Chapter 7 Client Accounts

Question 1

Red Flag Issue

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

Areas of concern

Answer 1

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

Question 2

FINRA Rules for Opening Cash Accounts

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

Answer 2

• 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)

Question 3

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?

Answer 3

This change must be requested in writing by the customer.

Question 4

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

Answer 4

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

Question 5

Handling Customer Assets

Transfer and Ship

Answer 5

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

Question 6

Handling Customer Assets

Transfer and Hold

Answer 6

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

Question 7

Handling Customer Assets

Delivery Versus Payment (DVP)

Answer 7

Shares are held at a custodian bank

Question 8

Handling Customer Assets

Street Name

Answer 8

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

Question 9

Steps to Opening an Option Account

1. Gather customer information through Option Account Agreement

Answer 9

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

Question 10

Steps to Opening an Option Account

2. Registered Options Principal (ROP) Approval -

Answer 10

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

Question 11

Steps to Opening an Option Account

3. Allow “Opening” Transaction (only after approval)

Answer 11

NONE

Question 12

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

Answer 12

15 days

Question 13

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

Answer 13

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

Question 14

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?

Answer 14

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

Question 15

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

Answer 15

1. Currency Transaction Report

2. Suspicious Activity Report (SAR)

Question 16

Currency Transaction Report is filed for ____ exceeding $___K

Answer 16

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

Question 17

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

Answer 17

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

Question 18

FinCEN is Financial Crimes __ __

Answer 18

Financial Crimes Enforcement Network

Question 19

OFAC

Answer 19

Office of Foreign Asset Control

Question 20

SEC Regulation SP (Privacy Policy) - Annually

Answer 20

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

Question 21

Types of Accounts

1. Joint
2. Corporate
3. Fiduciary

Answer 21

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

Fiduciary
-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

Question 22

Types of Accounts

Custodial

Answer 22

Custodial

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)

Question 23

COD / DVP / RVP Transactions

Answer 23

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

Question 24

Third Party Authorization

Answer 24

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

Question 25

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:

Answer 25

Written authorization from client
Written acceptance by a registered principal

Question 26

The difference between limited and full discretion:

Answer 26

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

Question 27

Incapacitated Clients | Guardianship / Conservatorship

Answer 27

-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

Question 28

Power of attorney=

Answer 28

trading authorization

Question 29

Death of a Client

Answer 29

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

Question 30

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?

Answer 30

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

Question 31

Escheatment

Answer 31

``` The process of turning over a client’s unclaimed or abandoned property to a state authority, but not to the federal government Escheatment occurs when a client:
Dies without a will(intestate) or
Cannot be located ```

Question 32

Securities Investor Protection Corporation(SIPC) Protects separate customers(not accounts) against B/D bankruptcy NOT ACCOUTNS Multiple accounts at a firm of the same client are combined; however, joint accounts are considered separate

Answer 32

Coverage: Cash & street name securities: Will only cover cash up to: SIPC coverage is NOT needed for securities specifically identified as belonging to a customer (they are distributed without limit) Not Covered by SIPC Accounts of the B/D’s senior officers or directors Fraud, futures contracts, or commodities

Question 33

Red Flag Issue A representative who works in a bank branch explains that SIPC’s role is to protect customer accounts from losses. Is the statement correct?

Answer 33

N, the rep is confusing SIIC with the FDIC. SIPC does not protect customers from losses in their portfolios. SIPC - for brokerage firms

Question 34

Protesting an Account Transfer | Acceptable reasons for protesting a transfer request include:

Answer 34

Additional documentation is required (e.g., death certificate)
The account is flat and reflects no assets
Account number is invalid
Social Security number or account title is mismatched
Receipt of writteninstructions to rescind request from client
But NOT a dispute over securities positions or money balances For any discrepancy claim that occurs after transfer, the carrying firm must resolve the claim within five business days If transfers arise due to an RR switching firms and taking clients, the carrying firm may attempt to convince clients to stay

Question 35

Non-Transferable Assets | At time of transfer, a client’s account may contain non- transferable assets, including:

Answer 35

Proprietary products of carrying member
Product of a third party (mutual fund or annuity) with whom the receiving firm has no relationship
Limited partnership interest in retail accounts If an account has any of the above assets, carrying firms must offer the following alternatives:
Liquidation of the securities with payment to client within 5 business days •Any surrender charges must be disclosed by carrying firm
Retention of the securities with the carrying firm

Question 36

Customer Communications | Firms may hold customer correspondence:

Answer 36

For 3 months if traveling abroad
For 2 months if traveling within the U.S. Written authorization from client required Account Statements
Must be sent by broker-dealers at least quarterly
However, if an account is active, statements are typically sent monthly
Statements may be electronic or physical

Question 37

DVP/RVP account does not get statement it gets a

Answer 37

confirm

Question 38

Penny Stock Rules | Penny Stock Regulations apply to solicited sales of unlisted, non-Nasdaq equities priced below $5 per share

Answer 38

Firms have special suitability, approval, and disclosure procedures (a disclosure document)
Established customers are exempt from these requirements, which includes clients who have: •Been with the firm for more than a year, or •Made three separate purchases of different penny stocks

Question 39

Red Flag Issue You notice that an online customer has begun to liquidate some long-held positions and is uncharacteristically moving the sales proceeds into penny stocks. What is your primary concern?

Answer 39

Identity Theft

Question 40

Federal Trade Commission Red Flag Rules Financial institutions must create reasonable policies and procedures for detecting, preventing, and mitigating identity theft The program should enable a firm to:

Answer 40

Identify relevant patterns, practices, and specific forms of activity –“red flags” –that signal possible identity theft Incorporate business practices to detect red flags Detail appropriate responses to any red flags detected to prevent and mitigate identity theft and The program must be updated periodically to reflect changes in risks from identity theft

Question 41

Which of the following provisions of a margin agreement are NOT optional: I. loan consent agreement II. hypothecation agreement III. house call provision IV. credit agreement

Answer 41

II and IV In order to purchase stock on margin, a customer must sign a margin agreement. Key mandatory provisions are: - hypothecation agreement - credit agreement loan consent is optional

Question 42

To approve a customer's account for transactions in a penny stock, the broker-dealer must take all of the following actions, EXCEPT:

Answer 42

they must a. determine suitability for transaction c. deliver a written statement to customer regarding determination of suitability d. Obtain manually signed and dated copy of suitability statement from client

Question 43

Non held order where the customer gives the RR discretion or price and time only may be executed with or without discretionary authority?

Answer 43

may be executed without discretionary authority. written not required

Question 44

Under CIP (Customer Identification Program) the firm must obtain from customer

Answer 44

1. name 2. date of birth 3. address 4. identification number may be requested but not mandatory

Question 45

All are required when opening customer account

Answer 45

1. street address 2 signature of rep opening account 3. signature of principle approving account NOT - address of customers previous employer

Question 46

Under UGMA (Uniform Gifts to Minors) approach the social security number of the minor or parent is needed?

Answer 46

Minor

Question 47

Currency Transaction Report is filed (CTR) if how much a cash deposit exceeds?

Answer 47

$10K

Question 48

Roger rep suspects money laundering but does not report it under AML violations including willingly negligence are punishable?

Answer 48

Yes , up to 20 years in jail

Question 49

if arbitrated of RR not handling a clients mutual fund redemption order properly then the evidence will be

Answer 49

examined and decision rendered by single public arbitrator

Question 50

A customer signature is required when opening which of the following accounts 1. Cash 2. Margin 3. Options

Answer 50

Margin and Options require signature