Book-entry Settlement

A registered representative becomes the subject of a reportable event. Who actually submits the Form U4 amendment, and what is the representative's own duty?

1. A.FINRA submits the amendment on its own initiative once it learns of the event from public records.Wrong. FINRA maintains the system but does not author disclosures on a registered person's behalf.
2. B.The member firm files through the registration depository, and the representative must promptly inform the firm.Correct. System access belongs to firms, so the individual discharges the obligation by telling compliance in time to file.
3. C.The representative files directly and notifies the firm afterwards so its records can be updated.Wrong. Individuals have no filing access, so a self-submission route simply does not exist.
4. D.Either the firm or the representative may file, whichever learns of the event first.Wrong. The choice is not optional; the filing channel runs through the member firm in every case.

Why: Amendments are filed by the member firm through the Central Registration Depository, because access to the system belongs to firms rather than to individuals. The representative's duty is to inform the firm promptly and completely so the firm can meet the filing deadline the rule sets; a representative who says nothing has caused the firm's failure and is separately responsible for it. The representative also attests to the accuracy of the disclosures, which is why a knowingly false or incomplete answer exposes the individual directly. Nothing in this structure lets the individual bypass the firm and file on their own behalf.

Lucienne Barbier asks her representative why she never receives share certificates for the stocks she buys, and how the shares actually change hands on settlement date. He explains the role of the central securities depository. Which description is correct?

1. A.Certificates are printed and physically couriered between the delivering and receiving firms on each settlement date.Wrong. Physical movement of certificates is precisely what immobilization at the depository eliminated.
2. B.The transfer agent re-registers a certificate into each buyer's own name on settlement date.Wrong. Street name positions remain in the depository's nominee name; re-registration happens only on specific customer request.
3. C.The depository holds only the cash side of settlement, while securities continue to move physically between broker-dealers.Wrong. The depository holds the securities; that is its central function.
4. D.Eligible securities are immobilized in the depository's nominee name and positions move by book entry, debiting one participant's account and crediting another's.Correct. Settlement is accomplished by book entry against immobilized certificates.

Why: Virtually all eligible securities today are immobilized at a central securities depository, held in the depository's nominee name on behalf of its participant broker-dealers and banks. On settlement date nothing physical moves. The depository simply debits the delivering participant's position and credits the receiving participant's position by book entry, with the firms in turn adjusting their customers' street name positions on their own books. This is what makes shortened settlement cycles and high daily volumes feasible at all.

A firm wants a particular security to be eligible for book-entry movement through the depository system, since customer demand for that security has grown. Can the firm simply designate the security as depository eligible on its own?

1. A.Yes -- any broker-dealer may unilaterally designate a security as depository eligible whenever customer demand for it justifies the added convenience.Wrong. A broker-dealer cannot unilaterally designate a security as depository eligible; the depository itself makes this determination.
2. B.No -- depository eligibility is determined by the depository itself, based on its own criteria and typically the issuer's own qualification or agreement, not by an individual broker-dealer's own preference or customer demand for a particular security.Correct. Depository eligibility is determined by the depository itself, based on its own criteria and the issuer's qualification.
3. C.Yes, but only if the firm first obtains written consent from every other broker-dealer that also holds positions in the same security.Wrong. Consent from other broker-dealers is not the mechanism by which depository eligibility is determined.
4. D.No, because depository eligibility is determined exclusively by a vote of the security's existing registered holders, held annually.Wrong. Depository eligibility is not determined by an annual vote of registered holders; the depository itself makes the determination.

Why: Depository eligibility is a determination the depository itself makes, generally based on its own criteria and the issuer's own qualification or agreement to have its security handled that way -- it is not something an individual broker-dealer can simply confer on a security by its own decision, no matter how much customer demand exists for the convenience of book-entry movement.

Within the DTCC group, how are the functions of the National Securities Clearing Corporation and The Depository Trust Company divided?

1. A.The clearing corporation compares and nets trades as central counterparty; the depository holds securities in book-entry form.Correct. Netting reduces how many deliveries occur and immobilisation makes each remaining one an electronic entry.
2. B.The clearing corporation holds the securities; the depository calculates each member's net money settlement.Wrong. This reverses the two roles, assigning custody to the netting entity and netting to the custodian.
3. C.The clearing corporation serves institutional members while the depository serves retail brokerage customers.Wrong. Neither entity has retail customers; both operate at the level of participating member firms.
4. D.The clearing corporation handles exchange-listed securities while the depository handles over-the-counter issues.Wrong. The division is functional rather than by market, and both cover a broad range of issues.

Why: NSCC handles clearing: it compares and nets trades among its members so that a day's many obligations in a security collapse into a single net position to be delivered or received, and it interposes itself as the central counterparty. DTC handles depository functions: it holds securities in book-entry form, immobilising the certificates so that transfers happen by adjusting records rather than by moving paper. Netting reduces the number of deliveries that need to occur, and immobilisation makes each remaining delivery an electronic entry, so the two together do most of the work of modern settlement. Separating them cleanly matters because a question about who nets obligations and a question about who holds the securities have different answers.