Error Resolution

Trade errors occur in the securities industry, and firms must have procedures to identify, correct, and document errors. Understanding error resolution protects both customers and firms.

Types of Trade Errors

Common Error Types

Error Identification

How Errors Are Discovered

Error Correction Procedures

Step-by-Step Process

Error Account Transactions

Firms maintain error accounts to correct mistakes:

Example: Wrong Security Purchased

1. Move erroneous shares to error account
2. Sell correct shares to customer at price when order was placed
3. Purchase correct shares from market
4. Sell erroneous shares from error account

Key Point: The customer should receive the price they would have gotten if the order was executed correctly.

Who Bears the Cost?

General Rule

Firm Error Examples

• Representative entered wrong security symbol
• Order not transmitted in time
• Order executed at wrong price
• Order placed in wrong account

Customer Error Examples

• Customer provided wrong instructions
• Customer authorized wrong trade
• Customer failed to provide necessary information

Customer Notification

When to Notify

Customers must be notified when:

• Error affected their account
• Correction changes their position
• Correction changes their cost basis
• Any time their account is adjusted

What to Include

Documentation Requirements

Error Documentation Should Include

Error Log

Firms typically maintain an error log containing:

• All errors identified
• How each was resolved
• Patterns or trends
• Root cause analysis

Preventing Errors

Best Practices

Supervisory Review

Supervisors should:

• Review error reports regularly
• Identify patterns or trends
• Address repeat offenders
• Update procedures as needed

Regulatory Considerations

FINRA Rule 3110 (Supervision)

Firms must have procedures to:

• Detect errors
• Correct errors promptly
• Document error resolution
• Prevent future errors

Record Retention

Error documentation must be retained:

• Part of firm's books and records
• Subject to 17a-4 retention requirements
• Available for regulatory examination

Customer Disputes

If Customer Disagrees with Resolution

Customer Rights

Customers can:

• Dispute the resolution in writing
• Request supervisory review
• File complaint with firm
• File complaint with FINRA
• Seek arbitration

Key Exam Points

1. Report immediately - Notify supervisor when error discovered
2. Customer made whole - Should receive correct price/position
3. Firm error = Firm pays - Generally firm bears cost of its errors
4. Document everything - Complete error documentation required
5. Notify customer - Must inform customer of any account impact
6. Error account - Used to process correcting transactions
7. Prevention focus - Analyze errors to prevent recurrence
8. Retain records - Error logs subject to recordkeeping rules