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Series 7 > B - Customer Accounts > Flashcards

B - Customer Accounts Flashcards

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1
Q

The firm can accept one of the following types of brokerage accounts:

A
  • Cash accounts

* Margin accounts

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2
Q

A CASH ACCOUNT

A

A CASH ACCOUNT is used when the customer pays the entire amount up front to purchase securities. Full payment in the case of a purchase, or complete delivery in the case of a sale, is required on the SETTLEMENT DATE.

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3
Q

The SETTLEMENT DATE varies depending on the type of delivery. The three types of delivery in a CASH ACCOUNT to be discussed are:

A
  • Same day delivery
  • Regular way delivery
  • Seller’s option delivery

Regardless of the type of delivery, the money and the securities must be delivered on the settlement date.

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4
Q

A SAME DAY DELIVERY

A

A SAME DAY DELIVERY is also known as a CASH TRADE or a CASH DELIVERY, and means transactions must be settled that same day.

The settlement date for a SAME DAY DELIVERY transaction stipulates completion of that transaction by 2:30 p.m. Eastern Time (ET) on the same day as the trade, or one-half hour after the trade if the trade is after 2:00 p.m. ET.

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5
Q

REGULAR WAY DELIVERY

A

The settlement date for a REGULAR WAY DELIVERY depends on the type of security traded. Two types of regular way delivery are:

  • T + 3
  • T + 1
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6
Q

T + 3

A

T + 3 settlement is for any trade where the transfer of securities is present:

  • Stock
  • Corporate bonds
  • Municipal bonds
  • Exercising stock (equity) options
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7
Q

T + 1

A

T + 1 settlement is for any trade where there is no transfer of securities, and the only transfer is money from the buyer to the seller of the securities, except in the case of index and interest rate options:

  • Government securities
  • Trading all options (stock, index, interest rate, foreign currency)
  • Exercising index and interest rate options (the writer pays the buyer of the option being exercised)
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8
Q

SELLER’S/ BUYER’S OPTION DELIVERY

A

A “seller’s/buyer’s option” delivery is used when a customer cannot deliver or does not want to pay for the securities the regular way because of extenuating circumstances. The delivery date agreed upon may be no sooner than the day after regular way delivery ends. SELLER’S/BUYER’S OPTION DELIVERY is usually referred to as a “seller’s option delivery.”

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9
Q

The following purchases can only be made in a cash account:

A
  • NEW ISSUES, or INITIAL PUBLIC OFFERINGS (IPOs), and new issues of municipal securities must be fully paid for by the settlement date as determined by the underwriter.
  • Mutual funds and variable annuities must be fully paid for on the date the purchase is made, since these are not purchased until the money is received.
  • Securities that are traded OTC and are not on the Nasdaq Stock Market, listed on a stock exchange, or listed as an OTC MARGIN-ELIGIBLE SECURITY are not eligible for margin.
  • Securities purchased for an UGMA (Uniform Gifts to Minors Act) or UTMA (Uniform Trust to Minors) account are not eligible for margin accounts.
  • Securities purchased for trust accounts in which the trust document does not allow margin purchases must use a cash account.
  • Securities that are not readily marketable, such as private placements and limited partnerships, are not eligible for margin.
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10
Q

VALUE OF A CASH ACCOUNT

A

A CASH ACCOUNT consists of the market value of the securities and any cash or money market funds in the customer’s account.

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11
Q

SAFEKEEPING

A

SAFEKEEPING is defined as the broker/dealer holding the physical certificates or records of the certificates if the securities are held at a bank or other institution. The securities are registered in the customer’s name.

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12
Q

STREET NAME

A

STREET NAME is defined as the broker/dealer registering the securities in the broker/dealer’s name, not in the customer’s name.

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13
Q

Margin accounts are composed of:

A
  • Long Positions
  • Debit Balance
  • Short Positions
  • Credit Balance
  • Equity
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14
Q

UNCOVERED OPTIONS

A

The writing of UNCOVERED OPTIONS (also known as NAKED OPTIONS) also must take place in a margin account.

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15
Q

The difference between a cash account and a margin account

A

The difference between a cash account and a margin account is the amount of payment required. In a CASH ACCOUNT, the customer must pay in full, 100%, for all securities purchased, and short sales are not permitted. In a MARGIN ACCOUNT, the customer only needs to pay the appropriate percentage depending on the securities that are involved.

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16
Q

ARBITRAGE TRANSACTION

A

An ARBITRAGE TRANSACTION is when a security is bought and sold short simultaneously in an attempt to profit from brief and small price differentials existing on different exchanges or markets.

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17
Q

An INDIVIDUAL ACCOUNT

A

An INDIVIDUAL ACCOUNT is used for one individual. The individual taxpayer is responsible for tracking investment returns and paying taxes on gains in the account.
An individual account can be in the person’s name or it can be a numbered account.
• If it is a numbered account, all information about the customer must be on file with the broker/dealer regardless of whether the account is a cash account or a margin account.
• The customer must present a government-issued photo ID, such as a valid driver’s license or passport.

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18
Q

JOINT ACCOUNTS

A

JOINT ACCOUNTS are established by more than one individual. In a joint account, either party may make a trade. Permission of the other account holder does not need to be given, unless specifically set up so that both parties must approve the trade.

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19
Q

The two main types of joint accounts are:

A
  • JTWROS

- Joint Tenants in Common

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20
Q

JTWROS

A

A JOINT TENANCY WITH RIGHT OF SURVIVORSHIP ACCOUNT

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21
Q

(JTWROS account) has the following characteristics:

A
  • Two or more person own it equally
  • Upon the death of one tenant, the surviving tenant(s) will own the deceased person’s interest.
  • JTWROS accounts are only established in states where the right of survivorship is allowed
  • JTWROS accounts are a frequent choice between spouses
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22
Q

A JOINT TENANTS-IN-COMMON ACCOUNT (sometimes abbreviated as TIC ACCOUNT) has the following characteristics:

A
  • Two or more persons each own a specific percentage of the account.
  • Upon one tenant’s death, the decedent’s percentage of interest in the account will revert to the estate.
  • TIC accounts are a frequent choice between individuals who aren’t related and who wish to pool their funds for investment or, between relatives, but not spouses.
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23
Q

TOD ACCOUNTS

A

TRANSFER ON DEATH ACCOUNTS (TOD ACCOUNTS) are established in the name of an individual and a beneficiary is named. Upon the death of the individual, the named beneficiary owns the assets in the account.

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24
Q

Benefits of a TOD account include:

A
  • This helps avoid probate because the securities are turned over to the beneficiary with the presentation of the death certificate.
  • The customer who files the TOD cannot limit the age at which the securities can be turned over to the beneficiary. It automatically occurs upon the death of the individual and the presentation of the death certificate.
  • If the beneficiary is a minor, a custodian will manage the account.
  • While most states permit TOD accounts, some broker/dealers will not accept them. Given certain legal complications that have taken place with JTWROS accounts when a tenant has died, TOD accounts may provide a more attractive alternative type of account for investors in the future.
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25
Q

FIDUCIARY ACCOUNTS

A

FIDUCIARY ACCOUNTS name a FIDUCIARY — a person who is in charge of the account and who has a fiduciary responsibility — to act in the account’s best interest. All of the brokerage accounts listed below can be established as fiduciary accounts, but some require specific documentation, and most can only be opened as cash accounts.

  • Trust Account
  • Guardian Account
  • Conservator of Incompetents
  • Investment adviser’s account
  • Receiver in Bankruptcy Accounts
  • Custodial Accounts
  • Estate Account
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26
Q

To open an account on behalf of a deceased

A

To open an account on behalf of a deceased person, the broker/dealer must receive the court order naming the executor and the requirement/permission to open the account.

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27
Q

CUSTODIAL ACCOUNTS

A

CUSTODIAL ACCOUNTS are a type of fiduciary account usually set up for minors or individuals who are deemed unable to enter into a contract on their own (legally incompetent).

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28
Q

UGMA

A

UNIFORM GIFTS TO MINORS ACT

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29
Q

UTMA

A

UNIFORM TRANSFER TO MINORS ACT

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30
Q

Requirements under UGMA/UTMA accounts include the following:

A
  • A
    CUSTODIAN must act in a fiduciary capacity and/or must act prudently in managing the account. The accountholder’s interests must come before the interests of the custodian.
  • Custodians may buy, sell, or otherwise manage the account at their discretion, as long as it is for the benefit of the account.
  • A
    custodian cannot delegate power of attorney to a third party.
  • O
    nly one minor and one custodian are allowed on each account.
  • T
    he number of donors to an UGMA/UTMA account is not restricted.
  • T
    he amount given to a minor is not restricted; however, for the gift to be free of gift taxes, it is limited to $14,000 per donor per year, or $28,000 per couple (for tax year 2013).
  • The minor can receive gifts from more than one donor that are gift‐tax free to the minor.
  • The custodian must be an adult in the state where the account is held (the age varies from 18-21, depending on the state).
  • Most types of securities may be given to a minor, unless the donor is also the issuer of the securities. Options may be restricted to sales of covered calls only.
  • All gifts made to an UGMA/UTMA are irrevocable, which means that the ownership of the assets must remain with the child.
  • S
    ecurities cannot be purchased on margin in an UGMA/UTMA account.
  • A
    ll securities must be registered in the name of the custodian for the minor. For instance, the account title will read: “John Smith custodian for the benefit of John Smith, Jr., a minor child. UGMA/UTMA (state of minor’s residence).”
  • The securities can never be used in any way for the benefit of the custodian.
  • A
    ll dividends and capital gains on the securities in the minor’s account are taxed to the minor in the year received. The income is taxed in the year the dividends and gains are received by the minor, not when the minor reaches the AGE OF MAJORITY.
  • All securities must be turned over to the minor when the minor reaches the age of majority.
  • If the custodian dies, resigns, or for any reason will no longer be the custodian without having appointed a successor, the court appoints a new custodian to manage the account.
  • The custodian may use the property in the UGMA/UTMA account for the support, maintenance, education, and benefit of the minor as long as the custodian is not also the donor. If the custodian is the donor, the custodian may not use the property.
  • A donor can never be compensated for being the custodian.
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31
Q

CORPORATE RESOLUTION

A

The board of directors of a corporation must draft a CORPORATE RESOLUTION to open an account. The corporate resolution:

  • Gives permission to open the account
  • Names the person who will effect transactions for the account
  • Names the person who will sign the certificates when they are being sold
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32
Q

If the corporation decides to open a margin account

A

The CORPORATE RESOLUTION is a document that has been signed by the board of directors authorizing an individual to act in the best interests of the corporation. If the corporation decides to open a margin account, it must also provide a copy of the CORPORATE CHARTER stating that a margin account is permitted and meet all other margin account requirements.
Corporations never need to provide an affidavit of domicile regarding the corporation when opening any account.

33
Q

TRUST ACCOUNT

A

Requires a certified copy of the trust agreement.

34
Q

GUARDIAN ACCOUNT

A

Requires a copy of the court appointment with the fiduciary as guardian. This happens when there are no parents. If no action is taken within 60 calendar days, the certificate of guardianship is declared void.

35
Q

CONSERVATOR OF INCOMPETENTS

A

Requires a court order showing the appointment of the fiduciary as the conservator. If no action is taken within 60 calendar days, the certificate of guardianship is declared void.

36
Q

INVESTMENT ADVISER’S ACCOUNT

A

requires a trading authorization agreement between the adviser and the client.

37
Q

RECEIVER IN BANKRUPTCY ACCOUNTS

A

Requires a court order showing the appointment of the receiver.

38
Q

CUSTODIAL ACCOUNTS

A

Court documents or simple custodial accounts, such as UGMA/UTMA accounts, use a simple custodial agreement.

39
Q

ESTATE ACCOUNT

A

ACCOUNT ADMINISTERED ON BEHALF OF AN ESTATE — A TRUST DOCUMENT or WILL may be required.
–
To open an account on behalf of a deceased person, the broker/dealer must receive the court order naming the executor and the requirement/permission to open the account.

40
Q

WRAP ACCOUNTS

A

Wrap accounts are trading accounts for investors held at a broker/dealer.

41
Q

The investors who have wrap accounts pay the broker/dealer a fee for:

A
  • Investment advice

- The commissions for any trades during the year

42
Q

Wrap Account Fees

A

The fees are charged yearly and therefore, the broker/dealers are said to “wrap all the fees together in one set fee.”

  • However, they are usually paid on a quarterly basis,
  • The fee is based either on a percentage of the investor’s assets or a flat fee based on the amount of assets being managed.
43
Q

The following information is required from the customer to open a brokerage account:

A
  • The full name of the customer — including the customer’s title (e.g., Ms., Dr.)
  • Address and telephone number — a post office box may also be included for all mailings instead of the street address, but the physical address is required to verify that the customer is a resident in the state in which the representative and firm are properly registered.
  • Tax information — Social Security number or tax ID number. If the account is under UGMA/UTMA, the Social Security number of the minor must be used.
  • The age of the investor — minors cannot open accounts or buy or sell securities.
  • Marital status
  • Employment information — occupation of customer and name and address of employer
  • Whether the customer is an associated person of another broker/dealer — registered representatives must request permission from their broker/dealer to open a brokerage account, but mutual fund accounts do not require a similar permission.
  • The name of the registered rep managing the account
  • Approval signatures — once the new account form is completed, the registered principal of the firm must sign the document to approve the account. The registered rep and the customer do not sign the new account form.
  • The name of the registered rep managing the account
  • Signed attestation of ownership — if customers request a numbered account, the broker/dealer must obtain a signed attestation of ownership from them.
44
Q

The registered representative must also obtain the following information from the customer:

A
  • The customer’s financial and tax status, which includes the person’s or family’s income, tax bracket, expenses, net worth, liquid assets, and any other pertinent financial information that will help the registered rep make appropriate decisions.
  • The customer’s investment objectives — growth vs. income vs. risk/reward
  • Any additional information — including the level of investment experience
45
Q

Requirements of a Corporate Cash Account

A
  • New account form
  • No signature by registered rep or by a corporate rep
  • Signature of the accepting principal
  • Corporate resolution
46
Q

Requirements of a Personal (Individual or Joint) Cash Account

A
  • New account form
  • No signature by registered rep or customer(s)
  • Signature of the accepting principal
47
Q

Requirements of a Corporate Margin Account

A
  • New account form
  • No signature by registered rep or by a corporate rep
  • Signature of the accepting principal
  • Corporate resolution
  • Margin agreement
  • Corporate charter
48
Q

Requirements of a Personal (Individual or Joint) Cash Account

A
  • New account form
  • No signature by registered rep or customer(s)
  • Signature of the accepting principal
  • Margin agreement
49
Q

MARGIN ACCOUNT REQUIREMENTS

A

In addition to the new account form that is signed by the accepting principal or branch office manager (BOM), each customer must fill out and sign:

  • The MARGIN AGREEMENT
  • Included in the customer agreement is the HYPOTHECATION AGREEMENT
50
Q

The MARGIN AGREEMENT

A

Also known as the customer agreement, this is the disclosure document that explains to the customer how the credit is extended, how much the margin interest will be, how the securities are pledged, and the amount of securities that can be pledged. The margin agreement now includes the hypothecation agreement and lending authorization; these used to be separate documents. Customers must sign the margin agreement stating that they understand and agree to the terms and conditions of the account.

51
Q

HYPOTHECATION AGREEMENT

A

Included in the customer agreement is the HYPOTHECATION AGREEMENT that allows the B/D to pledge stock equal to 140% of the debit balance in a long account.

52
Q

OPTION ACCOUNT REQUIREMENTS

A

To be able to trade options, the customer must fill out an options account form. This form shows the net worth and the liquid net worth of the investor, as well as a list of the types of option trades that will be allowed.

53
Q

OCC Disclosure Document

A

Prior to discussing options with the customer, the registered rep must send out the OCC Disclosure Document that tells in layman’s terms the risks of the different types of transactions as well as what underlies the different options.

The disclosure document must be sent out at the earliest possible time — prior to talking to the client, prior to opening the account, or at the very latest, prior to entering a trade for the customer. The rep must make a record of when the disclosure document was sent.

54
Q

The Options Agreement

A

After opening the account, the firm will send, by the next business day, the options agreement and the filled out options account form. The customer MUST sign and return the options agreement within 15 days of opening the account. In addition, if there are any discrepancies on the new account form, the client must make the changes and return it to the broker/dealer

55
Q

Upon the death of an account owner, the firm must:

A
  • Cancel all open orders
  • Freeze the account
  • Mark the account DECEASED
  • Not trade without proper documents on file and without instructions from the executor of the account

Securities cannot be sent out until a death certificate has been sent to the broker/dealer. Any checks mailed will be in the name of the owner until the death certificate has been sent to the broker/dealer.
• If the account is a joint account, then the death certificate must be received before the deceased person’s name can be removed from the account.

56
Q

ACCOUNT APPROVAL

A

After all forms are filled out by the registered representative, a principal of the firm, usually the BRANCH OFFICE MANAGER or a partner of the firm, must approve the account by signing the new account form.

57
Q

Depending on the securities that are traded, different managers must approve the opening of accounts and the orders for those securities. If the account or order is:

A
  • For stocks, corporate bonds, government bonds, mutual funds, variable annuities, and limited partnerships, the principal must be a general securities principal (Series 24) or BOM (Series 9/10).
  • For municipal bonds, the principal must be a municipal securities principal (Series 53) or BOM (Series 9/10)
  • For options, a registered options principal (ROP, Series 4) or BOM (Series 9/10) must approve the account
58
Q

LIMITED TRADING AUTHORITY or LIMITED DISCRETIONARY AUTHORITY

A

Customers can permit a registered representative to trade in their account without explicit confirmation of each trade. The registered representative, who has been authorized with a LIMITED TRADING AUTHORITY or LIMITED DISCRETIONARY AUTHORITY, can submit trades without confirming the transaction with customers. If registered reps have discretionary authority over a customer’s brokerage account, they can decide which stock or bond to buy as well as how much to purchase or sell on behalf of the customer.

LIMITED DISCRETIONARY AUTHORITY differs from FULL DISCRETIONARY AUTHORITY in that the latter allows funds or securities to be withdrawn from the customer’s account without supplemental permission from the individual listed on the account.

59
Q

DISCRETIONARY ACCOUNTS require:

A
  • Signatures of all persons who are authorized to exercise discretion over the account.
  • Assigned limited power of attorney (POA). The person with the signed limited power of attorney can only place trades with current assets in the customer’s account.
60
Q

Without having discretionary authorization, the registered representative may determine:

A
  • WHEN to enter an order for the customer

- At WHAT PRICE to trade the security

61
Q

LIMITED DISCRETION

A

LIMITED DISCRETION requires written permission and allows a representative to decide which securities to buy, as well as the quantity and time of the transaction, without the customer authorizing the individual transactions.

62
Q

The specific requirements that must be met for discretion to be granted to a registered representative include:

A
  • The registered rep cannot execute frequent numbers of trades or trades that are excessively large in a discretionary account.
  • The customer must grant written permission for discretion to be valid.
  • A registered principal must approve each discretionary order promptly in writing.
  • Trades that have been executed with discretion must be marked as such, with DISCRETION EXERCISED.
63
Q

A THIRD-PARTY AGREEMENT

A

A THIRD-PARTY AGREEMENT allows an individual who is not named on the customer’s account to instruct the customer’s representative regarding trades in the customer’s account. A client might grant this authority to her spouse or another trusted family member, or to an investment manager who has been hired to make trading decisions on behalf of the client. As with limited discretion, a third-party agreement must be in writing; often a standard form known as a Limited Trading Authorization form is used to grant this authority, but clients may also write a letter to the broker/dealer, indicating that they are granting limited trading authorization to the other party. Both the Limited Trading Authorization form and letter from a client are also referred to as a letter of authorization, or LOA.

64
Q

LOA

A

Letter of Authorization

65
Q

If a customer gives an order to a representative, the representative must execute the order as given.

A
  • If the market begins to move away from the customer, or the rep feels the order isn’t in the customer’s best interest, the rep must still follow the wishes of the customer.
  • No other action can be taken without the customer’s approval.
  • If the market is moving against the customers, the reps can do nothing until consulting with them.
66
Q

Any time that a customer does a stock trade, the following must be on the confirmation of the trade sent to the customer:

A

• The name of the customer and the account number
• The identification of securities that are purchased or sold
• The type of transaction — buy or sell and an opening or
closing transaction
• The amount of securities bought/sold
• Whether the firm acted as a dealer or a broker, and if as a
broker, the amount of commission
• The price per share and the total price including commission
• The time and date the order was executed

67
Q

Any time that a customer does a options trade, the following must be on the confirmation of the trade sent to the customer:

A

• The name of the customer and the account number
• The type of underlying security for the option — stock, index,
interest rate, or foreign currency
• The type class of option — puts or calls
• The type of transaction — buy or sell and opening or closing
transaction
• The amount of options bought/sold and the amount of
commission
• The amount of the premium and the total price including
commission that must be paid or will be received
• The time and date the order was executed

68
Q

Any time that a customer does a Municipal Bond trade, the following must be on the confirmation of the trade sent to the customer:

A

• The name of the customer and the account number
• Issuer, par value and description, such as revenue, general
obligation, and the security underlying the bonds
• State only if the bond is callable and date (not needed if not
callable)
• State only if the bond is in book-entry form (not if bond is a
registered or bearer bond)
• Trade and settlement date, price and amount of accrued
interest, or if trading flat
• Agent or principal transaction
• The lower of the yield to maturity or yield to call

69
Q

ERRORS IN TRANSACTIONS IN A CUSTOMER’S ACCOUNT

A

When an error occurs in a customer’s securities transaction, the firm must make an effort to correct the mistake. Regardless of the type of error that occurs in an account, registered reps must notify their supervisor immediately. Representatives cannot submit order corrections without supervisory approval. A supervising principal must review and approve all cancels, corrections, or other order modifications that are submitted to correct accounting entries.

70
Q

Every transaction that occurs at a broker/dealer firm has five trade confirmations sent out. The confirmations (confirms) go to:

A
  • The contra broker/dealer — the firm on the other side of the transaction
  • The margin department
  • The registered rep handling the account
  • The customer
  • The trading department
71
Q

Some problems that can occur in the trade and/or the confirmation are:

A
  • The wrong account number on the confirm
  • The wrong amount of shares traded
  • The wrong security traded
72
Q

When registered reps discover that an order has been filled incorrectly, their first action should be to?

A

Notify their supervisor

73
Q

The wrong account number:

A

The rep should enter a cancel and submit a correct order ticket to make sure the correct account is credited with the trade.

74
Q

More shares traded than were ordered:

A

The rep should enter an order ticket to cancel the amount of shares traded and reenter two order tickets — one with the correct number of shares for the customer and the other with the remainder for the firm.

75
Q

Fewer shares traded than were ordered:

A

The rep should enter a new order to purchase the additional shares and the customer must accept the price of the two transactions, even if they are different.

76
Q

The amount of shares ordered was correct, but now the customer wants to change the number of shares:

A

If the customer wants to reduce the number of shares, the rep should explain to the customer that they must complete the trade and either pay for or produce the shares for transfer. If the customer refuses, the rep should notify the supervisor and let the firm handle the problem.

77
Q

The wrong security is traded:

A

The rep should enter a cancel order for the original order and reenter a new order with the appropriate securities.

78
Q

A DK notice is sent for any of the following problems on the confirmations between the trading firms:

A
  • Wrong contra broker/dealer
  • Wrong number of shares or securities
  • Wrong security
  • Wrong price for the securities
79
Q

When an order is taken, the order goes:

A
  1. To the WIRE ROOM or ORDER DEPARTMENT to determine where to buy the securities.
  2. Then to the PURCHASE AND SALES DEPARTMENT (P&S) for the buying or selling.
  3. The completed order then goes to the MARGIN DEPARTMENT.
  4. Finally, when all the amounts are determined, the order is sent to the CASHIER’S DEPARTMENT, which sends the bill or other instructions to the customer.

Series 7 (3 decks)

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