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SIE Exam > Customer Accounts > Flashcards

Customer Accounts Flashcards

This deck focuses on the customer account opening process, different types of retail accounts and account titles.

1
Q

When a written trade confirmation must be given or sent to a customer

A

At or before the completion of the transaction (settlement)

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2
Q

Regulation that requires sheltering of private customer information and privacy notices

A

Regulation S-P

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3
Q

When principal approval is required for a new customer account

A

At or promptly after the first transaction in the account

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4
Q

Two types of custodial accounts established for minors

A

UGMAs and UTMAs

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5
Q

Joint account that passes assets to surviving owner at death with no probate

A

Joint tenancy with rights of survivorship (JTWROS)

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6
Q

Type of account that passes assets at death by will to the heirs

A

Joint tenants in common (JTIC)

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7
Q

Type of joint account that permits unequal ownership interests

A

Joint tenants in common (JTIC)

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8
Q

Type of joint account that requires equal ownership interests

A

Joint tenancy with rights of survivorship (JTWROS)

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9
Q

Type of account that authorizes registered representatives to make trades on behalf of the customer

A

Discretionary

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10
Q

Prohibited practice of trading frequently to boost commissions

A

Churning

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11
Q

Two order instructions that are not considered discretionary

A

Time and price

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12
Q

Length of time mail can be held for customers that are traveling in the U.S.

A

3 months

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13
Q

Length of time mail can be held for customers that are traveling outside of the U.S.

A

3 months

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14
Q

Minimum frequency for sending customer account statements

A

Quarterly

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15
Q

Frequency with which account statements are sent to customers in an active account

A

Monthly

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16
Q

Minimum frequency statements are sent to customers if penny stocks are held in the account

A

Monthly

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17
Q

When a principal must approve an order ticket

A

Promptly after execution

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18
Q

The number of days after account opening a firm has to furnish a copy of the account record to the customer

A

30 days

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19
Q

Two required documents for opening a corporate account

A

Corporate charter and corporate resolution

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20
Q

Account charge that is appropriate only for persons who engage in moderate to active trading

A

Fee-based

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21
Q

Account charge that is appropriate for persons who engage in little trading activity

A

Commission

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22
Q

Type of responsibility that applies to persons named to manage custodial accounts

A

Fiduciary

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23
Q

When assets transfer to the donee in an UGMA account

A

Age of majority

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24
Q

The Social Security number on an UGMA account form

A

The minor’s

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25
Q

The frequency that customer account information must be updated

A

Every 3 years

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26
Q

A pattern day trader effects 4 or more day trades within a

A

5 business day period

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27
Q

Customers must receive a copy of new account form every

A

36 months

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28
Q

Customers must be given a copy of new account form within

A

30 days of account opening

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29
Q

The party that can buy, sell or liquidate securities in an UGMA account

A

Custodian

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30
Q

When assets transfer to the donee in an UGMA account

A

Age of majority

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31
Q

The Social Security number on an UGMA account form is that of

A

The minor

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32
Q

When principal approval is required for the opening of a new cash account

A

promptly after the first transaction

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33
Q

Business document required for the opening of a trading account by a partnership

A

Partnership Agreement

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34
Q

Disclosure document that must be provided to the customer on or before account approval

A

Options Disclosure Document

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35
Q

Deadline for return of the signed options agreement by the customer

A

Within 15 days of account approval

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36
Q

Principal required by FINRA that is accountable for options sales supervision and review of customer accounts that trade options

A

Registered Options Principal (ROP)

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37
Q

When municipal confirmations must be sent or given to customers

A

At or prior to completion of a transaction

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38
Q

Protects customers from the bankruptcy or financial failure of broker-dealers

A

Securities Investor Protection Act

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39
Q

Maximum coverage per account under SIPC

A

$500,000

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40
Q

Maximum amount of cash claims per account under SIPC

A

$250,000

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41
Q

Window of time when telephone solicitation is permitted

A

8 a.m. to 9 p.m. in the time zone where the prospect lives

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42
Q

Agreement that gives a broker-dealer permission to pledge customer margin securities as collateral for bank loans

A

Hypothecation Agreement

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43
Q

The form required for a broker-dealer to loan customer margin securities to other customers for short sales

A

Loan Agreement

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44
Q

The regulation that grants authority to regulate the extension of credit in the securities industry

A

Reg T

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45
Q

Minimum deposit required in margin accounts within 4 business days by Reg T

A

50% of the market value of the transaction

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46
Q

Type of securities that cannot be purchased on margin, but can be used as collateral after 30 days

A

Mutual funds

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47
Q

Minimum initial deposit required by FINRA Rules

A

$2,000

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48
Q

The deposit required to purchase shares with a value of $2,500 in a margin account

A

$2,000

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49
Q

The deposit required to purchase shares with a value of $6,000 in a margin account

A

$3,000

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50
Q

The deposit required to purchase shares with a value of $1,500 in a margin account

A

$1,500

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51
Q

The deposit required to sell short shares with a value of $2,500 in a margin account

A

$2,000

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52
Q

The Reg T deposit required to sell short shares with a value of $6,000 in a margin account

A

$3,000

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53
Q

The deposit required to sell short shares with a value of $1,500 in a margin account

A

$2,000

54
Q

The minimum maintenance requirement in a long margin account

A

25% of the long market value

55
Q

The minimum maintenance requirement in a short margin account

A

30% of the short market value

56
Q

The point at which a maintenance call is triggered in a short account

A

Equity below 30% of SMV

57
Q

The two agreements that are required for an investor to open a margin account

A

Hypothecation Agreement and Credit Agreement (Loan consent is optional)

58
Q

The three components of a margin agreement

A

Hypothecation agreement, credit agreement, loan consent form

59
Q

When a maintenance call must be met

A

Promptly

60
Q

Minimum equity to open a day trading account

A

$25,000

61
Q

Under Reg T, payment must be made by

A

Settlement + 2

62
Q

account statement

A

A snapshot of a customer’s account, which must be sent to the client at least quarterly, though potentially even monthly if there is any account activity.

63
Q

cash account

A

A brokerage account that requires customers to pay in full for securities.

64
Q

churning

A

A prohibited practice in which a registered representative overtrades a customer’s account in order to generate additional commission revenue off the customer.

65
Q

commingling

A

A prohibited practice in which a firm combines customer securities and firm securities rather than keeping them segregated from one another.

66
Q

corporate account

A

A corporation’s brokerage account. In order to establish one, the corporation must provide a corporate resolution, which details who has trading authority on behalf of the company. If the corporation wants to trade on margin, that must be permitted in its corporate charter.

67
Q

credit agreement

A

Part of the margin agreement, which must be signed and returned by the customer before margin trading can begin. This part of the agreement describes the terms and conditions of the interest that investors pay on their margin loans.

68
Q

custodian

A

A person that is responsible for managing another individual’s account and making investment decisions for that person. For example, someone representing a minor in an UGMA or UTMA account

69
Q

custody

A

The process of ensuring that customers’ securities are kept in safekeeping in order to prevent misuse of their assets.

70
Q

day trade

A

Occurs when a customer opens and closes the same securities position on the same trading day.

71
Q

discretionary account

A

An account in which a customer provides a registered representative with a written power of attorney that allows the rep to trade on behalf of the customer. Specifically, this allows the rep to determine the action (whether to buy or sell), the asset (what security to buy or sell), and the amount (the number of shares).

72
Q

Federal Deposit Insurance Corporation (FDIC)

A

A government agency that insures customer bank deposits for up to $250,000 per account.

73
Q

fiduciary responsibility

A

A requirement that fiduciaries, who are individuals that open and manage accounts on behalf of others, must act in the best interest of the account beneficiary. Such accounts include minor and trust accounts.

74
Q

fee-based account

A

A type of account in which a customer pays a fixed fee or a percentage of assets under management rather than a commission for each transaction. These types of accounts are most appropriate for customers who place a large number of trades.

75
Q

free-riding

A

A prohibited practice in which a customer purchases and sells the same security without ever paying for the purchase. If this occurs, the broker-dealer will free the customer’s account and require the customer to pay cash upfront for future purchases.

76
Q

hypothecation agreement

A

Part of the margin agreement, which must be signed and returned by the customer before margin trading can begin. In this part of the agreement, the customer is pledging her securities in the account as collateral for a loan from the broker-dealer.

77
Q

hold customer mail

A

A rule that permits a firm to hold on to the customer’s mail, such as account statements and trade confirmations, for up to three months if requested by the customer.

78
Q

joint tenants with rights of survivorship (JTWROS)

A

A type of joint brokerage account in which ownership is undivided, meaning all owners own 100% of the assets. If one owner dies, her interest in the account passes to the surviving owners. This type of account is most common for related individuals, such as married couples or parents and their adult children.

79
Q

joint account agreement

A

A document that must be signed by all owners of a joint brokerage account. This agreement will stipulate which parties can conduct trades in the account.

80
Q

irrevocable trust

A

A type of trust that typically cannot be changed or terminated without the agreement of the trust’s beneficiary.

81
Q

margin agreement

A

A document that must be signed and returned by a customer to his brokerage firm before trading can begin in a margin account. It includes three parts:

  1. hypothecation agreement,
  2. credit agreement, and
  3. loan consent agreement.
82
Q

margin account

A

A type of customer account that allows the customer to purchase securities using money borrowed from a broker-dealer. The customer is required to deposit 50% of the security’s market value, while borrowing the other 50% from his firm.

83
Q

margin call

A

Occurs if a customer’s equity in a margin account falls below the required minimum thresholds, 25% in a long account and 30% in a short account. The customer is required to promptly deposit enough cash or securities to bring the account back up to the required threshold, and if she does not, the firm can sell the securities in her account to bring it into conformity.

84
Q

margin disclosure statement

A

A risk disclosure statement that a customer must receive prior to or at the time of opening a margin account.

85
Q

marking to the market

A

The process of calculating the equity in a customer’s margin account at the end of each trading day in order to reflect any gains or losses that have been incurred.

86
Q

minimum maintenance requirement

A

A FINRA rule that requires margin accounts to have a minimum amount of equity at all times. In a long margin account, the customer is required to have 25% of the market value in equity. In a short margin account, the customer is required to have 30% of the short market value of the account in equity. If the amount of equity in a customer’s account drops below these figures, the customer will receive a margin call.

87
Q

minimum initial margin requirement

A

A FINRA rule that imposes additional requirements on initial margin purchases by customers. Specifically, in a long margin account, it requires customers to deposit a minimum of $2,000 or 100% of the purchase price of the securities, whichever is less. For short margin transactions, the customer must deposit a minimum of $2,000, regardless of the price.

88
Q

new account form

A

A document that must be completed by a registered representative in order for a customer to open a new account with the firm. Although the rep completes this document, the customer provides all the required information, including his name, social security number, date of birth, and financial information.

89
Q

not held orders

A

A customer order in which the client provides the registered rep with the action (buy or sell), the asset (which security), and the amount (number of shares), but gives the rep the flexibility to choose the best time and price of execution. These orders do not require discretionary authority.

90
Q

pattern day trader

A

A customer that executes four or more day trades within a five-business-day period. Because of the increased risk of day trading, these investors are subject to special margin requirements, such as maintaining a minimum equity of $25,000 at all times.

91
Q

power of attorney (POA)

A

A document that allows a third party to act on behalf of an individual. It must be signed by a customer in order to grant the registered rep discretionary authority over her account.

92
Q

registered options principal (ROP)

A

A supervisor at a broker-dealer that is allowed to approve a customer’s account for trading options.

93
Q

Regulation S-P

A

An SEC regulation that aims to ensure the security and confidentiality of a customer’s personal information. This includes a requirement to provide clients with a privacy notice that explains the information the firm gathers about them and where this information is shared, allowing customers the opportunity to opt out of certain information sharing.

94
Q

Regulation T

A

A Federal Reserve Board rule that governs the extension of credit by broker-dealers in margin accounts and establishes initial margin requirements. Specifically, it says that customers must put up in equity 50% of the purchase price, allowing them to borrow the remaining 50% from the broker-dealer.

95
Q

revocable trust

A

A type of trust that can be altered by the creator of the trust.

96
Q

Securities Investor Protection Corporation (SIPC)

A

A nonprofit corporation funded by FINRA member firm assessments that protects each separate customer in the event that a broker-dealer goes bankrupt. Each separate customer account is protected for up to $500,000 total, but no more than $250,000 in cash.

97
Q

signature of convenience

A

A prohibited practice in which a customer’s signature is copied from another document to attain an approval. This is prohibited even if the customer gives permission.

98
Q

tenants in common (TIC)

A

A type of joint brokerage account in which ownership is divided, meaning each account holder owns a specified percentage of the assets based on his or her contributions. At an owner’s death, his portion of the account is liquidated and distributed to his designated beneficiary rather than to the surviving account owners.

99
Q

trade confirmation

A

A document that details a customer’s transaction, including the transaction terms, the broker’s name and capacity, and the fee charged. It must be sent to the customer no later than the settlement of the transaction.

100
Q

trust account

A

A type of account in which someone’s assets are held and managed by another party (trustee). The trustee has a legal obligation to act in the best interest of the beneficiary.

101
Q

trust agreement

A

A legal document that establishes the terms of a trust and appoints a trustee to act on behalf of the beneficiary.

102
Q

Uniform Gifts to Minors Act (UGMA

A

A type of brokerage account established on behalf of one minor and run by one custodian, who manages the account for the best interest of the child. When the minor reaches the age of majority, which is 18, the assets are transferred to the new adult.

103
Q

Uniform Transfer to Minors Act (UTMA)

A

A type of brokerage account established on behalf of one minor and run by one custodian, who manages the account for the best interest of the child. When the minor reaches the age of majority, which is between 18 and 25 depending on the state, the assets are transferred to the new adult.

104
Q

vulnerable investors

A

Customers who should receive increased attention and protection from their brokerage firms. These include persons age 65 or older as well as any person 18 and older who the firm or its representatives believe has a mental or physical impairment that renders the individual unable to protect his or her own interests.

105
Q

Who is the lender in a margin account?

A

The brokerage firm where the account is held lends cash to the investor to purchase securities. Not only does the firm earn commissions on the resulting trades, it also earns interest on the balance owed on the credit extended in the margin account.

106
Q

What are the risk characteristics associated with margin accounts?

A

When investors use margin to purchase additional shares, they use leverage to own more securities than they have the cash to pay for. This increases the potential for gain and loss. This is unlike options, which also use leverage, since the loss on an option is limited to the premium paid. However, an investor using margin could be subject to one or more margin calls and be forced to add cash or sell securities.

107
Q

What is disclosed in the credit agreement of a margin account?

A

The credit agreement details the exact terms, fees, and interest costs associated with the margin account, that is, all credit terms. The credit agreement is a separate document from the margin account and has to be signed by the customer before margin trading can begin.

108
Q

What is hypothecation?

A

This term describes how investors pledge their existing shares as collateral for credit extended by the brokerage firm.

109
Q

What is re-hypothecation?

A

To obtain funds to extend to the customer for margin purchases, the dealer pledges customer securities to a bank as collateral for a loan.

110
Q

How does Regulation T impact margin trading?

A

Regulation T regulates how much credit a dealer can extend to a customer for margin purchases. A customer’s equity must equal to 50% of the purchase price. For example, if the customer wants to purchase $100,000 of stock on margin, they must deposit 50% or $50,000.

111
Q

What is loan consent?

A

The loan consent agreement is an optional part of the margin agreement, but if signed by the customer it allows the firm to loan a customer’s shares to another customer for short sales.

112
Q

What is street name?

A

When a customer opens a margin account, the securities are held in what is called “street name” or the name of the broker-dealer the account is with. This allows for the lending and rehypothecation the customer agrees to in the customer’s margin account.

113
Q

What Is Regulation T?

A

Regulation T is a Federal Reserve Board rule that governs how much credit can be extended to any customer. The customer margin requirement stands at 50%; any dealer can increase this amount (meaning the customer can buy less on credit), but no dealer can accept lower margin that what is required by Reg T.

114
Q

What could cause a dealer to increase margin requirements beyond Reg T?

A

During times of extreme volatility, a dealer can increase margin requirement on existing account balances as a defensive measure against a customer going below Reg T requirements or being unable to repay.

115
Q

Which securities are exempt from Reg T?

A

All exempt securities (e.g. Municipal securities and Treasuries) are also exempt from Reg T.

116
Q

Why would a customer want to open a margin account?

A

Reduces the amount of cash needed to buy securities and Increases potential return

117
Q

What time period must elapse before a new issue can be purchased on margin?

A

30 days after the the SEC declares effectiveness

118
Q

What is the initial deposit for a new margin account in a long account under FINRA rules?

A
  • For purchases between $0 - $2,000, the customer must deposit 100% of the must purchase price
  • For purchases between $2,000 - $4,000, the customer must deposit $2,000
  • For purchases above $4,000, the customer must deposit 50% (this is when Regulation T comes into play)
119
Q

What is the margin requirement for an initital short sale in a new margin account under FINRA rules?

A
  • For purchases between $0 - $2,000, the customer must deposit $2,000
  • For purchases between $2,000 - $4,000, the customer must deposit $2,000
  • For purchases above $4,000, the customer must deposit 50% (this is when Regulation T comes into play)
120
Q

What must be received by the customer before the first options trade can be accepted?

A

Options Disclosure Document

121
Q

Within how long after the account opening must the signed options agreement be returned by the customer?

A

15 Days

122
Q

When is an account designated a “pattern day trader?”

A

When there are four or more day trades (buy and sell same day) made within a five-day period - also called a “round trip.”

123
Q

What type of joint account allows for a specified percentage of ownership of each party in the account?

A

Tenancy in Common

124
Q

What type of joint account allows for each party to own an undivided interest in the account - if one person dies the other party owns the entire account.

A

Joint Tenancy with Rights of Survivorship

125
Q

What is a customer account that allows the broker to trade but not to withdraw funds?

A

Limited power of attorney

126
Q

Which regulatory body sets margin rules?

A

The Federal Reserve

Remember that anything dealing with the creation of money is regulated by the Federal Reserve. A brokerage firm is effectively creating money for a customer to buy additional stock when opening a margin account. Specifically this is called Regulation T.

127
Q

What is another name for the body of margin rules?

A

Regulation T

This is because in the Act of 1934, margin rules are covered in section “T.”

128
Q

What type of joint account is a divided account?

A

Tenants in Common (TIC)

129
Q

In what type of joint account do all parties have an undivided interest in the account?

A

Joint Tenants with Rights of Survivorship (JTWROS)

130
Q

Define:

clearing broker-dealer

A

A clearing firm is a broker-dealer that is responsible for processing and settling customer transactions, as well as maintaining custody of customer cash and securities.

SIE Exam (14 decks)

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