Series 7 Study Guide Navigation
- Series 7 Study Guide Home
- 1.1 Contact with potential and current customers, marketing material development, approval, and distribution
- 1.2 Describing investment products to potential and current customers
- 2.1 Tells potential customers about the account types available and discloses their restrictions
- 2.2 Secures and updates information about customers along with relevant information and documents
- 2.3 Gather customer investment profile information
- 2.4 Get necessary supervisory approval to open accounts and make account changes
- 3.1 Passing on all investment strategy information to customers
- 3.2 Analyze customer’s portfolio of investments as well as product options to determine suitability
- 3.3 Disclose to clients characteristics and risks of investment products
- 3.4 Communications with customers
- 4.1 Providing current quotes for investors
- 4.2 Processing and confirming customers’ transactions as per regulations
- 4.3 Notifies the correct supervisor, helps with solving discrepancies, disputes, errors, and all complaints
- 4.4 Dealing with margin issues
Processing and confirming customers’ transactions according to the requirements as set out by regulations. Provides customers with details of delivery obligations as well as settlement procedures
The securities industry does its utmost to protect investors.
To help accomplish this, there are numerous regulatory procedures that govern the trading of securities, although regulators do understand that there is inherent risk when it comes to the investment of money in securities.
That means that the regulations that are put in place simply cannot remove all risks.
They do, however, ensure that those that want to invest receive the necessary information about the risks associated before they do so.
In this section, we cover the processes that are followed when entering the world of securities and investing.
We begin with the order ticket.
The order ticket is a critical document and there’s plenty of information that can be found on one.
Let’s find out more about it.
What’s an order memorandum?
Well, essentially it’s what the SEC calls an order ticket.
These used to be manual but as technology has progressed, order memorandums are available electronically as well.
When a customer enters an order, the order ticket is prepared by the registered representative.
From there, it gets passed on to the wire room or trading desk.
From there, it’s moved onto the relevant market where the order will be executed on behalf of the customer.
After the execution has taken place, it must be approved by a registered principal.
Just to expand on that a little.
FINRA expects that by the end of the trading day, the registered principal would have approved the order.
What does the approval process involve?
Well, the most important aspect of approval is that everything is thoroughly checked so any errors can be spotted.
This is critical when trading in high-risk securities and with accounts where discretionary trades are made by registered representatives.
Other than errors, the other thing that needs to be checked is suitability in terms of whether the trades being made are the right ones for the investor making them.
Of course, errors are easily missed.
There are two particular areas where they do occur:
- Miscommunication of the order between the customer and the broker
- Miscommunication of the order between the broker and the wire operator
Often, this is due to the information on the ticket being inaccurate.
A common mistake for example is when instead of a buying limit order being entered as per the customer instruction, instead a buy stop order is entered.
Another example is when a market order is entered as a limit order instead.
In some cases, a customer can have more than one account and the error comes when the wrong account number is associated with an order.
That’s why filling in the information on an order ticket should be done with care.
That information is:
- The account number of the customer
- The identification number of the registered representative
- If the order is unsolicited or solicited
- If the order is carried out with discretionary authority
- The security description
- The total number of bonds or shares that will be traded as a result of the order
- The action (is the order to buy, sell, etc)
- Options (buy, write, opening, closing, covered or uncovered)
- If there are any order restrictions
- If there are any price qualifications (Market, day order, GTC)
- The type of account used (cash or margin)
- Details of when the order was received, for example, time of entry the execution price
Before any order ticket is executed, either the account number or name must be on it.
For Series 7 exam purposes, two things should never appear on an order ticket:
- The name of the client and their address
- The securities’ current market price
Should a mistake have been made on an order, it can only be amended with the approval of either the branch manager or the principal and the facts that need to be changed must be put in writing.
These changes must be kept as records for a period of three years.
When a trade is executed, the registered representative will receive a report.
This is known as a report of execution.
The first task once they have received this is to check it to ensure that the trade was put through as the customer requested.
This is done easily enough by checking the report against the order ticket.
The execution can be reported to the customer should everything check out fine.
If a mistake is found, it must be reported immediately.
To do this, the representative will need to contact either the principal or the branch office manager.
In cases where a customer received the details of a trade and this has been reported to them incorrectly, the trade itself is what remains binding on the customer should that mistake have been made in the reporting process.
The trade is not binding, however, when the mistake was outside of what the customer instructed.
An easy example of this is if a customer wanted to purchase 50 shares and instead, the member firm reported the trade at 100 shares.
In this case, the extra 50 shares are not the obligation of the customer.
As soon as any error is found, FINRA regulations say that it must be reported.
Each member firm will have a designated person that error reports must be sent.
This can only be done in writing with proof of these records kept for a period of three years afterwards.
Note that these reports have different names and can be called:
- Trade correction reports
- Error records
- Error reports
For the Series 7 exam, know that a bona fide error can be corrected.
This correction, however, can only be undertaken by someone in a supervisory role.
The registered representative is never allowed to correct an error.
The main reason behind this is the fact that it could conceal misconduct on their behalf.
Let’s look at the workflow when an order is placed.
- Step 1: An order is placed with a broker-dealer by a customer
- Step 2: The order is now entered and once that is complete, the generation of the order ticket takes place
- Step 3: The order is sent to the floor of the NYSE. Floor brokers will receive not held orders directly while stop orders, market orders, and limit orders are sent to the order book.
- Step 3: At the same time, the order is executed OTC. The firm will secure securities by acting as an agent on behalf of its customer. The order is filled by the firm as the principal from inventory.
- Step 4: Generation of the execution report
- Step 5: Reporting the trade to either Nasdaq or Consolidated Tape
- Step 6: The confirmation is sent to the customer while the registered representative will receive a copy as well
- Step 7: Either the margin or cashiering department will process the trade settlement
Nasdaq quotation service
When a customer is interested in placing an order, the start of the process is usually securing a quote for the specific security they are interested in.
That’s easily achieved online through Nasdaq for broker-dealers that trade on the OTC market.
In fact, the system offered by Nasdaq has three different levels when it comes to stock quotation.
Available through a range of public vendors for registered representatives is Nasdaq Level 1.
In this system which displays the inside market only, you will find the lowest asks as well as the highest bids for various securities.
That’s not all.
There’s other useful information here, such as what the last sale of a particular security was as well as the volume thereof.
Because of normal price fluctuations in the market, a Level price cannot be guaranteed to a client.
Nasdaq Level 2 is not available to all registered representatives, only those who are subscribers to it.
Here you can find both the quote size and the current quote for securities that are found on this level.
Should a market maker wish to list a quote on this level, it needs to be guaranteed to be firm by the market maker and for at least 100 shares.
The last level is Nasdaq Level 3.
Subscribers to this level will receive all the level 1 and 2 services.
For any securities that they want to make a market for, registered market makers are allowed input and make updates to their quotes.
So we know that Nasdaq tracks equities trading on the OTC market (but not government or municipal securities).
It offers a range of critical services to those in the securities industry too.
Let’s take a look at a few of these.
Order trail system (OATS)
First up, is the OATS.
This automated system covers all traded equities on Nasdaq.
It records all the critical information about these equities including orders, quotes as well as other critical information traders use daily to make investment decisions.
All time-sensitive information that coincides with events that take place when an order is executed is recorded.
This means that right from when an order is entered until its eventual execution or cancellation, an accurate audit trail is recorded by OATS.
And all of this tracking is extremely precise with time stamps right down to the exact second.
Should a member firm need an OATS report, they can approach FINRA on an order-by-order basis.
Dark Pools of Liquidity
Also called dark liquidity or dark pools, this refers to liquidity or trading volume that’s not available to the general investing public.
Most of the trading here is carried out by institutions as well as trading desks.
The trading related to dark pools doesn’t take place on exchanges either but on alternative trading systems (ATS) as well as crossing networks.
With these transactions that cover large volumes, buy and sell orders are matched electronically.
They are then executed without the order being routed to any markets, including stock exchanges where information such as quotes, volume, or the price of the last sale are shown.
Large block orders are executed using dark pools and it’s an option for institutional traders that don’t want these orders to affect the price or public quotes.
It also allows them to not reveal their investment strategy when it comes to holding divestitures or accumulations.
Dark pools can be used anonymously as well, so the general investing public won’t know who placed the order, the volume of that order, or the price paid.
In terms of market transparency, dark pools do raise some concerns.
That’s because various market participants can’t see the trades, volumes traded, or prices in these pools and are certainly disadvantaged because of it.
Trade Reporting and Compliance Engine (TRACE).
Approved by FINRA, this looks at the OTC secondary market for corporate and government agency bonds and acts as a trade reporting system.
Note, this isn’t an execution system which means that quotations aren’t accepted.
It won’t provide any clearance or settlement information either.
TRACE reporting rules are as follows:
- For transactions, both sides must be reported
- Within 15 minutes of their execution, transactions must be reported
- The following information must be provided when transactions are reported: Date of execution, trade time, quantity, price, yield, and whether a commission is reflected in the price
The following securities are TRACE eligible:
- Asset-backed securities (ABS)
- Treasury securities
- Collateralized mortgage obligations (CMOs)
- Corporate debts securities
There are exclusions, however.
- Foreign government debt
- Money market instruments
- Debt securities that are not considered as depositary trust eligible
Trade Reporting Facilities (TRFs)
When OTC trades are made off the NYSE and Nasdaq stock market, members can report them through Trade Reporting Facilities (TRFs).
Note that these trades are for stock that’s listed on the NYSE and Nasdaq but those transactions didn’t take place there.
All equity securities traded in OTC transactions will need to be reported to FINRA by member firms.
The types of transactions that need to be reported include:
- OTC trades in OTC equity securities
- Transactions in restricted securities per Securities Act Rule 144A.
The role played by the NYSE DMM
DMMs came to prominence after 2008 but what role do they play on the NYSE?
Well, let’s start by explaining what a DMM is.
Simply put, they are the representatives of NYSE member firms, and their main task is linked to certain stocks as they help manage the trading thereof.
During trading, they will make a market for their particular stock.
They do this by showing both their best bid and ask prices for that particular stock.
Their other task is to ensure that a fair and orderly market is maintained when it comes to the particular stock that they are trading in.
For example, this means reducing market volatility related to that stock when an imbalance happens between buy and sell orders and they use their own capital to do so.
Another function of the DMM takes place at the opening of a day’s trading.
Here, they are tasked with trying to minimize price disparities as much as possible.
Should an intervention be needed to help with this, they will act as a dealer and buy or sell stock from their own inventory.
It’s not necessary, it’s the supply and demand of investors that help set the course of the market.
Of course, because they will need to buy stock for their own inventory at times to help keep the market in order, DMMs have a large capital backing.
This is imperative to ensure they can maintain a position in the various securities that they trade.
For the most part, DMMs won’t only trade in one stock but usually between 5-10.
During the conduct of their business each day, DMMs must adhere to NYSE floor rules which include:
- That they ensure that a fair and orderly market is maintained
- That they are able to buy or sell from their own account to do so
- That they ensure price continuity as well as minimized temporary disparities in price due to supply and demand by transacting business from their own account if necessary
- That they don’t transact from their own account when trading opens or reopens that it will throw out the supply and demand balance
- They trade from their own account between the current bid and ask quotes
DMMs also act as both agents and principals on the NYSE floor.
In the role of agents, they will take all the orders that brokerage firms provide to them and then execute them.
Also, certain kinds of orders from members are accepted by DMMs acting as agents as well.
This includes limit and stop orders which are executed when the conditions permit it.
In the role of principals (or dealers), they make markets in the stocks they are assigned.
To do this, they will use their own accounts to buy and sell.
As mentioned earlier, this also means that they need to maintain orderly markets that are both fair and continuous or in other words, markets that have reasonable price variations.
Note, however, that if it were at a price to compete with the current market, DMMs cannot buy stock for their own accounts.
Municipal bond reporting
There are various systems in place for municipal bond reporting.
Electronic Municipal Market Access (EMMA)
Operated by the Municipal Securities Rulemaking Board (MSRB), this is an online site in which retail investors can find various pieces of information about municipal securities without paying any fees.
For new bond offerings, 529 college savings plans, and other types of municipal securities, EMMA provides official statements, which is similar to a prospectus.
Also, for those investors who want it, rating information is something you will find on EMMA.
Should the rating for an issuer change, EMMA will include the new ratings as well as change information.
Not only that but EMMA can also give instant access to prices for municipal securities.
It also has information about the rates and prices for auction rate securities (ARS) as set by remarketing agents.
Real-Time Transaction Reporting System (RTRS)
This too is operated by the MSRB.
The main aim of this system is to ensure market transparency as well as for analytical purposes.
It does this by making available data that it has collected that relates to transactions of municipal securities.
According to MSRB Rule G-14, both municipal securities dealers as well as broker-dealers must report transactions.
Firms can either submit it themselves or by employing agents to do so but all transaction data must be made available within a period of 15-minutes from when the trade took place.
Surveillance of these transactions for regulatory purposes is enhanced thanks to the fact that an audit trail is maintained by RTRS.
The data stored on the RTS surveillance database includes:
- Dealer affected trades
- Any trade modifications
- Any trade cancellations
- Specific municipal securities trades (by CUSIP number)
Note, that there are no reporting requirements for municipal fund securities.
Good delivery as set out by FINRA’s UPC
What are the different components that make up the good delivery of securities?
Well, FINRA has the Uniform Practice Code in place to guide us.
Uniform Practice Code (UPC)
What is the UPC?
Well, FINRA defines it as: “The Uniform Practice Code (UPC) is a series of rules, interpretations, and explanations designed to make uniform, where practicable, custom, practice, usage, and trading technique in the investment banking and securities business, particularly with regards to operational and settlement issues. These can include such matters as trade terms, deliveries, payments, dividends, rights, interest, reclamations, exchange of confirmations, stamp taxes, claims, assignments, powers of substitution, computation of interest and basis prices, due-bills, transfer fees, “when, as and if issued” trading, “when, as and if distributed” trading, marking to the market, and close-out procedures.”
The purpose of the UPC is to simplify and facilitate members’ day-to-day business and to help eliminate any business misunderstandings and even disputes.
It also aims to ensure that free and open market mechanisms not only run effectively but are improved upon as well.
The provisions as set out in the UPC covers OTC securities transactions.
Those securities that are exempt from the Securities Exchange Act (1934), along with municipal securities do not fall under FINRA’s UPC.
When it comes to the UPC and the Series 7 exam, most questions are related to the payment for and delivery of securities transactions.
That’s what we will cover a little more in-depth now.
Good delivery of securities
When a transaction settles properly and everything about it is in good order, a good delivery is said to have occurred.
Of course, this includes a range of requirements such as:
- The proper time the delivery took place
- The size of the delivery
- And that it includes the correct documentation
Time of the delivery
Ok, so we know that the date on which the securities will change ownership from the seller to the buyer is known as the settlement date.
On this date, broker-dealers must exchange the relevant securities and funds.
The customer who bought the security, or the buyer, must pay for it to receive it and the customer who sold it, or the seller, must ensure that the relevant securities are delivered.
When it comes to good delivery times there is a range of specified ways to ensure it.
- Regular way settlement
This is how most securities will change hands unless otherwise specified. It’s the old T+2 scenario which means that settlement occurs on the second business day after the trade date.
Not all securities settle T+2.
For example, those that do include municipal securities, government agency securities, and corporate securities.
Others, like T-notes, T-bonds and T-bills will settle T+1 on the next business day.
Some even settle the same day, like transactions involving money market securities.
Sometimes, when dealers trade with each other, the delivery from the seller can take place before the settlement date.
Here, the buyer can refuse without prejudice or accept the security.
- Cash settlement
Also called a same day settlement, the securities must be delivered by the seller and paid for by the buyer on the day the trade was executed.
When stocks or bonds are sold for cash, they need to be available on the spot so the buyer can take delivery thereof.
Note that if the trade was executed before 2:00 pm, these kinds of settlements cannot happen after 2:30 pm ET,
The settlement will be due in 30 minutes if any cash settlement trades take place after 2:00 pm.
- Seller’s option contracts
When a customer wants to sell securities but cannot deliver them physically as per a regular way settlement, they can opt for a seller’s option contract.
Instead of having to make delivery on the second day following the execution of the sale, this type of contract allows sellers to lock in a selling price for securities.
This allows them to trade as the contract then specifies.
They can settle sooner too, as long as the buyer is provided with a written notice one day before.
This settlement can be carried out at any time from the third business day right up until the contract date.
There’s a buyer’s option contract as well and in this case, they specify when the settlement will happen.
- When-Issued Trades
These are also known as When-, As-, and If-issued contracts.
Often before they are even issued and made available for delivery, new municipal bond issues have already been sold to investors.
To confirm that they have bought these bonds and will receive them once they are issued, these investors will receive a when-issued confirmation.
This provides an exact description of what they have purchased.
What you won’t find on these confirmations is a settlement date or a total dollar amount for the bonds.
That’s because only when the settlement date is known can the accrued interest and with it, the total dollar amount, be calculated.
A new confirmation is sent to the investor who bought the bonds once they have been issued.
This will include the settlement date as well as the purchase price.
If a when-issued transaction confirmation is sent to an investor, it must include the following information:
- A description of the security they have bought
- The purchase price for a dollar bond, or yield for a serial bond
- The date on which the trade will take place
When-issued bond confirmations will not include accrued interest as the settlement date is not known.
Because of this, the total dollar amount due is never shown.
Here’s a quick breakdown of all the settlement rules you should know for the Series 7 exam:
- Regular way for equity: Two business days
- Regular way for corporate and municipal bonds: Two business days
- Regular way for investors trading options: Next business day
- Regular way for trading or exercising nonequity options: Next business day
- Regular way for T-bills, T-notes, and T-bonds: Next business day
- Regular way for U.S. government agency securities: Two business days
- Seller’s option: No sooner than T+3
- Cash settlement: Same day
- Regulation T: Two business days after regular way
For the exam, unless a question mentions Regulation T specifically, you should always assume it’s talking about regular way when it comes to settlement terms.
Also, there is often a question that covers when-issued confirmations in so far as what is included and what’s not included in them.
Just remember when it comes to what is not included, the acronym SAT will help:
- The settlement date is never included
- The accrued interest is not included
- The total dollar amount due at settlement is not included
Also, another exam tip is to remember that customer confirmations are to be sent by the settlement date and no later.
For broker-to-broker confirmations, however, these can be sent the business day following the trade (T+1) and no later.
We must not forget a DK or Don’t Know notice either.
When a trader is between two dealers, each version of the transaction, from the buyer and the seller, will be submitted to ACTS.
Should one dealer have a discrepancy in what the other has submitted, for example, they differ on the number of shares to be traded, they will DK the trade electronically.
A customer is entitled to the dividend for a stock should they purchase it before the ex-dividend date.
Sometimes, however, the seller might receive the dividend by mistake, for example, the trade may not have settled by the record date.
In that case, a due bill will be sent to the member firm of the seller informing them that the dividend is due to the buyer.
Good deliverable form
We’ve talked a lot about good delivery when it comes to securities.
Under-delivery or over-delivery
An over-delivery will see a customer wanting to sell 200 shares but producing a certificate for 250.
An under-delivery sees a customer wanting to sell 200 shares but producing a certificate for 150.
When that happens, the transaction cannot be considered to be a good delivery.
When this occurs in a member-to-member securities transaction, it’s generally acceptable under Uniform Practice Rules.
This is also long as an odd-lot is not included in the remaining amount to be delivered.
So for example, partial delivery of 200 of 300 shares is fine as the amount outstanding is a round lot.
Partial delivery of 250 of 300 shares is not because the 50 shares remaining is an odd-lot.
Good Delivery Clearing Rule
What’s this all about?
Well, when stock certificates are delivered between broker-dealers, the firm selling the certificates will ensure that they are separated into round and odd lots.
As long as they remain in 100s or multiples thereof, round lots certificates will be considered as good delivery and will meet conditions as set out by the UPC.
As for odd lots, well they can become round lot deliveries by adding them together.
Once a group of odd lots has been added into a single round lot, it too is considered a good delivery.
In the case where there is an odd-lot in a trade, it’s acceptable if several certificates in the trade add up to it.
As an example, a trade for 77 shares can be made up of 50, plus a 20, plus a 7.
Here’s another example in which the seller needs to deliver 200 shares.
This could be delivered as:
- one 200-share certificate
- two 100-share certificates
- four 50-share certificates
- two 50-share certificates, one 60-share certificate, and one 40-share certificate
- two 60-share certificates, two 40-share certificates
With each of these examples, the delivery rule requirement is met.
What about good delivery when it comes to bonds?
Well, the rules are the same.
Whether the bonds are delivered in bearer form or as a coupon, they can be delivered in two different denominations: $1,000 or $5,000.
For fully registered bonds, the denominations in which they are delivered are $1,000 and multiples thereof.
This delivery, however, can never be larger than $100,000.
Municipal bonds in bearer form are delivered in either denominations of $1,000 or $5,000.
What happens if there are missing coupons?
Well, then a good delivery has certainly not taken place.
When a coupon bond delivery sees an issuer in default, for it to be considered to be a good delivery, unpaid coupons must be attached too.
Transaction processing rules and regulations
When processing transactions, there are various rules and regulations that guide us and we will be covering these in this section.
Legal requirements for good delivery
We’ve covered various aspects of good delivery already, for example, that the size is correct and that it’s carried out at the proper time.
But there’s another critical aspect that defines good delivery and that’s having the correct and necessary documentation.
The certificates that represent ownership of the stocks, for example, must be negotiable for the ownership of those stocks to change hands.
When it comes to the negotiability of certificates, there is a range of criteria that need to be considered.
The first criteria to look at is that of assignment.
Stock and bond certificates always need to be assigned.
What exactly does that mean?
Well, it means they must be endorsed and this is done through the owner’s signature which appears on the face of the certificate.
If there is more than one owner – for certificates registered in joint names – all owners’ signatures need to appear.
While an endorsed certificate will include the customer’s signature on the signature line found on the back of the certificate, it could also come from a bond or stock power of substitution which is a separate document.
A separate one of these documents will be needed for each security.
It can be used for any number of certificates for a security, however.
The second criteria is stock or bond power.
Sometimes called a security power, this is separate from a securities certificate but does act as a legal document.
Its purpose is to aid in the transferring of ownership of securities.
In other words, ownership can be assigned or transferred from one investor to another.
A security power is usually used in two ways:
- If the owner cannot sign the actual bond or stock certificates, it can be used as a matter of convenience instead
- As a safety mechanism. Here, a signed security powers can be sent separately to unsigned certificates
Security powers are filled out in exactly the same way as you would a securities certificate.
The third criteria is a signature guarantee.
We already know that if a customer has a physical certificate for securities, they will have to sign either the certificates or a securities power should they wish to sell or transfer them.
However, before a transfer agent will approve the transaction, the signature will need to be guaranteed.
This is purely a way to stop the forging of signatures on certificates and securities power and essentially acts as a form of security for customers.
If a customer needs a signature guaranteed, they can get it from commercial banks, credit unions, and other financial institutions.
Some broker-dealers that are part of the Medallion signature guarantee program can also provide one in the form of a stamp or imprint.
If the customer uses a broker-dealer that is part of this program, transfer agents will process certificates immediately.
The fourth criteria relates to signature requirements.
At all times, the name registered on the certificate of the securities must match exactly with the customer’s signature.
In terms of good delivery, only two worlds can be abbreviated when it comes to signature requirements.
These are Co. (company) as well as & (and).
Other business abbreviations such as Corp. or Inc. are not allowed.
Legal transfer items
The sixth criteria are legal transfer items.
Documents with supporting guarantees or that render a certificate negotiable might be needed for forms of registration other than joint or individual ownership.
A guarantee from a broker-dealer is fine for business registrations of a partnership or a sole proprietorship.
Transfer agents, however, may require a corporate resolution in which the person who signs certificates is allowed to do so when corporate registrations or certificates with named fiduciaries are involved.
Depending on the fiduciary type, they might need to supply either:
- A copy of the trust agreement that has been certified
- A copy of the court appointment
The seventh criteria is invalid signatures.
A firm can be liable if a broker-dealer uses a forged signature and guarantees it.
This could happen in the case of a person who is recently deceased for example.
In this situation, before the securities can be sold, they must be transferred to the name of the estate.
This is done when the state administrator or executor endorses the certificate or provides a stock power.
When it comes to the registration of securities, a minor’s signature is deemed to be invalid.
Good condition of the security
The eighth criteria is the good condition of the security.
Should a certificate appear to be counterfeit or badly damaged in any way, before the agent can accept the security for replacement, the appropriate authentication needs to occur.
Should transfer agents still have questions over the authenticity of a certificate, the seller will then need to supply a surety bond which will protect the transfer agents from any future claims related to that certificate.
This acts as a form of insurance.
The ninth criteria is CUSIP regulations.
With regards to specific securities, trade confirmations and correspondence will include Committee on Uniform Securities Identification Procedure (CUSIP) numbers.
Each issue of securities will include an individual CUSIP number even if it is subdivided.
Should this happen a separate CUSIP number will be assigned to each class.
CUSIP numbers are a great help in not only identifying a security throughout its lifetime but also for tracking it.
Legal opinion for municipal securities
The tenth criteria is legal opinion for municipal securities.
All municipal bonds must have a legal opinion printed on them or attached to the bond unless they are stamped as ex-legal.
Well, this legal opinion vouches for the validity of the said bond.
When a security is traded as ex-legal it is considered to be in a good delivery condition as well.
The eleventh criteria is fail-to-deliver.
What types of situations is a fail-to-deliver?
Well, the name gives it away.
It occurs from the sell side of a contract and is when the broker-dealer doesn’t provide or deliver the security to the buy side of the contract in good delivery form on the settlement date specified.
The seller will not receive any payment for securities as long as the fail-to-deliver remains.
When this happens, the contract can still be closed but the buying broker-dealer.
To do these, they can buy-in securities.
There are implications for the seller, however, and they can be charged should changes in the market have caused the buyer to incur any losses.
Also, should the buying broker-dealer not opt to buy-in securities, the seller’s member firm is obligated to buy-in the necessary securities once 10 business days have passed from the original settlement date.
Our twelfth and last criteria is reclamation.
What is reclamation?
This happens when securities are accepted as a good delivery by the buying broker-dealer only for them to find out that the certificates are not in good deliverable form.
If this happens, together with a Uniform Reclamation Form attached, the securities can be sent back to the selling broker-dealer within specific time frames.
These time frames do depend on why the reclamation is being made.
For the Series 7 exam, you must remember the two types of securities where reclamation is never an option.
- Bond certificates subject to an in-whole call
- Bonds if after the trade date, the issuer goes into default