Account Types

Question 1

What is the New Account Form?

Answer 1

The New Account Form is used to gather basic information for compliance purposes when opening a new account.

Question 2

What is contained in the new account form?

Answer 2

Name, address, phone number of individuals accessing the account
Trusted contact age 18+ (recommended if client is 65+)
Marital status & number of dependents
Employment or affiliation with the securities industry (client or immediate family)
Type of account (e.g. cash, margin, retirement, discretionary, options, etc.)
SSN (individual) or Tax ID (corporation)
Occupation, employer info, type of business
Citizenship/residency status + ID (passport, residency card, etc.)
Financial info: net worth, liquid net worth, income, tax rate, bank references
Insider or control person status
Investment experience
Signature of a principal

Question 3

What needs to be updated if a client demographics change such as an address or marital status?

Answer 3

• If any information such as marital status or address changes, that must be updated on the account form.

Question 4

Broker dealers may, in accordance with the Patriot Act, request additional proof to confirm the client’s identity. What are two ways they confirm an individual’s identity?

Answer 4

• Verify the client does not appear on any list of known terrorists or terrorist organizations. OFAC which is a US treasury department agency keeps this list.
• Customer Identification program (CIP) - Is a program used to keep records on the client’s identification, brokers use this to verify the identity of anyone that wants to do business with them.

Question 5

Who is required to sign a new individual account form?

Answer 5

• A customer’s signature
• The principal manager

Question 6

Who is required to sign a new joint account form?

Answer 6

• Both owners
• The principal manager

Question 7

Who is required to sign a new margin account form?

Answer 7

• A customer’s signature
• The principal manager

Question 8

Who is required to sign all new account forms?

Answer 8

• The principal manager

Question 9

What is the KYC Rule and how is this related to suitability?

Answer 9

• Our duty to “know your customer” and the type of business we will be conducting.
  
  • This also helps with suitability (recommending the right investment based on their goals and objectives
  • To make accurate recs we need
    ○ Customers age
    ○ Other investments they might have
    ○ Their financial situation (are they buying a house soon, sending the kids to college, etc)
    ○ Their Tax rate (municipal bonds are more suitable for investors with a high tax rate.)
    ○ Investment experience (how much do we need to explain to them)
    ○ Time horizon (when do they expect to reach a certain goal)
    ○ Risk tolerance
    ○ Their liquidity needs (how ez or hard do they want to get out of securities)

Question 10

What is a street name account and what are two key features?

Answer 10

A street name account is a common type of account registered in the name of a broker dealer with an ID number on behalf of a customer.
- Helps keep client anonymity
- Transactions are signed by brokerage firm, not the customer

Question 11

What are some important rules around street name accounts?

Answer 11

Customer must provide a written statement confirming account ownership
Margin accounts must be in street name
Street name accounts (except margin) can be changed to regular accounts anytime

Question 12

Account types - Single

Answer 12

Account type in the name of one adult, individuals may not open accounts in other names without written permission (POA)

Question 13

Account types - Joint (with rights of survivorship)

Answer 13

Account type in the name of two or more adults, each person has equal trading authority, come in two flavors

Joint Tenants with rights of survivorship (JTWROS) - When one tenant dies, the assets pass to the name of the other joint tenant. These accounts are almost exclusively setup for married or related peoples.
□ In states where community property laws exist, investments acquired during marriage are automatically presumed to be jointly owned by both spouses.
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Question 14

Account types - Joint (Tenants in common)

Answer 14

Account type in the name of two or more adults, each person has equal trading authority, come in two flavors

Joint Tenants in Common (JTIC) - When one joint owner dies, their assets pass on to the estate which is governed by the will or state law. This account is usually for non-related investors. Often setup for estate planning purposes

Question 15

Account types - Trust Accounts

Answer 15

An account type that is setup by one party for the benefit of another party.

Question 16

Account subtype - Custodial Trust Account

Answer 16

A Custodial Trust Account - is a common type of trust account setup by an adult for the benefit of a minor, the adult performs all investments. Any adult can open a custodial account for a minor even though they may not be related.

Question 17

Account subtype - UGMA/UTMA

Answer 17

UGMA - Uniform Gifts to Minors Act
UTMA - Uniform Transfer to Minors Act

These are a type of custodial trust accounts setup by an adult (usually a parent) for the benefit of a minor (usually their kid)

Question 18

What is the major difference between UGMA/UTMA accounts?

Answer 18

□ Major difference in these two is UTMA accounts allow cash and securities to be transferred to the minor, gifts include.
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Question 19

What are important rules regarding Custodial accounts?

Answer 19

Rules specific to Custodial Accounts -

Only one custodian and one minor allowed
Minor is taxed (SSN on the account)
Account is in custodian’s name for the minor’s benefit
Cannot be held in street name
No margin trading or short selling
Gifts to the minor are irrevocable
Custodian must exercise or sell rights—they can’t expire unused

Question 20

T or F? Custodial accounts can only have ONE minor and ONE adult

Answer 20

True

Question 21

Account types - Discretionary Accounts

Answer 21

An account where the client gives written Power of Attorney (POA) to a registered rep to make investment decisions.

More scrutinized than regular accounts.
If client doesn’t specify the security, amount, or buy/sell, the rep can only choose when to execute (timing) → not discretionary

Market not held orders = rep delays trade for better price (not discretionary)

Question 22

What are important rules for Discretionary accounts?

Answer 22

Rules specific to discretionary accounts -

Order tickets must be marked with discretionary
Principals must sign each order
Principals must review accounts periodically to prevent excessive trading for commissions

Question 23

Account types - Corporate Accounts

Answer 23

An account for incorporated businesses only.

• Opened with the corporate Tax ID
• Must provide Organization Resolution form authorizing specific individuals to transact on the account.
• Corporate charter (bylaws) copy required if opening a margin account. The charter must state the corp can purchase securities on margin.
• An unincorporated organization (voluntary organization) is a group of two or more investors who form an org for the purpose of investing. If they have too many characteristics of an organization, they may be taxed at a higher rate.

Question 24

Account types - Institutional Accounts

Answer 24

These are accounts setup by institutions like banks, insurance companies, mutual funds, pension funds, hedge funds, and investment advisors are considered institutional accounts.

- Their role is to act as specialized investor on behalf of others.

Question 25

Account types - Cash accounts

Answer 25

An account type in which the client is paying for everything up front, these accounts use cash balances, they DO NOT use margin (borrow money)

Question 26

Account types - Margin Accounts

Answer 26

An account type that allows borrowing on credit. It is usually a combination of cash and borrowed money. They yield higher commissions but are considered riskier. Clients chose to make purchases with cash or on margin (credit). ○ All investors must receive a risk disclosure document which outlines the risks of trading on margin, along with signing a margin agreement which outlines the loan agreement.

Question 27

What is a risk disclosure document?

Answer 27

A document outlining the risks of trading on margin. § Broker can sell whatever securities they want to bring account current § Broker can sell without notice § Client must meet margin call deadline.

Question 28

What is a margin agreement and what are the three components?

Answer 28

A form that all investor must sign when opening a margin account, it includes Credit agreement - details how the borrowing will go down, the interest rate, how the broker dealer computes it, and how that rate can change. Hypothecation agreement - document that states the account must be in street name, it also allows broker to use a portion of the clients margined securities as collateral for a bank loan (rehypothecation). This agreement also allows the broker dealer to sell securities to offset the debt if the equity falls beyond a certain point. □ Investors lose equity at a faster rate on margin accounts than cash accounts Loan consent form - optional loan consent form gives permission to the broker dealer to loan a customers margined securities to other investors or broker dealers.

Question 29

T or F? Margin accounts MUST be in street name ONLY

Answer 29

True

Question 30

What are the two types of margin accounts opened?

Answer 30

Long Margin Account Short Margin Account

Question 31

What is the difference between a Long Margin Account vs Short Margin Account?

Answer 31

- Long Margin Account - an investor buys securities by coming up with 50% of the cash and borrowing the rest from the broker firm. They hope the securities go up to sell for a higher rate later. - Short Margin Account - the investor borrows securities, immediately sells them and prays to the gods the market value goes down so they can rebuy and pay back the securities to the firm. ○ If shorting, it must be sold on margin instead of cash.

Question 32

What is Regulation T?

Answer 32

Federal Reserve Board (FRB) rule governing the credit that broker dealers can extend to clients and what securities can be purchased on margin. - Currently Reg T requires clients to deposit 50% of the securities value in the account, then they borrow the other 50% from the broker dealer - Brokers can up the percentage to 55, 60, 70 if they want. If not stated 50% is assumed. Reg T also dictates how long clients w cash accounts to pay back transactions, they paid for.

Question 33

What is a Margin Call?

Answer 33

Also known as Fed Call, Federal Call, or Reg T call is the broker demanding the investor deposit cash or securities to cover their purchases or shorts (selling securities). - If the client is buying securities, they can deposit fully paid shares of the security instead of cash - The formula is - margin call is the dollar amount of purchased (or shorted) securities multiplied by Reg T (50%). ○ Ex: Investor purchases $50,000 worth of XYZ stock on margin. § The margin call would be $25,000 □ Margin call = Current market value x Reg T ® $50,000 x .5 (50%) = $25,000 Margin Call

Question 34

Do the requirements of the first (opening) transaction of a margin account apply to all other margin transactions?

Answer 34

No, The initial margin requirements for short and long accounts apply to the first transaction in a margin account only. Clients must follow REG T and FINRA/NYSE rules. ○ After the account is established, the investor can purchase or short securities by depositing Reg T of the current market value of the securities purchases/shorted ○ Reg T calls for 50% deposit but FINRA and the NYSE call for minimum deposit of $2000 (in most cases)

Question 35

What are the requirements for the opening (first) transaction in a long margin account?

Answer 35

○ Starting LONG - client is required to deposit Reg T (50%) or $2000 whichever is greater. Long = Buying on margin → Less than $2,000? Pay in full Ex $1800? pays $1800 → Over $2,000? Deposit $2,000 Ex $3500? pays $2000

Question 36

What are the requirements for the opening (first) transaction in a short margin account?

Answer 36

Since shorting on margin is riskier, investors are ALWAYS required to deposit $2000 or Reg T if greater than $4000. Short = Selling borrowed stock → Always higher risk → Always $2,000 minimum Exs less than $2000? pays $2000 Equal to or less than $4000? pays $2000

Question 37

Describe the Telephone Consumer Protection Act (telephone act of 1991)

Answer 37

- Law governing outbound calls made to clients ○ Can't call before 8am or after 9pm client local time ○ You have to give your name, company name, company phone and address ○ If client requests to not be called, you must add them to the DO NOT CALL list § Each firm maintains their own do not call list and must have access to the US National do not call list ○ May not send unsolicited ads via fax machine - This law DOES NOT apply to existing customers. Customers can be upgraded to DO NOT call afterwards via request.