Chapter 2 - Customer Accounts Flashcards
1
Q
Customer Account Form
A
Basic info:
1. Name
2. Address
3. SSN or TIN
4. Date of Birth
Obtained prior to account opening directly from customer
2
Q
Customer Account Form supplemental info
A
Margin/Cash, Occupation, Citizenship, Statutory insider
3
Q
Customer Identification Program (CIP)
A
Inform customers they will be verified. Typically with active Driver’s License, can use database to verify.
4
Q
SIPC
A
Provided at account opening.
Insures client against B/D failure
5
Q
Arbitration agreement
A
Is not required by FINRA, but in practice every firm requires it. If required, client must also sign acknowledgement of the agreement (copy provided within 30 days of opening)
6
Q
Pre-dispute Arbitration disclosures
A
- giving up right to sue
- arbitration is binding
- awards do not have to be explained
- panel will have minority representation of former industry professionals
7
Q
KYC essential facts are required to
A
- service account
- handle special instructions
- understand any authority on behalf of customer
- comply with any applicable rules or laws
8
Q
Account opening Rep Signature
A
only required if a suitability determination is made, otherwise just manager signs after reviewing info
9
Q
Account profile
A
customer must verify within 30 days of opening and every 36 months thereafter (includes info other than basic info)
10
Q
3 components to suitability
A
reasonable-basis suitability
customer specific suitability
quantitative suitability
11
Q
reasonable basis suitability
A
big picture strategy that could be right for various investors
12
Q
customer-specific suitability
A
after reasonable basis, compare it to their investment profile
13
Q
quantitative suitability
A
after reasonable basis and customer specific suitability has been determined, how many times can this transaction occur? this rule is to prohibit churning.
14
Q
Customer personal balance sheet
A
after all suitability determinations have been made, must be able to determine the client can afford it. know their liquid net worth.
15
Q
Suitability rule exceptions
A
Institutional customers
Unsolicited Trades
Investment Analysis Tools
16
Q
Long Term CD disclosures
A
subject to market risk
price may go below purchase price
limited secondary market
some are callable
step-up or step-down risk
FDIC only if in customer’s name
17
Q
Structured Products
A
Can be very high risk.
Credit risk, there is no underlying portfolio, just the promise from the issuer
Can trade on secondary market, ETNs
18
Q
Reverse Convertible Note
A
Buyer is typically neutral or slightly bullish.
Max Gain is 100% principal and yields, Max Loss is converting to worthless stock
19
Q
PIPE offerings
A
Reg D, each instance must pass reasonable-basis suitability.
Then customer-specific, even if they are accredited.
20
Q
Pattern Day Trader
A
4 or more day trades (round trip) in 5 business days. Must be in margin account
21
Q
Day Trading Disclosure
A
Before opening Account
Risky, exaggerated claims, requires knowledge, commissions, margin risks
22
Q
Day Trading Suitability facts
A
obtain prior to account opening, or within 10 days of finding out.
objectives, experience, finances, tax status, age/dependents,
23
Q
Non-managed Fee Based Account (NMFBA)
A
must determine annually that it is more cost effective than commission based, prevent reverse churning
24
Q
advisory product
A
all fee-based accounts, advisor must be an adviser rep.
25
Senior Citizen risks
firms do not have to "shield" senior citizens from risks they want to take, but must make sure they understand the risks associated
26
Recs for seniors that need extra justification
variable annuity/life, real estate LP, CDOs, mortgage/IRA funds for high risk investments
27
25-55 business day holds
if exploitation is suspected for senior or mentally impaired, account can be put on hold, can be extended another 30 days if still suspected. must notify "trusted contact" within 2 days
28
trusted contact
to disclose info about possible financial exploitation, confirm specifics regarding clients capacity, obtain identity of any guardian or POA
29
Free lunch seminars
are not prohibited but strongly discouraged
30
internal process for suspected mental capacity
document and escalate to firm designated persons. then stop trading in account and maintain contact with investor/emergency contact
31
Margin Account documents
1. Must sign margin agreement & receive "margin disclosure statement"
2. “loan consent” not mandatory but firms often require it
3. “credit disclosure statement” explains loan balance and interest
32
joint with rights of survivorship, JTWROS
each party owns undivided interest, other person assumes ownership if one dies. new acct info needed for both people, but one will be primary for tax purposes
33
Tenancy in common
specified interest by each party, death puts their portion to their estate. needs both persons info.
34
Divorce & joint accounts
if rep knows about divorce, cannot distribute funds without written instructions from both parties
35
TOD accounts
instead of jt, individual acct, but specified beneficiary that bypasses probate. avoids divorce/second marriage issues
36
corporate account
copy of corporate charter required
must know who is legally responsible to trade acct via corporate resolution w/ seal
37
limited trading authorization
buy/sell orders can be entered, but no withdrawal of funds
38
full trading authorization
trading and money movements allowed
39
durable/non-durable POA
non-durable ceases if client is mentally incompetent, both cease upon death
40
fiduciary
a third party is acting in the best interest of the owner of the account
41
fiduciary accounts
cash account unless specified in appointment docs
follow prudent man/legal list rules OR prudent investor rule- can have risk adjusted profile instead of simply low risk investments
42
Discretionary accounts
requires POA before any trades
considered discretionary if more than time and price are chosen
43
not held orders
orders entered "not held" are NOT discretion and they bypass automated systems and are worked by a floor trader. Day orders only.
44
prohibited trades in discretion
if a principal finds trades are:
unsuitable
too frequent
too big
-any losses to reverse trades are charged to rep
45
bulk transfers
switching funds via negative consent if it is due to default, m&a, changes in sweep or clearing. must send letter with comparisons and prospectus and then wait 30 days to implement negative consent.
46
opening accounts for employees of another firm
must obtain, in writing,
1. their association with their member firm
2. approval from their firm before account opening
3. must send duplicate trade confirms and statements upon written request of the employees firm
MF/529 accounts are exempt
47
FINRA Employees
Cannot buy stock in IPO
Cannot have stake in B/D that contributes to more than 10% of B/D's revenue
Cannot options trade on B/Ds
Must disclose all brokerage accounts to FINRA and send duplicate statements
48
UGMA accounts
Anyone can open them and be reimbursed for expenses related to operation
Gifts to account are irrevocable
All securities are in account name
Cannot sit in cash
Only one custodian, no third party authorization, but successor can be listed
No margin/options - "prudent man" but can do covered calls
rights or warrants must be exercised or sold, cannot let expire
49
UTMA accounts
newer version of UGMA, can include any kind of asset.
Typically goes until age 21 rather than 18
50
Omnibus account
For Investment Advisors to trade on behalf of large number of clients in one account.
Each client still needs to fill new account form and third party authorization
Charged an annual fee
51
Prime Brokerage Account
Hedge Fund will have an account at a firm with good clearing and margin capabilities, but still executes trades with other firms. Hence, in this instance, "trading away" is allowed.
52
Capital Introduction Services
Firms bringing HNW clients to prime brokers who in turn give their prime business to that firm. everything must be suitable.
53
Numbered Accounts
If the customer wishes to keep their name private, their account can be a number. Firm must keep written record of this agreement and monitor any potential AML issues.
54
Trade Confirms
Must be sent at or prior to completion of transaction. But typically firms send them on T+1
55
Account Statements
Monthly if activity, otherwise quarterly.
Any discrepancies must be brought to firm's compliance department
56
Holding mail
only by written request can mail be held for up to 3 months. only for valid reasons can it be held longer, convenience does not count
57
Address Changes
Must be verified in person, over phone, in writing. Beware of "in care of, C/O" changes
58
Error in Execution
Customer must get price and shares as intended, as long as market would have allowed it
59
CAT, Consolidated Audit Trail system
Started replacing OATS in 2020 and fully replaced in 2022.
Must enter name and amount of security, terms of the order, time of transmission and execution.
Incomplete order tickets are not accepted
60
CAT requires:
1. reporting for listed NMS securities, listed options, and OTC equities.
2. market makers to report their quotes.
3. B/Ds to report orders, order changes, cancellations, and executions in 50 milliseconds or smaller (1 millisecond is smallest).
4. customer accounts linked to each order or trade.
61
CAT Alterations to tickets
not allowed before or after entry, but can have exceptions that must be documents and signed off by principal
62
CAT orders by Investment Advisors
The only types of orders that can leave customer name out since the advisor trades in his account. orders must be allocated to client by noon next business day
63
Customer Complaints
Must be kept in OSJ for 4 years, including action taken/resolution.
complaint must be "acknowledged", but does not require a written response.
64
Voting materials
must be sent to client at no expense (as long as in US). materials are sent to B/D since they hold the stock in street name, but the clients are entitled to vote as the shareholder
65
Voting material reimbursement
B/Ds are reimbursed by issuers for forwarding their voting materials to clients. reimbursement is according to schedule set by FINRA
66
Proxy records
must be kept for 3 years total, 2 readily available
date of receipt from issuer, names of customers, all voting instructions, and a summary of all proxy votes
67
Account Transfers
Sign TIF/ACATS form at receiving firm, with medallion guarantee.
Some assets may not be transferrable.
TIF must be sent "immediately"
68
Receipt of TIF
firm has 1 business day to verify positions and validate or take exception which must be resolved promptly.
69
After TIF is validated
no new orders can be placed, unless options contract within 7 days of expiration.
firm has 3 business days to transfer positions to new firm.
positions not physically at firm must be acquired and sent within 10 business days (typically short shares or margin accounts).
for 6 months any divs or int will be forwarded to new firm
70
Valid delays for transfers
most common are most restrictive margin minimums at new firm, or any lien on holdings.
Disputes over money or security valuations are not valid reasons to delay transfers.
71
Interfering with account transfers
Firms CANNOT interfere. If a rep has a non-compete, they can get a court order against him soliciting, but they cannot get a court order against clients leaving on their own.
72
The Broker Protocol - rules of disengagement for rep's switching firms
1. info that rep can take: client name, address, phone number, e-mail address, and account titles
2. cannot contact clients until fully employed at new broker
3. cannot have anyone else contact clients for them
73
Educational Brochure
once rep is at new firm, must give client educational brochure which states:
1. could be potential conflicts of interest
2. some assets may not be transferrable
3. new firm could have higher fees
4. products and services available may not be the same
Must be sent within 3 months of transfer, whether client was solicited or not
74
Dealing with non-transferrable positions
a recommendation to liquidate the position still must go through suitability review. Rep might have to advise client to keep assets at old firm.
75
Negative Consent Bulk Transfer
1. Member at risk of going out of business
2. Introducing firm is out of business or changes clearing firm
3. Member firm is being acquired, or networking arrangement changes
4. Sometimes - if rep leaves directly held funds/variable product negative consent can be used
Negative Consent- client can opt out, but action will be taken with no response.
76
Death of Customer
Freeze account, no new orders or moving of funds.
Mark date of death for valuation purposes
Await further action from Executor
77
Transfer assets to beneficiary probate
1. Death certificate
2. will
3. probate court filing
4. proof of domicile and tax waivers
78
Transfer of assets to beneficiary without probate
just need death certificate and potentially proof of domicile
79
Security valuation for beneficiary
are given value as of date of death. if any tax due must be paid within 9 months of date of death
80
Escheatment Process
If assets have not been claimed for 5 years, they're turned over to the state. B/D must have record of trying to contact client. Client can then reclaim assets from state, they will be valued by the escheatment date
81
Currency Transaction Report, CTR
Any currency transaction in excess of $10,000, or one structured just under $10,000, reported to FinCEN. International exchange of currency on CMIR and FBAR
82
PATRIOT Act
Requires financial institutions to:
1. have written AML programs
2. Provide ongoing training
3. report suspicious transactions and actvitiy
83
Customer or Transaction is considered high risk if:
1. home country is NOT member of Financial action task force, 29 countries combating money laundering
2. associated with foreign jurisdictions that have bank secrecy laws
3. operate cash-intensive businesses
84
Drivers License/Passport
most firms use this to independently verify name and address and/or non-resident aliens
85
Lists must be checked before account openings
OFACs SDN
Terrorist watch list
86
Filing SARs
When there is suspicious activity in an account, file a SAR within 30 days for transactions over $5000. Can be filed immediately if suspicious enough. Do not inform client.
87
Rule 3310 AML
1. policies that detect suspicious activity
2. designate person responsible for day-to-day controls
3. annual independent testing (WHICH IS DIFFERENT THAN #4…)
4. provide ongoing training of personnel
Includes KYC policy and having designated AML compliance person who FINRA is aware of
88
Reg T
Initial margin requirements set by the Fed. for non-exempt securities
89
Minimum Maintenance
second level of margin applied by FINRA and exchanges.
90
Margin Agreement
Must be signed for margin account to open.
Customer pledges securities to the firm, and the firm loans the customer funds to pay for the securities.
91
Reg U
Brokers cannot borrow more than the amount of they loaned to the customer, because they are using the customers shares as collateral.
Cannot rehypothecate more than 140% of the debit balance.
92
Corporate Bonds & Reg T
Corp Bonds are non-exempt yet the Fed chooses to not set margin requirements for them, only FINRA minimum maintenance applies.
93
Marginable Securities
Must be actively traded
Listed on an exchange
If enough volume, some OTC stocks
New Issues AFTER 30 days
No options (except LEAPS)
94
Cash Account Reg T
Stocks must be paid in full by settlement date + 2. In "exceptional" cases a Reg T extension can be requested. If funds are still not paid, account is frozen (cash or securities must be in hand for any trades to be executed)
95
Margin Account Reg T
Payment must be collected like cash accounts, settlement plus 2. But only the Reg T or Maintenance amount is required.
96
Arbitrage Account Reg T
Simultaneously buying and selling short. net position is zero. "short against the box"
97
Fall to deliver
sold a security but did not provide shares by settlement. from there they have 10 business days to buy the security to deliver.
98
Minimum Maintenance vs Reg T
Whichever is higher applies, but typically Reg T are higher. Maintenance only applies to exempt securities. Calls must be met "promptly"
99
Minimum initial equity amounts for long account
new margin accounts need initial equity deposit of $2000, or full amount, regardless if its over 50%. ie buying 100s at $30 needs $2000, not $1500 (50%).
Also, if the total purchase price is under $2000, the full amount must be paid. ie buying 100s at $15 needs $1500 (100%), not $2000
100
minimum equity amounts for short accounts
Must have $2000 equity at any time due to unlimited potential loss. Same as long except even if full trade is less than $2000 in value, still need to have $2000 deposited.
101
Cheap Stock Rule
Shorting "inexpensive" stocks (under $10/share).
Must keep equity equal to share amount * $5/share if stock is between $10 and $5
Must keep equity equal to greater of 100% value or share amount * $2.50/share if stock is between $5 and $0
102
FINRA minimum maintenance for long stocks/convertibles
25%
103
FINRA minimum maintenance for short stocks/convertibles
30%
104
FINRA minimum maintenance for long/short corp/muni bonds
Corporate = greater of 20% MV or 7% face
Muni = greater of 15% MV or 7% face
105
Arbitrage Account minimum
5% of long market value
106
SMA
Excess equity in margin account. Can be borrowed, but debit increases, SMA increases by 50% of $1 MV increase.
If customer buys, SMA is used
If customer sells, SMA increases
107
Restricted account (margin)
fallen below initial margin, but not yet reached minimum margin. Purchases still need 50% margin rate. Sells will use 50% of proceeds to reduce margin debit.
108
Margin Call
Account equity falls below 25% account value. Funds must be deposited. It is ok if account falls below initial $2000 equity minimum but still above 25%
109
solve for 25% maintenance level
debit balance / .75
this is what LMV can fall to before a margin call is issued
110
market value and SMA
if MV rises, SMA increases
if MV falls, SMA stays the same. This is to stabilize falling markets
111
Dividends in margin accounts
used to reduce debit and 100% credited to SMA for 30 days
112
Short Sales
must be in a margin account
order ticket must be marked "short"
sale must comply with Reg SHO
113
SMA in a short account
Equity - 50% of MV
Every $1 decline MV makes $1.50 SMA
114
Short Account Restricted rules
If more short sells are made, Reg T applies
If purchase is made, 50% of proceeds must be retained (retention requirement)
115
Minimum maintenance for short accounts
30%
Account will be at maintenance when:
SMV = Credit balance / 1.3
116
Long Account Equity
Long Market Value - Debit
117
Short Account Equity
Credit - Short Market Value
118
Combined Margin Accounts
Figure Equity Values and Maintenance Values on their own, and then add results together
119
Other Reg T accounts
Omnibus, B/D Credit, Market Functions (prop positions with lower margin limits), Non-securities credit (commodities, fx, esop)
120
When Issued margin
not covered by reg T, but finra requires 25% initially, then 50% when issued
121
Reg X
Places regulatory responsibility on both borrow and lender - borrowing from foreign bank is subject to Reg T
122
DVP
B/D has 35 days to pay, customer has 4 days
123
Pattern Day Trade Margin
Pattern Day Trade assumes no positions at EOD, so margin is calculated based on highest intra-day price.
124
Buying power in Pattern Day Trade Account
4x, but if outstanding margin call, 2x.
Cannot "cross-guarantee" like regular margin account
125
portfolio margin
less stringent requirements for more sophisticated investors, hedged stock positions, but not for bond positions.
minimum equity:
$100,000 for indv accts
$500,000 for prime accts
$5,000,000 for day trading or unlisted derivatives
126
opening portfolio margin account
Must get FINRA approval
Firm must be able to supervise
Must be approved for uncovered options writing
customer must receive Portfolio Margining Risk Disclosure Statement prior to first transaction
Must sign acknowledging they have read statement
127
Leveraged ETF
designed to generate multiples of an index return. use derivatives/futures to multiply returns. volatility is multiplied. Margin minimum is also multiplied by the % the ETF is leveraged
128
Limited Partnership Margin Exemption
Must be registered with SEC or sold under exemption
Put 50% down
Payments reasonable to capital needs of issuer.
129
Mutual Fund Shares Margin
Not marginable for first 30 days, since all shares are a "new issue"
130
Customer Credit Terms Disclosure
conditions, rate, and method of computation for interest charged
how debit balance is determined
conditions rates will change & 30 days notice
Nature of liens or any other charges for account
**does not give stated rate of interest
131
Reporting short positions
Members must report a list of all short securities (NASDAQ and OTC market groups) on 15th and last day of month (bi-monthly).
FINRA publicizes info to show short interest in stocks
132
Mark-up charge is based on
Lowest ask
133
Mark-down charge is based on
Highest bid
134
Temporary hold due to elder exploitation
Customer and trusted contact must be notified within 2 business days
135
PIPE customer level suitability determination
For both accredited and non-accredited investors
136
Selling during ACATS
Once sending BD verifies positions, orders must go through receiving BD even if shared are physically still at sending BD
137
SEC Penny stock rule
Only applies to solicitation of OTCBB or Pink OTC Markets under $5. (AKA, non-exchange listed, non-NASDAQ issues)
138
Reg U lending
lending from banks to customers, securities used as collateral.
139
Credit Regs
Reg U - credit from bank to broker
Reg T - credit from broker to customer
140
marginable securities
the Fed approves all exchange and NASDAQ-listed securities for margin
141
senior seminar
highly discouraged but not prohibited. recommendations are permitted if supporting info is provided.
142
pattern day trading buying power
4x margin excess
2x margin excess if call outstanding
