intermediary who brings together buyers and sellers of the same security
or commodity and executes their orders, receiving a commission or brokerage
therefore. A broker is a specialist,
and accordingly is well versed in the technique of his or her particular
market, knowing the sources of supply and demand and being an expert on
prices and price trends. There
are brokers in many fields - stock, grain, cotton, produce, note, ship,
real estate, mortgage, arbitrage, insurance, discount, money, etc.
relationship between customer and broker is that of principal and AGENT,
and in most cases, such as stock exchange broker, the broker is a special
agent. The law of agency,
therefore, underlies the customer-broker relationship.
stock exchange broker is a member of the stock exchange and as such is
bound not only by the law of agency but also by the rules of the exchange.
The customer-broker relationship starts with the opening of the
account by the customer. Under
New York Stock Exchange rules, the broker must obtain essential facts
about the customer, usually on an information or signature card signed
by the customer, giving residence, occupation, employment, age, and one
or more references. He or
she also must obtain information for proper handling of the account, such
as type of account (cash, margin, or commodity account); instructions
on notices and statements; account number, etc.
account transactions are all in cash.
No margin purchases or short sales occur in this type of account.
General accounts (margin accounts) comprehend cash transactions,
margin purchases, and short sales.
For the latter type of accounts, the customer signs the margin
agreement (also known as the customer's agreement or standard customer's
agreement), which contains a series of clauses pertaining to margin transactions:
(1) authority to the broker to pledge the customer's securities
in collateral loans, either alone or with other customers' securities
(security loan consent or hypothecation agreement); (2) authority to the
broker at his or her discretion to sell the securities carried on margin
and securing the customer's liability for debit balance (amount of credit
plus interest), on notice, when in the broker's opinion the customer's
margin is inadequate; (3) communication consent authorizing the broker
to make all notices and demands upon the customer by mail, telegraph,
telephone, or orally; and 4) specification that all transactions shall
be subject to rules and customs of the exchange where such transactions
are consummated, including reference to arbitration of any differences
or controversies. In addition
to initial margins prescribed by the Board of Governors of the Federal
Reserve System, both initial and maintenance margins are prescribed by
New York Stock Exchange rules.
the customer's instructions to the broker will be observed by the latter
as agent, including the different types of orders:
market, limit, stop, stop and limit orders with respect to price;
and day, week, month, and open or good 'til cancelled (GTC) orders with
respect to time limits. Completely
discretionary orders are regulated by Rule 408 of the New York Stock Exchange,
which provides that in addition to carrying the customer's written consent,
such an order shall be approved and initialled on the day entered by a
member, allied member, or a manager designated with written authority
by a member or allied member to do so.
or margin accounts will not be accepted for persons under 21 years of
age. Parents, however, may
buy securities for their own account and transfer them to the minor children
upon their reaching 21 or serve as custodians for the minor children on
gifts of securities and manage the investment for the children until they
reach 21 (other adults may also be designated as custodians), under gifts
to minors acts of various states.
or margin accounts of employees of the New York Stock Exchange and employees
of member firms must have the prior written consent of the employer.
Such prior written consent of the employer is also required for
margin accounts of employees of banks, trust companies, insurance companies,
or any other broker or dealer in securities in any form, bills of exchange,
acceptances, or other forms of commercial paper.
Such disabilities (Rule 407 of the New York Stock Exchange) are
not considered to apply to independent insurance agents or officers of
banks, trust companies, insurance companies, etc.
the basic cash accounts and margin accounts, special types of accounts,
for particular kinds of transactions or to allow for particular application
of margin rules and regulations, include the following:
issued margin accounts, to cover transactions on a when issued basis.
accounts for a number of customers of a securities firm placing the orders
through a correspondent firm.
bond accounts for exempt securities.
accounts for such miscellaneous activity as collection or exchange of
securities, foreign exchange transactions, etc., for customers and miscellaneous
transactions for other securities firms.
Commodity accounts would encompass activity in commodities for
stock brokerage houses may act as dealers for their own account in transactions
with customers in unlisted securities and as broker for customers in transactions
in listed and unlisted securities.
Strict rules in many cases prevent a broker from acting as both
broker and dealer in the same transaction.
customer receives from his or her stockbroker the confirmation of execution
of the transaction, whether purchase or sale, by mail.
The confirmation is usually mailed on the day of the transaction.
In addition, member firms of the New York Stock Exchange send monthly
statements to all customers with active accounts, showing the transactions
affecting the account during the month and indicating by the bring-down
on the lower part of the statement the net securities position (inventory)
of the customer in the account at the end of the month.
The customer has a reasonable time after receipt of this statement,
which in legal effect is an account stated, in which to challenge any
member firm of the New York Stock Exchange must immediately notify the
exchange in writing as soon as it commences to carry accounts or hold
securities for customers. In
addition, each member and member firm shall answer financial questionnaires
whenever called for by the exchange, and be subject to an audit, by independent
public accountants, as of the date of an answer to a financial questionnaire.
Moreover, each member firm doing business with the public is required
to have an annual surprise audit by independent public accountants.
Each member firm shall make available to any customer at his or
her request a statement of its financial condition as of the date of its
most recent answer to the financial questionnaire of the exchange or as
of a date subsequent thereto, which financial statement in the opinion
of the firm shall fairly present its financial condition.
Each monthly statement sent to a customer by a New York Stock Exchange
firm carries a legend reading: "A
financial statement of the firm (or corporation) is available for your
personal inspection at its offices, or a copy of it will be mailed upon
your written request." Moreover,
within 35 days of the date after each annual exchange, each customer shall
be sent either the statement based upon such audit, or a notice with return
postcard inviting personal inspection of the statement at the firm's offices
or a request for mailing of the statement.
Reports to Exchange.
New York Stock Exchange also requires other financial reports from members,
allied members, and member organizations, including the following:
on loans obtained where any part of the proceeds is used to supply working
capital to the firm. (Note:
Net capital of the firm, figured pursuant to rules of the exchange,
is required to equal at all times at least 6⅔% of total liabilities,
including free credit balances of customers.)
reports with respect to the following:
Short positions in listed securities.
Obligations in respect of security underwritings
and net positions resulting therefrom.
Total of collateral loans from banks,
trust companies, and other lenders in the
Customers' debit and credit balances.
Total fail to deliver and fail to receive
Problem of Fails.
contracts originate when the selling broker or dealer in a transaction
fails to deliver the securities on the normal settlement date of the trade
to the buying broker or dealer. On
the books of the selling broker or dealer, the fail to deliver creates
a long security position. On
the books of the buying broker or dealer, the fail to receive creates
a short security position.
on fails to deliver securities accord the best single measure of the extent
of the brokerage industry's paperwork backlog.
Among the consequences of fails are the following:
(1) imposition by the exchange of restraints, where firms had not
voluntarily done so, on business emanating from such problem areas as
over-the-counter transactions, where numerically most of the fails originated;
(2) promulgation of the mandatory buy-in rule (NYSE Rule 282) to provide
for mandatory buy-ins of securities not delivered 50 calendar days after
the due date; (3) inauguration of the fail clearance system, whereby old
fails submitted by firms are paired off and intermediate deliveries are
eliminated, with money differences settled directly; and (4) addition
of a special operations questionnaire required by the exchange on the
status of each major area of record-keeping, including general ledger
and customer account postings, dividends and stock record, and information
on such related topics as overtime, customer complaints, etc.
The log-jam also led to the extraordinary action of a voluntary
closing of the markets, per recommendation of the Ad Hoc Committee on
Back-Office Procedures, on the New York Stock Exchange, American Stock
Exchange, and over-the-counter markets on four separate business days
in June and early July, 1968, and extension of closings to include the
last four Wednesdays in July, 1968.
With computer confusion finally cleared away (but not until various
firm casualties had occurred), the Wall Street community resumed a normal
situation with regard to fails.
between a broker and a client are sometimes submitted to arbitration.
A 1987 decision of the U.S. Supreme Court confirmed the binding
nature of the arbitration clause, which precluded filing suit in federal
court before the arbitration process was complete and limiting the nature
of appeals from the arbitration decision.