Servicing and Maintaining Customer Accounts

Question 1

Conduct Rules

Answer 1

• apply to all transactions between member firms and customers
• technically do not apply to exempt securities such as US government securities and municipal, however no one exempt from SEC anti fraud provisions

Question 2

Street Name Securities

Answer 2

securities are registered in the name of the brokerage firm as a nominee

Question 3

Commingling

Answer 3

violation of Securities Act of 1934 to mix securities of the broker dealer with those of the customers

Question 4

Updating Account Information

Answer 4

• address change
• financial background
• objectives

Question 5

Death of a Customer

Answer 5

• RR must mark account deceased and cancel all open orders
• firm must freeze assets and wait for proper documentation
• after receipt of proper legal documents, firm closed account and transfers funds to an estate account
• existing power of attorney is automatically canceled, and executor of estate is appointed by a court order

Question 6

Documentation Needed to Transfer Deceased Person to Estate Account

Answer 6

• copy of death certificate
• letters or testamentary
• inheritance tax waiver
• affidavit of domicile (sworn written statement certifying the deceased place of residence at the time of death)

Question 7

Account Statements

Answer 7

• broker dealers required to sent quarterly statement for inactive accounts, and typically send monthly statements for active accounts
• SEC regulation states that customer can request current financial statement at any time- balance sheet must be provided, however income statement is not required

Question 8

Transferring Accounts

Answer 8

• customer gives written instructions to receiving firm
• receiving firm must submit transfer request
• carrying firm must validate instructions or take exception withing ONE business day
• within THREE business days following validation of transfer instructions, the carrying member must complete the transfer

Question 9

Confirmations

Answer 9

SEC requires that broker dealers provide customers with detailed confirmation of a purchase or sale
Confirmation must include:
- identity and price of security
- number of share, units or principal amount
- date of transaction, time of execution
- capacity in which the broker dealer acted
- dollar price and yield information on debt securities
- whether security is callable
- settlement date

Question 10

Commissions/ Markups

Answer 10

commission: charge the broker dealer assesses for executing an agency trade for the customer
markup: is the difference in a principal transaction between the price charged to the customer and the prevailing interdealer price

Question 11

Two Situations Where Markups Must Be Disclosed

Answer 11

1. Riskless Principal Transactions: broker dealer purchases the security for resale to the customer only when the customer’s order is ALREADY in had
2. Principal transactions in Nasdaq stocks or NYSE or Amex listed stocks traded OTC

Question 12

Securities Investor Protection Act

Answer 12

• protection for customers in the event the broker dealer become insolvent
• SIPC coverage applies only to public customers & does not apply to commodity or futures accounts
• provides coverage for each customer to max of $500,000, of which can be for no more than $250,000 for cash losses
• one owner with cash and margin account: combined to determine max amount, if joint account with spouse, that will be covered separately
• **Securities that can be specifically identified as belonging to a customer (stock certificate has client’s name on it) will be distributed to the customer without regard for the dollar limits

Question 13

SEC Regulation S-P

Answer 13

• requires all broker dealers, investment companies, and investment advisers registered with the SEC to adopt policies and procedures to protect privacy of the confidential information that they collect from their clients
• must also give customers a copy of the privacy notice
• notice must also tell clients how to opt out of disclosing information to nonaffiliated third parties, if they so chose
  Customer vs. Consumer:
  1. Firms must give copy of privacy notice to Customers when the relationship is first established, and updated version annually
  2. Firm must give Consumers a privacy notice before it discloses any nonpublic personal information to any nonaffiliated third party

Question 14

US Patriot Act

Answer 14

• October 2011
• primary purpose to fight terrorism
• new obligations on broker- dealers under anti- money laundering laws

Question 15

Currency Transaction Reports (CTRs)

Answer 15

• FinCEN Form 104

- for all cash transactions by a customer during one business day that exceed $10,000

Question 16

Currency and Monetary Instrument Transportation Report (CMIRs)

Answer 16

• must be filed when anyone physically transports or receives cash in excess of $10,000 into or out of the US

Question 17

Suspicious Activity Reports (SARs)

Answer 17

As of Dec. 20, 2002 firms must file a report when transaction(s) equals or exceeds $5,000 and firm suspects any of the following:

• client is violating federal criminal laws
• transaction includes funds related to illegal activity
• transaction designed to evade reporting requirements
• transaction has no apparent business or other legitimate purpose

Question 18

Mandatory AML Compliance

Answer 18

All broker dealers MUST now have AML compliance programs, which at minimum include:

• policies and procedures that can be reasonably expected to detect and report suspicious transactions
• designation of compliance officer who is responsible for AML program
• ongoing employee training
• independent audit function to test the effectiveness of the firm’s AML program
• **Industry rules also require that AML programs be in writing and approved by a member of senior management.