Trade Confirmations and Completing a Transaction
SEC Rule 10b-10 dictates that a trade confirmation must be given to a customer at or before the completion of a transaction. The SEC defines the conditions for when a transaction is complete.
A purchase is judged to be complete when the securities are paid for on the settlement date. Payment may occur by cash payment, by debiting the customer’s account, or by reducing the customer’s separately managed account (SMA). Thus, if payment is made through a bookkeeping entry made by the broker-dealer in the customer’s account, the purchase is judged to be complete at the time that the bookkeeping entry is made. Payment may be paid in full or 50% if the security was bought on margin. The purchase will be judged to be complete before the settlement date if the securities were delivered and paid for before the settlement date.
A sale is judged to be complete when the securities are delivered on the settlement date. If the securities are not in the custody of the broker-dealer, it is the time when the securities are delivered to the broker, dealer, or municipal dealer. If the securities are held in custody by the broker-dealer, completion of the sale is the time when the securities are transferred out of the customer’s account. The sale can be judged to be complete before the settlement date if the securities were both delivered and paid for before the settlement date.
You can remember with the acronym PPSS: completion of a purchase is when payment is complete. Completion of a sale is when securities are delivered.
Purchase – Payment
Sale – Securities delivered
Example Question: According to the SEC, which of the following would not be enough to constitute a completed purchase?
- A. Fifty percent of payment was made on the settlement date for a security bought on margin
- B. Securities were delivered to the purchaser and 100% of payment was paid before the settle