6.4 Books, Records, and Customer Account Handling

6.4 Books, Records, and Customer Account Handling

Accurate and tamper-resistant books and records are essential to the regulatory integrity of the capital markets. Without comprehensive transaction records, regulatory authorities such as the Securities and Exchange Commission (SEC) and the Capital Markets Integrity Corporation (CMIC) could not conduct market surveillance, investigate insider trading, reconstruct fraudulent schemes, or verify financial solvency. Under Section 52 of the Securities Regulation Code (SRC / RA 8799) and SRC Rule 52.1, registered broker-dealers are subject to strict accounting, order documentation, statement delivery, and record retention mandates.

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Statutory Mandate: Section 52 of the SRC and SRC Rule 52.1

Section 52 of the SRC establishes the affirmative statutory duty governing market intermediaries:

Section 52.1 Mandate: Every registered broker, dealer, transfer agent, and clearing agency shall make, keep, and preserve for such periods, such accounts, correspondence, memoranda, papers, books, and other records, and make such reports, as the Commission by its rules and regulations may prescribe as necessary or appropriate in the public interest or for the protection of investors.

Under SRC Rule 52.1, all required records must be kept in sufficient detail to accurately show all transactions, assets, liabilities, and financial conditions of the broker-dealer, and must be open to inspection at any time by representatives of the SEC and the exchange.

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Core Accounting Records and Ledgers

SRC Rule 52.1 specifies the primary accounting records that every broker-dealer must prepare and maintain:

Broker-Dealer Core Records Architecture
  ├── Blotters (Journals of Original Entry - Cash, Securities Receipts, Daily Trades)
  ├── General Ledger (Assets, Liabilities, Income, Expenses, Capital Accounts)
  ├── Customer Ledgers (Individual Itemized Cash & Securities Account Ledgers)
  └── Stock Record / Position Record (Master Inventory of Location & Ownership of Securities)

1. Blotters (Journals of Original Entry)

Blotters are comprehensive, chronological daily records of original entry reflecting all operational events. A broker-dealer must maintain separate blotters for:

• Trading Blotters: Itemizing all purchases and sales of securities, showing the trade date, customer name, security, quantity, unit price, gross amount, and broker/dealer capacity.
• Securities Blotters: Recording all receipts and deliveries of physical securities certificates or scripless securities transfers through the Philippine Depository & Trust Corp. (PDTC).
• Cash Blotters: Recording all cash receipts and cash disbursements, including bank wire transfers, checks, and clearing house credits.
• Updating Rule: Blotters must be updated daily, reflecting all transactions not later than the close of the next business day (T+1).

2. General Ledger

The General Ledger reflects all asset, liability, revenue, expense, and capital accounts of the broker-dealer. It forms the direct mathematical foundation for calculating the firm's daily Risk-Based Capital Adequacy (RBCA) ratio and Net Liquid Capital (NLC). The General Ledger must be posted and balanced at least monthly.

3. Customer Ledgers

Customer Ledgers provide an itemized, continuous record of each customer's account. They must record all cash debits and credits, securities bought and sold, cash received or disbursed, dividends credited, and all securities held in custody or delivered out.

4. Stock Record (Securities Position Record)

The Stock Record is the master inventory of all securities positions. It tracks both "long" positions (securities owned by clients or the firm) and "short" positions (securities borrowed or owed to others). For every specific security symbol, the Stock Record must identify:

• Who owns the shares (beneficial ownership breakdown); and
• Where the shares are physically or electronically located (e.g., in the firm's vault, held at the PDTC depository, pledged to a lending bank, or failed to receive from another broker).

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Order Tickets and the Required Audit Trail

An Order Ticket is the foundational legal record of a customer's trade instruction. When a client instructs a broker to buy or sell securities, the salesman must immediately prepare a written or electronic order ticket.

Mandatory Order Ticket Contents

Under SRC Rule 52.1, every order ticket must contain:

1. Customer account name and account number;
2. Date of order;
3. Security name and ticker symbol;
4. Quantity of shares to be bought or sold;
5. Transaction side: Buy or Sell (if selling, whether the sale is "Long" [customer owns the shares] or "Short" [shares are borrowed]);
6. Terms of the order: Market Order (execute immediately at current market price), Limit Order (execute only at a specified price or better), or Stop Order;
7. Time in force: Day Order (expires at market close) or Good-'Til-Cancelled (GTC);
8. Identification of the registered salesman who accepted or entered the order; and
9. Indication of whether the order was executed pursuant to discretionary authority.

Timing and Execution Information Required by Rule 52.1

SRC Rule 52.1.1.1.13 does not prescribe three independent timestamps for customer receipt, broker transmission, and execution. The order memorandum must state:

1. The terms and conditions of the order or instruction and of any modification or cancellation;
2. The account for which the order was entered;
3. The time of entry, which the rule defines as the time the order was transmitted by the broker-dealer and received by the relevant party;
4. The price at which the order was executed; and
5. To the extent feasible, the time of execution or cancellation.

An order entered under the broker-dealer’s discretionary authority must be identified as discretionary. This record lets supervisors reconstruct what instruction was entered, for which account, when it reached the relevant recipient, how it changed, and how it was ultimately executed or cancelled. A firm may preserve more granular system timestamps, but an exam answer should not convert those operational controls into three separate statutory timestamps that the rule does not state.

Trade Confirmations and Account Statements

Written Trade Confirmations

SRC Rule 30.2.2 requires the broker-dealer to report every customer transaction promptly. The confirmation is sent during office hours on the transaction day but no later than the next business day. It goes to the address or electronic channel recorded in the Customer Account Information Form; a paper copy must be provided when the customer requests one.

The confirmation identifies the transaction and material execution terms and discloses whether the firm acted as broker for a customer or another broker-dealer, or as dealer for its own account. It also discloses relevant control relationships, whether the transaction was solicited, unsolicited, or discretionary, and the applicable charges. The stock transaction tax on covered exchange sales is 0.1% of gross selling price or gross value for transactions subject to the rate effective 1 July 2025.

Customer Account Statements

Under SRC Rule 52.1.8, a broker-dealer sends a statement at least monthly to a customer whose account had trades since the last statement. The statement describes securities positions, money balances, and account activity. A customer may request quarterly statements instead of monthly statements in writing, and the broker-dealer must retain that request. Quarterly frequency is therefore an affirmative customer election, not an automatic rule for every inactive account. Electronic delivery requires the applicable approval and a paper statement must be supplied when requested.

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Record Retention Periods and Storage Formats

SRC Rule 52.1.2 establishes the general broker-dealer retention baseline:

Electronic retention is permitted if records can be immediately projected in readable form, indexed for prompt location, reproduced on request, and backed up by a separately stored copy for the required period. The Philippine rule focuses on authenticity, readable reproduction, indexing, prompt access, and a separately retained copy for the full retention period.

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Customer Account Opening and Handling

SRC Rule 52.1.6 centers the account-opening process on a complete and current Customer Account Information Form (CAIF). Required information includes the customer's name and addresses, contact details, occupation and employer where applicable, government identification, source of funds, nationality, taxpayer identification and tax status, specimen signature, and the approval of the responsible broker-dealer personnel.

Before settlement of an initial non-institutional transaction, the firm also obtains applicable information about association with another broker-dealer, service as an officer or director of a listed company, investment objectives, financial situation and needs, and any person designated to receive duplicate confirmations. Discretionary accounts require the authorized person's signature, the date discretion was granted, and the governing written agreement.

For a corporation or institution, the broker-dealer verifies legal existence, constitutive documents, directors or partners, principal officers, authorized representatives, the board authority to open and operate the account, beneficial owners, financial information, and investment objectives. A person acting as agent, nominee, trustee, or in another representative capacity must identify the principal or beneficial owner. Anonymous and fictitious-name accounts are prohibited, and customer information must be kept current and available for regulatory review.

These are legal and control requirements, not mere onboarding formalities. A missing authority document can make an otherwise accurate order unauthorized; an unidentified beneficial owner can create both SRC and AML/CFT exposure; and stale financial or objective information can undermine suitability and risk monitoring.

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Margin Accounts and Credit Regulation: SRC Rule 48.1

Margin creates leverage by allowing the customer to finance part of a securities position through the broker-dealer. The rule distinguishes the initial credit limit from ongoing maintenance requirements.

Initial Credit and Minimum Equity

A broker-dealer may not extend credit exceeding 50% of the current market value of the security at the time of the transaction. Equivalently, the customer supplies at least half of the position's value. No new or additional credit may be extended to an account whose equity is below ₱50,000.

Example: for an eligible ₱1,000,000 purchase, credit may not exceed ₱500,000, so customer equity must be at least ₱500,000 at inception.

Maintenance Margins

The margin maintained must be at least:

• 25% of the current market value of securities held long; and
• 30% of the current market value of securities held short.

The percentages correspond to position direction. They are not alternative quality tiers for the same long position.

Calls, Restrictions, and Liquidation

When margin is insufficient, the broker-dealer promptly issues a call. An initial-margin call must be satisfied within five business days after receipt; a maintenance-margin call must be satisfied within twenty-four hours. No customer purchase or sale order may be executed in the deficient margin account until the call is satisfied.

If the customer does not satisfy the call on time, the broker-dealer must liquidate enough securities to meet the call or eliminate the deficiency, whichever is less, through the relevant exchange before the close of the next trading day. The deadline for an initial-margin call may be extended by seven days only through a timely written application to the exchange or SEC and a finding of good faith and exceptional circumstances.

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Practical Exam Traps & Regulatory Pitfalls

• Trap 1: The Record Retention Breakdown (5 vs. 2 Years). SRC Rule 52.1 requires the covered broker-dealer records to be preserved for at least five (5) years, with the first two (2) years in an easily accessible place. Do not import a different jurisdiction’s six-year formula.
• Trap 2: Time of Entry Is One Defined Record Element. Rule 52.1 defines the time of entry as the time the order was transmitted by the broker-dealer and received by the relevant party. The memorandum also gives the execution price and, to the extent feasible, the execution or cancellation time. Do not invent a separate three-timestamp statutory formula.
• Trap 3: Initial Margin Percentage. On Philippine SEC licensing examinations, candidates are frequently tested on the initial credit limit under SRC Rule 48.1, which implements Section 48 of the SRC. A broker dealer may not extend credit above 50% of current market value; 30% is the maintenance level for short positions, not the initial limit. (Section 48.1 of the Code sets the outer loan-value standard and lets the Monetary Board adjust it; the 50% limit comes from the implementing rule.)
• Trap 4: Confirmation Delivery Timeline (T+1 vs. Settlement Date). Confirmations must be dispatched to the customer not later than the close of the next business day (T+1) following execution. Do not confuse this with the settlement date, which occurs on T+2.