Brokerage Accounts Flashcards
How frequently must statements be sent to customers atleast?
Quarterly
linder what conditions must monthly statements be sent?
If there’s account activity during the month
What 3 things do brokerage account provide a historical view of?
- account activity
- security values
- overall balances
When can a firm hold mail for up to three months for any reason?
if customer requests in writing
What is the access = delivery rule?
Firm must have reasonable proof the customer has internet access in order to send electronic statements
How do firms certify their customer has internet access?
Customers sign a request for electronic delivery
When can mail be held longer than 3 months?
for legitimate reasons
When are monthly statements sent? Quarterly?
Monthly if there is activity
Quarterly if there is not
9 things trade confirmations detail?
- customer’s name
- account number
3 security bought or sold - number of shares or units traded
- date and time of transaction
- fees and/or comissions
- capacity of firm
- accrued interest
When must trade confirmations be sent by?
By the time of completion of transaction (settlement)
Who pays accrued interest to who?
bond buyer to bond seller
What must a representative do when they receive a complain?
document and submit i tto their principal
What counts as a complaint by law?
when it is submitted in writing
what does the patriot act require
requires submitting specific pieces of information in order to open new accounts?
What are the four pieces of critical information to open an account?
- name
- date of birth
- address
- SSN or TIN
What must a customer provide to open an account if they are not a US resident?
- passport
- US tax id number
Two ways brokerage firm verify customers identity?
- Checking with credit bureaus to see if info matches
- gov issued iD
What is the purpose of requiring the person’s occupation on account opening?
To see if they are an affiliate of a publicly traded company or works in the industry
Two things controllers are limited by Rule 144
- limited to selling the greater of the last four week’s trading average
or - 1 percent of the outstanding shares, four times a year
What are customers banned from purchasing if they work in the finance industr?
Common Stock IPO
What 3 things must a registered representative do to open an account at another brokerage firm?
- obtain written approval from their employer
- notify them when the account is opened
- provide with duplicate statements and trade confirmations if requested
What type of questions are optional to answer for customers opening an account?
suitability questions
What are the consequences of a customer not giving suitability information?
Firm cannot make recommendations to their customer
What type of account is a cash account?
Regular brokerage account
What does a cash account require the customer to do?
Pay 100% for any securities they purchase
What do margin accounts allow customers to do?
Borrow from broker dealer
Who signs the new cash account form and who doesn’t?
- Registered representative may sign
- Principal must sign
- customer does not sign
What is the phrase that means the principal will sign the cash account form?
“in good order”
What does the firm have to send the customer after cash account is confirmed and in how many days?
A confirmation of the information they provided on the new account within 30 days
What is the firm required to verify in a cash account and how often?
Customer information every three years
What does the customer sign when opening a brokerage account?
Arbitration agreement
What does the arbitration agreement force between the firm and customer and what does it do?
Any disputes between the customer and the firm into binding arbitration which makes the customer unable to sue the firm in court
Through what manner can customers gain restitution for disputes?
FINRA’s arbitration system
What does the registered representative’s signature claim?
THe information in the form is correct
Customers cannot sue firms if they’ve signed an….
arbitration agreement
Whose signature effectively approves a cash account?
principal
What counts as an individual account?
An account owned and operated by one person
What three are registrations chosen based upon?
- account ownership
- tax reporting
- beneficiary designations
What kind of account maintains a transfer in death (TOD) designation?
individual account
Who can inherit a Transfer On Death (TOD) account?
Person or an organization
What is the role of a probate court?
distributing a deceased person’s assets to surviving family, friends, and creditors
What kind of circumstance/account do probate courts handle?
Assets and accounts without named TODs
What two things must a beneficiary provide to receive inheritance from TOD?
- certified death certificate
- account
What is the difference between TODs and wills
TOD are contracts etween customer and firm to turn over assets and account to named beneficiary
Wills created outside of custodial firm with legal assistance
What is the difference in probate between wills and TOD?
TOD are handled outside of probate, wills are subject to probateWhat
What supercedes? Wills or TOD?
TODs supersede
What does it mean if a person dies testate?
Have a valid will in plae prior to death?
Who is the executor in the will?
Person nominated to handle deceased person’s estate
What must the executor do to gain legal authority?
present the will to their local probate court
What are two responsibilities of executor?
- Paying off outstanding debts and taxes
- distributing remainaing assets to beneficiaries
What is a letters testamentary?
The document a court gives that validates the will
What must the executor present to the firm maintaining custody of the decedents?
The letters testamentary
Three ways intestates differ from testate?
- Surviving family members petition probate to nominate estate administrator instead of executor
- Court issues letters of administration to confirm person
- Letters of administration are submitted to firm
What three things must be cancelled immediately upon a customer’s death?
- limit orders
- stop orders
- stop limit
Three things that must happen after death of customer?
- Cancel pending orders
- flag as deceased
- Obtain proper documentation
What is necessary if the decendent resided in a state with estate tax?
Inheritance tax waiver
What does the inheritance tax waiver do?
Ensures proper protocols are being followed
What is a numbered account?
Does not show the customer’s name but a string of numbers
What does the probate court determine?
distribution of estate assets
What does a TOD avoid?
Probate
4 typical documents required to claim accounts
- certified death certificate
- letters of testamentary (if no TOD and died testate)
- Letters of administration (if no TOD and died intestate)
- Inheritance tax waiWhat must ver
What must customer provide to open numbered account?
Written attestation of ownership
two types of joint accounts
with rights of survivorship
tenants in common
What do joint with rights of survivorship accounts provide?
Equal ownership rights to all owners
Why would joint with rights of survivorship accounts contain a TOD?
If all account onwers pass away
What do tenants in common accounts provide?
Specific ownership allotments to their owners
What happens if someone passes away in a TIC account?
Their percentage becomes property of their estate and is handled in probate court
How do account premissions work between all owners of joint accounts?
They all have the same permissions
What is the probate differentiation in WROS and TIC?
WROS avoid probate
TIC subject to probate
What’s the difference between Tenants by entirety TBE/community property and joint WROS accounts?
ONly married couples may open tenants by entirety/community property
Whose names must be written on checks in a joint account?
All joint owners?
Three things all joint owners can do?
- trade
- receive mail
- manage account
Who must echecks be made payable to in a joint WROS account?
All owners of the account
Who receives the assets of the deseased in a TIC account?
The decendent’s estate
What does a Power. ofAttorney allow?
someone other than the account owners to take action in the accounts
What are 4 types of POAs?
- Limited poa
- full poa
- non durable poa
- durable poa
What can a limited POA do/not do?
only perform transactions. onaccoutn but not withdrawal
What can a Full POA do?
Transactions as well as withdrawals
What is the difference between durable and non durable POA?
Durable POAs survive incapacitation whereas non-durable POAs cease to exist if account owner becomes incapacitated
When does a Power Attorney Cease
Either at incapacitation (non-durable) or deathWhat
What is POA also referred to ask?
Trading authorization
What does a discretionary account provide?
provides a financial professional with trading authority over an account
What type of account is a discretionary account?
a fiduciary account
What is a fiduciary?
Third party overseeing another person’s assets
WHat must trades be marked as if your broker has POA on your acconts?
Marked as discretionary
What are the three decision areas discretionary orders make on behalf of a customer?
- Asset
- Action
- Amount
What do asset, action, and amount each refer to?
Asset: what security is being bought or sold
Action: if the security is being bought or sold
Amount: how many shares or units are being bought or sold
What is the AAA rule?
If the financial professional chooses the asset action. oramount, the order is considered discretionary and requires POA to be submitted.
What two things can be decided WITHOUT POA?
- price of the security
- time of trade
In what two situations can a financial advisor not have to mark a trade as discretionary?
If they choose the price and/or time of transaction and if principal reviews right away
How long must the trade be completed in order to maintain a non-discretionary status?
1 day
What are discretionary accounts marketed to investors as and why?
Wrap accounts because they have all. theservices wrapped up into one fee
How are wrap account fees charged?
Asset under management AUM
What type of account is a wrap account?
type of discretionary
When must trading authority be received for any discretionary trades being placsed?
prior to
Are discretionary accounts supervised more or less rreuently?
more frequently
When must discretionary trades be approved by prinicipal?
promptly after order entry
A wrap account is considered what type of product for regulatory purposes?
investment advisor product
WHAT ARE THE TWO TYPES OF custodial acscounts?
UGMA and UTMA
Who is tax reported under for a custodial account?
minor’s SSN
What are 3 restrictions. on custodial accounts?
- may not be transferred to another
- only one custodian and minor per account
- contributions are irrevocoble
who can open a brokerage account on behalf of a minor?
any adult
Why type of account is a guardian account?
fiduciary
What type of investments must guardian accounts avoid?
risky
WHEN ARE GUARDIANSHIP accounts opened?
when someone cannot manage their own finances, incapacitation
Who manages the guardian account?
managed by court-appointed guardian
Three people involved in trust accounts?
- grantors
- trustees
- beneficiary
What are grantors responsible for
creating and funding the trust
What does the beneficiary specify in the trust agreement?
- objectives
- management style
- trust beneficiaries
What is the risk environment for trust accounts?
You can be more risky and open it as margin
What does the trustee do?
manage. thetrust for beneficiaries
what type of account is a trust account?
fiduciary
who can place trades in a trust account?
the managee
When can a trust account be a margin account?
when it is explicitly approed in the trust agreement
what type of account is not eligible for margin?
cash account
what are two roles of limited partnerships
- one who manages the origination
- one who invests in the organization
What must be submitted for either type of partnership?
A partnership agreement
What 3 things must a partnership agreement include?
- business name
- partners’ information
- roles and responsibilities of partners
What two things need to be submitted to open a corporate account?
A corporate charter and a corporate resolution
What does the corporate charter confirm?
The corporation’s legal status
What does the corporate resolution name?
The corporation’s employees that may act on behalf of the entire corporation
Are business/partnership accounts considered a type of joint account?
NO
What type of document is required to open a business account for a limited partnership?
A document naming all general and limited partners
What is a prime brokerage account?
Brokerage accounts where there is one central broker with many other brokers actually executing trades
Who is always the prime broker?
The financial firm
What are three things the prime broker does?
- maintains custody of assets
- recordkeeping
- send trades to various firms
What type of investor most often uses prime brokerage accounts?
hedge funds
On what, and how do clients save with prime brokerage accounts?
They save on interest using margin loans all through one firm cuz firms charge lower interest for larger loans
What are the two main types of accounts at brokerage firms?
Cash and margin
What two things define cash accounts?
- require customers to pay 100 percent for each security
- prohibit strategies that involve unlimited loss potential
What do margin accounts allow for?
Borrowing money for investment purposes
Wht does using levrage in a brokerage account do?
Amplify gain or loss
What must customers fill out and sign before opening a margin account?
The margin agreement
What are the three subsections of a margin agreement/
- hypothecation agreement
- crdit agreement
- consent loan form
What. isa hypothecation agreement?
Customer pledges securities as collateral for their margin account
What is rehypothecation and who does it?
Rehypothecation is when broker-dealers pledge their customers’ securities to banks in return for a loan
What does Regulation U allow?
broker-dealer to rehypotheciate securities up to 140% of the amount of the customer’s loan to the bank. matu
What are defensive stocks?
Defensive stocks (non-cyclical) do not respond significantly to volatility in the market
how does the broker dealer make money rehypothecating?
They take the borrowed money from the bank and re-loan it at a slightly higher interest rate
What is the broker loan rate?
The difference between the interest rate paid by the broker to the bank and the interest rate charged to the broker dealer’s customer
What two things does the agreement for a margin account contain?
- method of acalculating margin interest
- repayment schedule
when must a disclosure be provided for margin account?
If the inverstor’s credit will be checked
What is the loan consent form?
The agreement to allow the broker dealer to lend out their securities to other customers for short sales
When can one persons investments be held in another person’s account?
Margin accounts
When is comingling of securties allowed and not alloweid?
Allowed: for margin accounts
Not allowed: For cash accounts
Which does and does not have to be signed by the customer in the margin agreement?
Credit agreement must be signed
Loan consent does not
Regulation U covers what relationship?
Broker dealer and bank
What does the hypothecation agreement do?
pledge the customer’s securities as collateral
What is the rehypothecation rate?
140% of the debit balance
Which margin agreement allows the firm to lend customer margin securities?
loan consent form
The credit agreement details…?
THe margin loan structure and how interest is computed
How much must an investor deposit into a margin account to comply with regulation T?
They must deposit 50% of the overall transaction
How much is required by FINRA to have in margin equity to make margin loans?
2000
Which deposit requirement is used between FINRA’s and Regulation T?
Whichever one is greater
What can an investor do to avoid the deposit requirements?
Hold fully-paid securities as collateral for margin account
What are marginable securities?
Securities that can be purchased with borrowed funds or act as collateral
What are 6 examples of marginable securities?
- exchange listed stocks
- federal reserve approved OTC stocks
- debt securities
- Primary offerings after 30 days of ownership
- LEAPS options with more than 9 months to expiration
- Warrants
What type of securities can not be purchased on margin with borrowed funds, but what can the be used as?
IPOs and Mutual FUnds can be used as collateral towards a purchase of another security
What are 5 non-marginable securities?
- otc stocks not approved by the federal reserve
- primary offerings held less than 30 days
- Any option with 9 months or less to maturity
- Insurance products
- rights
What 5 accounts cannot use margin?
- Custodial accounts
- Guardianship accounts
- Trust accounts
- Education plans
- Retirement accounts
When can trust accounts be used margin?
When they are specifically authorised in the trust agreement
How many business days is Regulation T settlement?
Two business days after regular way settlement
What two things can happen if the invstor does not deliver the required cash or securities by Regulation T settlement?
- request an extension for the customer
- freeze the account
What is the most common process when a customer does not deliver the cash or securities for Regulation T?
Liquidating the customer’s positions and freezing the account
What CAN a customer still do with a frozen account?
perform transactions if the funds are immediately available
How long do accounts remain frozen?
90 days
What two things does Regulation T require?
- 50% deposit for margin trade
- May deposit 2x Reg T requirement in fully paid securities
What is the minimum equity requirement in FINRA margin account?
2000
When is an account frozen?
When customer misses REg. T settlement
What is the T+ for Regulation T settlement?
T+4
What organization offers extensions for REgulation T settlement?
FINRA
What is the initial deposit requirement in a cash account?
100% of transaction value
What does equity represent in a margin account?
The customer’s net ownership value
What are two equity formulas?
- long account equity formula
- short account equity formula
What is the formula for equity in a long account?
LMV-Debit = Equity
What does Long Market Value represent?
Overall value of all owned securities held in the account
What does debit represent in the long equity account formula?
The outstanding loan amount borrowed from the broker dealer
What do you do to the equity formula if the person sells the stock?
Add the gains from the stock sale to the LMV
What is the formula for a short account equity?
Credit - SMV = Equity
What does the credit represent in the short acount equity formula?
The cash held in a margin account being held to buy back shares
What two places does the cash(the credit) come from in a short margin account?
- short sale
- deposit when creating the short position
What does SMV Short market value stand for?
The overall value of the short securities in the account
What is the formula for credit balance in a short margin account?
the combination of the amount sold short and the customer deposit
What is the combined equity formula?
LMV+Credit-SMV - Debt
What is the formula for equity level?
Equity/Market value
What is the minimum maintenence percent for long accounts?
25% equity
WHen is a long account considered restricted?
When it is below 50% in equity
What must be done when the long accoun t is below 50% equity?
Half of any sales proceeds must be used to pay back borrowed funds
What is the minimum equity maintenance for short accounts?
30% equity
What does it mean if a short account goes underwater?
If the market value went above the credit balance
What is the FINRA rule number that requires a very specific process for opening an options account?
FINRA Rule 2360
What are the 5 steps to open an options account according to FINRA Rule 2360?
- Customer fills out the new account form
- Financial representative provides ODD
- Account is approved by an options supervisor
- First trade “open” the account
- Customer returns signed options agreement within 15 days
What personal information must customer disclose to open options account?
Name
DOB
SSN
Address
What are the consequences of the customer not providing enough suitability info?
Higher risk of count being disapproved
Who is the form sent to when the options account form is filled out?
ROP- Series 4 or General Security Sales Supervisor
What must the firm send the investor and after what action?
15 days after options account is opened, options form
What type of confirmation must the customer give to affirm the documentation for an option account?
Negative confirmation
Who must present what after the new account form is completed for options accounts?
The representative must provide the Options Disclusure Document
When must the ODD occur delivery?
Prior to opening an options account or any options-related discussion.
What does the suitability for form options trading determine?
The level of options trading the investor is eligible for
How many days does the options customer have to return signed options agreement?
15
What happens if the signed agreement for options is not returned within 15 days?
The account will be restricted to only closing transactions
What 3 things does the Options Disclusre Document Dislose?
- Characteristics
- Risks
- Beneits of otpions
What two thingsdoes the options agreement confirm that the investor has done?
- received the ODD
- Will abide by OCC rules
What license does the Registered options prinicipal hold?
Series 4
What license does the General Securities Sales Supervisor Hold?
9/10
Who are the two people that may approve options accounts?
- General Securities Sales supervisor
- Registered options principal
What is the ROP supervisor over?
Options activity
What is the General Securities Sales Supervisor supervisor over?
General brokerage activity
What two documents must be delivered and when?
THe ODD must be provided immediately and the Options agreement within 15 days
What is SIPC Insurance?
Non profit that provides insurance to brokerage firm customers incase of broker-dealer’s bankruptcy
What does the SIPC do when a brokerage firm becomes insolvent?
Ensures their customers receive the assets in their accounts
Up to how much money do SIPC insurance cover brokerage firm customers for securities and cash and per what?
500,000 total, up to 250,000 in cash per registration
What is not covered by SIPC in a margin account?
Only equity, not cash
What must a customer deduct from their margin account to apply for SIPC coverage?
If they owe any money to the broker-dealer
What type of creditor does a customer become if the coverage exceeds the limits of SIPC insurance?
general creditor
What two times does a broker dealer have to provide annual confirmations of SIPC?
at opening
annually
Does SIPC coverage cover per account or per person?
Per person
What is covered first by SPIC in the event of broker dealer failure?
Cash first, then securities
What 4 things do Business Continuity Plans (BCP) include?
- data recovery programs
- meeting locations for employees
- alternative communication plans for employees
- alternative communication plans for customers
Where/when must firms provide outline to Business Continuity Plans?
When they first open account
When requested in writing
make it available on website
What do business continuity plans provide?
protocols in the event of business disruption
