Customer Accounts Rules and Procedures Flashcards
A customer wishes to open a joint account with their spouse. The spouse could not attend the meeting with the registered representative due to a work commitment. Which of the following statements concerning who must sign the new account form is correct?
A
Either spouse can sign the form
B
Both spouses must sign the form
C
The introducing registered rep must sign the form
D
A principal must sign the form
D
A principal must sign the form
According to FINRA rules, the only signature required on a new account application is that of the approving principal. Industry rules do not require the customer’s signature, nor the signature of the registered representative on the new account application.
Which statement is false regarding a tenants in common account?
A
Ownership may be unequal
B
Neither tenant can devise or gift their interest
C
Both signatures are required to redeem shares when both names are on the certificates
D
When 1 tenant dies, their proportionate share goes to their estate
B
Neither tenant can devise or gift their interest
The co-tenant has specific percentage ownership in the account and may transfer their interest without consent of the other co-tenant. Their estate receives their percentage share upon death. If one’s name is on a certificate, that person must sign it to redeem it. There is no requirement for co-tenants to have equal percentage.
What are the characteristics of accounts owned by more than one person as JTWROS?
A
Each owner has a fractional, but not necessarily equal, undivided ownership interest and if any party dies, the survivors take over the whole account
B
Each owner has an equal undivided ownership interest and if any party dies, the decedent’s share of the account passes to their estate
C
Each owner has a fractional, but not necessarily equal, undivided ownership interest and if any party dies, the decedent’s share of the account passes to their estate
D
Each owner has an equal undivided ownership interest and if any party dies, the survivors control the account
D
Each owner has an equal undivided ownership interest and if any party dies, the survivors control the account
In JTWROS ownership, owners have equal interests and rights of survivorship. Fractional ownership and passing to the decedent’s estate are characteristics of tenants in common.
When will member firms reach out to an account’s designated trusted contact person?
A
If the account holder fails to heed the advice of the registered representative
B
In cases where the investment risk profile seems out of the ordinary
C
If they suspect the customer is experiencing diminished mental capacity
D
If the account is not doing very well from a performance standpoint
C
If they suspect the customer is experiencing diminished mental capacity
Firms are now required to make reasonable efforts to obtain the contact information of a trusted contact person for a customer’s account. Financial abuse can take many forms, and senior citizens are often seen as easy prey. Firms need to be alert for investment scams, forgery, intimidation, retitling accounts, and theft. Member firms will also reach out to the trusted contact person if they suspect the customer is experiencing diminished mental capacity or to obtain the identity of the legal guardian, trustee, or power of attorney for the customer.
The type of account ownership where a person owns a portion of the account, and their portion will pass to their estate upon death is a:
A
Individual registration
B
Trust account
C
JTWROS
D
Tenants in common
CORRECT!
The purpose of a tenants in common account is to afford each investor the ability to own a portion of the account, and upon the investor’s death, have their portion transfer to their estate. Under joint tenants with rights of survivorship, the surviving owner assumes ownership and control of the entire account with no interruption. In an individual account, the account passes to the single owner’s estate, unless it is set up as “transfer on death” (TOD). Under TOD, the account immediately passes to the named beneficiary.
D
Tenants in common
The purpose of a tenants in common account is to afford each investor the ability to own a portion of the account, and upon the investor’s death, have their portion transfer to their estate. Under joint tenants with rights of survivorship, the surviving owner assumes ownership and control of the entire account with no interruption. In an individual account, the account passes to the single owner’s estate, unless it is set up as “transfer on death” (TOD). Under TOD, the account immediately passes to the named beneficiary.
All the following statements about a community property account are true, except:
A
Income and appreciation in the account is equally owned by all owners
B
Each tenant owns an equal individual interest in the entire account
C
The joint tenants must be married
D
A community property account can be established in any state
D
A community property account can be established in any state
A community property account is similar to a JTWROS (joint tenants with rights of survivorship) but can only be held by a married couple. This account is opened based on the community property laws of the state in which the couple resides. Both parties have equal ownership and rights to the income and appreciation in the account. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
If an account has regular activity in it, a broker-dealer will typically send statements to customers at least:
A
Annually
B
Semiannually
C
Monthly
D
Quarterly
C
Monthly
Broker-dealers must send account statements to customers, at a minimum, quarterly. A quarterly statement is required for all inactive accounts as determined by the broker-dealer. If the account is classified as a penny stock account or a day trading account, statements must be sent at least monthly. Typically, in any account where there is activity, broker-dealers will also send statements monthly.
Which of the following pieces of information is required on the new account form?
A
Date of birth
B
Customer signature
C
Net worth
D
Customer employer
A
Date of birth
To open a new account, 4 pieces of critical customer information are required on the new account form: the full legal name of each customer, home or business street address, taxpayer identification number and date of birth. Additionally, the signature of the broker-dealer’s principal is required on the new account form, accepting the account for the firm. The customer’s employer and net worth is requested information that the registered representative must make a reasonable effort to obtain. Industry rules do not require a registered representative’s or customer’s signature on a new account application.
What does limited discretion allow a registered representative to do?
A
May enter buy or sell orders, and withdraw cash from the account
B
Cannot enter buy or sell orders, but can deposit and/or remove cash from the account
C
May only enter buy or sell orders in the account
D
May enter buy or sell orders, and deposit cash in the account
C
May only enter buy or sell orders in the account
There are 2 basic types of discretion: limited discretion (allowing someone to enter buy or sell orders into the account) and full discretion (allowing the designated individual to enter orders into the account and to deposit/remove cash and/or securities). Discretionary control over an account must be given to an RR in writing and approved by their manager.
A client in a cash account purchased stock from their broker-dealer. The client does not make payment for the shares within 4 business days. According to Regulation T, the broker-dealer must now:
A
Sellout the security in question
B
Grant an automatic 30-day extension
C
Arrange for an outside loan for the client
D
Grant an extension of 5 business days
A
Sellout the security in question
According to Regulation T, the broker-dealer must liquidate the security in question and freeze the account. Investors are required to pay for securities 2 business days after the settlement date (S+2). Regular-way settlement for corporate and municipal securities is trade date plus 2 business days (T+2), so the payment due date can also be worded as trade date plus 4 business days (T+4).
All the following are true regarding advisory accounts, except:
A
Fee-based accounts established by investment advisers can charge an annual fee based on a percentage of assets under management
B
A fee-based account may make more sense than a commission-based account if many transactions are expected to take place
C
Fee-based accounts established by investment advisers can charge an annual flat dollar amount for all investment advisory transactions
D
A fee-based account makes more sense than a commission-based account if few transactions are expected to take place
D
A fee-based account makes more sense than a commission-based account if few transactions are expected to take place
Fee-based accounts established by investment advisers charge an annual fee, based on a percentage of assets under management, or an annual flat dollar amount for all investment advisory transactions. Commission-based accounts charge a commission to the customer for each investment transaction. Each type of account has its advantages, depending on the number of transactions a customer makes on an annual basis.
Who is permitted to authorize transactions in an account that has a TOD registration?
A
Either the account owner or the individual named as TOD
B
The account owner
C
The individual named as TOD
D
The registered representative
B
The account owner
A transfer on death (TOD) or payable on death (POD) registration is an individual account that allows the investor to direct where the assets will go upon death. The account owner assigns one or more beneficiaries to receive the account proceeds upon the owner’s death. The account owner retains full ownership and control of the assets while alive but, upon death, assets are passed on to the beneficiaries to be divided equally or according to percentages determined by the owner.
Once a firm finds out one of its customers has died, it must do all the following, except:
A
Cancel all open orders
B
Freeze the account noting the customer is deceased
C
Sell all positions and send a check to the address of record
D
Wait for further instructions from the executor of the customer’s estate
C
Sell all positions and send a check to the address of record
Customer accounts will be closed if the customer makes the request in writing. Account closure may be the result of transferring the account to another firm, due to the death of the customer, or for another reason stated by the customer. If the customer has died, the firm must cancel all open orders, freeze the account from removal of assets noting the customer is deceased, and wait for further instructions from the executor or administrator of the customer’s estate.
To protect the account assets of seniors, firms need to be on alert for all the following, except:
A
Forgery
B
Retitling accounts
C
Market risk
D
Investment scams
C
Market risk
Financial abuse can take many forms, and senior citizens are often seen as easy prey. Firms need to be alert for investment scams, forgery, intimidation, retitling accounts, and theft. FINRA allows firms to place a temporary hold of up to 15 days on an account if fraud is suspected. The hold may be extended an additional 40 days if the firm believes the customer is being financially exploited. During the time when the hold is in place, the firm will document the reason for the hold and must notify the trusted contact person.
Which of the following may be purchased using margin?
A
Closed-end fund
B
Stock IPO
C
Unit investment trust
D
Open-end fund
A
Closed-end fund
Closed-end funds may be purchased using margin once they are traded in the secondary market. Open-end funds, stock IPOs, and unit investment trusts are new securities when they are offered to the public. SEC regulations and Regulation T prohibit the use of margin to purchase initial public offerings. This is especially important for shares of open-end funds, which are in continuous issuance even though the fund itself may have been in business for 40 years. Closed-end funds may be bought on margin only after 30 days have elapsed since their initial public offering. At that point, they are trading on exchanges and are subject to Reg T like any other publicly traded security.
