Study guide
Function 4, obtaining and processing customers' purchase and sales instructions, is the smallest section of the Series 6 at 5 of the 50 scored questions, but the material is compact and the points are readily earned. It covers how fund orders are priced and settled, what confirmations and statements must show, and how to handle exchanges, errors, and complaints with complete honesty.
Forward Pricing and Order Handling
Mutual fund orders never execute at a known price. Under the forward pricing rule, SEC Rule 22c-1, every purchase and redemption is executed at the next net asset value calculated after the fund or its agent receives the order. Because most funds price once daily at the 4 p.m. Eastern close, an order received at 2 p.m. gets that day's price and an order received at 5 p.m. gets tomorrow's. Accepting a post-close order at the already-computed price is late trading, an illegal practice that lets the buyer exploit news after the market close at other shareholders' expense. Funds also police market timing, rapid in-and-out trading that raises costs for long-term holders; prospectuses describe exchange limits, and funds may impose short-term redemption fees. Purchases execute at the public offering price, which includes any sales charge; redemptions execute at NAV, minus any deferred sales charge or redemption fee. Federal law requires a fund to pay redemption proceeds within seven calendar days. For every order, the representative creates an order ticket, or order memorandum, showing the account, the terms of the order, and time stamps; these records must be accurate and are retained for three years under SEC recordkeeping rules. Entering an order without the customer's prior instruction is an unauthorized transaction, and no discretion exists unless the customer granted it in writing. Example: Evan phones at 4:40 p.m. Eastern asking to buy at today's price because the market fell; his representative must explain that the order will receive the next calculated NAV, tomorrow's price.
Confirmations, Statements, and Settlement
SEC Rule 10b-10 requires a written or electronic confirmation for every securities transaction at or before completion, which means at or before settlement. The confirmation shows the trade date, the security, the number of shares or units, the price, whether the firm acted as agent or principal, and the commission or sales charge where applicable; for fund purchases it reflects the public offering price and the sales load. Account statements must be sent at least quarterly under FINRA rules, and monthly is common when there is activity; each statement shows holdings, values, and activity for the period, and customers should be encouraged to review and question them. Settlement timing depends on the product. Since May 2024, most corporate stocks, bonds, and exchange-traded funds settle in one business day, T+1. Mutual fund transactions settle as described in the prospectus, commonly one business day for purchases through a brokerage account, and the seven-calendar-day statutory deadline caps how long a fund may take to pay redemption proceeds. Payment practices matter as much as timing. Customer checks should be payable to the fund, its transfer agent, or the broker-dealer, never to an individual representative, and a representative may never deposit customer funds into a personal account, even briefly. Prompt transmittal is required: checks and applications received by the representative must be forwarded to the appropriate party promptly, and holding a customer's check while waiting for a better price is a violation. When certificates or documents are needed for redemption, signatures may require a signature guarantee, and proceeds must be delivered to the customer without unnecessary delay.
Exchanges, Errors, and Customer Complaints
Most fund families offer an exchange privilege: a shareholder may move money from one fund to another within the family at NAV, without a new sales charge. The convenience hides a tax fact the exam loves: an exchange is a redemption of one fund and a purchase of another, so it is a taxable event, and gain or loss is recognized even though the investor never touched the cash. Frequent exchanges may also trip a fund's market-timing limits. Errors happen, and the rule is escalation, never improvisation. A representative who discovers an error in an execution or an account entry must report it to a supervisor; corrections require principal approval and a documented reason, and a representative must never conceal an error, move a bad trade into another account, or reimburse a customer out of pocket to keep the mistake quiet. Guaranteeing a customer against loss is prohibited outright, and sharing in a customer's account is allowed only with prior written consent of the customer and the firm and, except for immediate family, in proportion to the representative's contribution. A customer complaint, under FINRA rules, is a written statement, including email or other electronic messages, alleging a grievance involving the firm's or a representative's activities. Every written complaint must be routed to the appropriate principal, kept in the complaint file, generally for four years, and included in the firm's quarterly complaint reporting to FINRA. Example: when Lena emails her representative claiming her fund purchase was never authorized, the representative must forward the message to a principal immediately, not negotiate privately or offer a personal refund.
Following Instructions Without Fraud
The antifraud rules travel with every order. SEC Rule 10b-5, adopted under the Securities Exchange Act of 1934, makes it unlawful to employ any device or scheme to defraud, to make untrue statements of material fact or misleading omissions, or to engage in any practice that operates as a fraud in connection with the purchase or sale of any security, and it applies to registered and unregistered products, recommendations, and order handling alike. In the transaction context, the recurring violations are concrete. Unauthorized trading is entering an order the customer did not approve; even a well-intentioned trade placed while the customer was unreachable is a violation without written discretionary authority. Forging or photocopying a customer signature, or having a customer sign a blank form, is prohibited. Instructions may be accepted only from the account owner or a person holding documented authority, such as a written power of attorney or trading authorization, so a spouse or adult child without authorization cannot direct the account, regardless of family relationship. Disbursement instructions deserve particular skepticism: requests to send funds to a newly added third party, a changed address, or an overseas account are classic fraud red flags, and firms verify them through callbacks or other authentication before releasing money. Selling away, effecting securities transactions outside the firm without its knowledge and approval, and borrowing from or lending to customers outside narrow firm-approved exceptions round out the prohibited list. The safe habit is simple: confirm who is instructing you, document what was said, transmit orders and funds promptly, and route anything irregular to a principal before acting.
Key terms
- Forward pricing
- — The rule that every fund purchase or redemption executes at the next NAV calculated after the order is received, never at a previously computed price.
- Late trading
- — Illegally accepting an order after the day's NAV has been calculated while giving that day's price, exploiting post-close information.
- Market timing
- — Rapid short-term trading in and out of a fund that raises costs for long-term shareholders; prospectuses disclose limits and possible redemption fees.
- Order ticket (order memorandum)
- — The record of each order showing account, terms, and time stamps; retained for three years under SEC recordkeeping rules.
- Trade confirmation (Rule 10b-10)
- — The written or electronic record of a transaction, delivered at or before settlement, showing security, quantity, price, capacity, and charges.
- T+1 settlement
- — The one-business-day settlement cycle applying to most corporate securities and ETFs since May 2024; fund redemption proceeds must be paid within seven calendar days.
- Exchange privilege
- — The right to move money between funds in the same family at NAV without a new sales charge; still a taxable sale and purchase.
- Customer complaint
- — A written grievance, including electronic messages, involving the firm or a representative; it must go to a principal, be retained, and be reported to FINRA quarterly.
- Unauthorized transaction
- — An order entered without the customer's prior authorization or written discretionary authority; a violation even if the trade is profitable.
- Selling away
- — Effecting securities transactions outside the employing firm without its knowledge and approval, a prohibited private securities transaction.
Exam tips
- Forward pricing means the next calculated price: an order before the 4 p.m. Eastern close gets today's NAV, an order after the close gets tomorrow's, and no one can promise today's price after hours.
- Redemption proceeds must be paid within seven calendar days, while confirmations are due at or before settlement and statements at least quarterly — keep the three deadlines separate.
- An exchange within a fund family avoids a new sales charge but not taxes; it is a sale and a purchase, so gains are recognized even though no cash reaches the customer.
- Anything written that alleges a grievance — including a text or email — is a complaint that must go to a principal; personally settling, concealing, or guaranteeing a customer against loss are all violations.