CH 13 Customer Accounts Flashcards
List some items that are found on a customer confirmation.
Trade date, time of trade (or available on request), buy/sell, description, price, number of shares/units, CUSIP number
If Mary has a cash account as well as an IRA account, what coverage will SIPC provide?
The cash account is one customer and the IRA (which is a trust) is a second customer. So, $500,000 for each customer.
True or False: Prior to recommending stock to a client, the member must review the issuer’s current financial condition.
TRUE
If a client grants discretion to a third party, what must be obtained?
The signature of the person who has been granted discretion must be obtained.
True or False: At death, assets in an account with a Transfer on Death designation are subject to estate taxes.
TRUE
What are some of the special standards that firms follow in regard to soliciting sales of penny stocks?
Determine suitability, principal approval, send risk disclosure, client’s written authorization for the first 3 trades
For a power of attorney to be effective, what must happen?
It must be signed by the client and accepted by a principal of the firm.
Under the Customer Identification Program of the USA PATRIOT Act, what information MUST be obtained about a client?
Date of birth, name, address, and an ID number
Define penny stock.
A non-exchange-traded (OTC) equity with a bid price below $5.00
When is a firm required to provide John with a privacy notice?
At the time the account is opened.
How much SIPC coverage is provided for Tom’s individual and joint accounts?
Tom will have $1 million of coverage, since each account is covered separately.
What action should be taken to protect the interests of any beneficiaries if a client dies?
Outstanding orders should be cancelled.
At the death of a client with a Transfer on Death designation, what happens to the assets?
Assets are transferred without going through probate.
What type of power of attorney is required for an individual to buy and sell securities in a client’s account?
Limited power of attorney
What is required for an account being opened for a client who wishes to engage in short selling stock?
(1) Principal’s signature and (2) client’s signature (since the activity requires a margin account)
True or False: Customers are required to sign the Loan Consent Agreement.
False. Signing the agreement is optional.
True or False: Transmitting unsolicited advertisements to fax machines are permitted.
False. Unsolicited transmissions to fax machines are prohibited.
May uncovered option positions be permitted in a custodial account for minors?
No. Uncovered option positions require the use of a margin account, which is prohibited for minors.
What will SIPC cover in a customer’s margin account?
Only the customer’s equity (securities clear of any outstanding loan)
What defines an established customer?
An established customer is one that has traded with a firm for more than one year.
True or False: When a client signs a power of attorney, it is immediately effective.
False. A power of attorney is not effective until approved by a principal of the firm.
What is required to open an account for a partnership?
A Partnership Agreement is required.
What does full power of attorney allow a person to do?
It allows a person to buy or sell securities, transfer assets, or have check writing privileges.
What is needed to exercise discretion over a client’s account?
Written power of attorney
What document must Meg present to take over her husband’s affairs as conservator?
A court-certified copy of the certificate of appointment of the conservator to act for her incapacitated husband
Who may enter orders in a joint account?
Any owner named on the account
What are a BD’s obligations regarding its Customer Identification Procedures (CIP)?
Firms are required to obtain and verify certain customer information when opening accounts.
How often must member firms send clients an account statement?
At least quarterly
True or False: A firm may hold client shares in its vault, at the DTCC, or with a prime broker.
TRUE
True or False: A Transfer on Death (TOD) designation creates a joint account.
False. The beneficiary has no control over the assets in the account.
What document allows a BD to lend customer securities to someone wishing to sell them short?
Loan Consent Agreement
Is Jess an established client if she has purchased Omega Industries, a penny stock, on three separate occasions?
No. Established customers are those who have purchased three different penny stocks on three separate days.
How long must a client’s name and number be kept on the Do Not Call List?
Indefinitely.
What describes the customer’s pledging of securities as collateral to the BD?
The Hypothecation Agreement.
True or False: The capacity in which a firm acts appears on both the confirmation and the order ticket.
False. Firm capacity is disclosed on the confirmation, not the order ticket.
What happens to the power of attorney to exercise discretion if the client dies?
The client’s death invalidates the power of attorney.
True or False: The TCPA requires the caller to disclose her BD’s CRD number.
FALSE
What is the purpose of ERISA?
To establish guidelines for private sector retirement plans and protect employees from improper investments by employers.
May a wife enter trades in a husband’s account?
Yes, with written third-party authorization.
True or False: A client must provide signed acknowledgement of receipt of the penny stock risk disclosure document.
TRUE
What protects customers from BD bankruptcy?
Securities Investor Protection Corporation (SIPC).
Under the TCPA, how is an established customer defined?
One that has made an unsolicited inquiry or effected a transaction with the firm.
Under penny stock rules, from what requirement are established customers NOT excluded?
The penny stock disclosure rules.
What is a guardian?
A form of court-appointed custodian.
What is required for Jerry’s son to pay bills and make investment decisions while he’s on vacation?
(1) A signed request from the client, and (2) full power of attorney.
True or False: Principals must approve discretionary orders prior to entry.
False. The orders must be approved promptly afterward.
Under the UGMA, when may a gift given to a minor be revoked?
Under no circumstances, since gifts to minors are irrevocable.
True or False: Long or short futures positions are permitted in a custodial account.
FALSE
What happens to securities registered in the customer’s name if a BD goes bankrupt?
They are returned to the customer without regard to SIPC limitations.
True or False: Only one person must provide information to open a joint account.
False. Each owner must provide information to open a joint account.
How often must customer account information be updated?
Every 36 months.
True or False: Both limited and full power of attorney allow a person check-writing privileges in a client’s account.
False. To authorize check-writing privileges, full power of attorney is required.
Give some examples of what SIPC does NOT cover.
Fraud, futures contracts, and commodities.
What happens to securities that are able to be specifically identified as belonging to a client for SIPC purposes?
They are distributed to the client without regard to the dollar amount limit.
Under Regulation SP, who is considered a customer?
Someone who has an ongoing relationship with a firm.
List the proper naming sequence for registering a custodial account.
Custodian’s name, then the minor’s name, followed by the appropriate state.
Under the TCPA, when does an existing relationship exist?
If a client has engaged in transactions with a firm within 18 months.
What opt-out methods are acceptable for a client wishing to prevent a firm from sharing personal information?
Calling a toll-free number and returning a postcard.
What happens to the power of attorney if an investor who granted it dies?
It is cancelled upon the death of the principal in the account.
Under Penny Stock Rules, when does a customer become established?
When they have purchased 3 different penny stocks on 3 different occasions, or they have been a customer for one year.
Does SIPC protect separate customers or separate accounts?
Separate customers.
True or False: Penny stock trades that are NOT recommended by the BD are exempt from the disclosure rules.
TRUE
What is SIPC?
Securities Investor Protection Corporation. SIPC protects separate customers in the event of BD bankruptcy.
How is SIPC funded?
Through assessments on BDs that are SIPC members.
True or False: Firms may use the official SIPC logo or create their own.
False. Only the official SIPC logo may be used.
What is the use of a Transfer on Death (TOD) designation?
It allows the owner to name one or more beneficiaries for his account in the event of his death.
Under Penny Stock Rules, from what requirements are established customers excluded?
Account approval for such stocks and the provision for obtaining client consent for the trade showing stock and quantity.
According to the TCPA, what information must telephone solicitors provide to clients?
Their name, firm name, a telephone number, or address where they can be contacted, and the purpose of the call.
True or False: Penny stock rules govern the recommendation of a $4.00 OTC stock to a new client.
TRUE
True or False: Penny stock trades with institutional accredited investors are subject to the disclosure rules.
False. These trades are excluded from the disclosure rules.
True or False: Under Regulation SP, requiring a client to write a letter to opt-out of information sharing is allowed.
FALSE
What two forms are required for Sue’s son to make her investment decisions and pay her bills while she’s on vacation?
(1) Full power of attorney, and (2) a signed request from the client.
True or False: All corporate officers may effect transactions for the corporation.
False, only those named in the Corporate Resolution.
When must an RR obtain customer information in the process of opening a new account?
Prior to entering the first order.
What times are allowed for calls under the Telephone Consumer Protection Act (TCPA)?
From 8:00 a.m. to 9:00 p.m. local time of the called party.
What must a BD handling a discretionary account do with each order?
Review and approve each order by the end of the trading day.
What steps are taken if a customer dies?
Mark the account ‘deceased,’ cancel open orders, and await instructions.
True or False: An individual who has been granted discretionary authorization is considered a co-owner of the account.
False. All account assets remain the sole property of the account owner.
What document would no longer be valid if a brokerage client with a discretionary account dies?
A power of attorney.
True or False: All discretionary orders must be pre-approved.
False. Discretionary orders are required to be reviewed and approved on the day the order is entered, not in advance.
How are joint accounts considered by SIPC?
Joint accounts are considered separate from individual accounts.
How much SIPC coverage is provided for Jim’s cash account containing $275,000 of cash and $185,000 of securities?
SIPC coverage is provided for $250,000 of cash and the full $185,000 of securities.
What other documents may be required at the time of a client’s death?
Inheritance tax waiver, affidavit of domicile, and letters testamentary.
Describe the employees who must be eligible to contribute to an ERISA qualified plan.
Employees who are 21 years or older with one year of full-time service.
True or False: Names appearing on the OFAC List are customers who had a previous business relationship with the firm.
False. The list shows the names of suspected terrorists and criminals.
If a customer changes his address, where and when must notification of the change be sent?
Notification must be sent to the customer’s old address within 30 days of the change.
How often are BDs required to send statements to clients regarding penny stocks in their accounts?
Monthly.
To not be required to justify a recommendation, what must an institutional client be able to make?
An independent evaluation of the recommendation.
What happens to the deceased’s portion in a joint account with tenants-in-common?
The deceased’s portion goes to his estate for tax purposes.
ERISA gave the U.S. Government jurisdiction over what type of plans?
Private pension plans.
To not be required to justify a recommendation, what must an institutional client be able to make?
An independent evaluation of the recommendation
ERISA gave the U.S. Government jurisdiction over ___________________ plans.
ERISA gave the U.S. Government jurisdiction over private pension plans.
Tim has both a cash and margin account with the same BD. If BD bankruptcy occurs, how are Tim’s accounts handled?
Tim’s accounts are combined for SIPC coverage purposes.
Any ______ may be named as the custodian for a custodial account.
Any adult may be named as the custodian for a custodial account.
True or False: Custodial accounts are solely carried in the name of the minor.
False. The account is in the custodian’s name for the benefit of the minor.
Ted’s dad has been declared incompetent. A court names Ted to oversee his dad’s brokerage account. What does Ted need?
Evidence of appointment of incumbency
A client granting third-party authorization to another person does NOT constitute ______ ownership.
A client granting third-party authorization to another person does NOT constitute joint ownership.
From what requirement of the penny stock rules are established customers exempt?
The account approval requirement
The ___________________ must sign the account form.
The supervising principal must sign the account form (clients are not required to sign).
If a security is quoted on the OTC market at 4.85 - 5.03, what is it considered?
A penny stock
Under the Customer Identification Program, may accounts be opened for clients refusing to provide required information?
No
Explain the concept of holding securities in street name.
This is when client securities are held by and registered in the name of the BD
When is a firm obligated to disclose its markup?
When acting in a principal capacity for trades involving listed securities or riskless principal trades
True or False: When a client grants third-party authorization to another person, the account becomes a joint account.
FALSE
If a firm acts in an agency capacity, the ___________ must be disclosed on a confirmation.
If a firm acts in an agency capacity, the commission must be disclosed on a confirmation.
SIPC provides coverage of $_________ of which no more than $_________ can be cash.
SIPC provides coverage of $500,000 of which no more than $250,000 can be cash.
To what trades do penny stock rules apply?
Recommended or solicited trades of penny stocks
True or False: All discretionary orders must be approved verbally by the client by the end of the day.
FALSE
What is some of the important information to obtain when opening a new client’s account?
Name, address, age, occupation, SSN, citizenship, income, net worth, objectives, risk tolerance, investment experience
Joan left a message on a BD’s voicemail requesting information about opening an account. May she be called at 9:01 p.m.?
Yes. Call time restrictions do not apply since Joan has made an unsolicited inquiry of the firm.
What is required for a not-held order to be valid for more than one trading day?
A client’s written authorization
When is a privacy notice presented to a customer?
No later than when the relationship is established
Upon receipt of a death certificate, the existing power of attorney is __________.
Upon receipt of a death certificate, the existing power of attorney is cancelled.
Under the TCPA, time-of-day restrictions are applied based on the ____________ of the call.
Under the TCPA, time-of-day restrictions are applied based on the destination of the call.
True or False: Confirmations must disclose the profit earned and whether the firm publishes research reports on a stock.
FALSE
Client information is sent to the client within ____ days of the account opening and updated at least every ____ months.
Client information is sent to the client within 30 days of the account opening and updated at least every 36 months.
When may telemarketers place calls to prospective clients?
From 8:00 a.m. to 9:00 p.m. on any day of the year
True or False: A client must approve each discretionary trade in writing before it is executed.
False. Once the client’s written authorization is obtained, discretion may be exercised without trade-by-trade consent.
Account statements must be sent to customers at least ____________.
Account statements must be sent to customers at least quarterly.
What is TOD as it relates to a customer account?
Transfer on Death. TOD allows assets to transfer to a named beneficiary at owner’s death.
Because margin is not allowed in a custodial account, what activities/investments are prohibited?
Short selling, uncovered option positions, and commodity futures contracts
True or False: Customers are required to sign the loan consent agreement.
False, the loan consent agreement is optional.
When a child reaches legal age, what action is taken in the custodial account?
The custodian must transfer the assets to the owner.
If a firm uses the SIPC logo on its Web site, what must it include?
A hyperlink to the SIPC Web site
What happens to the deceased’s portion in a joint account with right of survivorship?
Her portion passes to the survivor.
True or False: Transfer and hold is an alternative to holding client securities in street name.
True. Transfer and hold indicates the securities are registered in the client’s name, but held at the brokerage firm.
True or False: An account may be opened without a completed Form W-9.
True. However, if a Form W-9 (Request for Tax ID # and Certification) is not completed, backup withholding will apply.
How many business days prior to presentation must evidence of incumbency be dated?
No more than 60 days
True or False: Jim’s joint account with his wife is considered a separate customer by SIPC.
True. E.g. Jim’s cash and margin account are combined for coverage, but Jim’s joint account with his spouse is separate.
According to the Uniform Gifts to Minors Act, gifts to minors are ____________.
According to the Uniform Gifts to Minors Act, gifts to minors are irrevocable.
What regulation protects the non-public personal information of customers?
Regulation S-P
How often must an updated copy of the privacy notice be provided to customers?
At least once during each 12-month cycle
What information is found on a confirmation and NOT an order ticket?
Firm capacity, accrued interest, commission, and CUSIP number
True or False: Clients need not sign the account form for a cash account.
True, but signature would be required for an option or a margin account.
_____ power of attorney is required for a named person to trade for the account owner’s benefit and/or remove funds.
Full power of attorney is required for a named person to trade for the account owner’s benefit and/or remove funds.
Ben’s margin account has a market value of $800,000 and a debit balance of $350,000. How much SIPC coverage is provided?
In a margin account, SIPC covers the net equity (market value minus debit). In this example, $450,000.
True or False: BDs may accept oral permission from clients to exercise discretion in their accounts.
False. The client’s prior written authorization is required.
A BD client of six months has purchased penny stocks on five occasions. What is the client considered?
An established customer
When is confirmation of a transaction sent to a client?
No later than completion of the transaction
For SIPC purposes, what is a money-market mutual fund considered?
The fund is considered a security, not cash.
When a BD is acting as agent for both the buyer and seller, what must be disclosed on the confirmation?
The BD must disclose (or offer to disclose) the name of the contra-party, compensation received, and time of the trade.
Regulation S-P requires clients be provided with a ______________ detailing how BDs handle personal client information.
Regulation S-P requires clients be provided with a Privacy Notice detailing how BDs handle personal client information.
If the owner of a discretionary account becomes incapacitated, what happens to the power of attorney?
The power of attorney is void and the appointment of a guardian/conservator would be required.
After receiving client authorization, whose written approval is required to exercise discretion in the client’s account?
A partner, officer, or other appropriately registered official of the member firm
Who is considered the legal owner of all the cash and securities in a custodial account?
The minor
According to Regulation SP, what information must be included in a BD’s privacy notice?
Type of personal information collected, third parties with whom the information is shared, and an opt-out provision
True or False: When documenting third-party authorization, a BD must record the date on which authorization is granted.
TRUE
True or False: A not held order may be executed at any point during the course of a week.
False. Not held order may only be executed on the day the order was entered.
To have the authorization to buy or sell securities in a client’s account, an RR must have ________ power of attorney.
To have the authorization to buy or sell securities in a client’s account, an RR must have limited power of attorney.
What is ERISA?
Employee Retirement Income Security Act
True or False: A customer confirmation is only required to disclose whether the firm was acting in an agency capacity.
False. Confirmations must disclose whether a firm acts in an agency or principal capacity.
What must be checked before a BD makes telephone solicitations?
The firm’s Do Not Call List
Does this order require prior discretionary authorization? “Buy 300 shares of DMB this week”
Yes, since it is NOT a not held order. Not held orders are only good for a trading day, and this order is for the week.
Under the TCPA, if requested, a client must be placed on the Do Not Call List within ____ days of request.
Under the TCPA, if requested, a client must be placed on the Do Not Call List within 30 days of request.
What is required for an RR to execute trades and have check-writing privileges in a client’s account?
Written authorization from client, written acceptance by a principal, and full power of attorney
Under the TCPA, on what days do the call time restrictions apply?
The call time restrictions apply on every day of the year.
Under Regulation SP, a _________ is someone who gives nonpublic, personal information to a BD that may result in trades.
Under Regulation SP, a consumer is someone who gives nonpublic, personal information to a BD that may result in trades.
True or False: The owner of an account with a Transfer on Death (TOD) designation may change her named beneficiary.
TRUE
What is required if the evidence of appointment of incumbency is dated more than 60 days prior to presentation?
It must be recertified.
Define promptly as it relates to a principal’s approval of discretionary orders.
Promptly means on the day of the trade, but not in advance.
A principal of a member firm must approve discretionary orders __________.
A principal of a member firm must approve discretionary orders promptly.
What is the penny stock commission limit for a BD to be excluded from the penny stock disclosure rules?
The BD’s penny stock commissions may not exceed 5% of its total commissions.
According to penny stock disclosure rules, what must BDs disclose for each penny stock trade?
The current quote of the security and the compensation to be received by both the BD and RR
True or False: Third-party authorization may NOT be given to a person who is neither a blood relative nor U.S. citizen.
False. There is no requirement that the person granted authorization be a U.S. citizen or relative of the account owner.
May a custodian make speculative investments in a minor’s account?
Yes, provided they are suitable based on the objectives.
If a client refuses to disclose her age when opening an account, what should the BD explain to her?
The firm should explain that without proof of age, an account may not be opened.
What equities are excluded from the definition of a penny stock?
Exchange-traded stocks, investment company securities, OCC-listed puts and calls, and stocks priced at $5.00 or more
What program must be established by BDs to verify the identity of each customer opening an account?
Customer Identification Program (CIP)
True or False: Before settlement, a client may transfer a trade executed in her cash account to her margin account.
TRUE
True or False: SIPC provides coverage for both commodities and futures accounts.
FALSE
What is the OFAC List?
The Office of Foreign Assets Control of the U.S. Treasury List; it identifies suspected terrorists and criminals.
Since the _______ is responsible for any tax liability, custodial accounts use the tax ID of the _______.
Since the minor is responsible for any tax liability, custodial accounts use the tax ID of the minor.
Both the ____________ and the ____________ are required for a corporation to open an options or margin account.
Both the Corporate Resolution and Corporate Charter are required for a corporation to open an options or margin account.
As it relates to account management, what is the role of a guardian?
To handle the affairs of a person who is legally disabled based on age, or physical or mental incapacity.
True or False: For trades involving bonds, confirmations must disclose the yield computation used (i.e., YTM or YTC).
TRUE
Under Regulation SP, what method of opting out of information sharing is considered too burdensome for a client?
Requiring the client to write a letter, however, a customer may opt out by calling the firm.
True or False: Client signature is required when opening either a cash or margin account.
False. Client signature is required when opening a margin account, but not a cash account.
For active accounts, many firms send account statements ________.
For active accounts, many firms send account statements monthly.
Prior to a client’s initial penny stock trade, what must the client receive?
A risk disclosure document.
Why is short selling not permitted in a custodial account?
Because short sales may occur only in a margin account, and minors are not permitted to establish margin accounts.
When are firms required to provide a non-customer (consumer) with a copy of their privacy notice?
Prior to the sharing of non-public personal information.
Customers become ___________________ if their cash or securities positions exceed SIPC coverage.
Customers become general creditors if their cash or securities positions exceed SIPC coverage.
When are covered option positions and penny stock transactions permitted in a custodial account?
When they do not comprise a significant portion of the account assets.
A child with a UGMA account dies at age 11 without a will. To whom do the assets revert?
To whomever state law dictates.
What must be included in the monthly statement sent to clients with penny stocks in their accounts?
Each penny stock owned, the number of shares, and the stock’s estimated market value.
