Lesson 11: Customer Accounts

do-not-call list

under the telemarketing rule, once and individual is added to the firms internal do not call list, they remain there indefinitely

do-not-call list exceptions

• a registered rep can call an individual on the list if the individual is:

1. An existing customer of the firm

2. The registered rep has a personal relationship with the individual

3. The individual has provided prior written consent

cold calling

• can occur 8 am - 9 pm and directed towards anyone

• must disclose it is a telemarketing call and the rep and firm’s name, address/phone number, and reason for the call

account opening

1. New account form → rep confirms info w/ client

2. Principal approves and signs new account form

3. Within 30 days customer verifies account info is accurate

4. Every 36 months, client re-verifies account info

cash account

all securities paid for in full

Margin account

• allow the purchase of securities using borrowed funds from a BD

• customer must sign the margin agreement

• customer will receive a margin disclosure statement which details all the risks at the account opening and annually thereafter

Margin agreement

• includes hypothecation agreement which pledges securities as collateral

• a credit agreement which has the terms of the loan

• loan consent agreement (optional) → firm may lend customer securities to others

Reg T

Federal Reserve rule that requires payment two business days after settlement

free-riding

describes when a customers fail to pay within the Reg T timeframe and their account is frozen

initial margin

• Reg T requires the customer to deposit 50% of the purchase price and the BD can loan the other 50%

• FINRA requires a minimum initial equity of $2,000

• for long positions less than $2,000 FINRA requires 100%

maintenance margin

• 25% of current market value for long positions

• 30% of current market value for short positions

marginable securities

• Exchange listed stock

• OTC issues approved by Fed

• Closed-end funds

• ETFs

• LEAPS options

• Fixed-income securities

mark to market

the value of a customer’s margin account is marked-to-market daily to determine equity balances and margin calls

options disclosure document

the sequence for documentation for options accounts is unusual in that the customer can begin trading options once their account is approved but before they return the signed options agreement

discretionary account approval

• must be approved by principal prior to the first trade

• each discretionary trade must be approved by a principal promptly after execution

discretionary account

• a customer gives trading authorization to a registered rep

• the customer must deliver power of attorney in writing

• the RR can buy or sell any asset at any amount

churning

excessive trading based on the customer’s investment objectives

individual account

• has single ownership and total account authority

• assets are divided in the will

joint tenants in common (JTIC)

• divided ownership

• assets pass to named beneficiary in death

joint tenants with rights of survivorship (JTWROS)

• undivided ownership

• assets remain in account upon death and avoid probate

transfer on death (TOD) account

• has a named beneficiary and avoids probate

• assets in the account bypass estate settlement process and are transferred directly to the beneficiary at death

payments in joint accounts

• any party can give trading instructions in a joint account

• checks must be made payable to all parties

UGMA new account registration form

• the new account registration form for a UGMA account includes the name of the custodian

• does not include the name of an individual who donates funds to the account

minor (UGMA) account

• one minor who is the account owner and one custodian

• is a trust account

• the minor’s social security is listed on the account and they are liable for any taxes on gains

• any gifts to the account are irrevocable

Trust account

• the settlor contributes assets into the trust and can restrict the use of the assets

• the trustee holds the legal title to the property in the trust

• the property is held in for the trust’s beneficiaries and there can be multiple

guardian

an individual appointed by the court to manage the assets of a minor

trust invalidation

• this can happen due to undue influence → the individual signing the documents was coerced

• can happen due to lack of capacity → the individuals signing the documents was mentally incompetent

clearing firm

• responsible for processing and settling customer transactions

• maintains custody of customer cash and securities

introducing firm

• has a direct relationship with the client and can accept customer orders but does not handle customer assets or the mechanics of the actual trade

• in a margin account the securities are maintained by the clearing firm and not this one

delivery versus payment (DVP)

• requires payment to be made before or at the same time as delivery of securities

• this method ensures the buyer receives the securities only after paying for them

• reduces the risk of the seller delivering securities without receiving payment

receipt versus payment (RVP)

• requires payment to be made before delivery of securities

• ensures that the buyer pays for the securities before receiving them

• reduces the risk of the buyer receiving securities without paying for them

Depository Trust & Clearing Corporation (DTCC)

• a clearing corporation with the primary role of facilitating the exchange, payment, and settlement process for securities transactions

• the largest is the National Securities Clearing Corporation (NSCC) which a subsidiary of the DTCC which is jointly owned by all BDs

inherited securities cost basis

• when an investor inherits securities their cost basis is adjusted to the fair market value of the security at the time of death

• referred to as a “stepped-up basis”

customer account statements

• offer a snapshot of the account: purchases, sales, interest or dividends received, funds in or out

• firms must send to customers quarterly

commingling violation

when a customer and firm’s assets are mixed together in the same account

holding customer mail

• firms can hold customer mail such as account statements, trade confirmations, disclosures upon written request

• the firm can hold mail for up to 3 months and must notify the client with alternate ways to access account info

Regulation S-P - information security

• establishes privacy standards to ensure the security and confidentiality of customer data

• firms must deliver the Reg SP privacy notice to their customers at account opening and annually thereafter

• customers have 30 days to opt out of having their info shared with 3rd parties

Securities Investor Protection Corporation

• a not for profit corporation that protects against losses of cash and securities held by a brokerage firm in the event of the firm’s failure

• no coverage for market losses, inappropriate recommendations, fraud by issuers, currency/commodities

• each separate customer is protected for $500,000 total of which up to $250,000 is the limit for cash coverage

Federal Deposit Insurance Corporation (FDIC)

• insures deposits in banks (checking and savings accounts)

• protects up to $250,000

• is backed by the US gov

protection of vulnerable investors

• when opening an account, firms must make reasonable efforts to include the name and info of a trusted contact person

• firms may place a temporary hold of up to 15 business days on distributions or transactions if there is reasonable belief of financial exploitation