Order Memorandum

SEC Rule 17a-3 requires a broker-dealer to make a memorandum of each brokerage order given or received, whether or not the order is executed. Which item is NOT required to appear on that record?

1. A.The time the order was received and the time it was entered.Both time stamps are expressly required on the order memorandum.
2. B.Whether the order was solicited or unsolicited.Order tickets carry this designation; it drives surveillance for suitability and best-interest review.
3. C.The identity of the associated person responsible for the account.Rule 17a-3 expressly requires identification of each associated person responsible for the account.
4. D.The customer's estimated net worth.Correct. Financial profile data belongs on the customer account record, not on each order memorandum.

Why: The order memorandum must identify the account for which the order was entered, the time the order was received and the time it was entered, the price at which it was executed, the terms and conditions of the order, the identity of each associated person responsible for the account, whether the order was entered pursuant to discretionary authority, and, for modifications or cancellations, the time of those events. Firms also mark whether the order was solicited or unsolicited. What the record does not carry is the customer's financial background, which is captured on the account record rather than on individual tickets.

A customer disputes the details on a trade confirmation, claiming the price shown does not match what was agreed to over the phone. What must the principal ensure occurs regarding this discrepancy?

1. A.Accept the confirmation as correct by default, since it was generated through the firm's standard processWrong. A disputed confirmation should be investigated against the underlying order record, not simply defended by default.
2. B.Investigate the discrepancy, including reviewing the order ticket and any recorded communications, to determine the accurate termsCorrect. A disputed confirmation should be investigated against the underlying order and communication records to resolve the discrepancy.
3. C.Dismiss the dispute unless the customer provides a written contract signed by both partiesWrong. A signed written contract is not the standard for investigating a trade terms dispute; the firm's own order and communication records are the relevant source.
4. D.Cancel the trade automatically whenever a customer disputes any confirmation detailWrong. Automatic cancellation is not the appropriate response; the discrepancy should first be investigated to determine the accurate terms.

Why: The principal must ensure the discrepancy is investigated, including a review of the order ticket and any recorded communications, to determine the accurate terms of the trade -- not simply accept the confirmation as correct by default without investigating the customer's specific claim.

Ironvale Capital's new operations manager asks which of the firm's books is properly called a record of ORIGINAL ENTRY, and how promptly it must be made. The answer is:

1. A.Blotters, itemized daily records of securities and cash transactions, made no later than the business day following the transactionCorrect. Blotters are the records of original entry from which all other books are built.
2. B.The trial balance, prepared monthlyA trial balance proves the ledgers; it is prepared from records that already exist.
3. C.Customer account statements, delivered at least quarterlyAccount statements are periodic reports to customers, not firm records of original entry.
4. D.The general ledger, posted at the end of each monthThe general ledger is a derived record summarizing what the blotters captured first.

Why: Blotters are the records of original entry. Under the SEC's books and records rule, a broker-dealer must make itemized daily records of all purchases and sales of securities, all receipts and deliveries of securities, all receipts and disbursements of cash, and all other debits and credits. These entries must be made no later than the business day following the day of the transaction. Ledgers, trial balances and customer statements are all built from the blotters, which is why the blotter is the original record.

A principal's automated surveillance system flags several accounts for potential unauthorized trading -- trades that appear on statements the customers later say they did not request. The principal closes each alert after speaking briefly with the representative involved, who denies any wrongdoing each time. Is this an adequate response?

1. A.Yes, as long as the representative has no prior disciplinary historyWrong. A clean disciplinary history does not substitute for independently investigating the specific alerts raised.
2. B.No, but only because the surveillance system itself should be replaced with a different vendorWrong. The issue is the inadequacy of the investigation process, not a flaw in the surveillance system's alerting itself.
3. C.Yes, since the representative directly denied any wrongdoing each timeWrong. This is the exact trap the question describes; relying solely on the accused representative's denial is not an adequate independent investigation.
4. D.No, the principal must independently review order tickets, communications, and contact the customers directlyCorrect. A meaningful investigation of potential unauthorized trading requires independent verification, not reliance on the representative's own denial.

Why: Not necessarily. Relying solely on the representative's own denial, without independently reviewing order tickets, communications, or contacting the customers directly, does not constitute a meaningful investigation of a serious red flag like potential unauthorized trading. The principal must conduct an independent review, not treat the accused representative's explanation as dispositive.