Chapter 12 Custody and Corporate Actions Flashcards Preview

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Flashcards in Chapter 12 Custody and Corporate Actions Deck (25)
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Custody Functions
A B/D that maintains custody has the following responsibilities:

-Maintenance of the vault
-Periodic box counts
-Safekeeping of physical certificates
-Reconciliation with DTCC
-Reconciliation with foreign depositories
-Creation of stock record


The Securities Count

Conducted on a quarterly basis

Not less than 2 months, or more than 4 months, from the previous count

Completed or supervised by someone not responsible for the care and handling of securities

Firms must account for all securities in its possession as well as those in transfer or transit, pledged, or borrowed

A short securities difference that is unresolved for seven business days is subject to a net capital adjustment



Securities Information Center (SIC) Reporting
The SIC may investigate issues with security deliveries

B/Ds must make inquiry of SIC regarding every security that comes into its possession UNLESS the security has been:

Received from the issuer or its agent

Received from another B/D or a Federal Reserve Bank

Received from an EXISTING customer and is registered in the customer’s name (inquiry required for street name)

Received from an EXISTING customer and can be verified through B/D’s records

Part of a transaction for $10,000 or less


Fidelity Bond
B/D insurance coverage against losses due to:

Fraudulent trading, loss of securities, or forgery

NOT errors and omissions or B/D bankruptcy

Amount is based upon firm’s _____

net capital requirement


Securities Control

Good Control Locations

Held by bank, broker-dealer, or DTCC
Held by a clearing corporation or custodian
Held by a foreign depository
Securities in transfer


Corporate Actions

A department of a B/D is responsible for handling the following corporate actions:

-Stock splits and dividends
-Cash dividends
-Interest payments
-Bond calls
-Rights offerings
-Tender offers
-Mergers and spinoffs


Stock Splits
Company’s attempt to improve marketability of its stock

No economic gain or loss for holders

No change to holder’s percentage of equity ownership

No immediate tax liability

Two Types:

Forward –more shares, lower price

Reverse –fewer shares, higher price


Dividend Dates
Declaration Date:

stock begins to trade with the dividend


Payment Date:

the dividend, cash or stock, is distributed


Record Date:

Owners of record receive dividend

For a buyer to receive the dividend, transaction must settle on, or before, record date


Ex-Dividend Date:

2 business days before the record date

Stock begins to sell without dividend at reduced price

Regular way settlement is assumed


Regular way settlement is

The conclusion of a securities transaction when a broker-dealer pays for securities purchased or delivers securities sold and receives from the contra broker the proceeds of a sale.

most 3 business days from trade date

Gov bonds and options settile the next day
Cash settles same day


All orders that have been entered below the market will be reduced by enough to cover the full dividend

See slide notes and update 196
Buy Limit

Sell Stop

Sell Stop Limit


Red Flag Issue
Which of the following is taxable when received?
a.Cash dividend
b.Stock dividend
c.Forward stock split
d.Reverse stock split



12-1 Under the Consumer Protection Rule, broker-dealer must determine the amount of securities in its possession or control daily.

True or False

a. Ture


12-2 All of the following broker dealers are exempt from maintaining Special Reserve Bank Account under Rule 15c3-3, EXCEPT:

a. BD that sells mutual fund
b. BD that carries 10 or fewer customers
c. BD that executes customer trades exclusively through a special customer account at a bank and does not hold customer funds or securities
d .An introducing BD, fully disclosed broker-dealer

b. one that carriers 10 or less customers


12-3 A broker dealer must make inquiry of the Securities Information Center when it has received:


SEC rule 17f-1 a broker dealer is required to make inquiry of the Securities Information Center with respect to every security that comes into its possession unless the security:

1. is received from the issuer or issuer's agent
2. is received from another reporting institution or federal reserve bank,
3. is registered in the name of the (existing) customer that person's namiee
4. Was previously sold to the customer by the firm, as verified by the firm's internal records (d)
5. Is received as part of a transaction, which has an aggregate face value of $10K or less in the case of bonds, or a market value of 10K or less ins stockes


Slide notes

Forwarding Official Communications
Communication items which must be forwarded include:




Tender notices
Issuers may not know all beneficial owners (OBO versus NOBO status)

B/Ds have the complete list in the stock record
The issuer (NOT the client) is charged for distribution


12-4 The Ops area has received bearer bonds it believes are counterfeit. The firm should notify all of the following, EXCEPT:

a. Securities Information Center
b. U.S Treasury Dept
c. FBI
d. Transfer agent for the issuer

B. Treasury - is concerned with currency


12-5 The examination and count of securities required under Rule 17a-13 must be supervised by an

a person employed by the BD whose regular duties do involve direct responsibility for the care and protection of the securities


12-6 The broker-dealer must review and adjust its fidelity bond converge:

b. Annually


12-7 The portion of a company's profit paid to shareholders is called a



12-8 A stock split does all of the following, EXCEPT:

a. Change the net dollar value in a stock
b. Reduce the market price of the stock
c. Decrease par value
d. Make the stock more marketable

a. Change the net dollar value


12-9 A reverse stock split creates a:

____ number of shares.

smaller number of shares


12-10 The call premium of a bond refers to the amount:

b. The issuer must pay to exercise the call privilege