Chapter 2 Customer Accounts (Self) Flashcards
Customer fails to deliver must be bought in: A 7 business days after trade date B 7 business days after settlement date C 10 business days after trade date D 10 business days after settlement date
D. If a customer fails to deliver on a sale, this is not known until settlement date. As of settlement, the customer has 10 business days to deliver the stock, or the position will be bought in by the brokerage firm.
Under SEC rules, customer account information must be verified by the member firm: I within 15 days of account opening II within 30 days of account opening III every 12 months IV every 36 months A I and III B I and IV C II and III D II and IV
D. SEC rules require that the basic customer account information collected at account opening be sent separately to the customer for verification within 30 days of account opening; and this information must be sent for verification and updating (if needed) every 36 months thereafter.
In order to open a new account for a customer, the customer’s name, date of birth, address and tax identification number MUST be:
I obtained prior to account opening
II obtained within a reasonable time before or after account opening
III independently verified prior to account opening
IV independently verified within a reasonable time before or after account opening
A I and III
B I and IV
C II and III
D II and IV
B. To open an account for a new customer, 4 critical pieces of information must be obtained before the account can be opened - customer name, mailing address, social security number, and date of birth.
This information must be used to independently verify the customer’s identity within a reasonable time after account opening.
This verification can be done by matching the 4 critical pieces of information to a valid government issued identification (which cannot be expired); or by using a database service such as Equifax to do the matching.
A customer who wishes to open a new account is asked by the registered representative for a government issued photo identification. The customer gives the representative a copy of his driver’s license, which the representative notes has expired 3 months ago. Which statement is TRUE?
A Because the identification document was government issued, it can be used to verify the customer’s identity
B As long as the identification has not expired more than 6 months ago, it can be used to verify the customer’s identity
C As long as another non-documentary method is used to verify the customer’s identity, the account can be opened
D This account cannot be opened unless the customer renews his or her driver’s license and presents it to the member firm
C. The reason an expired ID cannot be used to verify customer identity is simple. Let’s say that you were issued a new driver’s license because your old one expired, so you toss the old one in the trash. The garbage man sees the old expired license, takes it and sells it to a person who specializes in identity theft. That thief would attempt to use the expired license to open accounts in your name!
If the registered principal is suspicious about the activities of a new customer who is attempting to open an account, a(n):
A AML report must be filed with FINRA promptly
B AML report must be filed with FINRA within 30 days
C SAR report must be filed with FinCEN promptly
D SAR report must be filed with FinCEN within 30 days
D. If a member is suspicious about a customer, an SAR - Suspicious Activities Report - must be filed with FinCEN (part of the Department of Homeland Security) within 30 days.
In a prime brokerage account, which statement is NOT true?
A The prime broker executes all transactions for the customer
B The prime broker settles all transactions for the customer
C The prime broker maintains custody of all positions taken by the customer
D The prime broker provides financing for all positions taken by the customer
A. Prime brokerage accounts are demanded by large hedge fund customers, that use the “prime broker” to:
- settle all trades
- maintain custody of positions taken
- provide financing on those positions
However, the customer can (and does) “trade away” from the prime broker, sending trades to other executing brokers.
One worry of large hedge fund customers is that if they sent all their trades through one executing broker, then that broker could figure out the hedge fund’s trading strategy and use that information to do proprietary trading for the firm’s benefit.
If the hedge fund parcels out its trades to many different executing brokers, then each one only sees a piece of the puzzle and cannot put the hedge fund’s whole trading strategy picture together.
FINRA defines a "customer complaint" as one that is received by the member firm: I in writing by mail II by e-mail III verbally over the telephone A I only B I and II only C II and III only D I, II, III
B. FINRA defines a customer “complaint” as one received in writing (e-mail is written). Verbal complaints (screamers) don’t count!
Which of the following are TRUE statements about discretionary accounts?
I Power of attorney must be obtained in writing from the customer before discretion can be exercised
II Each order ticket must be marked as discretionary
III Each order ticket must be approved by the principal prior to entry
IV The power of attorney must be renewed annually with the customer
A I and II
B II and III
C I, III, IV
D I, II, III, IV
A. There is no requirement to renew a power of attorney annually with the customer. The power continues until the customer revokes it in writing or the customer dies.
Discretionary order tickets must be approved by the manager “promptly,” meaning by the end of the day and not before entry.
Every discretionary order ticket must be marked as such, and a written power of attorney from the customer is required before discretion can be exercised.
Which statement is TRUE about minimum margins for day trading accounts?
A Minimum equity to open a regular margin account is greater than that for a day trading account
B Minimum equity to open a regular margin account is lower than that for day trading account
C Minimum equity to open a regular margin account is the same as that for a day trading account
D Minimum equity does not apply to the opening of either a regular margin account or a day trading account
B. The minimum equity required to open a regular margin account is $2,000; as opposed to $25,000 for a day trading account.
FINRA rules require broker-dealers to report customer and proprietary short positions in each OTC security: A weekly B twice monthly C monthly D quarterly
B. FINRA rules requires broker-dealers to report “short interest” figures by the 15th of each month and on the last calendar day of each month.
A broker-dealer that extends credit to a customer must disclose:
I The basis upon which interest will be charged
II The basis upon which the debit balance will be computed
III The type of liens to be placed on the customer’s collateral
A I only
B I and II
C II and III
D I, II, III
D. Rule 10b-16 requires that full disclosure of the conditions upon which credit is extended must be made.
Thus, the method of:
- charging interest
- the method of computing the debit balance
- the nature of liens placed on the customer’s securities must all be disclosed.
Which of the following does NOT affect SMA in a long margin account? A purchase of securities B sale of securities C increase in market value D decrease in market value
D. As the market drops, SMA in a long account locks and stays the same. The amount available to borrow stays intact.
- A rising market increases SMA.
- A purchase of securities uses SMA if the margin is not deposited.
- A sale of securities reduces the debit, increasing SMA.
A customer sells short 1,000 shares of ABC stock at $2 in a margin account. The customer must deposit: A $1,000 B $2,000 C $2,500 D $5,000
C. Under the “cheap stock rule,” if a customer wishes to short a stock under $5 a share, he or she must put up the greater of 100% or $2.50 per share.
100% of $2 per share x 1,000 shares = $2,000. $2.50 x 1,000 shares = $2,500. The greater amount is $2,500.
Unlisted derivative positions in a portfolio margin account:
A are prohibited
B require at least $100,000 of account equity
C require at least $500,000 of account equity
D require at least $5,000,000 of account equity
D. To open a portfolio margin account that will either engage in day trading or take unlisted derivative positions requires minimum $5,000,000 account equity.
What is the best way to ensure that a broker-dealer has an effective AML program?
A By providing AML training to the representatives in each office
B By making sure that SAR and CTR reports are filed in a timely fashion
C By following Know Your Customer procedures that are risk-based
D By arranging for another member firm to review that firm’s AML procedures
C. The FINRA rule on creating a firm’s AML (Anti-Money Laundering) policy is quite generic, however their interpretations state that the AML Policy should include “KYC” (Know Your Customer) procedures that permit the firm to make a reasonable risk-based determination as to its customers, its customers’ sources of income, and expected activity.
Also part of the AML procedures is the requirement for an annual outside independent audit; and for annual AML training. However, the key part of the interpretation is “KYC” - and this is the best answer.
