SIE Chapter 12: Customer Accounts

Emmanuel God With ME God with US

New account form

Internal compliance document that must be signed by the principal (and spouse for joint accounts)

• It states the customers’s identity details, investment profile and financial state

Opening Accounts: Know Your Customer (KYC)

The obligation to gather enough client information (age, holdings, objectives, experience, time horizon, risk tolerance, etc.) in order to make suitable recommendations

Patriot Act / Customer Identification Program (CIP)

Requires firms to verify the customer’s identity and keep records of that verification

Street name account

Registered in the broker-dealer’s name for the customer’s benefit

• It speeds up trading and adds privacy

• Street name accounts are required for all margin accounts

Single (individual account)

One owner; no one may open an account in another’s name without power of attorney

Custodial account (UGMA/UTMA)

Set up by an adult custodian for a minor

• one custodian and one minor per account

• Taxed to the minor

• Can not be margined or shorted or held in street name

• Ends at the age of majority (typically 18)

NOTE: UTMA’s allow non-cash gifts like real estate or royalties

Fiduciary / Prudent Man (Investor) Rule

A fiduciary must invest according to their state’s 'legal list’ of safe securities or otherwise as a prudent persons seeking income and preservation of capital would

Corporate account

Requires the corporation’s tax ID and a copy of the corporate charter and a corporate resolution stating who may give trading instructions

NOTE: For margin accounts the corporate charter must state the corporation is allowed to purchase securities on margin

Discretionary account

The representative may choose the security, the amount, and the buy/sell decision without asking each time (discretionary AAA: asset, action, and amount)

• This requires a written power of attorney

• Every order must be marked discretionary

  • Principal reviews discretionary accounts regularly

Partnership account

Requires a partnership agreement on file establishing who has trading authority

Institutional account

Opened by entities such as banks, mutual funds, insurers and hedge funds, to invest on behalf of others

Cash Account vs Margin Account

Cash Account: customer must pay for each trade in full with no borrowing

Margin account: Customer borrows money from the broker-dealer to buy stocks or borrows shares to sell short

Credit agreement

Discloses the interest rate and terms for money borrowed for margin trading

Hypothecation agreement

Lets the firm hold margined securities in street name as loan collateral

• It also allows the firm to sell the customer’s security if their equity on the account falls too low

Regulation T

A FRB rule requiring an initial deposit of 50% of the current market value of securities purchased or sold short on margin

Margin call

The firm’s demand for a customer to deposit additional cash when their equity falls below the required maintenance level for their margin account

Long margin account initial deposit minimum

The greater of Regulation T (50%) or the FINRA $2,000 minimum

• Purchases under $2,000 must be paid in full

Short margin account minimum deposit

A $2,000 minimum always applies

• Above $4,000, its the greater of Regulation T or $2,000

Day trading account

Requires $25,000 minimum equity in margin account

• It applies to an investor who day trades the same security 4 or more times in 5 business days

Telephone Consumer Protection Act

Bars calls before 8AM local time and after 9PM local time

• requires caller to identify themselves and their firm

• There’s a do not call list

• Doesn’t apply to existing customers

3 Types of Fiduciary Accounts

Custodial Account: UGMA and UTMA (set up for a minor, 1 custodian, 1 minor per account, minor’s SSN)

Trust Account (set up by grantor, with specific purpose, trustee manages the trust for beneficiary)

Guardianship account (An account managed by a guardian for someone who can’t manage their money due to issues)

Minimum maintenance margin requirement for short margin accounts

is 30% of current market value

Minimum maintenance margin requirement for long margin accounts

is 25%