input functions for the order once it has been executed. The brokerage firm assigns specific departments to handle all of the important functions of trade execution and input. The departments are:
- Sales Department
- Order Room / Wire Room
- Purchase and Sales Department
- Margin Department
- Cashiering Department
- Custody Department
- Corporate Action Department
The sales department is where registered representatives interact with the investing public. Representatives work with individual and institutional investors, manage portfolios, make recommendations and accept orders.
Order Room / Wire Room
Once a representative has received an order from a client, the representative must present the order for execution to the order room. The order room will promptly route the order to the appropriate market for execution. Once the order has been executed, the order room will forward a confirmation of the execution to the registered representative and to the purchase and sales department.
Purchase and Sales Department
Once the order has been executed the purchase and sales department inputs the transaction to the customer’s account. The purchase and sales department sometimes called “P & S” are also responsible for mailing confirmations to the customer and for all billing.
All transactions, regardless of the type of account, are sent through the margin department. The margin or credit department calculates the amount of money owed by the customer and the date when the money is due. The margin department will also calculate any amount due to a customer.
The cashiering department handles all receipts and distributions of cash and securities. All securities and payments delivered from clients to the firm are processed by the cashiering department. The cashiering department will also issue checks to customers and, at the request of the margin department, will forward certificates to the transfer agent.
The custody department maintains physical control of customer and firm assets. The custody department sometimes referred as the “cage” safeguards the physical securities in the firm’s possession. Employees in the custody department will create stock records for each security in the firm’s control and will record which securities belong to the firm and which securities belong to customers. The “box count” of physical securities will take place in the custody department and any long or short differences in securities positions will be investigated by members of the custody department.
Corporate Action Department
The corporate action department handles communications between the investors and the issuers of securities. The corporate action department will mail proxies and prospectuses to beneficial owners of securities and handles mergers, reorganizations and name changes relating to issuers. The corporate action department also manages the collection of interest and dividend payments.
Becoming a Stockholder
While some people purchase the shares directly from the corporation when the stock is offered to the public directly, most investors purchase the shares from other investors. These investor-to-investor transactions take place in the secondary market on the exchange or in the over-the-counter market. Although the transaction in many cases only takes seconds to execute, trades actually take several days to fully complete. We will now review the important dates regarding transactions, which are done for a “regular way” settlement.
The trade date is the day when the order is actually executed. Although an order has been placed with a broker, it may not be executed on the same day. There are certain types of orders that may take several days or even longer to execute. A market order, however, will be executed as soon as it is presented to the market, making the trade date the same day the order was entered.
The buyer of a security actually becomes the owner of record on the settlement date. When an investor buys a security from another investor, the selling investor’s name is removed from the security and the buyer’s name recorded as the new owner. Settlement date is three business days after the trade date. This is known as T + 3 for all regular way transactions in common stock, preferred stock, corporate bonds, and municipal bonds. Government bonds and options all settle the next business day following the trade date. Any trade done on a cash basis settles on the same day regardless of the security involved in the transaction. Settlement dates are set by the Uniform Practice Code.
The payment date is the day when the buyer of the security has to have the money to the brokerage firm to pay for the purchase. Payment date for securities under the industry rules is five business days after the trade date, or T + 5. Payment dates are regulated by the Federal Reserve Board under Regulation T of The Securities Exchange Act of 1934. While many brokerage firms require their customers to pay for their purchases sooner than the rules state, the customer has up to five business days to pay for the trade.
If the customer fails to pay for the purchase within the five business days allowed, the customer is in violation of Regulation T. As a result, the brokerage firm will “sell out” and freeze the customer’s account. On the sixth business day following the trade date, the brokerage firm will sell out the securities that the customer failed to pay for. The customer is responsible for any loss that may occur as a result of the “sell out” and the brokerage firm may sell out shares of another security in the investor’s account in order to cover the loss. The brokerage firm will then freeze the customer’s account, which means that the customer must deposit money up front for any purchases they want to make in the next 90 days. After the 90 days have expired, the customer is considered to have reestablished good credit and may then conduct business in the “regular way” and take up to five business days to pay for their trades. A customer may get an additional five business days to pay for the trade by requesting an extension. An extension request must be submitted to the NYSE or FINRA before the expiration of the fifth business day. A broker dealer may ignore a call for cash of $1,000 or less.