3.3 Stock Records, Counts and Missing Certificates

The Stock Record and Security Differences

The stock record connects customer and firm entitlements with securities locations and obligations: depository balances, physical holdings, pledges, loans, borrows and failed deliveries. It tracks quantities; the general ledger tracks monetary accounts.

Systems use different debit/credit or long/short labels. The reliable test is a balanced explanation of entitlement and location, with correct offsets. Do not place customer shorts, borrowed securities or failed receipts on a memorized side without understanding the obligation.

If customers own 1,000 shares, DTC holds 800 and a valid fail-to-receive explains 200, the quantity record reconciles. It does not prove all 1,000 are in good control. A balanced stock record can still reveal a possession deficit.

Trace discrepancies through trade capture, settlements, loans and corporate actions. A split applied in the customer ledger but missing from depository reconciliation differs from a stolen certificate. Keep the original evidence, correcting entry, approver and aging. Never post an unsupported offset just to make totals balance.

Quarterly Physical Securities Counts (SEC Rule 17a-13)

Under SEC Rule 17a-13 (Quarterly Security Counts), carrying broker-dealers must conduct comprehensive audits of all securities on record, known historically in the industry as Box Counts.

Operational Rules & Cadence

• Frequency: The box count must be executed at least once each calendar quarter.
• Cycle Spacing: Consecutive quarterly counts must be held not less than 2 months and not more than 4 months apart.
• Independence Mandate: The count must be conducted or supervised by personnel who are completely independent of the cashiering, custody, and vault departments. Cage personnel who manage daily intake and dispatch of certificates cannot audit their own inventory.

Comprehensive Scope of Verification

The independent audit team must:

1. Physically count and examine all securities held on-premises in the firm's vaults, safes, and cashiering cages.
2. Account for and verify all securities in transit between firm offices.
3. Reconcile and verify all securities held in external locations, including:
   • Positions at DTC and central depositories.
   • Securities in the process of transfer or re-registration at transfer agents.
   • Margin securities pledged to commercial banks.
   • Securities out on loan to other broker-dealers or borrowed from lenders.
   • All Fails to Receive and Fails to Deliver.
4. Compare the physical count and verified external positions against the firm's master stock record.

Mandatory 7-Business-Day Recording Rule

If the count uncovers any discrepancy (an unresolved difference between the physical/verified count and the stock record):

• Operations must research the break immediately.
• Any unresolved differences (security shortages or overages) must be recorded on the firm's books and records (in a Security Difference Account) no later than 7 business days following the date of the count.
• Unresolved security shortages that remain open require capital charges under SEC Rule 15c3-1 (Net Capital Rule) and may necessitate a mandatory buy-in.

Lost, Stolen and Counterfeit Certificates

SEC Rule 17f-1 distinguishes reporting situations. Suspected theft/loss involving criminal activity requires reporting to the SEC or designee and registered transfer agent within one business day of discovery, with prompt FBI notification. Counterfeit certificates have their own one-business-day reporting provisions. Do not wait for a count to report known theft.

Ordinary unexplained loss generally permits two business days of search followed by reporting within one business day, subject to exceptions. Securities found missing through required counts/verifications generally use the later of ten business days after the count or ascertainment of certificate numbers. In-transit losses generally use the later of two business days after notice of nonreceipt or ascertainment of the certificate numbers. There is no general requirement to wait ten transit days before reporting.

Recovery requires appropriate notices to recipients of the original report within the rule’s one-business-day period. Preserve issue, serial numbers, quantities, dates, search history and report references. Follow required inquiry procedures when receiving applicable certificates; appearance alone does not establish validity.

Notify the transfer agent and follow stop-transfer, replacement and indemnity procedures. A loss report does not authorize creating a certificate, removing a legend or selling an unsupported holding. Preserve evidence of suspected forgery and prevent a replacement from generating a duplicate customer credit.

Count Independence

Compare the count’s independent findings with the operational record rather than changing the count sheet to match the ledger. Preserve discrepancies, investigative evidence and authorized corrections. Count personnel should not simply accept the vault employee’s unverified assertion that a missing certificate is “in transfer.”

Sources checked 2026-10-20: SEC customer protection rule, SEC certificate reporting rule.