Investor Protection

Who Cares About The Trade Confirmation Slip? Ken Kivenko

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he trade (sometimes called transaction) confirmation slip may seem routine, but it has important functions from a regulatory standpoint and for clients’ record-keeping. The trade confirmation slip is a confirmation of transactions done on a particular day for and on behalf of a client. A confirmation slip issued in the prescribed content and manner establishes a legally enforceable relationship between the dealer and client in respect of the trades stated in that confirmation slip. Confirmation slips can be sent either electronically or in the mail-they may not all look the same but they all contain certain common information. Just like any receipt, it becomes important should a dispute or complaint arise. You must also keep these confirmation slips to verify your cost basis for tax purposes when you sell the investment. In other words, when you declare your income, you need to prove the price at which you bought the stock as well as the price at which you sold it. A nasty type of error is when an order you placed fails to occur, and you do not notice. These kinds of errors must be corrected as soon as discovered, usually, the sooner the better for you and your dealer. Although you might believe that placing the order once should be enough, it is important that you verify that the order was actually completed.

Investment Industry Regulatory Organization Of Canada Trade Confirmations Rule The Investment Industry Regulatory Organization of Canada (IIROC ) Dealer Member Rule 200 Minimum Records (para 200.1(h) Trade Confirmations sets out the requirements relating to trade confirmations. In the case of a purchase or sale of securities, the requirements include the disclosure of the day and marketplace upon which the trade took place; the commission charged, if any; the quantity and description of the security traded; the consideration paid or received; whether the dealer

acted as principal or agent; and whether the securities are those of the dealer, or a related or connected issuer of the dealer. On September 4, 2012, further confirmation disclosure requirements took effect mandating yield disclosure for debt instruments and a remuneration disclosure statement for over-the-counter securities transactions for retail clients. IIROC offers a online guide http://investorguide.iiroc. ca/en/ that helps people understand how trading works on stock exchanges and Alternative Trading Systems (ATSs). The guide is free, and is a good tool for people who want to understand the ins and outs of trading securities (stocks, ETFs, etc.) on equity marketplaces. There are six easy-to-navigate lessons, with each offering a quiz to test your knowledge. It takes about 10 to 15 minutes to complete each lesson, and you can come back to do the modules at your leisure.

Mutual Fund Dealers Association Of Canada Trade Confirmation Rule For mutual fund dealers, MFDA Rule 5.4 Trade Confirmations (para 5.4.3) states that every confirmation of trade sent to a client must set forth the following information: (a) the quantity and description of the security; (b) the price per share or unit at which the trade was effected; (c) the consideration; (d) the name of the Member firm; (e) whether or not the Member is acting as principal or agent; (f ) if acting as agent, the name of the person or company from or to or through whom the security was bought or sold; (g) the type of the account through which the

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trade was effected (e.g. Trading, RRSP, RESP, TFSA..);

• the class of fund (for fee-based accounts “F” class funds should be purchased with the trailers stripped out) • whether the trade was as a Agent or Principal and • the exchange (except for mutual funds) on which the trade was effected.

(h) the commission, if any, charged in respect of the trade; (i) the amount deducted by way of sales, service and other charges; (j) the amount, if any, of deferred sales charges (resulting from early redemption of a fund); (k) the name of the Approved Person, if any, in the transaction; (l) the date of the trade; and (m) the settlement date. You will note that both rules refer to the term “agent”. Investment firms participate on the secondary market in one of two ways: as principals, holding securities for sale in their own inventory, and as agents, acting on behalf of a buyer or seller but not owning the security at any point during the transaction. In their function as brokers, firms simply act as an agent or intermediary in a transaction on the secondary market, never actually owning the securities themselves. The broker can represent buyers and sellers, who in fact are the principals, or owners of the securities. In exchange for facilitating or executing a trade, brokers charge their clients a commission that is disclosed on the confirmation. Some dealers provide additional information as well. This can include the CUSIP # (a unique number that identifies the issuer and the security), the representative's (Rep) name, order #, and a reference to the applicable investor protection fund.

The points to be checked by an investor include : If you don't receive transaction confirmations , follow up right away. Here are some points to check: • Name and address of trading member, • the account number (incorrectly allocating a transaction to a registered account can be costly), • details of trade like order Number/, security name/ description, quantity,price and currency (note that slips do not normally carry ticker symbols or Fund Codes) • brokerage commission charged (significant client errors are reported, so double check), • If a mutual fund, whether the fund was sold to you on a deferred sales charge basis (this is typically depicted by the cryptic letters DSC; if the order was for a front-load, the scene is set for an unpleasant surprise a few years hence should you wish to redeem)

Be sure to ask for an explanation for any fees you had not expected or that seem unreasonable. Be aware that not all costs/fees appear on always on a confirmation slip —these costs may include, but are not limited to, wrap fees, account maintenance fees, trailing commissions, as well as, administration fees charged on sales transactions or withdrawals, termination fees and currency conversion charges. Some dealers automatically and unnecessarily convert U.S. Dollars in RRSP accounts to Loonies without authorization or disclosure of the fee charged (this issue is part of an ongoing class action suit). DRIP transactions also do not trigger a confirmation slip but they will appear on your account statement. If you find unauthorized trading, excessive or questionable fees, or other discrepancies on your confirmations, these should be reported immediately to the dealer. Don't be shy— it's your money. If you are not satisfied by the dealer’s explanation, you can file a formal complaint to address the problem.

Slips Marked As “Unsolicited” Be wary of investments recommended by your dealer Rep that are categorized as “unsolicited” on the trade confirmation, because this may indicate wrongful conduct. An “Unsolicited” Order is any order for a particular security which was initiated by the client and which was not recommended or otherwise suggested in any manner by the dealer Representative. Effectively, the Rep's participation in the order is limited to merely giving the customer specifically requested statistical information, such as the current quote or known (not estimated) earnings, dividends, etc., and taking the order at the customer’s direction. Treat as a red flag an investment that was the broker’s idea, but reflected on the confirmation as an unsolicited trade. One of the most violated rules of the securities industry is that of suitability. The IIROC and MFDA rules state that a dealer Rep cannot recommend an investment that is not suitable based on investors’ investment goals, needs , risk and loss tolerance and time horizon. Without getting into the heated argument of whether a brokerage firm has duties on both solicited and unsolicited orders, it appears that most of the investment dealer industry treats solicited trades differently than unsolicited trades. The industry

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mentality is that it has heightened duties with respect to solicited trades versus unsolicited trades. Therefore, the marking of trade tickets either solicited or unsolicited can effect the supervision level and attention given to orders. When a supervisor or regulator is reviewing trade tickets to check for things like suitability or account churning, the tendency is to give stronger weight and concern to solicited trades, than unsolicited trades. An investor’s allegation of mis-marked order tickets invariably is coupled with other securities violations, such as churning, unsuitability, or unauthorized trading. And every claim of mis-marked order tickets necessarily brings in a claim of failure to supervise. This logically follows, because the primary motivation for a dealer Rep to mismark a trade ticket is to circumvent proper supervision.

Unauthorized Trades/Transactions It would be hard to imagine a more serious securities violation than that of unauthorized trading. When you detect an unauthorized charge on your credit card bill, it's relatively easy to get it corrected. But in an investment transaction a dealer Rep can commit a client to ownership of hundreds of thousands of dollars of stock purchases. Regulators prohibit a broker from making trades in a customer’s account on a discretionary basis (that is, without first discussing the trade in detail prior to the entry of the order and obtaining client consent in a non-discretionary account). Some slips may also contain a warning (possibly on the seldom read reverse side of the slip) like: “Please review this confirmation carefully. Failure to object to incorrect or unauthorized trades within five days of receipt of this confirmation, constitutes ratification by you of those trades”! One of the major defenses launched by dealers to a investor restitution claim that there was unauthorized trading in their accounts is, “Why didn’t the investor complain about the unauthorized trading years ago when it began?” The dealer claims that the investor had to have seen the trades on the confirmation slips and monthly statements and by remaining silent, the investor has in effect, ratified the trades. With stockbrokers touting titles these days, such as VP Investments, Seniors Specialist, Financial Planner, and Financial Advisor, investors mistake stockbrokers for registered investment advisors who typically only manage money on a discretionary basis. In a non-discretionary account, Reps are not supposed to make trades without first discussing the trades with clients. Most brokers don’t explain this regulation and concept to clients from the get-go. The end result is when brokers make unauthorized

trades in clients’ accounts, far too many investors think that the Rep is just doing his job. It may even be years later, after the broker has traded away all of the client’s money and the client is talking to a securities lawyer , OBSI or arbitrator that the client discovers that what he/ she thought was proper activity by their stockbroker was, in fact, a serious securities violation. So, check those innocuous looking slips when received and promptly advise the dealer of any unauthorized transactions .

Bottom Line Although it has not been customary to regard them as such, confirmation slips are effectively a “point-of-sale” disclosure document. Make sure that all account paperwork, especially trade-related documentation, is sent directly to you and not first to your dealer Rep. Even if you don't trade online, consider getting online account access. Internet access to your account lets you look at your account any time, whenever you wish. You can also immediately verify trade information (and account statements). And to cut down on the mountains of paperwork that needs filing, you can ask for trade confirmations and account statements to be sent to you via e-mail. When you keep an eye on your trades, you'll be able to prevent minor snafus from evolving into portfoliobusting problems. Keep an eye peeled for slips that look unprofessional, crooked or altered in any way. This may signal fraud. Check graphic elements such as logos-if a logo has poor resolution or is inconsistent with other statements or communications from the dealer, it is a red flag. In some cases, fraudsters simply cut and paste the logo of a legitimate firm onto their own bogus slips. Needless to say, never make cheques (or other payment forms) for investment purchases payable to an individual. Regulators recommend cross-referencing your trade confirmations with your account statements to confirm the transaction, the date and amount and to detect fees not included on confirmation slips. For example, firms that sell mutual funds on a waived or zero front-end sales commission basis sometimes leave the impression in their sales pitches that because there are no immediate sales commissions payable by the investor there is no cost to the investor, notwithstanding the substantial embedded sales commissions that are payable by the manager of the fund to the dealer (even discount brokers), in the form of trailing commissions relating to the investment. As always, CAVEAT EMPTOR. Ken Kivenko, PEng, President , Kenmar Associates, Etobicoke, ON (416) 244-5803, [email protected], www.canadianfundwatch.com

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