How to Document Trade Errors and Corrective Actions

Mistakes happen—even at the most diligent advisory firms. Trade errors, while unfortunate, are not uncommon. What matters most is how your firm responds to and documents those errors.

For Registered Investment Advisers (RIAs), proper handling and documentation of trade errors is a vital part of maintaining regulatory compliance and client trust.

❌ What Is a Trade Error?

A trade error is any unintentional deviation from a client’s instructions, the firm’s policies, or trading best practices. Examples include:

- Buying or selling the wrong security

- Incorrect position size or trade amount

- Executing a trade in the wrong account

- Failure to cancel or update a trade

- Typographical or entry errors

⚠️ Why Documentation Matters

Regulators expect firms to:

- Detect trade errors promptly

- Resolve them fairly and consistently

- Prevent clients from being harmed

- Maintain detailed records of the error and corrective steps taken

Improper handling—or worse, attempts to conceal errors—can result in regulatory sanctions and reputational damage.

📝 Key Components of Trade Error Documentation

1. **Error Identification**

- Who discovered the error and when?

- How was the error identified? (system flag, manual check, client inquiry)

2. **Description of the Error**

- Detail exactly what happened

- Include relevant account numbers, security names, trade dates, and amounts

3. **Client Impact Assessment**

- Determine whether the client was affected and how

- Was there a financial loss or gain? Did it affect performance reporting?

4. **Corrective Action Taken**

- Describe how the error was corrected

- Include trade corrections, journal entries, or reimbursements

5. **Error Resolution Outcome**

- Was the client made whole?

- Did the firm absorb the loss? Did a third party (custodian, broker) assist?

6. **Preventive Measures**

- What changes, if any, were made to prevent recurrence?

- Consider training, policy updates, or technology improvements

7. **Compliance Sign-Off**

- Ensure that the Chief Compliance Officer or designee reviews and signs off

- Maintain a central trade error log or file

✅ Best Practices for Trade Error Handling

- Create a written Trade Error Policy and include it in your compliance manual

- Train staff to report errors immediately, without fear of punishment

- Refrain from using client accounts to absorb trade error losses

- Document every step of the correction and resolution process

- Perform periodic reviews of trade error trends and internal controls

🚫 What Not to Do

- Don’t try to "correct" an error by placing offsetting trades in the client account

- Don’t delay disclosure or sweep errors under the rug

- Don’t profit from the error—any gains should be returned to the client or the firm, not kept in accounts

Final Thoughts

Trade errors are a test of your firm’s integrity and controls. Handling them quickly, fairly, and transparently reinforces your commitment to doing what’s right for the client—and meets regulatory expectations.

Make sure your documentation tells the full story, from mistake to resolution, in a way that regulators and clients can trust.