HilltopSecurities Inc. Callable Securities Disclosure
HilltopSecurities ("HTS") Impartial Lottery Process: When a security is subject to a partial redemption, pursuant to FINRA Rule 4340, which has been incorporated into the FINRA Consolidated Rulebook, HTS must have procedures in place that are designed to treat clients fairly in accordance with an impartial lottery process. Below is a description of the impartial lottery process:
When an issuer initiates a partial call of securities, the depository holding such securities (typically, the Depository Trust Corporation "DTC") conducts an impartial computerized lottery using an incremental random number technique to determine the allocation of called securities to its participants (including HTS) for which it holds securities on deposit. Because DTC's lottery is random and impartial, in the case of a partial call, Depository Participants may or may not receive an allocation of securities selected for call.
When HTS is notified that it received an allocation of called securities, HTS conducts a similar computer-generated random lottery. The lottery determines the accounts that will be selected and the number of securities in the account that will be redeemed. Allocations are based on the number of trading units (e.g $1,000 lots for bonds) that the accounts hold. The probability of any trading unit held by an account being selected as called in a partial call is proportional to the total number of trading units being held through HTS. Once the lottery is completed, HTS notifies any brokers whose client accounts have received an allocation. Securities registered in customer name, either in transit or held in custody, are excluded from the HTS lottery process.
HTS systems initiate the lottery process by identifying the accounts that hold the called security, the total par value of the called securities held in the accounts and the trading unit of such security (e.g. $1,000).
Example (unit of trade = $1,000)
| Example Customer Account | Par Value | Number of Trading Units |
|---|---|---|
| 123456789 | $100,000 | 100 |
| 456789123 | $75,000 | 75 |
| 789101112 | $150,000 | 150 |
| 159753258 | $50,000 | 50 |
In brief, that allocation process involves the following steps:
- Each account gets identified with the number of trading units held.
- Each trading unit gets a sequential number assigned. (e.g, Acct 789101112 would get 150 numbers assigned to it.)
- A random number is generated that will result in one of these trading units being the first unit in the selection process.
- Thereafter, the trading units participating in the allocation are based on an incremental random number technique until the number of trading units allocated for HTS is exhausted.
Additional Information about the Impartial Lottery Process
- The allocation of called securities is not made on a pro rata basis. Therefore, it is possible that a customer may receive a full or partial call or may not have any securities selected for call at all.
- Each trading unit gets a sequential number assigned. (e.g, Acct 789101112 would get 150 numbers assigned to it.)
- When a partial call is deemed favorable to the holders of the called security, in accordance with FINRA Rule 4340, HTS will exclude any proprietary and Associated Person accounts of HTS or Broker/Dealers for which it clears from the lottery. No allocation will be made to HTS proprietary or Associated Person accounts until all other customer positions in such securities have been called. Conversely, when a partial call is deemed unfavorable to holders of the called security, HTS will not exclude proprietary or Associated Person accounts of HTS or Broker/Dealers for which it clears from the lottery.
- Generally, a partial call will be deemed favorable if the call price is above the current market price as captured in HTS's price reporting system. If the partial call is made at a price that is equal to or below the current market price of the security, as captured in HTS's price reporting system, the partial call will be deemed as unfavorable to holders of the security.
- You have the right to withdraw uncalled fully paid securities from HTS at any time prior to the cutoff date and time established by the issuer, transfer agent and/or depository with respect to the partial call, and also to withdraw excess margin securities provided that your account is not subject to restriction under Regulation T or such withdrawal will not cause an under margined condition.
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