3:52 p.m., 4:05 p.m., and a $200,000 Keying Error
Friday afternoon. At 3:52 p.m. ET, Mr. Okafor leaves a voicemail: 'Buy $20,000 of Fund X in my IRA.' You are on another line and listen at 4:10 p.m. At 4:05 p.m., Ms. Lin emails: 'Sell $30,000 of Fund Y today.' You see the email Monday at 9:00 a.m. Fund X's NAV moved from $20.00 on Friday to $19.40 on Monday. Monday morning Mr. Okafor calls: 'The fund dropped 3% Friday - cancel my purchase.' Minutes later you discover a second problem: on Friday you keyed Mr. Okafor's order as $200,000 instead of $20,000, and $200,000 of his IRA went into the fund at Friday's price. You have not told your principal. Your firm's written procedures state that an order is 'received' when it reaches a registered representative who can act on it.
1. What price does each order receive - Okafor's purchase, Lin's redemption, and Okafor's Monday cancellation request - and why?
Read the worked answer
Governing principle: mutual fund shares are priced forward. An order gets the next NAV computed after the order is received by the firm - one NAV per day, struck as of the close of the NYSE at 4:00 p.m. ET. What matters is receipt, not when the ticket is keyed, but the firm's written procedures define 'receipt' and must be applied consistently.
Okafor purchase
- The voicemail arrived at 3:52, but the firm's procedures say an order is received when it reaches a registered representative who can act on it. That was 4:10. The order therefore prices at the next NAV computed after 4:10 - Monday's NAV, $19.40.
- You may not reach back and assign Friday's $20.00. Doing so would be applying a stale price that was not available at the time of receipt, and altering the time stamp to make it look like a 3:52 receipt is record falsification.
- Note the irony: the procedural rule that seems harsh here actually helped him - Monday's NAV was 3% lower.
Lin redemption
- Received 4:05 p.m. Friday, after the close → Monday's NAV. You may enter the ticket Monday morning; it still prices at Monday's close. Do not backdate it to Friday.
Okafor's cancellation request
- Denied. The purchase was priced and completed at Friday's NAV when the order was executed. There is no right to cancel a completed mutual fund trade because the market moved. If he wants out, he can redeem at Monday's NAV and bear the $0.60 per share decline - which is the market risk he accepted when he placed the order.
- Canceling and re-billing at Monday's NAV would be granting him a price he was never entitled to. That is a fraudulent transaction, violates the forward-pricing rule, and is exactly the pattern regulators look for.
2. Now the keying error: $200,000 instead of $20,000. What must you do, who bears the loss, and what records and approvals are required?
Read the worked answer
Immediate steps
- Tell your principal and compliance today. Hiding or self-correcting a $180,000 error is far worse than the error itself, and it is the kind of thing that ends careers.
- Notify the fund/transfer agent and follow the firm's error-correction policy. Many funds will accept an as-of correction with the fund's approval, restoring the account to the position it would have held at the original price.
- Make the customer whole. Mr. Okafor should end up holding $20,000 of Fund X purchased at Friday's NAV, as instructed. The unintended $180,000 is unwound.
- The firm absorbs the loss, through its error account. If the fund declined an as-of correction and the NAV fell, the difference between the Friday price and the unwind price is the firm's cost, not the customer's and not a windfall to him either.
What you may not do
- Do not leave the extra shares in his account 'for now,' do not have him sell to offset, and do not execute offsetting trades to disguise the position. Each makes the error worse.
Records and approvals
- Written error report: what was instructed, what was entered, when discovered, the dollar impact, the corrective trade, the fund's response, and the principal's approval.
- Confirmations for both the original and corrective trades; a customer notification letter describing the correction.
- Root-cause review for the supervisory file - was the order read back? Was there a dollar-amount confirmation step? Was the ticket reviewed before release?
- Retain everything under Rules 17a-3 and 17a-4 (six years, first two easily accessible). Depending on size, the firm may have a reporting obligation; legal decides that.
3. Suppose instead you had listened to Okafor's voicemail at 3:59 p.m. and entered the ticket at 4:06 p.m., after the close. Would that change your answer? What if you had listened at 4:05 p.m. and entered it at 4:10 p.m. with a 3:58 p.m. time stamp?
Read the worked answer
Scenario A - received 3:59, keyed 4:06.
- Under the firm's procedure, the order was received before the close by a representative who could act on it, so it is entitled to Friday's NAV. That is not late trading; it is correct handling. The keyed time may be after 4:00, but receipt is what governs, and the firm's procedures must allow the order to flow through at the earlier price and must be applied consistently to every order.
- The requirement is that the same rule apply in both directions: an order received before the close gets that day's price, and an order received after the close does not.
Scenario B - received 4:05, stamped 3:58.
- This is the classic late trade and it is prohibited. The customer was not entitled to Friday's price, and changing the time stamp to manufacture entitlement is both a forward-pricing violation and a books-and-records violation. It harms the fund and the other shareholders who bear the dilution.
- It is also a supervision failure with criminal exposure in egregious cases. There is no version of 'the system let me do it' that defends it.
Takeaway for the exam and the job: the pressure point in these fact patterns is almost always someone trying to move a price to benefit a customer, themselves, or a favored client. The defensible answers are: apply the written procedure, never alter a time stamp, absorb errors at the firm's expense rather than the customer's or the fund's, and escalate to a principal before touching anything.