Account Basics Flashcards
What are the basic items required on a new account form?
- Customer name and address
- Is it a cash or margin account?
- Customer DOB
- SS# or Tax ID #
- Occupation and employer
- Employed by another broker/financial insitution
- Officer/director/ 10% shareholder
What information re: citizenship is needed to open a new account?
- Citizenship status
- If foreign: foreign passport number and US tax ID #
What are the “Big 4” items that firms must independently verify?
- Customer name
- Customer address
- Social security or Tax ID #
- Date of birth
What is the CIP?
Customer identification program: Put in place to impede terrorists from having bank/brokerage accounts in the US
- Every customer must be notified that the firm has a CIP
What is an SIPC notice, and when must it be given?
The SIPC is the insuring corporation for broker dealers. Customers are advised in writing about the SIPC when the account is OPENED. Customers must also be given the SIPC info annually
What are the rules regarding an arbitration agreement?
- Customers do NOT have to sign an arbitration agreement by law - but many firms require it
- FINRA requires that w/in 30 days of signing the agreement, the customer must be provided a copy and must sign the receipt
What is FINRA Rule 2090 - Know your customer?
The reg. rep and member firm must use reasonable due diligence to know and retain the “essential” facts relative to every customer
What items must be obtained from a client for the KYC rule?
- Name, address, telephone
- Tax ID
- DOB
- Occupation/employer
- Investment objectives
- Annual income/net worth
- Signature of associated person opening account
- Signature of CUSTOMER (if discretionary acct)
What happens if a customer refuses to provide KYC info that the firm is trying to obtain?
There is no obligation to collect it and can still open the account, unless it is one of the Big 4 items (Name, address, SS#, or DOB)
Who must sign the new account form?
The Reg. Rep. There is no rule that the customer must sign (unless it is a discretionary account)
When must a customer receive a copy of the Account Profile?
Within 30 days AFTER opening and every 36 months thereafter
What is the FINRA Suitability rule (Rule 2111)
Firms must have a reasonable basis to believe that a recommendation is suitable for the customer based on investment profile
What items are recorded in an investment profile?
- Investment objectives, experience
- Age
- Other invest
- Fin situation/needs
- tax status
- time horizon/liquidity needs
- Risk tolerance
What are the THREE main components to determine suitability?
RCQ
- Reasonable basis Suitability
- Customer specific suitability
- Quantitative suitability
What does the Reasonable basis suitability test require?
The Reg. Rep must fully understand the features, returns, risks, and costs associated w/ any recommendation given
What does the Customer specific suitability test require?
The member firm must have a reasonable basis to recommend the strategy based on evaluation of customer profile
What does the quantitative suitability rest require?
Even if a recommended strategy to a customer might be suitable once, it may not be suitable for a series of similar transactions (no churning)
What is the main consideration regarding an ECN?
The risk of default. They are only backed by the faith and credit of the issuing bank
What defines a pattern day trader?
One who engages in 4 or more day trades in a 5 business day period
What must firms give day traders before opening a day trading account?
A Day Trading Disclosure Document
What must a firm do if it realizes that one of its accounts has not been properly qualified for, and is day trading?
Account must be approved for day trading within 10 days following the date of realization
What is an NMFBA?
Non managed fee-based acccount. Prior to opening one for a customer, firm must provide the customer with a disclosure document showing fee computation
What are fee-based accounts that do NOT impose a per transaction commission considered?
Advisory products
How often are firms required to monitor account activity for NMFBA’s?
At least every 12 months
What are some red flags for senior citizen accounts?
- Buy variable annuities, equity indexed annuities, RE lim. partnerships
- Variable life settlements
- Structure product purchases (CDO’s)
- Mortgage one’s residence to invest
- Use retirement money to make risky investments (growth stocks)
What steps must a rep take if diminished mental capacity in a senior citizen is noticed/suspected?
- Document it and escalate immediately
What must the firm do once diminished mental capacity is recognized?
- Communicate w/ customer’s contact person or P.O.A
- Maintain contact with the investor to assess situation
- Consult state statues to determine next steps
(Note: verbal confirmations of diminished mental capacity can only be given by IMMEDIATE family members)
When must a customer receive the ODD (Options Disclosure Document)
BEFORE the options account is opened (first trade made)
What goes on the ODD?
SPECIFIC questions regarding:
- Invest. objective/experience
- Financial situation/needs
- marital status
- net worth
- liquid net worth
- estimated annual income
If the customer does not disclose all info, the account CAN still be opened
When is the options agreement required to be sent and signed?
It is sent when the account is opened, and required to be signed by the customer 15 days after the account is opened. If not received, no new trades can be initiated - only closing transactions
Is the customer signature required on the new account form?
No. Remember, it can be done over the phone
What are the characteristics of a margin account?
- Customer deposits portion of funds to buy security and balance is LOANED by brokerage firm
- Firm charges interest on loan
- Margined securities held in STREET name
- Customer SIGNS margin agreement
- Sometimes there is a loan consent agreement or a Credit disclosure document
What is the basis of a Joint Tenancy w/ Rights of Survivorship?
If one party dies, the other side is now the 100% owner
What is the basis of a Tenancy in Common?
Each party has a PERCENT (%) and that % is passed to the estate if one party dies
What is a Transfer on Death policy? (TOD)
Replacement for JTWROS - the account is in ONE party’s name, but upon death, assets go directly to the named beneficiary and avoids probate
What is required to establish a corporate account?
- Copy of corporate AGREEMENT
- Corporate RESOLUTION with corporate SEAL
What is required to establish a partnership account?
- Copy of partnership agreement
- If it is a LIMITED partnership, you only need the general partner’s signature
What is a prime brokerage account?
- In return for sending commission trades to different firms, an institution (like a hedge fund) gets research and recommendations from the broker dealers
- The prime brokerage account designates a single broker as primary - where all assets are consolidated
What does the prime broker do for an institution?
Settles all trades, maintains custody, and provides LOWER financing costs on margined positions
What is third party trading?
The customer will allow someone other than himself or the brokerage firm to trade for him
What defines a a limited trading authorization?
Orders to buy and sell can be entered, but funds can NOT be withdrawn
What defines a full trading authorization?
Orders can be entered and funds can be withdrawn, but the name on the check is the CUSTOMER’S
What must occur for a duplicate confirmation to be sent to a third party under POA?
It must be requested by the customer
What are the Fiduciary account types?
- Trust
- Guardian
- Admin of Estate
- Executor of estate
- Conservator or income
- Receiver in bankruptcy
Is it ok for the reg. rep. to be the trustee over the customer’s account?
No. This is generally a conflict of interest
What are the basic rules for a fiduciary account?
- Third party is acting as owner
- NO third party TRADING
- CASH only; no margin accounts
- often limited to investing in a Legal List OR they must follow the PRUDENT man rule
What is the prudent INVESTOR rule?
Using Modern Portfolio Theory for investment choices. Investor applies risk-return analysis to choose appropriate investments
What is a discretionary account?
An account in which the customer gives the FIRM authorization to trade. Must be signed BEFORE any trades take place
What are the 4 items that are chosen in every trade, and which 2 items make a trade “discretionary”
The 4 items are:
- Size of trade
- Security
- Price of execution
- Time of execution
If the SIZE and/or SECURITY is chosen by the broker, then it is a discretionary trade (Remember SS)
What must be acquired for a firm to execute a market-not-held order?
A power of attorney (POA) - these orders must be executed same day
What is an OMNIBUS account?
- individual new account form and trading auth. needed
- investment adviser’s clients are grouped into ONE account
- Annual mgmt. fee
- Confirms of trades and statements sent to both customer and adviser
What is a numbered account?
Name is confidential, but the firm is obligated to maintain record of true owner
When are trade statements sent to customers?
If there has been trading, they are sent monthly, if there has been no trading, they are sent Quarterly
Where must inaccuracies identified by the customer on their account statement be sent?
To the brokerage FIRM
What must a registered rep. keep track of?
- Copy of new account form info
- Chronological record of trades
- Current account statement showing securities positions
What is the difference between error in confirmation and error in execution?
Error in confirm - customer gets corrected confirm
Error in execution - customer gets corrected TRADE
