Chapter 8: Customer Accounts
financial instion such as banks, insurance companies and pension plans
are generally required to invest either using a legal list or consrvativly under prudent man rule
commision based advisors
are paid to trade- this increases number of transactions they execute
prospecting new customers
build customer base is to make unsolicited telephone calls to potential customers- cold calling/telemarketing
prime brokerage acct
bundled package of services offered by b/d to hedge funds, other b/d and instional investors that use agrreeive trading staretgies including securities lending, centralize trade processing, calculating an absolute return
sole propreitorship
business owned by an indivual- simplest way of doing business- no legal filing except for doing business as
spuse may have community property
but spouse is not permitted to trade or withdraw if their name is not on acct
example of not disretionary order
buy 100 ABC when time is right --
order tickets must include
buy, sell , # of shares, security, discretionary acct or not, acct #, time order was entered, time order was executed, any terms or condisiton
corporate acct
corp which opens a securities act must provide a certifiate copy of the corp resolution and articles of incorportation and may rewuire corporate bylaws or charter- may engage in security transactions -
customer develops dementia
court order will be required for RR to take orders from a thrid party
firm making telephone soliciations must have written policy for maintianing do not call list
customer acct number must be encrypted
discretionary authority
customer grant authority to their rep to make investment decisions on their behalf = RR must obtain prior written authoirzation on a discretionary account agreement --designated that the RR is authoirzed to trade in the acct
time and price discretion orders are good for the day of entry only
customer wants an order to be good for more then a day - written instructions would be required
in commison based accts
customers are charged per transaction
firm needs to have a permant in house do not call list
for people who do not want to be called and compare this infro to national do not call list
ll transactions in customers acct
must be reviewed and itiated by princpal or supervisory person of b/d
cuatomer acct info
must be sent 30 days of the opening of the acct, must be furnished to each customer at least once every 36 months, must be updated within 30 days after reicing notice of a chnage in investment obj-- acct info must be kept for 6 years after acct is closed
if custiodian is someone other than a childs legal guardian
the guardian cannot exert any control or enter orders in the acct
confrimation must contain
reference to finra that contains public trading date and exectuion time of the transaction expressed to the second
non managed fee based acct program
refers to arrangements in which no investment advisroy services are provides by member firm and in whcih customers are charged a fixed fee/ and/or percentage of accts value rather than transaction based commissions - benefits customer who trade a lot- fees and costs must be disclosed before acct is established-
registered rep are never
ALLOWED to return a percentage of commisions earnied while executing transaction for customers
churning
RR makes transactions which are excessive in size or frequency
when power of attorny is granted
RR must know essential facts about both customer and agent that is granted the power
client fails for bankruptcy
RR should cancel all open orders to buy and sell
when trade comparsions between b/d do not match
a dont know notice is sent to confriming b/d
letter of authroization
allows for the transferring of a customer cash and/ or other securities
joint acct: joint tenants with rights of surviourship
acct for 2 or more people - usually husband and wife- upon death of either party, the surving tenant becomes the sole owner of the securities - surviving tenant needs to present death certificate and a affidavit of domicile and then securities can be regsitered to surviing tenant
indivudal accts
acct opened for one person
unform gifts to minor
allow opening of a securities act for a minor - acct involing a minor cannot be set up as a joint acct - donnor must be an aduly and can give any kind of securities or cash- no limit to gift size, donor can be custodian -does not pay capital gains taxes on donate securites, donnor cannot gift rhoguh his last will
full trading authoirzation
allow rep to make purchase and sale decisions for the account and also withdraw cash or securities from acct- approved discretionary acct does not mean that the rep has unlimited trading priviledges
member must disclose
amount of a markup charged to a customer if it is not a market maker and engages in a riskless or simultaneous transaction with customer
new acct from must contain : address
army post office or fleet post office is acceptable, if this is used the customer does not need to provide another adress, post office box is not valid address but can be used for mailing purpose, in individual does not have a residence, APO, FPO, o rbusiness address, the residence or business of a next kin or another indivudal contact may be used
exemptions from investment advisor registration are
banks, lawyers, accountants, teachers, and engineers or anyone who gives advice
customer dies the RR must
cancel all open orders, freeze acct and note client is deceased, await instruction from estate representaive, obtain death certificate, obtain an affidavit of domicile, order for exector of estate to transfer funds they must obtain an affidavit of domicle, death certificate, abide by insturction in last will and testament of deceased person
acct request made by spouses of customers
cannot accept an order or request to withdraw funds from a spouse of a customer unless the account holder provides written authorization to the RR stating that the request by the spouse is authorized
fiduciary acct
cannot grant trading authority to a 3rd party, accts may adhere to prudent investor rukes, require low risk conservative investments
fee based accounts
charged a flat dee, usually based on percentage of assets in customers acct, fee can be a one time or ongoing, depending on the types of services they provide
when doners makes a gift they should consider
completion of the transaction occurs when the securities are registered in the name of the custodian for the benfit of the minor - age pf person who the gift is for, gift is completly irrevocable,
new acct from must contain : customers name
customers name-broker cannot open an acct in the name of a person other than the customer, acct name should match document names, new accts may not be opening in name of 3rd party, an alias or a minor, numbered acct- must submit writtten statement attesting to ownership
TOD is apprortie
for an investor who wants to leave securities to a specific person but maintain control of the assets while they are alive
order tickets do not have to indicate
designated market maker who executed trade
corporate resolition
document from board and authorizes specific person or persons to enter order on behalf of the corp- do not require affidavit of domicile
essential facts allow RR to
effecvtily service acct, act in accrodance with special handling instructions for acct, understand the authority of any person acting on behalf of customer, act in complaince with rules
know your customer rule
every memeber shall use reasonable diligence, in regard to opening and maintenance of every acct, to know and retain essential facts concerning every customer and concerning authority of each person acting on behalf of such person
pattern day trades
execute 4 or more trades within 5 business days - generally do not keep position overnight
automated customer acct tranfer service
facilitates the transfer of customer accts from one brokerage frim to another brokerage firm - transfer must be completed in 3 bus days following validation of transfer - firm carrying acct must validate the transfer instrutions within 1bus day
cold calling act banks junk fax ads
fax sent to customer must contain-date and time that the fax is sent, identity of the send and telephone # of sender -does not require # of pages to be used
unearned income over amounts specified by IRS kiddie tax
for a child udner 18 will be taxed to the child at the rate at which is would be taxed at the parents top marginal rate if that rate is higher than child rate
limited trading authorization
gives rep the right to make purchase and sale decision for acct - but cannot withdraw any cash or securities from the acctount- checks must be disbursed payable to the owner of the acct
investment clubs
group of indivuidals that pool their money together and may choose any investment strategy that the group agrees on- conservative or speculative
unicorpated association
group of two or more indivudals who voluntarily enter into an agreement to form an organization for a common purpose- important factor with unincorpated association is that members have unlimited personal liabilty for any legal action
fee based advistors
have incentive to grow their clietns port in size as they would get paid more
partnership acct
if one of the partner dies- RR should freeze the acct because a partnership is legally dissolved at death of a parnter
handling a joint acct with rights of survirorship
if one party dies, ownership passes to the survivor, orders may be placed by either party, correspondence may be mailed to either party, both names must appear on corrsepponce, all checks are made payable to both
diligence in opening accts
investment obj, employment, estimated annual income from all sources, estimated net worth, martial status and # of depents, age
gifts and inheritance are not subject to community property laws if only one person
is names
fianal approval of new acct
is resonability of member firm as evidenced by the signature and approval of a principal executive office or partner
unregistered cold callers
limited to what they can do but they can- send investment literature to prospects, set up appointmets for rospectus with the registered rep and may extend invitations to firm sponsored events- CANNOT pre qualify for profile prospectus
community property
marrier couples have joint ownership of aseets under what is referred to as community property- all assets acquired after becoming married either acquired indivudially or as a couple- are owned equally by both persons regardless of whose name appears on ownership titles
trade confirmations of corporate and agency debt securities for retail customers
member firm must disclose mark up or mark down if the member also executes an offsetting principal trade in the same security on the same trading day- mark up/down myst be expressed in total dollar and percentage
custodian retains control over minors account until either
minor attains age of majority in which case the cash and securities remaining will be distributed to individual, cusodian is removed by court order or dies, if minor dide the reamining proceeds will be payable to minors estate
confirmations of transactions
must be sent to customer at or before the completion of any transaction in any secutity effected for or with the acct of a customer- all customers must be sent confirmations whether they are indivual customers of institional-- must disclose settlement date and disclose if security is callable
day traders
must have a minmum equity of 25,000, are most conerned with market timing risk, are least susceptiable to inflationary risk - buying power limit is 4 times the maintenance margin excess in the acct
customer acct rules
must recieve statment quarterly, statments must disclose the current securities positions in acct, ant and all money and debit balance, and any activty such as margin interest, interest and div payments
signatues, approval and recordkeeping
must rep completes new acct form, the form must be signed by branch maneger of principal - reg rep and customer do not need to sign
firms do not need
name of other b/d firms or educational background, tax return bracketst for previous year and designation beneficaries
new acct must contain
name, adress, email, telephone, annual income, net worth, bank reference, occupation and employer, citizen, date of birth, socia security, must provide govt issued ID, identy of reg rep, trusted contact person
priror relationship with person exists
no call restriction do not applt - this is defined as customer having an account in the last 18 months
advantage of sole propreitorship
no or low start up and maintenance costs, losses may be used to offset income for tax purposes
cold call rules do not apply to
non profit organizations, provisions set forth in this rule are applicable to members who make calls to wireless #s, firm may outsoure telemarketing but frim maintains reposniable for ensuring compliance with all provisions of the telemarketing rules
cold calling act
only call between 8am-9 pm local time of the party called, caller must provide the called aprty with the identity of the caller and a telephone number or adress at which the caller or frim may be contacted
change to orders
once an order has been entered- any change or correction to order requires approval of the branch manager or supervisor before the change is made
custodian account for UGMA there may only be
one person as custodian anf one minor and beneficary --account is opened with minors social secutity number, taxes due are paid by the minor - only new gifts are premitted-stock certifcates must be regustered in name of custodian
tenants in common
one tenant dies- his interest will pass to his estate and not other joint owner- no right of surviroship in a tenancy in common - either can place order
guaridian acct
opened for a child or adult with disabilities who is unable to manage their own financial situation -guardian appointment cert issued by court to open account- guardian handle acct but has no ownership
time and price discretionary orders
orders where RR only determines the time when the order will be entered and the price of the security at the time of entry- broker does not decide which security or how many shares or whether to buy or sell
fiduicary
person vested with legal rights and powers to be exercised for the benefit of other persons incldue trustees, executers, adminstrators, guardians, custodians, FBO
investment advisor
person who is in business of giving investnebt advice for compensation and not for execution of transaction - maangement fee charged by IA may be different for each investment advisro from fund to fund
auto dialing used with pre reorde message is
prohibited to residence, healthcares care and cell phone
trust acct
property is managed by one person for the benefit of another person- trustee is a fiduciary who holds title to the trust assets for the benefit of the trusts beneficaries - order for a trustee to establish a margin acct for the trust- is must be authorized in agreement
direct registration system
provides for electronic direct registration of securities in an investors name on the books for the transfer agent or issuer and allows shares to be transferred between transfer agent and broker electronically DRS provides investors with an alternate approach to holding securities - DRS can elect to have their securities registered directly on the issuers records in book entry
limited partnership acct
require signature of general partners when establishing new act and do not require the singature of each limited partner since the general partners manage and controls partnership
USA patriot act
requires full and true name, date of birth, street adress, tax payer ID #, acct should not be opened if this isnt porvided
types of trust include
revocable, irrevocable, living, testamentry
mitgatuon of risk
risk in inherent to investing- it can be mitigated by emplying - diversifaction,port rebalancing or hedging
profile changes
rr must update records to reflectt changes,updates required are employment, income, address, obj, as well as all changes in securities positions
margin accts are not allowed for minors
short sales are not allowed in UGMA acct
discretionary acct
teminated when owner dies, check must be made to owner, have rhe right to waive confirmations and statments , owner can still intiate orders, RR must write discretionary on order ticket- all order must be reiiewed by princpal of firm, no churning
RR should consider
temperament, marital, # of dependts and education needs, equity in their home
firm accepts orders from investment advisors on behalf of a client or clients
the IA is allowed to make allocations of their orders to clients accts- allocations must be recieved by the firm by noon on the business day following the trade- such allocations are not allowed for the rep trading on behalf of customers
if client wants to trnsfer his acct to different rep in same firm
the new rep must review and udate the customer acct from - newly assigned RR must treat the accr as a new customer and update the customers profile- once the reiew and update are completed RR can then make approtate recommendation
customer uses service of an investment advisor and wants duplicate copies of his confirmations and statement sent to advisor
the request would have to be made in writing by the customer and the customer woud have to provide the name and address of the investment advisor
new account form: trusted contact person
this is optional - firm may conact trusted person to disclose infor about customers acct, confirm specifivs of the customer current contact info, discuss the customer health, idenify power of attorney
statements would not be required
to show orginal price paid for the securities or year to date income in acct
when acct will be transfered
trading can continue untill the new firm begins transfer process
custodian must
turn over property when child reaches age- must mange acct for best interest or minor- generally seeking cpaital growth - usuallt permited to recieve compenation for service unless he is mino
disadvantahes sole proprietorship
unlimtied personal liabilty, owner should carry liabilty insurance, sole propreitors must pay selg employment tax for themselves and employees, are repsobilble for running business, recordkeeping
transfer on death
upon death- individual investorm or last surviving acct owner in joint acct, assets in the acct are passed on to beneficaries accorinign to written TOD agreement- eliinating porbabte- (court)- this is for basic securities including stocks, bonds and mutual funds
officrs of financial instion - if persident of bank
wishes to open margin acct- they would have to complete a new acct firm -but would not be required to obtain authorization from the banks board
client is terminally ill
you should advise client to see a tax attorny for estate tax advice