Chapter 8 - Customer Accounts Flashcards
Cold calling can only be done between
8am and 9pm local time of the party being called
When cold calling we are required to provide…
our identity, and a phone number and address where the caller or firm may be contacted
If request the caller can be placed on…
a do not call list. This must be maintained in house and should be compared to the national do not call list
Auto dialing is prohibited with use of an…
automated pre-recorded message
A fax sent to a customer must contain…
The date and time the fax was sent, the identity of the sender, and the telephone number of the sender
If there is prior business relationship the Do not call list does not apply. Prior business is defined by …
The person being called has an account with the person making the call and that there has been some form of activity during the last 18 months
Do Not Call list does not apply to
Non-profit organizations
Telephone consumer protection act apply to
wireless telephone numbers as well
If a firm outsources telemarketing functions…
they are responsibility for ensuring compliance
Unregistered cold callers are limited. They can:
Send investment literature
Set up cold calls
Extend invitations to firm events
They CAN NOT pre-qualify or profile a prospect
Before opening an account the customer must complete a…
New account report form. important part of the “know your customer” process
Essential Facts on the new account report form are
Any facts needed to service a customer’s account
those needed to act in accordance with special handling instructions for the account
Those needed to understand the authority of any person acting on behalf of a customer
those needed to act in compliance with applicable laws regulations and rules
New account reports must contain certain information
-Customer names- can use a number or symbol after making a written statement of ownership (no-false names are allowed)
-For individuals we need a street address, APO or FPO. If one is not available they can use a street address of a next of kin or another’s contact information
- email address
- phone number
- annual income bank references and net worth (excluding primary residence)
-Occupation, name and address of employer
- Whether the individual is a citizen
- date of birth
- Social security or tax id number
-Photo ID
-Identity of the RR
-Trusted contact person- optional
Firm can contact the trusted contact person to…
disclose information about the customer’s account to address possible financial exploitation
Confirm the specifics of the customer’s current contact information.
Discuss the customer’s health status
Identify any legal guardian, executor, trustee or holder of a power of attorney on the account
New account firm does not need to include
Names of other broker dealer firms where customer has account
The educational background of the customer
The tax return or tax bracket from the previous year
designation of beneficiaries
How we demonstrate diligence in opening an account
Find: investment objectives
Employment status
Estimated annual income from all sources
estimate net worth (excluding primary residence)
Estimated liquid net worth
Martial status and number of dependents
Age
New account report form must be signed by
Branch manager or principal
Not needed to be signed by customer or RR
Patriot requires what to open an account
Customer full and true name
date of birth
street address
taxpayer identification number
If any of this information is refused account should not be opened
Customer account information must be sent…
within 30 days of opening
once every 36 months
must be be updated within 30 days of receiving notice in change of investment objectives
Customer account information must be maintained for…
6 years after the account is closed
Joint Tenants with rights of survivorship (JTWROS) accounts
An account with two or more people, usually a married couple but not required
Upon ones death the other become sole owner
Surviving tenant must present death certificate and affidavit of domicile before the securities can be changed to be the sole ownership of the surviving tenant
Orders can be placed by either party
correspondents can be mailed to either party but must have both names on the correspondence
All check must be made out to both names
Tenants in common account
If one tenant dies their interest ownership passes to their estate
Either party can place orders
Transfer on Death (TOD)
Upon the death of an individual investor, the assets in the account are passed to the beneficiaries according to the TOD and avoid probate
Even though probate is avoided beneficiary is still responsible for any estate taxes owed
Probate
The will of a deceased person is handled in the court system
Can not us TOD on…
Limited partnerships, precious metals, variable annuities, fixed annuities, and commodities
Corporate accounts
investment accounts opened by a corporation
Must provide a certified copy of the corporate resolution and articles of incorporation and possibly the corporate by-laws or charter
Limited Partnership Account
Business account. Requires the signature of the general partner when establishing a new account
does not require signature of limited partners
Pattern Day Traders
Customers who execute 4 or more trades within 5 business days
Minimum $25,000 equity
most concerned with market timing risk
Least susceptible to inflationary risk, since the closed their accounts each day
Buying power is limited to 4 times maintenance margin excess in the account
Trust Accounts
Trust is where one person manages an account for the benefit of another
If margin is to be extended it must be authorized in the trust agreement
Types of trusts
Revocable (changeable)
irrevocable (not changeable)
living (set up when the grantor is living)
testamentary (created from a will)
Investment advisor
Anyone who receives compensation for giving advice must be registered under the investment advisors act of 1940
Exemptions include banks, lawyers, accountants, teacher and engineers; or anyone who gives advice as an incidental part of their profession and does not charge a separate fee
Discretionary Authority account
RR must obtain prior written authorization designating that the RR is authorized to trade in the account and they must also obtain the firm’s approval
Limited Trading Authorization (limited power of attorney)
Right to make purchase and sales decisions
Can not withdraw cash or securities from the account
Checks must be made payable to the owner of the account
If Trading authority is someone other then the RR, then the RR must know essential facts about that agent
Full trading authorization (full power of attorney)
Can make trades, sales and withdraw cash and securities from the account
Not unlimited privileges
Discretionary accounts
Terminated upon customers death
checks must be made out to owner of the account
account owner may waive right to confirmation and statements
Owner of account may also initiate order
RR must show that it is discretionary on the order ticket
Good until revoked in writing by customer
RR must never make transactions excessive in size or frequency (churning)
All discretionary orders must be reviewed by a principal of the firm (but does not have to be before order is placed)
Time and Price Discretion
RR only determines the time and price at which the order will be entered
No written discretionary authority is required
Only good for the day
If the customer wants it to last for longer then 1 day they need to give written authority
Prudent Investor Rules
Require investment to be low risk conservative investments
UGMA and UTMA custodians and beneficiaries
There can only be 1 custodian and 1 beneficiary on the account
Opening UGMA and UTMA accounts
Opened with the beneficiaries social security number and taxes due are paid by the beneficiary
Proxies
Legal authorization for 1 party to act on behalf of another.
Typically used in voting
If broker dealer receives a proxy concerning a customer’s securities held in street name the broker dealer must
send the proxy to the customer promptly
If the shares owner does not return the proxy ballot by the specified date the firm can vote on behalf of the owner so long as
The vote does not involve:
a merger or consolidation
A proxy contest
appraisal rights concerning a security
RR sharing in a customers account
Can only share directly proportional to their contribution and the must share in profits and losses
Holding Mail
Holding mail is permitted if the firm receives written request
If longer then 3 months an acceptable reason must accompany the letter, convenience is not an acceptable reason
All transactions in a customer’s account must be reviewed by
a principal or supervisory person of the broker dealer
this does not have to take place before entry
Consideration when determining customer financial profile
Temperament
Marital status
number of dependents and their educational needs
equity in the home
Changes to orders
Require the approval of branch manager or supervisor before the change is made
Requests by spouse
Can not accept withdrawal orders from a spouse unless the spouse has been given written authorization from the account holder.
Even if there is written authorization checks must be made out to the account holder, not the spouse
Death of a customer
Cancel all open orders (always the first action)
Freeze account and note the death
Await instructions from the estates representative
Obtain a death certificate
Obtain an affidavit of domicile
Executor must obtain affidavit of domicile, a copy of the death certificate, and abide by the instructions of the last will and testament to transfer funds
Community property states and spousal permission
While the spouse would have equal claim to the account the spouse can not trade or withdraw money from the account without proper outhorisation
Order tickets must indicate
Buy or sell
Number of shares
the security
whether or not it is discretionary
The account number
the time the order was entered
the time the order was excecuted
any term and conditions of the order
the identiy of each associated person
Confirmations
Must be sent out before completion of any transacation is completed
Must disclose settlement date
Must note if security is callable
Capacity which B/D acted
Amount of mark up charge to a customer if not a market maker
Confirmation of corporate and agency debt securities to retail customers only
Mark up or mark down if the member also executes an offsetting principal trade in the same security on the same trading day
Confirmation must contain a reference and a hyperlink if the confirmation is electronic to a web page hosted by finra that contains publicly available trading data for the specific security and the execution time of the transaction to the second
Customer Account Statements
Must be received quarterly (monthly if penny stocks)
Must disclose the current securities position
any and all money debit balances
any activity such as margin interest, interest and dividend payments
Capital Risk
The risk of lose of principal value of an assets
Interest rate risk
loss of market value on a fixed income security because of a rise in competitive interest rates
Inflationary (purchasing power) risk
the risk of loss of buying power especially on fixed income
Liquidity Risk
The risk that an investor will not be able to find a buyer to be able to pay market value for your asset
Systematic Risk
Securities market risk that can not be eliminated through diversification
Non-systematic risk
Is a company specific risk meaning that the value of a single investment choice will decline. Can be minimized with diversification
Credit Risk
A company will declare bankruptcy
Economic and Social Risk
Generally refers to how domestic and world affairs affect investment as well and fiscal and monetary policy
Risk/Reward Relationship
More risk gives the ability to have more reward
Reinvestment Risks
The risk that interest rates will decline and income that is received from existing investments will ear less when reinvested that the original investment
Call Risk
The risk that a bondholder will have their bond called or redeemed prior to maturity
Currency Risk
Risk that changes in exchange rates will adversely affect your investment
Regulation/Legislative risk
Risk that legislative changes may adversely affect your investments
Market Timing Risk
Risk incurred by trying to time the market
Business Risk
The risk associated with the unique risk circumstances of a particular company
Mitigations of Risk
Lessing of risk
Diversification- spreading the risk over several asset classes
Portfolio Rebalancing - Re setting your portfolio to meet the original allocation that was designed to meet your investment goals. This should be done at predetermined times
Hedging - offsetting the risk of a particular investment strategy
Fundamental Analysis
A method of security analysis that concentrates on a particular company’s financial statements, earnings, management, and strategic position in its industry. A fundamental analyst attempts to determine under-valued securities based on these factors.
Top Down fundamental analysis
Investor starts by looking at the economy, then a sector, then a specific company
Bottom Up Fundamental analysis
Investor starts by looking at a company, then the sector, then the overall economy
Technical Analysis
Uses charting and watching patterns of stock price movements
Things an RR must make a reasonable attempt to know before executing a transaction
Customers financial status
Customers tax status
Customers investment Objectives
any other pertinent facts the member knows about the customer
Recommendation strageties that are excluded from recommendation Rules
General financial and investing information
Descriptive information about employer sponsored retirement or benefit plans
Asset allocation models
Components of Suitability Obligations
Reasonable basis obligation- good for a customer
Customer specific obligation- good for this customer
Quantitative obligation- while individually the recommendations are good but when viewed as a whole the recommendations are not good
Investment risk tolerance
Conservative - preservation of capital
Moderately conservative- Willing to accept low level risk to see modest levels of portfolio return
Moderate - Willing to accept some risk to initial principal to seek higher returns
Moderately aggressive - Willing to accept high risk of initial principal and high volatility to seek high returns
Aggressive - Willing to accept significant risk to achieve maximum returns
Investment Objectives
Preserve wealth
fund retirement/educational needs
Generate current income
Grow wealth over time
Speculation
Regulation BI- 4 components
Disclosure - Must disclose material facts and the capacity that the broker is acting in
Care Obligation - Must consider the cost of the recommendation
Conflict of Interest - Conflicts that can not be eliminated must be disclosed
Compliance - B/D must establish maintain and enforce policies and procedures regarding Reg BI
Delivery of Form CRS
Must be delivered to new customer before or at the time a recommendation of a security or account type is made
IF Form CRS is amended or revised
It must be filed within 30 days and delivered to retail customers or prospective customers within 60 days
Member firms are required when dealing with seniors to…
determine at the opening of an account whether the customer has an executed durable power of attorney
If a customer develops dementia and does not have a DPA then the RR or a relative of the client must receive a court approved guardianship not a Power of Attorney (must be of sound mind)
Ask the client to designate a secondary or emergency contact for the account
Ask the client if they would like to be accompanied by a trusted friend or relative to the appointments
Inform client of an unsuitable trade when it is unsolicited
Inappropriate recommendations when dealing with senior investors
Recommendations that have a lack of liquidity or withdrawal penalties
variable life products or settlements
Complex structured products such as CDO or CMO
Home equity loans used for other investments
Taking early withdrawal from retirement plans to invest in high risk investments
Any high pressure seminars (limited time offer and Must sign up today)
RR may only use Senior Designation or Retirement specialist if they are accredited through
CRPC - Charted Retirement Planning Counselor
or
CFP - Certified Financial Planner
Also requires firms approval
FINRA Rule 2165 - exploitation of specified adults requires procedures for two groups
Adults age 65 and older
Adults age 18 and older that they reasonably believe are mentally or physically impaired and unable to protect their own interest
If the member firm believes that financial exploitation is, has, or will occur they can…
Put a hold on the account for 15 days. Extendable up to 30 additional days if it has been reported to state authorities
and the member firm must contact all authorized individuals in the account within two business days of the imposed hold
Firm is also allowed to contact trusted contact person to discuss their concerns, either on the phone or in writing
