General Securities Sales Supervisor (Series10) Practice Exam

What must a broker-dealer do when a customer does not have sufficient funds to settle a transaction?

1. Credit the transaction to the firm

2. Complete the transaction at a discounted rate

3. Notify the customer of the failure to settle

4. Automatically sell the stock to recover costs

The correct answer is: Notify the customer of the failure to settle

When a customer does not have sufficient funds to settle a transaction, the appropriate action for a broker-dealer is to notify the customer of the failure to settle. This notification is essential for several reasons. First, it maintains communication and ensures that the customer is aware of their obligation and the consequences of not meeting the settlement requirement. This action also provides the customer with the opportunity to address the shortfall, whether by transferring additional funds, negotiating a different settlement arrangement, or potentially taking other actions to fulfill the financial obligation. Notification serves as a critical step in preserving the integrity of the transaction process while protecting both the broker-dealer’s and customer’s interests. In scenarios where customers fail to settle, broker-dealers typically have established protocols that involve first reaching out to the client to inform them of the situation before considering other actions. This aligns with regulatory requirements and industry standards, which prioritize clear communication and customer service in financial transactions.