Chapter 6: Customer Accounts Flashcards
______ is concerned with the relationship between the securities firm and its customers as well as the rules regulating that relationship.
FINRA
A customer can buy on ______ and sell ______ in a margin account. A margin account has much greater ______ than the cash account, where customers can only establish ______ positions and must pay in ______.
- Credit
- Short
- Risk
- Long
- Full
If the customer is a minor with a required custodian, the account must be opened as either ______ or ______. Only one custodian and one minor are permitted with either account.
- Uniform Gifts to Minors Act (UGMA)
2. Uniform Transfers to Minors Act (UTMA)
The ______ is called a(n) ______. Securities purchased must be paid for in full (no margin).
- Cash Account
2. Special Cash Account
Cash accounts are specifically required for ______, since all securities purchased must be registered in the name of the ______ for the benefit of the ______. Because of this, ______ is impossible. Securities purchased on ______ are held ______ (or in the name of the broker/dealer).
- Minors
- Custodian
- Minor
- Margin
- Margin
- Street Name
______ are specifically required in the case of guardianship, because all securities must be registered in the name of the ______.
- Cash Accounts
2. Guardian
In a(n) ______, the investor must maintain a cash balance sufficient to purchase securities, or the investor must pay for the securities within ______, which is the Reg T payment deadline.
- Cash Account
2. 4 Business Days
The following information is the minimum required on a new cash account:
- Customer’s ______.
- Customer’s ______.
- Customer’s ______.
- Customer’s ______.
- Signature of the ______ who approved the account.
- Customer investment ______ information, including:
a. Customer financial information
b. Investment objective
c. Risk tolerance
d. Time horizon
- Name
- Residential Address
- Date of Birth
- Social Security Number
- Principal
- Suitability
The ______ requires the broker/dealer to review the customer’s current, government-issued photo identification. This includes a driver’s license, a passport, or a military identification.
USA PATRIOT Act
The ______ does not require a customer signature on the new account form. However, the ______ may require it.
- Self-Regulatory Organization (SRO)
2. Broker/Dealer
Firms must have the customer verify new account information within ______ of the account opening.
30 Days
After the account is open, a change in the account registration, for example, as the result of marriage or divorce, must be updated within ______. The same is true for updating a change of address.
30 Days
On an ongoing basis, customer account information must be verified every ______.
3 Years (36 Months)
Firms must retain a record of the account’s last update for a period of ______ after the update to any customer account information. If there are no updates, the record must be retained for ______ after the account is closed.
6 Years
If there is a(n) ______, meaning that the account is transferred from one registered representative to another within the same firm, the new registered representative must verify all information.
Internal Account Transfer
A(n) ______ is the traditional brokerage account.
Cash Account
If the customer purchases securities in a cash account and does not pay for the securities within the ______ required by Reg T, the broker/dealer may either ask the ______ for additional time on behalf of the customer or ______ the securities out and ______ the account for ______.
- 4 Business Days
- Self-Regulatory Organization (SRO)
- Sell
- Freeze
- 90 Days
If a customer’s account is frozen, the customer must have ______ in the account before the broker/dealers enter any ______ on behalf of the customer.
- Money
2. Buy Orders
If a customer purchases a security and sells the same security without first paying for the original purchase, the broker/dealer will ______ (______) the customer’s account for ______, and will not release the sales proceeds to the customer until the customer pays for the original purchases. If the customer pays before the Reg T ______ requirement is up, the broker/dealer will then remove the ______ on the account.
- Restrict (Freeze)
- 90 Days
- 4-Day
- Restriction
When a customer transfers an account form one broker/dealer to another, the customer signs a(n) ______ form. The new broker/dealer sends this form to the old broker/dealer.
- Automated Customer Account Transfer Service (ACATS)
FINRA allows the old broker/dealer ______ to verify the account positions and another ______ to complete the transfer. Any option position within ______ of expiring remains at the old firm.
Under MSRB rules, a municipal securities broker/dealer has ______ to validate positions and ______ to complete the transfer.
- 1 Day
- 3 Days
- 7 Days
- 3 Days
- 4 Days
Once the ______ form is signed and sent, all new trades are executed through the ______ firm. The ______ firm freezes the old account and cancels any open orders.
- Automated Customer Account Transfer Service (ACATS)
- New
- Old
When a registered representative is recruited by a broker/dealer and the registered representative’s ______ are transferred to the new firm (also called the ______), the new firm is required to deliver a FINRA-created ______ to the registered representative’s former customers.
- Accounts
- Recruiting Firm
- Educational Communication
The FINRA-created ______ highlights key considerations when transferring their assets, including a summary of the direct and indirect impacts of the transfer. It also must include information about the new firm’s recruitment practices.
Educational Communication
The educational communication must be delivered for a period of ______ following the registered representative’s date of employment. Member firms may provide the educational communication in a(n) ______, either as a PDF or through a hyperlink.
- 3 Months
2. Email
The three main suitability obligations include:
- ______
- ______
- ______
- Reasonable Basis
- Customer Specific
- Quantitative Suitability
______ suitability requires a broker to have a reasonable basis to believe, based upon reasonable diligence, that the recommendation is suitable for at least some investors.
Reasonable-Basis
______ suitability requires that a broker have a reasonable basis to believe that the recommendation is suitable for a particular customer based on that customer’s investment profile.
Customer-Specific
______ suitability requires a broker to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile.
Quantitative
The ______ requires that firms and associated persons of firms have ascertained a customer’s investment profile to determine the reasonable basis for a recommendation.
Suitability Obligation
The customer’s ______ includes, but is not limited to, a customer’s age, other investments, financial situation and needs, tax status, investment objective, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information that the customer may disclose to the member or associated person in connection with a recommendation.
Investment Profile
A registered representative may process ______ requests at any time. The Suitability Rule does not apply.
Unsolicited
Clearly stated recommendations to “______” a security are subject to the same suitability rules and requirements as recommendations to buy or sell.
Hold
Investment objectives can be broadly defined as follows:
- ______
- ______
- ______
- Preservation of Capital
- Income
- Growth
The investment objective ______ refers to the investor’s desire for liquidity and safety of principal, in other words, protection against the loss of invested principal.
Preservation of Capital
An investor who expects to use their funds within the next ______ or who simply has a very low tolerance for ______ will typically sacrifice growth of principal for this level of liquidity.
- 5 Years
2. Risk
A(n) ______ investment is one that can be sold quickly without losing significant principal.
Liquid
Investments with little or no price ______, such as capital preservation or money market funds, short-term treasuries, or Ginnie Maes, may be appropriate for an investor seeking ______.
- Volatility
2. Preservation of Capital
______ means income now as opposed to in the future, which translates into investments with a(n) ______.
- Current Income
2. Current Yield
With a(n) ______ investment objective, growth is generally sacrificed because distributions are taken in cash. Since ______ is the primary focus, moderate price ______ may be of less concern to such an investor.
- Current Income
- Yield
- Volatility
Depending on an investor’s ______ tolerance, ______ bracket, and income ______, a wide range of income-producing investments may be considered:
- Corporate bonds.
- Treasury securities.
- Agency securities.
- “______” stocks (well-established corporations with a history of strong dividends).
- Utility stocks.
- ______ stocks (for their regular stated dividend payments).
- Risk
- Tax
- Needs
- Blue Chip
- Preferred
For increased ______ under a current income investment objective, choices such as REITs (real estate investment trusts) and a wide range of income-oriented mutual funds are available. Municipal bonds and municipal bond funds may be advantageous for investors in the ______ tax brackets.
- Diversification
2. Higher
The federal marginal tax rate ______ in the U.S. as income rises, and is the tax rate paid on the next dollar of income. Also known as ______, the marginal tax rate helps ensure low-income earners are taxed at a(n) ______ rate than higher income earners.
- Increases
- Progressive Taxation
- Lower
Higher yields generally carry a(n) ______ degree of risk and/or price volatility.
Higher
Investors with a(n) ______ objective seek capital appreciation.
Growth
Growth investors typically have a longer ______ and no immediate ______ for the funds. Therefore, they have more time for their assets to ______. The longer time frame also means that they are able to weather the short-term ______ in the market. They avoid having to ______ on the funds when the market is down.
- Time Horizon
- Need
- Grow
- Ups and Downs
- Draw
______, also called ______, imposed an obligation on broker/dealers and registered representatives or associated persons to act in the best interest of individual retail customers at the time recommendations are made.
- Regulation Best Interest
2. Reg BI
______ requires that broker/dealers and associated persons must not put their financial or other interests ahead of those of the customer. This rule applies when recommending securities transactions (buy, sell, or hold), investment strategies, and types of accounts.
Regulation Best Interest (BI)
The best interest standard of conduct consists of 4 component obligations that broker/dealers must meet:
- ______: provide material terms of the relationship, fees, and conflicts of interest.
- ______: exercise reasonable diligence, care, and skill in making recommendations.
- ______: establish, maintain, and enforce policies and procedures reasonably designed to identify, disclose, and eliminate material conflicts of interest related to recommendations.
- ______: establish, maintain, and enforce policies and procedures to ensure compliance.
- Disclosure
- Care
- Conflicts of Interest
- Compliance
Broker/dealers and registered investment advisers (RIAs) are required to provide in writing a(n) ______ to each new or prospective retail investor.
Customer Relationship Summary (Form CRS)
The ______ includes required disclosures that provide retail customers with the following:
- Services offered by the firm.
- Fees and costs.
- Conflicts of interest.
- Required standards of conduct associated with the services offered.
- Legal or disciplinary history of the firm and its associated persons.
- Instructions on how to obtain additional information about the firm.
Customer Relationship Summary (Form CRS)
Form CRS must provide a link to the ______, which contains educational material for investors about investment professionals.
SEC’s Form CRS Webpage
Broker/dealers must provide Form CRS ______ or ______ (whichever is earlier):
- Recommending an account type, a security, or an investment strategy.
- Placing an order.
- Opening a brokerage account.
Before or When
RIA’s must provide the ______ document to new or prospective retail investors ______ or ______ entering into an advisory agreement.
- Customer Relationship Summary (Form CRS)
2. Before or When
Firms must deliver the ______ when recommending that assets be rolled over from a retirement account into a new or existing account or investment.
Customer Relationship Summary (Form CRS)
Form CRS must be updated within ______ of any material changes in customer information.
30 Days
Under certain circumstances a member firm might ______, ______, or ______ an account. In fact, it may do so at its own discretion, without disclosing the details of that decision. The firm may also require additional information or documentation in order to keep an account open.
- Refuse
- Restrict
- Close
If a member firm or associated person is unable to ______ and ______ required information, they could refuse to open an account.
Obtain and Verify
Before opening an account, member firms must adhere to the ______ rule. At a minimum, they must obtain the name, date of birth, address, and identification number (ex, social security number) of a customer.
Know Your Customer (KYC)
Firms are required to put procedures in place to verify the ______ of any person seeking to open an account.
Identity
The person opening the account must be at least ______ of age and of ______ in that state in which he or she resides in order to enter into a brokerage account agreement.
- 18 Years
2. Full Legal Age
When opening an account, the customer must provide ______, ______, ______, and ______ information and the member firm must be able to verify the ______ and ______ of a prospective customer.
- Current, Accurate, Truthful, and Complete
2. Identity and Creditworthiness
When opening an account, required customer ______ include information about domestic or foreign residency and/or citizenship, corporate insiders, employees of broker/dealers or self-regulatory organizations (SROs).
Disclosures
The ______ process also involves gathering information about customers by asking specific questions. Many of the questions are related to ______, including those focusing on investment objective, experience, and time horizon, as well as age, financial situation, other investments, tax status, liquidity needs, and risk tolerance.
- Know Your Customer (KYC)
2. Suitability
The ______ requires financial institutions to verify the identity of individuals wishing to conduct financial transactions with them. This is a provision of the ______ and is intended to help the government fight the funding of terrorism and money-laundering activities.
- Customer Identification Program (CIP)
2. USA PATRIOT Act
The discovery of ______, ______, or ______ would cause a member firm to refuse to open an account, and if uncovered after the account is open, would result in an account being closed.
- Fraud
- Money Laundering
- Tax Evasion
______, such as freeriding, liquidations from unsettled trades, late sales, and frequent trading or market timing limit a customer’s ability to make new purchases and may result in a restriction on the account.
Violations
______ is the prohibited practice of buying and selling a security and then paying for that purchase by using the proceeds from the sale of the same security. It is not permitted under the Federal Reserve Board’s ______ concerning broker/dealer credit to customers.
- Freeriding
2. Regulation T
In a(n) ______ account, a customer must pay for the purchase of a security before selling it.
Cash
Freeriding will cause the account to be restricted for ______. During this period, the customer may still purchase securities, but must fully pay for any purchase on the date ______.
- 90 Days
2. Of the Trade
The customer may avoid having a restriction placed on his cash account by paying for the securities by the ______ with funds that do not come from ______.
- Settlement Date
2. The Sale of the Securities
If the customer pays for the original purchase within ______ after the standard T+2 settlement date, the broker/dealer will then lift the restriction on the account. This is called ______. Reg T gives an investor a maximum of ______ to pay for securities purchased in a cash or margin account.
- 2 Business Days
- T+4
- 4 Business Days (T+4)
The customer has $2,000 in cash available to trade in his cash account. On Monday, he purchases ABC stock for $3,000; the trade will settle on Wednesday. On Tuesday, after an unexpectedly favorable earnings report that pushes the stock price higher; he sells ABC for $4,000 without paying in full for the initial purchase. He would have needed ______ in the account to cover the initial purchase; alternatively, he could have deposited an additional ______ prior to settlement. The purchase was paid for, in part, with proceeds from the sale of the same stock. This is a(n) ______ violation.
- $3,000
- $1,000
- Freeriding
The customer has no cash available to trade in his cash account. On Monday, he purchases ABC stock for $3,000. No payment is received from the customer by Wednesday’s settlement date. On Thursday, he sells the ABC stock for $4,000 to cover the cost of his purchase. This is a(n) ______ violation because he did not pay for the stock in full prior to selling it.
Freeriding
The customer owns $5,000 of ABC stock in a cash account. It is fully paid for and the trade has settled. On Monday, he sells ABC and, using the proceeds from the sale, buys XYZ for $5,000 on the same day. On Tuesday, he sells all of the XYZ stock, without adding additional cash to the account. The customer used the proceeds from the sale of ABC, which had not settled yet, in order to buy XYZ. He cannot sell XYZ prior to Wednesday without adding ______ to the account to cover the XYZ purchase. This is a(n) ______ violation.
- Additional Cash
2. Freeriding
______ or ______ violations are also called ______. In a cash account, the customer buys a security without enough funds to cover the purchase and sells another security, at a later date, to pay for it. The settlement of the purchase and subsequent sale do not match, which is a violation.
- Cash Liquidation
- Trade Liquidation
- Late Sales
Any ______ violations in a rolling ______ period trigger a(n) ______ funds-on-hand restriction. During this time, the customer must have ______ available in the account before he can buy anything.
- Three
- 52-Week
- 90-Day
- Settled Funds
The customer owns $7,000 of XYZ stock, but has no cash available to trade. On Monday, the customer buys $5,000 of ABC stock. In order to pay for the ABC purchase which will settle on Wednesday, he sells $7,000 of XYZ stock on Thursday. However, the sale of XYZ will not settle until Monday, which is after the funds are due based on ______ for the purchase of ABC. A(n) ______ violation will occur.
- Reg T+4
2. Cash Liquidation
______ or ______ involves excessive buying or selling of a fund. This activity can disrupt a fund manager’s ability to effectively manage the fund as the cash level in the fund is constantly changing. As a result, the broker/dealer may ______ the account.
- Frequent Trading
- Market Timing
- Restrict
A margin account is restricted or blocked when its ______ balance is greater than the ______ of the securities in the account. The customer is unable to purchase any additional stock on margin without putting up more ______.
- Debit
- Loan Value
- Equity
If an account is closed, the member firm or associated person must verify the ______ of the account. If the customer would like to transfer the account to another member firm, the transfer can be initiated by either firm using the ______, which enables eligible participants to efficiently and automatically enter, review, and settle the transfer of customer accounts between each other.
- Ownership
2. Automated Customer Account Transfer Service (ACATS)
Depending on the type of account being closed, the holdings could either be ______, in which case they would be sold and the cash proceeds would be transferred, or they could be ______, meaning that the securities would be transferred directly to another account.
- Liquidated
2. Transferred In-Kind
After an account is closed, the account information must be maintained for ______.
6 Years
A(n) ______ is any trade in which the registered representative chooses one or more of the following:
- The security
- The quantity
- The action (buy or sell)
Such activity can only be performed in a(n) ______.
- Discretionary Trade
2. Discretionary Account
A discretionary trade is any trade in which the registered representative chooses one or more of the following:
- The ______
- The ______
- The ______ (______ or ______)
- Security
- Quantity
- Action (Buy or Sell)
If the registered representative controls only execution time and price, the representative is NOT exercising ______.
Discretion
If the registered representative controls only ______ and ______, the representative is NOT exercising discretion.
- Execution Time
2. Price
There are two types of discretion: ______ and ______.
- Limited
2. Full
With ______ discretion, the representative may only authorize trades in the customer’s account.
Limited
With ______ discretion, the representative may withdraw cash and/or securities from the account.
Full
Possessing discretionary authority does not eliminate the representative’s responsibility to make ______ recommendations.
Suitable
In addition to the basic account information requirements, a customer must sign a(n) ______, which is a power of attorney providing trading authority, and this agreement must be approved by a(n) ______ prior to the first discretionary trade.
- Discretionary Account Agreement
2. Principal
A(n) ______ must regularly review activity in each discretionary account.
Principal
Fiduciaries are often limited to investing in securities that follow the “______”, which includes conservative, prudent investments; only investments that would be made by a prudent individual are allowed.
Prudent Investor Rule
The foundation of the investment advisor-to-client role is that of a(n) ______ who acts in the ______ of the client. An investment adviser must “______” in order to effectively perform this duty.
- Fiduciary
- Best Interests
- Know The Client
Investment advisers are ______ while broker/dealers are compensated based on ______.
- Fee-Based
2. Transactions
When looking at an investor’s situation, it is important to determine which would be better for the ______ with regard to a fee-based vs. a transaction-based account. For example, it would not be appropriate to put an investor who does not trade often in a(n) ______ account. This would be called ______.
- Customer
- Fee-Based
- Reverse Churning
Discretionary authority must be given ______ prior to the first transaction in the account. The account must be approved by a(n) ______ and it is subject to closer ______ than a nondiscretionary account.
- In Writing
- Principal
- Supervision
Trades in discretionary accounts require prompt approval from a(n) ______ and must be marked “______”.
- Principal
2. Discretionary
The registered representative must be qualified as a(n) ______ general securities representative in order to have discretionary authority.
Series 7
An individual account is one in which there is only ______. The broker/dealer may discuss the account with, and receive trade instructions from, the ______ only.
- One Owner
2. Owner
Without ______, not even the individual account owner’s spouse is authorized to discuss the account with anyone at the broker/dealer.
Prior Written Permission
A(n) ______ account bypasses probate and transfers directly to the deceased owner’s designated beneficiary.
Transfer on Death (TOD)
A TOD account is always a(n) ______ account.
Individual
______ accounts are accounts for wealthy individuals or portfolio managers who want simplified, reduced paperwork. The ______ holds the account and is responsible for all safekeeping and bookkeeping services, including customer statement delivery.
- Prime Brokerage
2. Primer Broker/Dealer
Because they are involved in safekeeping customer assets, ______ are subject to higher net capital requirements under SEC Rules of financial responsibility.
Prime Brokerage Firms
Under a prime brokerage account, the investor has one centralized ______ for all trading activity. However, account trades may be executed by several different ______.
- Statement
2. Broker/Dealers