Series 7 Customer Accounts

Ongoing Laundering Flags

-Attempt to make frequent to large deposits of currency (layering) where owners or illegal funds deposit them in layers with different accounts -Engages in case transactions structured to be under $10,000 IRS reporting limit -common sense -Wire transfer activity

Options Account Procedures

-Before options account can be opened the customer must receive the latest Options Disclosure Document with the date the customer was sent this placed on the new account form -Based on suitability, customers are allowed a certain level of options trading

Rehypothecation

-Brokerage firm rep ledges customer securities to a bank -the bank loans funds to the broker -broker then reloads to the customer

One Custodian For One Minor Account

-Can't have one custodian for two people on same account, need separate accounts. -Cash Accounts only -Gifts are irrevocable -Need SS of Minor -Rights can be sold or exercised, can't expire as worthless

Death of a Customer

-Cancel open orders and freeze the account from removal of assets -note "deceased" on account forms -await to hear from the executor or estate

Fiduciary Accounts

-Cash Accounts only, no margin unless specifically authorized -Often limited to investing in securities that are on a legal list or they must follow the Prudent Man Rule

Continuing Maintenance of Account

-Confirms are sent day after trade date -Statement sent quarterly unless trades occur that month -Any inaccuracies must be promptly reported

Corporate Account

-Copy of corporate charter is required -"resolution" with corporate seal affixed to it will state who has trading authorization

Registered Rep Must Keep a

-Copy of new account form info -Chronological record of trades -current account statement showing securities positions

Reg U.

-Credit relationship between bank and broker -brokerage can't borrow more money from banks using customer securities as collateral than actual amount loaned to customers -Broker limited to rehypothecating customer securities equal to 140% of debit balance

Required Info on New Account Form

-Customer Name -Cash or Margin Account -DOB -SS or tax ID # -citizenship

Third Party Trading

-Customer allows someone other than himself or the brokerage firm to trade -Limited Trading Authorization: orders to buy and sell can be entered but funds can't be withdrawn -Full Trading authorization: orders can be entered and funds can be withdrawn but customer's name is on check

Margin Account

-Customer can buy a security or sell short as long as reg t is met -if security isn't marginal it must be paid in full

Documentation for Margin Accounts

-Customer deposits a portion of funds to buy a security and the balance is loaned by a brokerage firm -Firm charges interest on the loan, collateral are securities fun the account -Customer signs Margin Agreement before account can be opened -May also need to sign loan consent agreement -Customer must also be provided with credit disclosure document

Error In Execution

-Customer gets corrected trade

Error in Confirmation

-Customer gets corrected trade

Discretionary Accounts

-Customer gives brokerage firm trading authorization -Customer must sign trading authorization BEFORE any discretionary trades take place

FINRA/NASD Rules

-Determine if adverse interest -Notify the employing firm in writing of the employee's intention to open the account -Make available duplicate confirms -Tell the employee that you are required to notify his employer

Broker Loans

-Funds borrowed from bank by brokerage firm at a broker loan rate -This is a short term money market rate; the larger the debit balance the less interest rate spread taken by the brokerage firm on actual interest rates

Durable vs Non-Durable Power of Attorney

-If grantor becomes mentally incompetent, the power of attorney remained in effect for a durable power of attorney, ceases for non-durable. -ANY POWER OF ATTORNEY CEASES UPON DEATH

Acceptable opt-out notices

-Including a reply form with an opt out notice -providing an electronic means to opt out if the customer agrees to electronic deliver of info -providing a toll free #

Omnibus Account

-Individual new account form and trading authorization needed for each customer along w third party trading authorization -clients under one account -annual management fees (wrap account)

Suitability Rules do not apply to

-Institutional Customers -unsolicited transactions -Investment analysis tool

Procedures for Joint Accounts

-Joint Tenancy with Rights of survivorship: one party dies, the other is sole owner -Tenancy in Common: each party has a % and is passed to estate if he dies -Transfer on Death: Account is in one party's name but upon death, assets go directly to the named beneficiary avoiding probate

Marginal Non-Exempt Securities

-Listed on stock exchange -Specific OTC issues that have sufficient trading volume -included on OTC margin List

Prime Brokerage Account

-Many times institutions maintain accounts with a number of different broker dealers because some firms are better at executing stock traders versus bond trades -Prime brokerage account designates a single broker as primary-a place where all assets are consolidated

Specific Rules for Structured Products

-Members must perform a reasonable basis suitability determination to evaluate the products risks and rewards relative to other structured products

Customer Sells and Fails to deliver

-Must be bought in 10 business days after settlement

What info is NECESSARY for account to be opened?

-Name -Address -SS -DOB

Firms must verify what 4 things?

-Name -Address -SS or tax ID -DOB

Numbered Accounts

-Name is confidential, but the firm is obligated to maintain a record of a true owner

Death in an individual or joint tenants in common customer account

-Need copy of death certificate -do not know who beneficiary is so a copy of will is also required -no trading can occur unless there is a court order

Non-Marginable Issues

-Non marketable securities -OTC issues not on the etc margin list -new issues for the first 30 days after issuance

Senior Citizen Suitability

-Obviously a customer's age and life stage are important -Reps must make sure customers understand the products that they are using -Older clients should be using less risky investments -Must identify mentally diminished -FINRA requires firm to have an internal process to permit reps to get advice from others as to what steps to take

Account Transfer

-Once the customer completes the transfer form, the new firm that receives the account must submit instructions to the old firm currently carrying the account immediately -no new orders accepted and all old ones cancelled -Old firm has one day to verify after receiving transfer form -3 business days after that given to transfer securities to new firm -10 days to buy and deliver shorted shares

Day Trading Account

-Pattern Day Trader is someone who trades 4 or more day trades in a 5 business day period -Firms must five a day trading disclosure document indicating that day trading has risks

Investment Adviser

-Person that a customer entrusts to manage money -will open an account with a brokerage firm to perform trades for customer -can have hundreds of customers

Non-Managed Fee-Based Accounts

-Prior to opening a NMFBA for either a new or existing customer, the member firm must provide the customer with a disclosure document describing these accounts and how the fees are computed

Federal Reserve Margin Rules Set under Reg T

-Reg T only applies to non exempt securities (NOT US GOVT OR MUNIS) -Reg T controls credit from broker to customer industry minimum maintenance margin

FINRA/NYSE Rules

-Rule 407 requires prior written employer consent by a series 9,10 or 24 -If employee of another NYSE member wishes to open a cash or margin account, duplicate confirms and statements must be sent to employer member

Municipal Securities Suitability

-Similar to FINRA rules -Tax status as well was state of residence must be asked -recommendations cannot be made without the disclosure of financial status -can execute trading that is considered unsuitable at specific direction of customer (marked as "unsolicited")

4 Items chosen in any Trade

-Size of Trade -Security -Price of execution -Time of execution

New Account Form

-The information required on anew account form would depend upon the type of security that will be traded

UGMA

-Uniform Gifts to Minor's Act: any adult can open account for minor -all securities must be registered in name -cash balances can't be held for extended periods

FINRA Rule 2090- Know your customer rule

-Use due diligence to know and retain the essential facts relative to every customer -Does not specify exact into that must be obtained

Complaint Definition

-Written customer complaints must be "forwarded" by the rep to the manager for resolution

Partenership Account

-copy of partnership agreement must be obtained -if the account is for a limited partnership the only signature required to open the account is that of the general partner

Higher level of scrutiny for customer suitability needed for

-customers from a different country that are not a member of the Financial Action Task Force -reside in countries that have bank secret laws -When opening an account a firm must independently verify customers name and address

4 main components of suitability

-reasonable basis -customer specific -quantitative suitability

Order Department

-receives orders from registered rep -verifies order and transmits order to exchange or etc for execution -sends copy back to registered rep and forwards copy to purchase and sales department

Prohibited Practices

-unsuitable trades for the account -too frequent trades in account -trades of excessive size for account

Unacceptable forms of opt out notices

-writing a letter exercising his opt out right -having customer use check boxes only included in original form

Defines 3 Types of Accounts

1. Cash 2. Margin 3.Arbitrage Account

Hypothecaton

A pledge of the securities that are purchased by the customer to brokerage firm -loan is called the debit balance

How often must firms monitor account activity to maintain written procedures for contacting customers?

At least every 12 months

SEC Regulation SP

Broker dealers and other financial institutions must provide a to retail customers a notice of firm's privacy policies and practices -firms must deliver an initial privacy notice to new customers when the account is opened and an annual privacy notice to all customers -Firms cannot divulge non public info about customers to 3rd parties unless firm has given notice to the customers of this intent and the customer has not elected to opt out

Mail holding

Can be held for 3 months, if customer requests this in writing -if longer than 3 months, customer's written instructions must include an acceptable reason for this

Patriot Act

Congress passed the providing appropriate tools required to intercept and obstruct terrorism act after 9/11 -used for money laundering

Regulation T

Controls credit from broker to customer -sets initial margin for securities and basic account procedures for collection of moneys -ONLY FOR NON EXEMPT SECURITIES

Account Profile Info

Customer must receive a copy of this for verification within 30 days of opening account -must be sent every 36 months thereafter

Arbitration Agreement

Customers do not have to sign the arbitration agreement, but many firms require this as a policy -FINRA requires that within 30 days of signing the customer must be provided with a copy and the customer must sign a statement acknowledging the receipt

What must a customer sign?

Discretionary accounts

Non-FINRA firm Rules

If an employee of a broker-dealer opens an account at a non member financial institution or non-member investment adviser, FINRA requires that employee must notify employer prior to execution of initial transaction

Reasons for delaying an Account Transfer

If customer has a proprietary "in house" mutual funds position and it isn't sold by other broker-dealers

Firm AML Policy

Includes know your customer -3 ares of suspicious activity 1. wire transfers 2. deposits 3. monetary instruments

Specific Rules for ETNs

Main consideration is risk of default

MSRB Rules

Mandates duplicate confirms sent

Proxy Department

Margin customers securities are held in street name brokerage firm mails voting materials to beneficial owners of the stock

What orders can be accepted without a written power of attorney?

Market-Not Held orders

FINRA Suitability Rule 2111

Must have reasonable basis to believe that a recommendation is suitable for the customer based on the info obtained

Retention of Records

New account forms must be retained for as long as the customer remains at the firm and then 6 years after the account is closed

Death of Partner

No orders can be accepted until the partnership agreement is amended

Reorganization Department

Notifies customer of takeovers or tender offers or bonds being called -any unusual situation affecting customer should be communicated by this department

What is marginable?

Only actively traded securities

Prudent Man Rule

Only investments that would be made by a prudent individual are allowed

Death in a JTWROS or TOD

Only need certificate of death -Registered owner names beneficiary to whom the security will be transferred

Cash Account

Payment made promptly but no later than 5 business days after trade date -S+2 -if payment not collected firm may ask for Reg T extension from FINRA (usually 3 days) -if still not paid firm must sell out position

Purchase and Sales Department

Preps customer confirm to be sent no later than business day after trade; trade is recorded in firm's purchase and sales ledgers

CBOE Rules

Prior consent must be obtained -duplicate confirmations and statements must be sent

Cashier

Receives and delivers cash and securities

Customer Buys

Reg T requires payment promptly but no later than 5 business days

Margin Department

Responsible for keeping customer account records; keeps record keeps record of all stock positions debit and credit balances in customer accounts

License needed for FINRA

Series 24

License Needed for Options (ROP)

Series 4

License needs for Munis

Series 53, 54, 24, or 9/10

License for FINRA Branch Manager

Series 9,10

Options Agreement

Signed 15 days after account is opened whereby the customer agrees to the transactions that are allowed to be performed in his/her options account

Arbitrage Account

Simultaneously buying and selling short the same security -net position is always zero so there is no risk -customer would short against the box in this account -no reg t margin; minimum set by FINRA is 5%

Initial Margins Set by Reg T: Short position

Stock= 50% Options= 20% of mkt value of underlying security LEAPS= N/A

Initial Margins Set by Reg T: Long Position

Stock=50% Options=100% premium LEAPS/Index LEAPS=75% of premium until contract has 9 months to expiration- then 100%

Broker dealer must file (for suspicious things)

Suspicious Activity reports with the Financial Crime enforcement network within 30 days of suspicious activity

OFAC List of SDNs

The office of foreign assets control maintains an SDN list of named countries, organizations and individuals with whom anyone in US is prohibited from doing business

FINRA suitability

There is a general know your customer rule, requiring that any security recommended is a suitable investment for the person

FINRA Investment Profile

Think of what TradeKing Asked

Note that if a person does not have an account and simply wants to sell some securities then have a check remitted...

This person is a consumer not a customer and only gets privacy notice at time of transaction

UTMA

Uniform Transfers to Minors Act -Similar to UGMA except UTMA allows any type of gift, including real estate -Allows set transfer age

SIPC Notice

When the account is opened, customers are advised in writing about SIPC which insures customer accounts against broker-dealer failure

Suitability Evaluation

looks at customers -Investment objectives -trading experience -institution -age, marital status and number of dependents

Customer Identification Program (CIP)

put in place to impede terrorists from having bank/ brokerage accounts in the US from which the could transfer funds

Fee based accounts...

that do not impose a per transaction commission charge are considered advisory products