Ch 10: ICAs

What 5 things are required to open a new account?

• Name & address

• Legal age

• Registered rep

• Principal approval

• Authorized person (if corporate)

Is the customer's signature required to open an account?

NO. Only the principal's approval is required.

Before first trade settles (reasonable effort)

• SSN/TIN

• Employer & occupation

• BD/bank employee?

• Officer/director?

• Citizenship

• Cash or margin

• Third-party authorization

Suitability information for client

• Age

• Investment experience

• Time horizon

• Liquidity needs

• Risk tolerance

• Financial situation

• Investment objectives

• Income

• Tax status

when must a customer receive a copy of the new account form

• Within 30 days of opening

• Within 30 days of updates

• Review every 3 years

How long are customer records kept?

6 years after last update/account closes.

USA Patriot Act

Need name, address, DOB, and SSN

What does CIP (Customer Identification program) require

verify identity

check OFAC terrorist list

keeps records of 5 years

KYC (Know your customer

Know their identity, their investment history, their investment objectives, and sources of funds

AML (Anti money laundering: Placement

dirty cash enters the system

AML (Anti money laundering: layering

hide the trail

AML (Anti money laundering: integration

money looks legit

How long are customer records kept

6 years

how long are CIP records kept

5 years

How often is every suitability review

every 3 years

What is an SAR

a report filed with FinCEN whenever money laundering or suspicious activity is suspected

filed within 30 days and do not disclose with customer

CTR: Currency transaction report

This is required when there are cash deposits or withdrawals over $10,000 in one day

What is structuring

Breaking up transaction to avoid the $10,000 CTR requirement

Monetary Instrument Log

Cash purchases between $3k and 10K. Can include money orders, traveler’s checks, needs an internal log

AML program

• AML officer

• Written procedures

• Customer Identification Program (CIP)

• Annual independent testing

• Employee training

How long are AML records kept

5 years

privacy notices for consumer

internal notice only if firm shares info, can opt out if sharing

privacy notices for customer

initial and annual notice, opt out required

Inedividual accounts

Only the owner can trade and receive account info

Limited trading authority

can buy and sell, cannot withdraw money

Full trading authority

can withdraw money and trade

discretionary authority

allows the registered rep to choose trades without asking each time, but the customer still owns the account

The AAA rule

Without discretionary authority, the rep needs permission for

Asset, action, and amount

What does not require discretionary authority

The rep can decide the price and time

Discretionary accounts

need written authorization and power of attorney. POA = limited authority

Even if someone haws a POA

They still cannot sign documents for the customer

Churning

Excessive trading to generate commissions for the registered rep

For discretionary accounts, a principal must

approve the account before opening

approve the discretionary orders

review the account regularly

If someone works for broker dealer A but wants to have an account at broker dealer b

they must notify employer, get written permission, duplicate confirmation statements sent if requested

To determine the suitability of recommendations made to a customer, inquiry should be made about what

Income and Net worth, investment objective and experience only, 401k balance

Which are true regarding a customer account with full third party trading authorization

• upon the death of a customer, the power of attorney is revoked

• the customer can designate that confirmations be only sent to the third party

• the third party can enter orders in the account

In an effort to curb money laundering, dealers registered with FINRA must record what in a monetary instrument log

cash purchases between $3,000 and $10,000

When would an SAR be filed

When a customer regularly deposits $9,900 into their account in cash

Regulations SP (Statement of Privacy)

requires financial institutions to provide customers with a copy of their privacy policies and procedures, and requires that customers will be given the ability to opt out to any such disclosures

Margin account

a brokerage account that allows you to borrow money from your broker to invest, using your existing cash and securities as collateral.

Customer Suitability Info

Age, Time Horizon, Liquidity needs, risk tolerance, tax status, current and future financial needs, investment experience

Reasonable Basis Suitability

Rep must understand the product. Before recommending leveraged ETFs, the rep needs to understand how they work

Customer specific suitability

Age, goals, risk, liquidity, taxes, time horizon

quantitative suitability

is the rep recommending too many trades (churning)

Unsolicited orders

When the customer wants a trade executed even if the rep does not agree with it, and the rep simply notes it as unsolicited

Customer refuses suitability info

if a customer does not answer questions, you cannot make recommendations but you can accept unsolicited trades

Institutional companies

• banks

• insurance companies

• investment advisors

• investment companies

• individuals with $50 million in assets

Muni securities: Tax status

For munis you have to ask their tax bracket and state of residence because of tax benefits

Reg BI (Best interest)

Is this in the customer’s best interest. Broker cannot put their own interests first

Older investor suitability

treasuries, CDs, dividend stocks, immediate annuities

High tax bracket suitability

muni bonds, IRAs, 401ks, 529s, DPPs

Long term investor suitability

stocks, equity funds, REITs, buy and hold

Who does Reg BI apply to

only retail customers. A natural person, personal investing, or receiving a recommendation NOT CORPORATIONS

What counts as a recommendation

Buying XYZ stock, Open a Roth IRA, Roll over your 401k, Transfer your IRA, open a margin account

What does not count as a rec

general education, explaining roth vs traditional, giving contribution limits, talking generally about investing

The four Reg BI obligations

Disclosure, care, conflict, compliance

Disclosure

Before recommending something, disclose fees, costs, services, conflicts, limitations, acting as broker-dealer

Care

Must know the risks, rewards, and costs, then recommend what is in the customers best interest.

Conflict of interest

proprietary products, third party payments, sales contests, bonuses tied to one product

Compliance

Firms must establish and enforce written policies and procedures to comply with reg BI

Form CRS (Customer relationship summary)

A disclosure document given to retail investors that explains services, fees, conflicts, standards of conduct, disciplinary history, and how to obtain more information

When form CRS is delivered

Before or at earliest of opening an accounting, making a recommendation, or placing the customer’s first transaction

Reasonable basis obligation

The broker must understand the investment itself and believe it is suitable for some investors

Suitability vs reg bi

suitability requires recommendations to fit the customer, while Reg BI goes further by requiring recommendations to be in the customer’s best interest

Customer order verification

When taking an order from a customer, the firm must be able to verify the customer’s identity

Customer order verification: phone

if the rep knows the customer personally, this is verification

Customer order verification: phone to call center

they will be asked security questions to verify identity

Customer order verification: online order

can only be accepted after the customers logs into their account which can be verified

Confirmations sent day after trade date

customers must be sent written confirmation of each transaction at or prior to settlement

error in confirm

if a confirmation contains any errors, the firm must send a corrected confirmation to the customer

Quarterly statements

Customers must receive quarterly statements showing all positions in the account at their current market value

When does a quarterly statement not need to be sent

when no balance or securities are in the account

if the customer owns penny stocks

statements must be sent monthly

Firms can generally not hold customer mail but

if the customer requests in writing, it can be held for up to 3 months. Any longer than that it must be an acceptable FINRA reason for it to be held and not convenience

Business Continuity Plan (BCP

Every broker-dealer must maintain a written plan explaining how it will continue operations during a significant business disruption or emergency.

BCP disclosure:

Firms must provide written BCP information when opening an account, post it on their website, and mail it upon customer request.

Accounts belong to the broker-dealer:

If a representative leaves a firm, customer accounts remain the property of the broker-dealer, not the representative.

Inherited accounts:

If a representative inherits accounts from another rep, account documents must be updated before any transactions occur.

Transfer within the same firm

A branch manager must approve the transfer. A new account form is not required.

Discretionary authority transfer:

Discretionary authority does not transfer automatically. The customer must provide new written authorization to the new representative.

Street name registration:

Securities are registered in the broker dealer’s name

Beneficial owner:

The true owner of a security who keeps all ownership rights, including dividends and voting rights.

Forwarding proxy materials:

Firms holding securities in street name must forward issuer communications (annual reports, proxy statements, etc.) to the beneficial owner.

Proxy statement:

Information sent before shareholder meetings describing matters shareholders will vote on.

Proxy statement topics:

Election of directors, accountant ratification, new securities issuance, security modifications/exchanges, and shareholder proposals.

Senior suitability

Age, life stage, liquidity needs, risk tolerance, time horizon, goals, and tax status become increasingly important when determining suitability for senior investors.

Red flag recommendation for seniors:

Variable annuities, equity-indexed annuities, RE limited partnerships, variable life settlements, CDOs, mortgaging a residence to invest, or using retirement savings for high-risk investments require extra scrutiny.

Senior certifications

Representatives cannot use misleading or bogus senior designations (such as Certified Senior Adviser or Senior Specialist).

Permitted professional designations

Legitimate credentials requiring rigorous training (such as CFP or CPA) may be used.

Trusted contact person

Firms must make reasonable efforts to obtain a trusted contact person's name and contact information when opening an account.

Trusted contact person purpose:

May be contacted to address suspected financial exploitation, verify contact information or health status, or identify a guardian, trustee, executor, or power of attorney.

Document diminished capacity

Representatives should document suspected diminished mental capacity and immediately escalate the concern within the firm.

Trading during diminished capacity review:

Firms should stop trading in the account until the concern has been resolved.

After escalation: of diminished cap

Communicate with the trusted contact or power of attorney, maintain contact with the customer, notify legal/compliance, and follow applicable state law.

Specified adult:

Either a person age 65 or older or an adult (18+) with a mental or physical impairment that prevents them from protecting their own interests.

Financial exploitation:

If suspected, representatives must immediately report the concern to the appropriate person within the firm.

Temporary hold on disbursements:

Firms may place a 15-business-day hold on suspicious disbursements when financial exploitation is suspected.