Series 6 - Unit 8 - Basic Customer Accounts

8.1 - Individual & Joint Accounts

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What form is required for ALL accounts?

new account form

(4) things that only the owner of an individual account can do:

1. Control investments

2. Get distributions

3. Authorize 3rd parties to do 1 & 2

4. Add a transfer on death (TOD) designation)

Transfer on Death (TOD) is also called…

Pay on Death (POD)

TOD helps to avoid _______, but Is still considered……

Probate court, part of the owners taxable estate

(2) Forms required for all joint accounts:

1. New account form

2. Signed joint account agreement - allows both owners to make transactions

Joint accounts - What is required if there is a TOD on the account?

all owners must agree and sign the TOD

joint accounts - on what basis is suitability determined?

Suitability must be based on the entire group of owners

Joint Tenants with Rights of Survivorship (JTWROS)

owner dies, they pass their share to the surviving owners

JTWROS - how much of the account does each owner own?

equal shares

JTWROS - when would a TOD go into effect?

after the last owner dies

Tenants in Common (TIC)

owner dies, their share goes to their estate

TIC - how much of the account does each owner own?

% ownership of each owner is defined

TIC - when would a TOD go into effect?

TIC CANNOT have TOD

In Tenants in common, what must happen as soon as an owner dies or is declared incompetent?

all pending transactions and orders are canceled. Considered a decedent account until their share has an executor

Tenants by the Entirety (TBE)

for married couples, much like JTWROS

What's the big difference between JTWROS and TBE OTHER than the fact its for married couples?

BOTH spouses must sign/agree to be able to sell securities or take a loan against assets in the account

(2) assets that are NOT considered joint property in marriage?

1. Inherited/received as a gift and kept separate

2. Owned before the marriage, never titled jointly

Types of business accounts (6)

1. Sole proprietorship

2. General partnership

3. Limited partnership

4. C corporations

5. LLC

6. S corporations

(2) risks of sole proprietorship:

1. Owners personal assets can be used to cover business debts

2. Taxes from business flow through to owner and are on personal tax return

What form is required when opening a partnership account?

Partnership agreement

What does a partnership agreement state?

which partners are authorized to make transactions

What if changes are made to the partnership?

must provide amended partnership agreement

How are partnerships taxed?

they're a tax reporting entity, not a tax paying entity. Gains/losses pass to individual partners who report them on individual tax returns

General Partnership

ALL partners have unlimited liability and participate in management duties

Limited Partnership

limited liability, no management

C Corporations

responsible for its own debts and taxes. Pays the corporate tax rate. Owners are not personally liable

LLC

protects investors from liabilities

LLCs can choose how they are taxed between (3) options:

1. Sole prop

2. Partnership

3. C corp

S Corporations

protects investors from liability while allowing pass-through taxation like a partnership

How many investors/members can an S corp have?

100 max

Types of trusts (4):

1. Revocable

2. Irrevocable

3. Living

4. Decedent

Revocable Trust

trustor can modify/cancel at any time

Irrevocable Trust

cannot be changed

Living Trust

created/funded during trustor's life

Decedent Trust

created after trustor's death through estate

Guardianship Account

guardian (fiduciary) appointed by court to manage assets for (often) legally incapacitated adults

Custodial Account

account for minors under the UTMA act

How long does the custodian manage the UTMA account?

adulthood - depends on state. Usually 18 or 21

Which of the following business structures is considered a separate legal entity where owners are not personally liable for business debts and the entity is responsible for paying its own taxes?

A)

General partnership

B)

Sole proprietorship

C)

C corporation

D)

Limited partnership

C

8.2 - Basic Account Information

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FINRA Rule 2111

firms/reps "must have a reasonable basis to believe" that investment is suitable. Know your customer.

SEC requires the following "basic info" when opening account (12)

1. Name

2. SSN/Tax ID

3. Address

4. Date of birth

5. Telephone #

6. Government ID info

7. Employment status/occupation

8. Works for brokerage firm?

9. Corporate insider?

10. Annual income

11. Net worth

12. Investment objectives

If customer refuses to provide additional information to determine suitability, what happens?

customer can only make unsolicited trades. No recommendations

Does the new account form require a customer's signature?

no - only the principals signature

Who can and cannot open a new account?

any legally competent person over age of majority. Legally incompetent people cannot

How often must customer information be reconfirmed?

at least every 3 years/36 months

FINRA Rule 3210

associated person must obtain written consent from employer to open an account at another firm. Employer must monitor their accounts. Associated person must notify the firm in writing that they are associated with a member firm

All of the following information would normally be found on a new account application except

A)

address.

B)

education.

C)

employment status.

D)

investment objective.

B

Under FINRA Rule 3210, what must an associated person do before opening a brokerage account at another financial institution?

A)

Restrict trading in the account to unsolicited transactions only.

B)

Open the account and notify their employer afterward.

C)

Obtain prior written consent from their employer.

D)

Ensure that the financial institution is a FINRA member.

C

8.3 - Margin Accounts

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Leverage

using borrowed money to increase potential return, also magnifies losses

(2) ways margin trading benefits BDs:

1. Generates interest from margin loans

2. Larger positions = higher commissions

Short Selling

borrow stock, sell it, then hope the price falls so you can buy it back and return it to the owner

Where margin traders borrow stock from (5)

1. Firm executing the short sale

2. Other customers margin accounts (with consent)

3. Other member firms

4. Stock lending firms

5. Institutional investors

• Most common is from other customer's - consent to loan agreement

(4) forms needed to add margin borrowing to an account

1. Credit Agreement

2. Hypothecation Agreement

3. Consent to Loan Agreement (optional)

4. Risk Disclosure Document

Hypothecation

customer pledges their securities as collateral for their OWN margin loans

Rehypothecation

BD repledges customer's securities as collateral for a BANK loan

Consent to Loan Agreement

optional, customer pledges their securities as collateral for OTHER INVESTORS margin loans

(2) comingling rules:

1. Firms CANNOT mix your securities with firm-owned securities

2. Firms CAN commingle one customer's securities with another customer's only if both have signed hypothecation agreement

Margin trading is allowed if documents do NOT specifically state that margin is not allowed (2)

1. Corporate - per corporate charter

2. Partnership - per partnership agreement

Margin trading is allowed if documents DO state that margin trading is allowed (2):

1. Trust accounts

2. Fiduciary accounts

Margin trading is NEVER allowed (2):

1. Custodial accounts (UTMA)

2. IRAs

Securities that can be purchased on margin AND used as collateral (4)

1. Exchange listed stocks/bonds

2. Nasdaq stocks

3. OTC securities approved by FRB

4. Warrants

Cannot be purchased on margin or used as collateral (4)

1. Options

2. Rights

3. OTC issues not approved by FRB

4. Variable insurance

Cannot be bought on margin, but can be used as collateral (AFTER 30 DAYS) (2)

1. Mutual Funds

2. New issues

Exempt from regulation T requirements (3)

1. Treasury bills, notes, bonds

2. Gov agency securities

3. Municipal securities

Regulation T says investor can borrow up to __% of the value of a margin purchase

50%

FINRA requires a minimum equity of $X on an initial margin purchase

$2000

Maintenance Call

if customers equity drops below 25%, customer receives a call to make a deposit by EOD to bring equity back up to 25%

What happens if customer fails to make the maintenance call deposit?

BD can liquidate assets to bring equity to 25%

House Call

set by a BD, a higher minimum equity than 25%