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Flashcards in Chapter 10.2 Deck (18):

When must the new account report form be completed?

Before entering trades


Information required on the new account report form

-Account name: Complete customer name and any titles must be included
-For an individual, a residential or business street address, or for an individual who does not have a residential or business street address, an Army Post Office or Fleet post office box number. If an APO or FPO is used, the customer does not need to provide another address. A post office box is not a valid address, but can be used for mailing purposes.
-Telephone NUmbers
-Whether the person is a citizen
-Non U.S. citizen's tax ID or passport number
-Occupation, employer, type of business. If a customer is associated with another member it must be noted on the form
-Annual income and net worth, and bank references
-Customers must provide a government issued photo ID and it must be verified that the customer does not appear on a terrorist list
-How account was acquired
-Name and occupation of persons with authority to create activity in the account
-Must identify the names of associated persons responsible for the account
-Must be signed by a FINRA principal
-The person authorized to exercise discretion in the account if it's a discretionary account
-Other B/D's with whom the customer has accounts, but customers do not have to provide them
-Accounts investment objectives
-SEC Books and Records rules require B/D's to include a definition of the clients chosen investment objective with their customer account information

**If a customer refuses to provide basic information the account could still be opened with the requirement of accepting only "unsolicited orders"
**The customer's tax status would not be required
**Any change in the investment objectives of the customer requires that the B/D provide an updated account record to the customer within 30 days after receiving notice of the change


Recordkeeping requirements for customer accounts

-SEC rules requires customer account records to be kept for 6 years after the account is closed
-CIP requires customer account records must be kept for 5 years after the account is closed


Customer Accounts and documentation - Numbered Accounts

Customers can open an account bearing only a number or a symbol provided that the customer submits a written statement attesting to the ownership of the account and that their name appears on the new account report form. However a B/D cannot open an account in the name of a person who is not in fact a customer.


Margin Account document requirements

-Customer's agreement
-Loan Consent Agreement
-Credit Agreement


Customer's Agreement

Sets forth the privileges and conditions under which the firm will finance the customer margin transactions. This must be signed before a margin account is opened. It is also called a hypothecation agreement, or margin agreement.
-This agreement also gives the B/D the right to sell securities from the account to cover the customer's indebtedness to the B/D.


Loan Consent Agreement

Gives specific permission to the B/D to lend customer's securities to itself or others. Although it is not mandatory that customers sign this agreement, most firms require it as a matter of firm policy.

**Securities may not be borrowed from other customer's cash accounts. Borrowing can only be done from customer margin accounts where Loan Consent Agreement has been signed.


Credit Agreement

-Requires a B/D extending credit to a customer to disclose the terms and conditions under which such financing will be maintained.
-This rules requires a B/D to disclose to a customer in writing:
-The manner in which interest is calculated on the debit balance
-The manner in which annual interest is computed
-That the interest rate can be changed without notice
-The nature of any liens that the B/D has on the securities and the conditions under which additional collateral will be required
-Any changes to the terms and conditions of how interest will be calculated or charged are unlawful unless the customer has been given not less than 30 days written notice of such changes.
-Firms have their customers sign the Credit agreement to evidence their understanding of the terms of credit
-B/D's must advise customers quarterly as to how the interest is being calculated in their accounts
-If the president of a bank wishes to open a margin account, they would have to complete a new account report form and sign a margin agreement. However, they would not be required to obtain authorization from the bank or the bank's board of directors.


Requirements for Corporate Accounts

-A copy of the charter or by-laws giving the corporation authority to engage in securities transactions
-A Corporate resolution from the board of directors authorizing specific persons to enter orders on behalf of the corporation
-If the corporation wants to open a margin account then the Customer's agreement, loan consent agreement, and credit agreement must be completed. Also for a margin account a copy of the charter or by-laws and corporate resolution must specifically authorize transactions on a margin basis.
-If a corporation wants to transfer ownership of securities in the name of the corporation, the B/D must obtain the signature of the officer authorized to act for the corporation, plus documentation of that authorization(corporate resolution).
-The following documents are required for margin accounts of unincorporated associations
-New account report form
-Certified copy of the constitution, partnership agreement, or by-laws authorizing transactions in securities on a credit or margin basis
-A certified copy of a resolution of the governing body
-Customer's Agreement
-Loan Consent Agreement
-Credit Agreement


Limited Partnership Accounts

Offer flow-through tax consequences to investors and require the signature of the General Partner when establishing a new account but does not require the signature of each limited partner since the general partner manages and controls the partnership.
-Limited partnerships are also known as Direct Participation programs
-"Organizational and offering expenses" are defined as expenses which are paid to register and offer a DPP. Such expenses are considered to be "unreasonable" if they exceed 15% of the gross proceeds of the offering
-A limited partner's potential liability in a limited partnership investment is limited to the limited partner's original or principal investment plus any contractual commitments to make additional investments. This is referred to as the limited partners "at risk" amount.
-A limited partnership rollup is the combining or reorganization of one or more limited partnerships in which some or all investors receive new securities. RRs may participate in the solicitation of a limited partnership rollup transaction if the general partner agrees to pay all solicitation expenses related to the rollup.


Margin requirements for pattern day traders

-Minimum equity of $25,000
-Day trading equity requirements are either 25% of the cost of all day trades in one day or are based on the highest position held during the day and 100% of the current market value of non-marginable eligible equity securities.
-"Pattern day traders" are customers who execute 4 or more trades within 5 business days
-Day traders would be most concerned with "timing risk"
-Cross guarantees cannot be used to meet day trading margin requirements
"Day-trading buying power" is 4 times the maintenance margin excess(the equity in the account less any maintenance requirement) as of the close of the previous day.


Day trading rules

Apply to member firms that promote day trading strategies. Firms must furnish a risk disclosure statement to a non-institutional customer prior to opening an account for the customer. The firm will be required to either:
-Approve the customer's account for day trading, after determining that day trading is appropriate for the customer, or
-Obtain from the customer a written agreement that the customer does not intend to use the account for day-trading purposes.


Promoting day trading

A member firm would be deemed to be promoting "Day trading" strategies if it advertises to obtain above average market returns using intra-day trading on margin.

A member would not be deemed to be promoting day trading strategies if:
-It provides general investment research
-It advertises reduced trade execution costs for multiple trades
-Its website allows multiple entry intra-day trades on the same security


Joint tenants with rights of survivorship

Under the death of either, the surviving tenant becomes the sole owner of the securities
-The surviving tenant must present a death certificate and an affidavit of domicile and then the securities can be registered in the name of the surviving tenant
-Once the transfer has taken place the surviving spouse could then trade the account
-An inheritance tax waiver would not be required as tax considerations must be handled by the heirs

In handling a joint tenant with rights of survivorship account:
-If one party dies, ownership passes to the survivor
-Orders may be placed by either party
-Funds may be sent to either party, but checks must be made payable to both parties
-Correspondence may be mailed to either party


Joint tenants in common

If one of the tenants dies, his interest will pass to the estate and not to the other joint owner. There is no right of survivorship.



A fiduciary is a person vested with legal rights and powers to be exercised for the benefit of another person. Fiduciaries include the following Administrators, Executors, Guardians, Trustees, Custodians, of any account with FBO(for the benefit of)

**A fiduciary cannot grant a trading authorization to a 3rd party
**If a fiduciary wants to open a margin account, the fiduciary must present documentation stating that margin trading is permitted
**If a guardian wants to open an account, the firm must obtain a new account report form plus a guardian appointment certificate issued by a court.


Trust Account

An arrangement in which property is managed by one person for the benefit of another person. The trustee is a fiduciary who holds title to the trust assets for the benefit of the trusts beneficiaries. In order for a trustee to establish a margin account for the trust, it must be authorized in the trust agreement. Generally, confirmations are sent to the sole trustee of the trust account


Option Accounts

When reviewing the opening of an option account for a new client, the branch manager must:
-Review and approve the new account report form
-Determine that the Option disclosure document was delivered to the customer
-Determine that options trading is suitable for the client and that no more than 15% to 20% of the client's assets are being used for the purchase of options

**The option account agreement must be received by the firm within 15 calendar days from the time the account is approved for options trading. The agreement does not have to be received prior to the approval of the account