Chapter 5- Customer Accounts 15-25 Questions

Question 1

New account form

Answer 1

Required document to open an account with a broker dealer

Need basic info, social security if individual, occupation, citizenship, age, annual income, bank and brokerage references, are they an employee of another bank, signature of principal (not customer or Registered rep)

MSRB also requires customers tax status

FINRA doesn’t require signatures on the form from either the rep or the client

Question 2

Know your customer rules

Answer 2

Need to know essential facts about customers current financial situation, present holdings, risk tolerance, needs and objectives.

Should be updated periodically.

Should know if customer is director officer or shareholder of 10% plus in a public ally trades company

May only make recommendations if sufficient info is provided to determine suitability

Should mark unsolicited if trade was made without recommendation of advisor

Unmarked is assumed to be solicited

Question 3

USA patriot act 2001

Answer 3

Broker dealers are required to:

1. Verify identity of new customer
2. Maintain record to identify
3. Determine if person is on a terrorist list

Designed to protect against money laundering and financing of terrorism

Must at least obtain to open an account:

1. Customer Name
2. DOB
3. Address
4. Social security number (if applied for, get in reasonable time period)

Must check names of customers against list of Specially Designated Nationals maintained by Office of Foreign Asset Control

The OFAC tracks terrorists and drug traffickers

Assets are blocked and US persons are banned from doing business with them

Question 4

Specially Designated Nationals

Answer 4

List maintained by Office of Foreign Asset Control (OFAC)

Keeps track of all parties, companies individuals who act as terroists or those who traffic narcotics

Individuals or groups on the list have their assets blocked and US businesses are prohibited from conducting business

Should make aware that you will check ID by placing it on their website, verbally saying so or on the account form

Question 5

Patriot Act rule on Updatig Contact info

Answer 5

Must provide customer an account record within 30 days of account opening to check all info

Must deliver updated information in same time period

Account updating must take place every 36 months

Question 6

Regulation S-P (Privacy Notice)

Answer 6

Enacted by the SEC to protect customer privacy

Must supply customer with privacy policy when a new account is opened

If the firm discloses info to third parties in the policy, customers must be allowed to opt out through a check box form and return mailing, electronic form, and a toll free number

Asking customers to write a letter or to opt out on their own is not good enough

Question 7

Account Ownership types and Authority

Answer 7

Individual, corporate, joint and partnership

Trading authorization (power of attorney)- someone other than the owner can open the account

Primary types of trade authorization-

1. Discretionary- Registered rep given authorization to make trading decisions
2. Custodial- Adult acting on behalf of a child
3. Fiduciary- Third party legally appointed to prudently manage account

Fiduciary and Custodial accounts can be opened for children and incompetents

Question 8

Payment and Delivery Designations

Answer 8

1. Transfer and Ship- Registered in customers name and shipped to them
2. Transfer and hold- registered in customer name, broker/dealer holds
3. Hold in street name- registered in broker name and held by broker
4. Delivery versus payment- Delivered to a bank against payment. Cash on delivery settlement

Question 9

Direct Registration System

Answer 9

Offering of the Depository Trust Company

Allows owners to hold securities on the books and records of the issuer or their transfer agent

Delivery of assets electronically between transfer agents and broker dealers

Available to issuers who act as their own transfer agent, transfer agents and Depository Trust company participants

Question 10

Mailing Regulations

Answer 10

Statements and confirmations can be sent to those who have power of attorney if in writing and a duplicate is sent to the client

Firm is able to hold mail for a customer if:

1. There is written instruction and it’s less than three months (requests for longer can be granted, not for convenience)
2. Member firm informs of alternate methods to view activity in account
3. Verifies that request still applies periodically

Firms not required to hold

Must be able to communicate with client

Question 11

If a firm receives instructions from a client by email, what should it do?

Answer 11

A firm should have established guidelines regarding supervisory control of funds or securities

In regards to email correspondence, a firm should do the following:

1. Make a method to verify an email
2. A method to identify and respond to red flag emails, that are out of ordinary customer interactions

Question 12

Cash Account

Answer 12

Basic investment account

Customer pays in full for securities

Personal retirement accounts, corp retirement accounts and custodial accounts must be cash accounts

Only signature required is that of principal

Question 13

Margin Account

Answer 13

Allows an investor to borrow money for investing

Margin refers to minimal amount of cash needed to be on hand

Customer signature required along with principal

Question 14

Corporate Account

Answer 14

Registered Rep must establish:

1. Business legal right to open an investment account
2. Indication of any limitations put on account by shareholders or court
3. Who will represent the business in investing activities

Must receive a corporate charter and corp resolution (establishes ability to open)

Question 15

Fee based accounts

Answer 15

Only charges a single fee or a percent of assets instead of commission

Only appropriate for those doing a moderate amount of trading

Must provide customers with a disclosure of the services and cost of account

NOT A WRAP ACCOUNT

Wrap accounts provide a group of services such as AA, portfolio management, execution, admin for a single fee

Question 16

Prime brokerage account

Answer 16

Account where a customer (usually an institution) designated one firm to provide custody of securities (prime broker), and another to execute trades (executing broker(

Prime broker Must sign an agreement

Prime broker then enters into agreements with executing brokers named by customer

Prime brokers provide trade confirmations and account statements

Offered to more active trading clients like a hedge fund

Often includes special services such as: security lending, margin financing, trade processing, operation support

Usual users are hedge funds

Provide Clearing service and lending on margin

Question 17

Numbered Accounts

Answer 17

Customer can be identified by a number or symbol instead of name

Must supply other info and sign form to identify self

Celebrities sometimes use to preserve anonymity

Does not have to be approved by FINRA

Question 18

Guaranteed accounts

Answer 18

Cash and margin accounts are considered one account

If a customer wants to open another, the other account must guarentee each other if not linked to another person

Question 19

Account Transfers

Answer 19

To transfer an account the new broker/dealer notifies old

Old firm has one day to validate the request or take exception to if social doesn’t match, account title doesn’t math or customer signature is improper

Transfer is validated when security holding are sent back, all accounts freeze except options expiring in 7 days or less

3 business days allowed to transfer

Once transfer instructions are validated, all new trades are made with new firm even if assets haven’t been transferred

Automated Customer Account Transfer Service can be used to accomplish transfer and validation

Question 20

FINRA Requirements regarding employees of broker dealers and spouses/minor children

Answer 20

Person Must notify employer and executing member before opening account with another broker/dealer

Executing firm must notify employing firm before transactions occur and supply confirms

Employing firm can request duplicates of account info as well

Question 21

MSRB Requirements

Answer 21

Employee must notify if opening an account with another firm prior to opening

Must receive prior permission

Must supply employer with duplicate confirmations and any other material if requested

Question 22

Specific testable topics

Answer 22

Principal must approve every new account

Approval does not have to take place before first trade (under FINRA the executing member will notify before execution)

One day to notify and three days to carry out in an account transfer

Cash accounts are sometimes referred to as special because before the market crash in 1929, all accounts were margin

Question 23

Registered names

Answer 23

Owners of the account, only individuals allowed to access or control of investments

Question 24

Single Account

Answer 24

One beneficial owner

Account holder is only person with control and ability to request distribution

Transfer on Death allows registered owner to pass all or portion of assets to a beneficiary, even if will is not authenticated

TOD avoids probate

Question 25

Joint account

Answer 25

Two or more adults are apportioned some sort of control Joint account agreement must be signed and designated either tenants in common (TIC) or Joint Tenants with right of survivorship (JTWROS) Require signature of both owners Checks must be made payable to names on account and endorsed by both to deposit Good delivery form for securities also requires both signatures

Question 26

Tenants in Common

Answer 26

Deceased tenants interest not passed to other tenant, specified interest in account Tenants have divided interest

Question 27

Joint Tenants with Right of Survivorship

Answer 27

Deceased interest passed to surviving tenants All parties have undivided interest

Question 28

Community Property

Answer 28

Marital property in specific states is owned jointly by both spouses Joint ownership is automatically assumed Absent of anything stating otherwise Exception is inheritances gifts or property owned pre marriage Lower capital gains tax when property is dissolved by surviving spouse

Question 29

Partnership accounts

Answer 29

Unincorporated Association of 2+ individuals May frequently open cash, margin, retirement accounts Partnership agreement designates who can make transactions Must disclose limitations if opening a margin account Similar to corporate resolution

Question 30

Fiduciary and custodial accounts

Answer 30

A person other than the owner initiates trades Most familiar example of fiduciary account is a trust Account is for the benefit of the owner, but the owner has little control Fiduciary can be reimbursed for a management fee Custodial relationship must be evident when registered Beneficial SS is used

Question 31

Fiduciary

Answer 31

Any legal person appointed to look over an account. Examples include: 1. Trustee designated 2. Executor of a will 3. Administrator appointed to liquidate an estate without a will 4. Guardian designated to handle minors affairs 5. Custodian of UGMA or UTMA account 6. Receiver in bankruptcy 7. Conservator for incompetent May require court certification Trust agreement needed in a trust account No documentation needed for UGMA or UTMA Speculative transactions are usually not permitted Margin only allowed if established in court docs Many states provide legal list of securities May charge reasonable fee

Question 32

Power of Attorney

Answer 32

If a person is not named on account, written authorization must be filed with broker Full power- Ability to Deposit or withdraw cash, make investment decisions Limited power- document specifies power, no withdrawal of assets, but can make buy/sell orders Durable- will survive deceleration of incompetence

Question 33

Discretionary Account

Answer 33

Gives registered rep authority to decide security holdings in an account. Authority to decide what security, # of shares and whether to buy or sell Does not apply to timing the market or price Must file trade authorization or limited power of attorney. Customer can still trade Discretionary orders must be identified Record of transaction must be kept No excessive trading or churning Supervisor must be appointed

Question 34

Non Conventional Investments

Answer 34

Do not fit a common category and include: Hedge Funds Distressed Debt Equity linked notes FINRA requires proper due diligence be done before a discretionary authority can trade these for a customer May require prior written consent

Question 35

Identifying a discretionary order

Answer 35

Discretionary if one of three As is missing 1. Activity (buy or sell) 2. Amount (number of shares) 3. Asset (the security) Price is not included, nor is time rather it's a market not held order

Question 36

Market not held order

Answer 36

If a customer gives authority of time or price, it is a market not hold order Must be executed on day the order is received NOT DISCRETIONARY

Question 37

Death of Account Holder

Answer 37

Open orders are cancelled and assets are frozen Account marked deceased Discretionary authority ends To release the assets, all documents are needed: 1. Death certificate 2. Inheritance tax waiver 3. Letters testamentary Unless it's a JTWROS, where only death certificate is needed In a Tenant in common account, documentation is required to unfreeze, other tenant has to wait In a partnership, an amended partnership agreement usually has to be filed

Question 38

Uniform Gift to Minors Act (UGMA) Uniform Transfers to Minors Act (UTMA)

Answer 38

Adult acts as a custodian for a minor Any kind of security or cash may be given to account without limitation Property transferred upon coming of age in UGMA Property can be held until 25 or 21 (depends on state) under UTMA before transfer is made UGMA and UTMA securities are given an indefeasible title (gift cannot be taken back by giver or given back) Securities in the accounts are managed by custodian. Custodian can use property in any way that is deemed proper for the child. Rearing expenses not included. Only one custodian (individual) allowed and one minor Minor can benefit from more than one account, custodian can make other accounts Minors social is required for opening account Securities in the account are registered like: "Joan Smith as custodian for Brenda Smith" The account is a cash account not margin All money must be invested Stock subscription or warrants must be exercised or sold Minors will be taxed on the account at parent rate until reaching age of 18. Parent responsibility to see that the taxes be paid (but not by them) All cash proceeds must be reinvested, warrants are to be sold or exercised Account state is needed in opening of account If minor dies the securities are passed to the minors estate not to parents or custodian estate

Question 39

When a customer wishes to open an account as guardian, you would ask for

Answer 39

A copy of the court order and other guardian papers to open the account

Question 40

Discretionary accounts

Answer 40

Must be reviewed frequently and must be approved by a principal of the firm Orders must be approved on the day of the trade

Question 41

Account that allows registered owner to pass all or a portion of the account upon death to the beneficiary

Answer 41

Transfer of Death! JTWROS would be transferred to other account member

Question 42

To open a corporate account you must have

Answer 42

A copy of the corporate resolution A new account Form And a copy of the corporate chartered

Question 43

How often should financial institution policy be sent out

Answer 43

At least annually

Question 44

Order tickets

Answer 44

Should be marked as solicited or unsolicited

Question 45

Account Record

Answer 45

Should be provided within 30 days of opening an account If problem, customer should receive updated within 30 days Should be updated every 36 months at least

Question 46

FINRA Rules regarding opening a new account with a different firm (employee)

Answer 46

The employee must receive prior written permission from employing member firm The employing member must receive duplicated statement The employing member can request confirmations in writing The employing firm must be notified in writing for intent to open account

Question 47

FBO accounts

Answer 47

An adult cannot open an account for another adult even if the other adult is family

Question 48

Margin transactions in a trust account

Answer 48

Must be specifically provided for in the underlying documentation of the trust

Question 49

FINRA rules on entering an unsuitable trade

Answer 49

Mark unsolicited Written information is not needed to execute