Account Opening Procedures and Regulations

Vocabulary flashcards covering the key terms, regulatory rules, and account opening requirements for new accounts, margin accounts, and options accounts under NASAA and federal regulations.

Patriot Act

A federal law signed after the 9/11 attacks in 2001 to prevent terrorism and money laundering, mandating that financial institutions verify customer identities before opening accounts.

Customer Identification Program (CIP)

A required identity-verification procedure under the Patriot Act where broker-dealers and investment advisers must collect four critical items: name, date of birth, address, and an SSN or TIN.

Suitability Information

Information gathered regarding a client's financial status, risk tolerance, and investment goals that allows a financial professional to make suitable recommendations.

Unsolicited Trade

A transaction initiated entirely by the customer without any advice or recommendation from the firm or its representatives.

Assignment

Any transaction or event transferring direct or indirect control of an advisory contract, including changes to entities directing policies or holding more than $50\%$ of voting securities, requiring voluntary client consent in writing.

Majority Change (Partnership)

A structural change where more than $50\%$ of partnership interests change hands, triggering an assignment that requires written approval from all clients to continue managing accounts.

Minority Change (Partnership)

A structural change affecting $50\%$ or less of partnership interests, which does not constitute an assignment but requires written notification to clients within a reasonable time.

Hedge Clause

Contractual language binding a client to waive compliance with provisions of the Uniform Securities Act, which is unlawful under NASAA rules unless strictly limited to uncontrollable events.

Performance Fees

An advisory fee arrangement where the adviser retains a portion of the capital gains generated (e.g., 2 & 20: $2\%$ of AUM and $20\%$ of gains), permitted only if the client meets qualified status.

Margin Account

A brokerage account allowing an investor to borrow money from the broker-dealer to purchase securities, utilizing leverage to amplify potential gains and losses.

Hypothecation Agreement

The mandatory section of a margin agreement in which the customer pledges securities in their account as collateral to secure the broker-dealer's margin loan.

Credit Agreement

The mandatory section of a margin agreement establishing the loan's financial terms, including the repayment schedule, the calculation of interest, and credit check disclosures.

Loan Consent Form

The optional section of a margin agreement granting permission to the broker-dealer to lend the client's margin securities to other investors for short sales.

Options Disclosure Document (ODD)

A booklet explaining the characteristics, risks, and benefits of options that must be delivered to an investor before an options account is opened or any options discussions take place.

Options Clearing Corporation (OCC)

The primary options regulator and creator/publisher of the Options Disclosure Document (ODD).

Options Agreement

A document confirming the customer read the ODD and verified their suitability information, which must be signed and returned within $15\text{ days}$ of account opening to avoid closing-transaction restrictions.