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Flashcards in Chapter 7 Client Accounts Deck (50)
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Red Flag Issue

A client asks to open a numbered account. Is this practice acceptable?

Areas of concern

Yes, the use of nominee names is permitted

-Proper ID of beneficial owner
-Protection of the beneficial owner's identity from general access within the firm
- Examples - celebrities


FINRA Rules for Opening Cash Accounts

Know Your Customer (KYC)
-Each member shall maintain the following information (required):

•Customer’s Name and Residence
•Whether customer is of legal age
•Name of the introducing registered representative (RR)
•Signature of the principal who accepts the account (on the day account is opened)


Red Flag Issue
An RR asks you to change an account mailing address to a P.O. box for the next several months since the client will be traveling abroad. What safeguards should be taken prior to making this change?

This change must be requested in writing by the customer.


Opening Accounts
Each member shall also make a reasonable effort to obtain the following customer information:

Tax I.D. / Social Security Number

Occupation and name / address of employer

Whether associated with another broker-dealer

Information to be used when making recommendations: •Income •Net Worth •Risk Tolerance •Objectives

Whether client shall be Objecting Beneficial Owner (OBO) or Non-Objecting (NOBO) status


Handling Customer Assets

Transfer and Ship

Shares are registered in client’s name and delivered to client in certificate form (a fee may be charged)


Handling Customer Assets

Transfer and Hold

•Shares are registered in client’s name, but held at the B/D in certificate form (still segregated)


Handling Customer Assets

Delivery Versus Payment (DVP)

Shares are held at a custodian bank


Handling Customer Assets

Street Name

•Shares are registered in the B/D’s name, but segregated in bulk from proprietary positions


Steps to Opening an Option Account
1. Gather customer information through Option Account Agreement

-Financial status, objectives, experience -Data need not be verified, but copy sent for customer’s eventual signature -Send OCC Risk Disclosure Document


Steps to Opening an Option Account
2. Registered Options Principal (ROP) Approval -

ROP must determine that account is suitable -Does client understand strategies, profit / loss potential, ability to assume risk -ROP approves the account to a certain level of trading based upon the customer’s profile


Steps to Opening an Option Account
3. Allow “Opening” Transaction (only after approval)



Steps to Opening an Option Account
4. ______ days after the ROP’s approval, client must sign and return Options Account Agreement
-If not, only closing transactions would be permitted

15 days


Customer Identification Program (CIP)
As a part of the USA PATRIOT Act, the CIP requires B/Ds to obtain and verify client information when opening accounts

Minimum required information:

Name, street address, ID number, date of birth (proof of age)

If client is serving in the military, an APO (Army) or FPO (Fleet) box is allowed
Forms/methods to verify identity:

Passport, driver’s license, or other government-issued identification forms

Checking references with other financial institutions

Comparing information with a consumer reporting agency


Red Flag Issue
If a potential new client has provided you with all of the documentation required under your firm’s CIP, should you go ahead and open the account?

Only after due diligence has been performed to ensure the information provided by the client is correct.


Designed to deter, detect, and punish terrorists in the U.S. and abroad
Required Reports:

1. Currency Transaction Report
2. Suspicious Activity Report (SAR)


Currency Transaction Report is filed for ____ exceeding $___K

Filed for all currency transactions by single customer during one business day exceeding $10,000 -Filed also for structured transactions


Suspicious Activity Report (SAR) filed for ____ exceeding $___K

Filed whenever a transaction (or group of transactions) equals or exceeds $5,000 and the firm is suspicious


FinCEN is Financial Crimes __ __

Financial Crimes Enforcement Network



Office of Foreign Asset Control


SEC Regulation SP (Privacy Policy) - Annually

Requires all broker-dealers to adopt policies and procedures designed to protect the privacy of the confidential information they collect from their clients

The Privacy Notice must be received at account opening and delivered annually thereafter

The Privacy Notice must include: •The type of personal information the firm collects •Categories of affiliated and non-affiliated third parties to whom the information may be disclosed •The fact that client’s may opt out and refuse to allow disclosure


Types of Accounts
1. Joint
2. Corporate
3. Fiduciary

Joint Account

-New account information obtained for each owner
 -Any owner may initiate activity
 -Checks made payable to all parties
 -May be opened as JTWROS or JTIC

Corporate - (Resolution. Options/Margin - charter)
-Always examine Corporate Resolution
-If options or margin account, also Charter

-Person charged with responsibility of investing money wisely or safeguarding securities for a beneficiary
-Fiduciaries must provide documentation of their authority
-Firms must be aware of investment limitations stated in the documentation


Types of Accounts



Opened under Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) •One minor •Legal owner •Responsible for taxes; minor’s Social Security number •One custodian •Has authority to initiate activity •Gifts •Irrevocable •Cash or securities (fully paid, no margin)


COD / DVP / RVP Transactions

Acronyms used to describe situations in which a client (usually an institution) uses a bank to settle trades with a B/D

Delivery versus Payment (DVP) or Collect on Delivery (COD) •Client is purchasing securities from a B/D •Payment is made as securities are deliveredand accepted •Delivery is required to be made by the B/D promptly, but no later than 35 calendar days after the trade

Receipt versus payment (RVP) •Client is selling securities to a B/D •Payment made when delivery is receivedand accepted


Third Party Authorization

If a client wants to open a cash account and allow another personto make investment decisions and pay bills, the following forms/steps are required:

New account form

Signed request from client

Signature of the person to whom authorization is granted

Record of the date authorization is granted

Power of Attorney (POA)
Does not constitute joint ownership


Discretionary Account
If a client with an existing account wants an RRto be able to buy or sell securities in his account, the following steps/forms are required:

Written authorization from client

Written acceptance by a registered principal


The difference between limited and full discretion:

Limited: the ability to buy and sell securities

Full: same as limited, but includes the ability to extract funds

Trades must be reviewed/approved promptly (not in advance)
To determine whether trading is excessive (churning), a client’s investment objective is the principal’s primary focus


Incapacitated Clients
Guardianship / Conservatorship

-Exists when a court-appointed fiduciary is instructed to act on behalf of a person determined to be incapacitated or mentally incompetent
-To change the title of the account from the named person to another person (conservator), a court-issued Certificate of Incumbency must be presented to the B/D within 60 days of its execution

-Existing Durable Powers of Attorney may remain in effect


Power of attorney=

trading authorization


Death of a Client

Upon receipt of death certificate, any open order and/or existing power of attorney is cancelled
Other relevant documents may include:

Inheritance tax waiver

Affidavit of domicile

Letters testamentary

Proof of identity of the executor of the estate
Client may use Transfer on Death (TOD) designation

Allows the owner to name one or more beneficiaries for his account (who may be changed)

At death, assets transfer without going through probate, but are subject to estate taxes

Beneficiaries have no control over the account


Tax Issues with Client Death
A client has inherited securities from a relative. The securities were originally purchased for much less than what they are currently worth. The client wants to sell the securities and capture the gain. How does the IRS view this event?

Beneficiaries of an estate receive securities with a stepped up cost basis

The cost basis is the market value of the securities when the inheritance occurred

When a beneficiary sells securities, any tax due will be based on the difference between the selling price and the stepped-up basis