Customer Accounts 6% Flashcards
What are the main differences between JTWROS and TIC Accounts?
- these are joint accounts
- JTWROS
- Joint Tenants with rights of Survivorship
- each spouse owns and undivided 50% of the account
- TIC
- Tenants in common
- unequal ownership is permitted
What are the two types of discretion?
- Limited
- only authorize trades in the customer account
- Full
- may also withdraw cash and or securities from the account
How many donors may contribute to an UGMA/UTMA account?
-unlimited
What is the current Regulation T margin requirement?
1
What is the difference between long and short maintenance rules? Who is responsible for their enforcement?
- Long maintenance is 25% of long market value
- 25% of stock price
- debit balance/.75%
- Short maintenance is 30% of the short market value
- 30% of stock price
- credit balance divided by 130%
What are the sources of SMA? What are its uses?
1
How does SIPC define a customer?
1
How much financial protection is provided for each securities customer under SIPC Coverage?
1
Key to this section?
understanding certain definitions
What is the cash account?
- also called a “special cash account”
- securities must be paid for in full
- required for minors
- for guardianship
- must have sufficient cash in the account and must pay in 5 days(Reg T payment deadline)
Whose name are securities purchased in margin held?
-street name
What info is required for a cash account
- Customer’s name
- address
- dob
- ssn
- signature of the principal who approved the account
- customer investment suitability information
- financial info
- investment objective
- Risk Tolerance
- Time Horizon
- Patriot act requires a review of the customer’s gov issued id.
when does a customer account become frozen?
-if they don’t pay for their securities in 5 days and the b/d doesn’t ask the SRO for an extension.
What happens when a customer’s account is frozen?
- security is sold
- account frozen for 90 days, can’t trade on margin, but can on cash
- must have money in the account before b/d enters any buy orders
- if a customer purchases a security and sells the same security without first paying for the original purchase, b/d freezes and won’t release the sales processes to the customer until the customer pays for the original purchase
What is the process for a customer to transfer an account from one broker to another?
- Sign ACATS Form - Automated Customer Account Transfer Service
- New b/d sends to old b/d
- old b/d has one day to review and 3 days to transfer the funds
- options within 7 days of expiration remain at the old b/d
- under MSRB, b/d has 3 days to validate positions and 4 days to complete transfer
What one or more things make a Trade a “Discretionary Trade”, as it applies to a RR making the choice?
- The security
- the quantity; or
- the action (buy or sell)
- Time and Price does not make a trade discretionay
How is a discretionary account opened?
- Customer must sign a Discretionary account agreement
- RR’s principal must approve and then regularly review the account
What securities are Fiduciaries typically limited to in Discretionary Accounts?
- legal list - gov, muni, corporate debt (rated BBB and higher)
- prudent man rule - conservative, prudent in investments, only investments that would be made by a prudent individual are allowed
Describe an Individual Account
- opened when one adult owns the entire account contents
- b/d may discuss the account, and receive trade instructions from the owner only
- must have advanced written permission from anyone else, even your spouse to discuss account with
Describe “Prime Brokerage Accounts”
- for wealthy individuals or portfolio managers who want simplified paperwork
- receive one statement even though may trade by several different b/d
Describe “Joint” Accounts
1
What happens to account when an owner dies?
- must be frozen
- all open orders canceled
- account must be marked “deceased”
- Proper legal paperwork must be gathered
- death cert
- affidavit of domicile (in some states)
- inheritance tax waiver form
- letters testamentary (court-recognized will)
Describe a “Corporate” Account
-to open
-must provide a copy of corporate resolution to the b/d
-identifies who can trade
-margin account
-provide a copy of its corporate charter, which must state the firm
may engage in margin activity
Who uses DVP
- Institutional Investors
- Delivery vs Payment
- b/d delivers and large commercial bank pays
- must pay within 35 days
Describe a “partnership account”
- basic info required on each partner
- partnership agreement required - names who is authorized to trade
Up to what age does the custodian retain control on a UTMA?
most states is 25, and says the transfer must be done by then
Who is responsible for taxes on UGMA/UTMA
- the minor
- Younger that 19, if the taxable income is in excess of $1900, the excess is taxable at the parents highest marginal rate
- Older than 19 (or 24) taxed at the minor’s tax rate
When is payment due on all securities?
- 5 biz days (regular way + 2
- Except for
- gov securities
- cash trades made before 2:30PM
- OPTIONS (the underlying securities settle the regular way)
- must pay next day on all
Describe “Margin Accounts”
-sign margin agreement
-contains a “hypothecation agreement” - customer agrees to
hypothecate or pledge the account securities as collateral for margin
or the loan from the b/d.
-customer agrees the b/d may re-hypothecate these securities as
collateral to a bank
-b/d re-hypothecates these securities when its borrows funds from
the bank to use for the customer’s margin
-margin interest is tax deductible
-except for muni, which are rarely traded on marging
-all short sales are traded on margin
-if an investor has a margin account, they have a cash account
-these do not account if the margin account has a debit balance
Describe Regulation T
- created under the Securities exchange act of 1934
- Fed Reserve Board was granted authority
Margin Requirements under Federal T
- 50% of the account must be cash or fully paid securities
- this is hypothecation
- New issues are ineligible for margin purchase within 30 days of distribution date
- Mutual funds must be held is a cash account for 30 days before they can be used as collateral for a margin account
What %down payment (under fed t) must be made for all equity positions, long or short?
50%
Describe Marginable Securities
- Securities that can be purchases on margin
- FRB determines the marginable
- NASDAQ national market system
- certain otc stocks
- new issues, including shares of open ended mutual funds are not
Describe the “Minimum Equity Rule”
- $2,000 required upon opening a margin account or up the first margin transaction
- exception is if the securities is less than $2,000
- short always requires $2,000
Describe “short against the box:
- investor has an unrealized gain and wishes to lock that in, but not to close the position yet
- sell short the same stock
Minimum Maintenance
- if a stock trades between $5 and $17.50, the rule is $5 a share
- if a stock trades between $2.50 and $5, the rule is 100%
- If a stock trades at $2.50 or lower, the rule is $2.50 a share
SMA
- Special Misc Memorandum Account
- it is not an account, and it is not an equity, it is a line of credit
- SMA increases 50% of the market appreciation and on the short, 150% of the market decpreciation
Equity Excess to a Current Reg T
- only source of SMA related to equity
- this is the excess amount to margin against
- Long:
- 1/2 LMV less the DB = SMA(if there has been a market increase)
- Short side:
- Equity - 1/2 SMV = SMA(if there has been a market decrease)
Uses of SMA
- Buying Power - SMA * 2
- you can buy $2 of stock for every $1 of sma
- Borrowing Power - SMA * 1
- you can borrow
SMA - Portfolio Margin Account
- professional money manager who qualifies for uncovered option writing
- minimum equity requirement is $100,000
- allowed a higher level of leverage than a normal margin account
SMA - Day Trading Account
- for pattern day traders
- buys and sells securities on the same day and has done so 4 days in 4 different securities over the last 5 days
- minimum equity position of $25,000
- cannot use a cross lien, must be the day trader’s dollars
- buying power equals 4 times excess over maintenance
What is a cross lien?
1
SIPC
-Securities Investor Protection Act of 1970
-procedures for the protection of the customer funds in the event the b/d becomes insolvent.
-Created SIPC “Securities Investor Protection Corporation”
-Collects assessments from broker/dealers in order to protect
customers from loss due to a failed broker/dealer
SIPC Membership
- Insures accounts up to $500,000, including up to $250,000 in cash
- covers losses due to the b/d bankruptcy only.
- must by a blanket fidelity bond to cover employee theft or loss of customer securities
- currently $25,000, soon increase to $100,000
SIPC - Coverage
- A joint account is eligible for $500,000 each
- IRA rollover account is a separate account
- commodities are not covered by SIPC
Customer Claims
-Street name
-the securities are readily negotiable without the customer’s
endorsement
-only securities held in the street name are SIPC eligible
-Max Limit on Claims
-b/d generally carry additional insurance coverage in excess of SIPC
-Whatever isn’t repaid through liquidation, SIPC, and then add’l
insurance, the customer becomes a general creditor of the firm
