Unit 5: Opening and Servicing Customer Accounts

Question 1

Opening Accounts

Answer 1

• name
• DOB
• address
• SS #

** signature of client not required

Question 2

Types of Account Ownership

Answer 2

1. individual
2. joint
3. corporate
4. partnership

Question 3

Trading Authorization - Power of Attorney

Answer 3

• accounts may be opened with someone other than the owner having the authority to buy and sell securities

1. Discretionary: registered representative, need principal approval
   (if there is one of these 3 things missing it is discretionary….authority to decide action - buy or sell, asset - which security and amount)
2. Custodial: competent adult to act on behalf of child/beneficiary (UGMA, UTMA accounts one-to-one, no limit on gifts but gift tax)
3. Fiduciary: third party legally appointed

Question 4

Payment Methods

Answer 4

1. margin account: borrow $

2. cash account: pay full purchase price

Question 5

Interpositioning

Answer 5

• results in a less favorable price to the customer as the third party will trade at inside market for themself

Question 6

COD Orders

Answer 6

Cash on Delivery

- payment for securities purchased or delivery of securities sold is to be made by an agent bank

Question 7

Opening Accounts for employee of another member firm

Answer 7

• account holder must be advised in writing that his employer will be notified of this account
• employer must receive written notification that the account is being opened
• if employer request duplicate confirmations, they must be sent

Question 8

Individual Account

Answer 8

• one beneficial owner
• only person who can control investments within the account & request distributions of cash or securities from the account
• transfer on death: allows account holder to specify who is to receive the account on his death

Question 9

Joint Account

Answer 9

• two or more adults named as co-owners
• tenants in common or joint tenants with right of survivorship
• checks must be payable and endorsed by both parties
• any party may make a trade

Question 10

Private Securities Transactions (PSTs)

Answer 10

any sale of securities outside an associated person’s regular business and his employing member

• provide written notice to employer
• describe in detail the proposed transaction
• describe in detail his proposed role in transaction
• disclose if he will or may receive compensation or the transaction

Question 11

Outside Business Activities

Answer 11

need prior written notice to receive compensation as a result of any business activity outside scope of their employer firm

Question 12

Violations of Fair Dealing

Answer 12

• recommending any investment unsuitable for customer’s financial situation and risk tolerance
• short-term trading of mutual funds
• fraudulent acts of forgery or ommission

Question 13

Churning

Answer 13

excessive trading to generate commission

abuse of fiduciary responsibility

Question 14

Wrap accounts

Answer 14

• account that holds all of a customer’s assets and is managed for a flat fee or percentage of the assets being managed

Question 15

5 Types of Lending arrangements permitted

Answer 15

1. immediate family relationship
2. customer in the business of lending $
3. customer and representative are both registered persons with same firm
4. customer and representative have a personal relationship outside broker-customer relationship
5. customer and representative have a business relationship outside broker-customer relationship

Question 16

Misrepresentation

Answer 16

• qualifications, experience, and education
• nature of services offered
• fees to be charged

Question 17

Directed Brokerage Arrangements

Answer 17

• prohibited by FINRA
• prevents a mutual fund from choosing a broker/dealer for the execution of portfolio trades based on the amount of commissions the broker/dealer generates by selling the fund’s shares

Question 18

Terms of Prohibited Market Manipulation

Answer 18

• painting the tape
• wash sales
• matched purchases
• capping
• pegging

Question 19

Front Running

Answer 19

• unethical

- broker/dealer placing a personal order ahead of a previously received customer order

Question 20

Breakpoint Sale

Answer 20

encouraging a purchase below the amount that would qualify for reduction in sales load

Question 21

Criminal Penalties

Answer 21

• fined up to $1 million and prison for up to 10 yrs

- up to 2.5 million fine for broker/dealers

Question 22

Code of Procedure

Answer 22

• created to deal with alleged violations of SRO rules and federal securities laws
• trade practice complaints
• 25 days after receiving complaint to file an answer
• 60 days to make a decision
• 25 days to make an appeal
• 21 days to schedule prehearing conference

Question 23

Uncontested Offer

Contested Offer

Answer 23

form of plea bargain initiated by the accused

Question 24

Acceptance, Waiver and Consent (AWC)

Answer 24

form of plea bargain initiated by the prosecution (FINRA)

Question 25

Code of Arbitration Procedure

Answer 25

- offers participants a relatively easy method of settling disputes at a cost that is lower than formal procedures - 45 days to respond - dispute needs to be about $50,000 or less - monetary awards must be paid within 30 days of decision date - statue of limitations: 6 + years - member vs. member - member vs. associated person - associated person vs. associated person

Question 26

USA Patriot Act of 2001

Answer 26

- US Treasury Department is lead agency for developing regulations in connection with anti-money laundering programs and requires broker/dealers to establish internal compliance procedures to detect abuses - Customer Identification Program to verify identity of any new customer

Question 27

Currency Transaction Reports (CTRs)

Answer 27

- Bank Secrecy Act requires financial institutions to report currency transactions over $10,000 in a single day

Question 28

Suspicious Activity Reports

Answer 28

- broker/dealers are required to file these reports involving transactions of $5,000 or more when financial behavior appears commercially illogical and serves no apparent reasonable business or legal purpose

Question 29

Anti-Money Laundering Rules

Answer 29

- money laundering allows criminals to hide and legitimize proceeds derived from illegal sources - 3 stages: Placement, Layering, Integrating

Question 30

Office of Foreign Assets Control

Answer 30

- US Treasury | - maintains a list of individuals and entities viewed as a threat to the US

Question 31

New Account Form

Answer 31

- must be updated no less frequently than every 3 years | - must be sent to the customer within 30 days after account opening for verification of details