Chapter 5- Customer Accounts 15-25 Questions Flashcards
New account form
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
Know your customer rules
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
USA patriot act 2001
Broker dealers are required to:
- Verify identity of new customer
- Maintain record to identify
- 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:
- Customer Name
- DOB
- Address
- 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
Specially Designated Nationals
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
Patriot Act rule on Updatig Contact info
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
Regulation S-P (Privacy Notice)
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
Account Ownership types and Authority
Individual, corporate, joint and partnership
Trading authorization (power of attorney)- someone other than the owner can open the account
Primary types of trade authorization-
- Discretionary- Registered rep given authorization to make trading decisions
- Custodial- Adult acting on behalf of a child
- Fiduciary- Third party legally appointed to prudently manage account
Fiduciary and Custodial accounts can be opened for children and incompetents
Payment and Delivery Designations
- Transfer and Ship- Registered in customers name and shipped to them
- Transfer and hold- registered in customer name, broker/dealer holds
- Hold in street name- registered in broker name and held by broker
- Delivery versus payment- Delivered to a bank against payment. Cash on delivery settlement
Direct Registration System
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
Mailing Regulations
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:
- There is written instruction and it’s less than three months (requests for longer can be granted, not for convenience)
- Member firm informs of alternate methods to view activity in account
- Verifies that request still applies periodically
Firms not required to hold
Must be able to communicate with client
If a firm receives instructions from a client by email, what should it do?
A firm should have established guidelines regarding supervisory control of funds or securities
In regards to email correspondence, a firm should do the following:
- Make a method to verify an email
- A method to identify and respond to red flag emails, that are out of ordinary customer interactions
Cash Account
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
Margin Account
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
Corporate Account
Registered Rep must establish:
- Business legal right to open an investment account
- Indication of any limitations put on account by shareholders or court
- Who will represent the business in investing activities
Must receive a corporate charter and corp resolution (establishes ability to open)
Fee based accounts
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
Prime brokerage account
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
Numbered Accounts
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
Guaranteed accounts
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
Account Transfers
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
FINRA Requirements regarding employees of broker dealers and spouses/minor children
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
MSRB Requirements
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
Specific testable topics
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
Registered names
Owners of the account, only individuals allowed to access or control of investments
Single Account
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
Joint account
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
Tenants in Common
Deceased tenants interest not passed to other tenant, specified interest in account
Tenants have divided interest
Joint Tenants with Right of Survivorship
Deceased interest passed to surviving tenants
All parties have undivided interest
Community Property
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
Partnership accounts
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
Fiduciary and custodial accounts
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
Fiduciary
Any legal person appointed to look over an account. Examples include:
- Trustee designated
- Executor of a will
- Administrator appointed to liquidate an estate without a will
- Guardian designated to handle minors affairs
- Custodian of UGMA or UTMA account
- Receiver in bankruptcy
- 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
Power of Attorney
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
Discretionary Account
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
Non Conventional Investments
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
Identifying a discretionary order
Discretionary if one of three As is missing
- Activity (buy or sell)
- Amount (number of shares)
- Asset (the security)
Price is not included, nor is time rather it’s a market not held order
Market not held order
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
Death of Account Holder
Open orders are cancelled and assets are frozen
Account marked deceased
Discretionary authority ends
To release the assets, all documents are needed:
- Death certificate
- Inheritance tax waiver
- 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
Uniform Gift to Minors Act (UGMA)
Uniform Transfers to Minors Act (UTMA)
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
When a customer wishes to open an account as guardian, you would ask for
A copy of the court order and other guardian papers to open the account
Discretionary accounts
Must be reviewed frequently and must be approved by a principal of the firm
Orders must be approved on the day of the trade
Account that allows registered owner to pass all or a portion of the account upon death to the beneficiary
Transfer of Death!
JTWROS would be transferred to other account member
To open a corporate account you must have
A copy of the corporate resolution
A new account Form
And a copy of the corporate chartered
How often should financial institution policy be sent out
At least annually
Order tickets
Should be marked as solicited or unsolicited
Account Record
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
FINRA Rules regarding opening a new account with a different firm (employee)
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
FBO accounts
An adult cannot open an account for another adult even if the other adult is family
Margin transactions in a trust account
Must be specifically provided for in the underlying documentation of the trust
FINRA rules on entering an unsuitable trade
Mark unsolicited
Written information is not needed to execute
