Customer Accounts

Financial Institutions Investing

Financial Institutions are generally required to invest either using a Legal List provided by some States or conservatively under the Prudent Man Rule

Individual Accounts

Accounts that are opened for one person only. Sometimes the individual is referred to as a "natural person," which means that the entity is not a corporation or organization

"Essential Facts" Defined

"Essential Facts" are defined as those that allow an RR to: 1) Effectively service a customer's account 2) Act in accordance with special handling instructions for the account 3) Understand the authority of any person acting on behalf of a customer (e.g. a power of attorney) 4) Act in compliance with applicable laws, regulations, and rules

"Cold Calling Act"

1) Call Hours - Telephone solicitations may be placed only between the hours of 8 a.m. and 9 p.m. local time of the party called 2) Contact Info - The caller must provide the called party with the identity of the caller and a telephone number or address at which the caller or firm may be contacted 3) "Do Not Call" List - If the people being called indicate that they DO NOT WANT TO BE CALLED IN THE FUTURE - Firm making the calls must maintain such phone numbers on a permanent in-house "Do not call" list and compare to the national "Do not call" list 4) Account # Encryption - The firm making telephone solicitations must have a written policy available on demand for maintaining a "Do not call" list. - Customer account numbers must be encrypted 5) Informed & Trained - Personnel engaged in telephone solicitations must be informed and trained in the existence and use of the "Do not call" list 6) Call Automation - Auto-dialing used in conjunction with pre-recorded messages is prohibited to residences, health care facilities, and radio common carriers 7) "Junk Fax" Ban - A fax sent to a customer must contain all of the following inofrmation: * The date and time that the fax is sent * The identity of the sender, and * The telephone number of the sender - It does not require that the number of pages in the fax be included 8) Prior Business Relationship - If a prior business relationship with the person being called exists, the "no call" restriction does not apply Note: - "Prior business relationship"- the person contacted has an account with the person making the call and that there has been some form of activity in the account (trade, interest, etc.) during the last 18 months 9) Non-Profit Organizations - These rules do not apply to non-profit organization 10) Wireless Telephone #s - The provisions set forth in this rule are applicable to members who make telephone solicitation calls to wireless telephone numbers Note: - A member firm may outsource telemarketing functions, but the firm remains responsible for ensuring compliance with all provisions of the telemarketing rules 11) Unregistered Cold Callers - Limited in what they may do with respect to solicitation of customers because they lack the appropriate registration They can: - Send investment literature to prospects - Set-up appointments for prospects with the registered representative - May extend invitations to firm-sponsored events Note: - They CANNOT pre-qualify or profile prospects

Broker-Dealer Failure Procedures

1) Customer Entitlement - Customers are entitled to obtain any securities registered in their name 2) Liquidation Expenses - The firm pays liquidation expenses 3) Customer Claims - Remaining assets are availabe to satisfy remaining portions of customer claims 4) SIPC Protection - Up to $500,000 per seperate customer for cash and securities - No more than $250,000 (formerly $100,000) may be paid for a cash claim 5) Claim Exceeds the Maximum - The customer becomes a general creditor of the firm and securities will be settled at the market value on the date that a Federal Court was petitioned to appoint a trustee

Signatures, Approval, & Recordkeeping

1) Form Signature - Once the registered rep has completed the New Account Report form with the customer it must be signed by the Branch Manager or Principal - However, the Registered Rep and the customer do not need to sign the form 2) Final Approval - Final approval of new accounts is the responsibility of the member firm, as evidenced by the signature and approval of a principal executive officer or partner 3) US PATRIOT Act - Requires, as a minimum: * customer's full and true name * date of birth * street address * taxpayer identification number - If a customer refuses to submit this required information, the account should not be opened 4) Account Updates - Customer Accounts must be updated by the member firm every 36 months 5) Closed Account Info - Customer Account Information must be maintained for 6 years after the account is closed

Profile Changes

As the customer's account profile changes, the RR must update records to reflect those changes Updates are required for changes in the customer's: - Employment - Income - Address - Investment objectives - Securities positions

SIPC Facts

1) It is a non-profit organization 2) Membership consists of registered broker-dealers 3) SIPC is NOT an agency of the U.S. Government 4) SIPC does not cover claims relating to commodity accounts 5) The protection it provides is limited to certain amounts

Fiduciary Account Considerations

1) Trading Authority - A fiduciary cannot typically grant trading authority to a third party 2) Margin Account - If a fiduciary wants to open a margin account, the fiduciary must present documentation to the broker-dealer stating that margin trading is permitted 3) Prudent Investor Rules - These accounts must adhere to the Prudent Investor Rules which require investments to be low-risk conservative investments 4) Account Profits - the fiduciary cannot share in the profits of the account

Customer Profile Considerations

A RR should consider the following when determining a customer's financial profile: 1) Temperament 2) Marital Status 3) Number of dependents and educational needs 4) Equity in their home Terminal Illness - If a client is terminally ill, you should advise the client to see a tax attorney for estate tax advice

Prime Brokerage Account

A bundled package of services offered by broker-dealers to hedge funds, other broker-dealers and institutional investors that use aggressive trading strategies Services May Include: - Securities lending - Centralize trade processing (settlement) - Calculating an "absolute return" (total return) for the hedge funds A prime brokerage agreement is needed to open a prime brokerage account

Sole Proprietorship

A business owned by an individual No legal filings are required except for a "DBA" (Doing Business As) for the use of a fictitious name

Corporate Accounts

A corporation which opens a securities account must provide a Certified Copy of the Corporate Resolution and Articles of Incorporation and may require a copy of the Corporate Bylaws or Charter. this demonstrates that the corporation may engage in securities transactions Corporate Resolution - A document from the Board of Directors of the corporation and authorizes a specific person or persons to enter orders on behalf of the corporation Required Documents - Must be completed whether the corporation opens a cash or margin account Affidavit of Domicile - Corporate accounts do NOT require an Affidavit of Domicile

Unincorporated Association

A group of two or more individuals who voluntarily enter into an agreement to form an organization for a common purpose An important factor with unincorporated associations is that members have unlimited personal liability for any legal action taken against the association

Fiduciary

A person vested with legal rights and powers to be exercised for the benefit of other persons Examples include: 1) Trustees 2) Executors 3) Administrators 4) Guardians 5) Custodians 6) FBO- for the benefit of

Investment Adviser

A person who is in the business of giving investment advice for compensation (management or wrap fee-based business), not for the execution of transactions (commissions by RRs). - Anyone who receives compensation for giving advice must be registered as an Investment Advisor under the Investment Advisers Act of 1940 - Management fees charged by Investment Advisers may be different for each Investment Adviser and fron fund to fund

Advantages/Disadvantages of Sole Proprietorship

Advantages - No or low start up and maintenance costs - Losses may be used to offset income for tax purposes Disadvantages - Unlimited personal liability - Must pay self-employment tax - Sole proprietors are responsible for running the business, including recordkeeping responsibilities

Investment Risk Tolerance

All investing involves risk. Different investment products and strategies involve different degrees of risk. The higher the expected returns of a product or strategy, the greater the risk that you could lose most of your investment. 1) Conservative - Preservation of initial principal in this account, with minimal risk. Current income is desired, but preservation of principal is more important 2) Moderately Conservative - Willing to accept low risk to initial principal, including low volatility, to seek a modest level of portfolio returns 3) Moderate - Willing to accept some risk to initial principal and tolerate some volatility to seek higher returns; could also lose a portion of the money invested 4) Moderately Aggressive - Willing to accept high risk to initial principal, including high volatility, to seek high returns over time, and understand I could lose a substantial amount of the money invested 5) Willing to accept significant risk to initial principal in to achieve maximum returns, the customer could lose most, or all, of the money invested

Institutional Investor Suitability Exemption

An exemption to customer-specific suitability regarding institutional investors An institutional investor may exercise independent judgement: - On a trade-by-trade basis - On an asset-class-by-asset-class basis - In terms of all potential transactions for its account

Non-Managed Fee Based Account Programs

Arrangements in which no investment advisory services are provided by the member firm and in which customers are charged a fixed fee and/or percentage of the account's value rather than transaction-based commissions Fees and Costs - All fees and costs associated with the account must be disclosed before the account is established Opening An Account - Customers who want to open a non-managed fee-based account must receive a full description of the services they provide and a list of eligible assets available to the account Excessive Trading - The firm must have procedures in place which monitor these accounts for possible "excessive" trading

Requests to Transfer Customer Accounts

Automated Customer Account Transfer Service (ACATS) - Facilitates the transfer of customer accounts from one brokerage firm to another - Transfer must be completed in 3 business days following validation - Validation of the transfer instructions must occur within 1 business day Transfer to New RR - If a client wants to transfer his account to a different RR in the same firm, the new RR must review and update the customer account form - The new RR must treat the account as a new customer and update the customer's profile - Once the review and update are completed the RR can make appropriate recommendations Continue Trading - When an account will be transferred, trading can continue until the new firm begins the transfer process

Exemptions from IA Registration

Banks Lawyers Accountants Teachers Engineers - Anyone who gives advice as an incidental part of their profession or does not charge a seperate fee

New Account Report Form

Before your customers can conduct a securities business with your firm, they must open an account by completing a new account report form Integral to "KYC" - The new account report form plays an integral role in the "know your customer" process FINRA "Know Your Customer" Rule - "Every member shall use reasonable diligence, in regard to the opening and maintenance of every account, to know and retain the essential facts concerning every customer and concerning the authority of each person acting on behalf of such person." (Rule 2090)

Account Authorizations

Changes to Orders - Once an order has been entered, any change or correction to the order requires the approval of the branch manager or supervisor Requests By Spouses - A RR cannot accept a withdrawal order from a spouse of a customer without written authorization from the account holder privides written authorization - Note that regarding withdrawals, the check must be made out to the account holder only, not the spouse Letter of Authorization (LOA) - Allows for the transferring of a customer's cash and/or securities Street Name - If a customer has fully paid securities being held in the name of the broker-dealer (street name), they must be informed that the securities may be registered in the customer's name if the customer decides they want the securities registered

Diligence in Opening Accounts

Collection of the following customer information demonstrates diligence in opening customer accounts: 1) Investment objectives 2) Employment status 3) Estimated annual income from all sources 4) Estimated net worth (exclusive of family residence) 5) Estimated liquid net worth 6) Marital status and number of dependents 7) Age

Other Customer Account Considerations

Commissions - Registered Representatives are never allowed to return a percentage of commissions earned while executing transactions for customers Bankruptcy - If an RR discovers that a client has filed for bankruptcy, the RR should cancel all open orders to buy and sell Direct Registration System (DRS) - Provides for electronic direct registration of securities in an investor's name on the books for the transfer agent or issuer, and allows shares to be transferred between a transfer agen and broker electronically - Provides investors with an alternate approach to holding their securities in certificate or "street" form - Under DRS, investors can elect to have thier securities registered directly on the issuer's records in book-entry form Dementia - If the customer develops dementia so that he cannot handle his affairs, a court order will be required for the RR to take orders from a third party

The Custodian

Custodial Property - Must turn over all custodial propety to the minor when the minor reaches age of majority. Legal title is vested in the minor and cannot be revoked Best Interests of the Minor - Must manage the account for the best interests of the minor which could include purchase and sales of securities as well as the exercising of the subscription rights Custodial Property Management - Is empowered to collect, hold, manage, invest, and reinvest custodial property as the custodian deems advisable, generally seeking capital growth Custodial Property Discretion - May use the custodial property for support, maintenance, education, and general use and benefit of the minor Receiving Compensation - Is usually permitted to receive compensation for reasonable services (unless he is the donor) and reimbursement for necessary expenses Control Over the Minor's Account - the custodian retains control over the minor's account until either: * the minor attains age of majority in which case the cash and securities remaining will be distributed to the individual * The custodian is removed by a court order * The custodian dies. If the custodian dies, a successor custodian will be appointed * If the minor dies, the remaining proceeds will be payable to the minor's estate Legal Guardian - If the custodian is someone other than a child's legal guardian, the guardian cannot exert any control or enter orders in the account Checks - Can never be drawn on the account in the custodian's own name Transactions - May only be executed by the custodian

Pattern Day Traders

Customers who execute four or more day trades within 5 business days, and generally do not keep positions overnight Day Traders: - Minimum Equity * Must have a minimum equity of $25,000 "Timing Risk" - Are more concerned with market "timing risk" Inflationary Risk - Are least susceptible to inflationary risk because they close all positions daily

The Donor

Donor - Must be an adult - Appoints the custodian for the account. The donor is permitted to designate himself as custodian Securities or Cash - May give any kind of securities or cash, including mututal fund shares. When gifting securities, only fully paid securities may be gifted Gift Size - Any amount may be given. There is no limit on the size of a gift When Making a Gift Under this Account - The donor should consider: * Completion of the transaction accurs when the securities are registered in the name of the custodian for the benefit of the minor * The age of the person to whom the gift is made * The gift is completely irrevocable * Certain states permit gifts of money, life insurance policies, and annuity contracts Last Will & Testament - The donor cannot make a gift through his last will and testament (inheritence) No Capital Gains Taxes - The donor does not pay capital gains taxes on the donated securities

The Custodian Account

Each UGMA Account May Only Have: - One person as a custodian- joint custodians are not permitted - One minor as beneficiary- multiple beneficiaries are not permitted on the same account Opening Account - The account is opened with the minor's social security number, not the donor's or custodian's. Taxes due are paid by the minor New Gifts Only - Only new gifts permitted. Property already owned by the minor may not be given Stock Certificates - Must be registered in the name of the custodian, not as trustee or guardian. The registration of the securities completes the gift No Margin Accounts - Margin accounts are not allowed for minors- securities may not be purchased on margin. Short sales are not allowed in UGMA accounts Cash Proceeds - Cash proceeds from sales or dividends may be held in a custodian account for a reasonable period if they are reinvested Minor's SSN - The transfer agent is given the minor's social security number, not the donor's or custodian's SSN Unearned Income - Over amounts specified by the IRS (Kiddie Tax) for a child under 18 will be taxed to the child at the rate at which it would be taxed at the parent's top marginal rate if that rate is higher than the child's rate

What Constitutes a Recommendation?

FINRA does not define what constitutes a recommendation, but has provided guidance. FINRA has stated that determining whether a recommendation has been made depends on "the facts and circumstances of the particular case." Instances when an explicit recommendation to... - Buy a Security - Sell a Security - Hold a Security When No Explicit Call to Action - "the facts and circumstances of the particular case" will be how FINRA determines if a recommendation has been made

Member Firm Obligations to Seniors

FINRA has published guidance on what they believe is the proper handling by members of senior customers The following are some of the considerations when handling accounts of senior customers: 1) Designate a specific individual or department to serve as central advisory contact for questions about senior issues 2) Provide employees with written guidance on senior related issues 3) Offer training to help RRs understand and meet the needs of older investors 4) Determine at the opening of the account whether the customer has an executed durable power of attorney Note: - If an elderly customer develops dementia, the RR or a relative of the client would have to acquire a court apporoved Guardianship- not a Power of Attorney. A Power of Attorney can only be signed by a person of "sound mind." 5) Ask the client to designate a secondary or emergency contact for the account 6) Ask the client if he or she would like to invite a friend or family member to accompany the customer appointments 7) Members must inform the customer that unsolicited trades placed by the customer with the member firm may be unsuitable- if that is the case 8) The following may be considerd to be inappropriate investment recommendations when dealing with senior investors: - Reccomending products which inlude withdrawal penalties or lack liquidity (defered variable annuities, etc.) - Variable life products or settlements - Complex structures products such as collateralized debt obligations (CDOs and CMOs) - Home equity loans to be used for other investments - Taking early withdrawals from retirement plans to invest in high risk investments 9) High pressure sales seminars and tactics are prohibited especially when they are aimed at senor such as "limited time offer" or "you have to sign up today." 10) Generally, when making recommendations to senior investors, a registered rep should take into consideration the client's status and the possible inflation risk of any investment product 11) Registered Representatives may use a "Senior Designation" such as "retirement specialit" if the RR is currently an accredited member of a national accreditation organization - CRPC (Chartered Retirement Planning Counselor) - CFP (Certified Financial Advisor) - Use of such designation requires the firm's approval

Financial Advisor Fee-Based vs. Commission-Based

Financial Advisor Fee-Based - Accounts * Charged a flat fee, usually based on a percentage of assets in the customer's account. * One-time or ongoing fee - Advisor Compensation * Have an incentive to grow their client's portfolio in size, as they would get paid more as a result Financial Advisor Commission-Based - Accounts * Customers are charged on a per transaction basis - Advisor Compensation * Paid to trade securities and, as a result, are motivated to increase the number of transactions they execute

Investment Clubs

Groups of individuals that pool their money together and may choose any investment strategy that the group agrees on- conservative or speculative. Investment clubs do not qualify for breakpoint discounts from mutual funds

Mitigation of Risk- Hedging

Hedging - Hedging is used to offset the risk of a particular investment or strategy

Holding Mail

Holding mail for a customer who is traveling is permitted if the firm receives written instructions from the customer that includes the time period the firm is requested to hold the mail Time Period - Longer than 3 consecutive months, the instructions must include an acceptable reason for the request - Convenience is not an acceptable reason Note: - The minimum holding period is 3 consecutive months, but more than one holding period can occur within a year, provided non of the holding periods exceeds the 3-month maximum

Proxy characteristics

If a broker-dealer receives a proxy concerning a customer's security being held in street name, then the broker-dealer must send the proxy to the customer promptly Equity Securities - The member must forward all proxy material annual reports, information statements, and other material furnished by the issuer Debt Securities - The member must make reasonable efforts to forward any communication or document pertaining to the bond issue that has been prepared by or on behalf of the issuer Reimbursement of costs - FINRA rules allow member firms to be reimbursed for forwarding these materials to their customers - Costs associated with the mailing of proxies directly by the issuer to the customer are paid by the issuer and not the customer Note: - Member firms do not have to send proxy materials to an ERISA plan fiduciary Member Organization - A member organization, which has not received voting instructions from the beneficial owner of the security by the date specified in the proxy material, may vote the shares on behalf of the beneficial owner provided the matter to be voted on does not involve: 1) a merger or consolidation 2) A proxy contest 3) Appraisal rights concerning a security

Death of a Customer

If a customer dies, the RR must: - Cancel all open orders (this is always the first action taken) - Freeze the account and note that the client is deceased - Await instructions from the estate's representative - Obtain an affidavit of domicile In order for an executor of the estate to transfer funds they must obtain an Affidavit of domicile, a certified copy of the Death Certificate, and abide by the instructions in the last Will and Testament of the deceased person Note: - The RR must NOT liquidate or churn the account Partnership Accounts - If one of the partner dies, the RR should freeze the account because a partnership is legally dissolved at the death of a partner

USe of Investment Advisor

If a customer wants duplicate copies of his confirmations and statements sent to his Investment Advisor, the request would have to be made in writing by the customer and the customer would have to provide the name and address of the investment advisor When a firm accepts orders from Investment Advisors on behalf of client or clients, the IA is allowed to make "allocations" of their orders to client accounts Such allocations must be received by the firm by noon on the business day following the trade Such allocations are not allowed for Registered Representatives trading on behalf of customers

Erroneous Trades

If a mistake is made and a trade is erroneously reported, the customer must pay the actual price at which the trade was executed If an RR is given a bad report, the RR should contact their supervisor immediately

Discretionary Authority

If customers want to grant authority to their registered representative to make investment decisions on their behalf, they must open a discretionary account Prior to Executing Discretion - The RR must obtain prior written authorization on a discretionary account agreement, designating that the RR (or another person) is authorized to trade in the account, and obtain the firm's approval

Officers of Financial Institutions

If the President of a bank or officer of any financial institution wishes to open a margin account, they would have to... Complete a New Account Report Form Sign a margin agreement or hypothecation agreement Would not be required to otain authorization from the bank's board of directors

Community Property

In certain states, all assets acquired after becoming married, either acquired individually or as a couple, are owned equally by both persons, regardless of whose name appears on ownership titles Spouse - May have claim to assets under community property laws, but if the spouse's name does not appear on a securities account, FINRA regulations do not permit them to trade or withdraw assets without authorization Gifts & Inheritances - May be not subject to community property laws if only one person is named After Marriage - Income, assets, and debts incurred after marriage are all subject to community property laws - Student loans incurred prior to marriage are excluded

Recommended Strategy

Includes an investment strategy involving a security or securities with an "explicit" recommendation to hold a security However, excluded from this rule, as long as they do not include a "recommendation" of a particular security or securities would be: 1) General financial and investment information - Basic investment concepts - Historic differences in the return of asset classes based on standard market indices - Effects of inflation - Estimates of future retirement income needs - Assessment of a customer's investment profile 2) Descriptive information about an employer-sponsored retirement or benefit plan - Participation in the plan - The benefits of plan participation - The investment objectives available under the plan 3) Asset allocation models that are: - Based on generally accepted investment theory - Accompanied by disclosures of all material facts and assumptions that may affect a reasonable investor's assessment of the asset allocation model or any report generated by such model - If the asset allocation model is a covered "investment analysis tool" 4) Interactive investment materials that incorporate 1, 2, or 3

Benchmarks and Indices

Integral part of measuring investment performance Asset Classes - Benchmarks vary and are used for many asset classes such as stocks, bonds, and commodities Point of Reference - They are a point of reference to measure investor's portfolio or security returns Benchmark Types - A benchmark can be an interest rate, the value of a group of stocks, or bonds Most Common - the most common benchmark are indices, with the S&P 500 the most common benchmark that stock portfolio managers track

Components of Return

Interest - Money paid by the bond issuer to the bond holder - Modt fixed income securities pay interest- typically on a quarterly basis for preferred stock and semi-annually for bonds - Issuers can be corporations, federal, state and local governments. Issuers of interest paying fixed income securities are obligated to make interest payments Dividends - Usually cash payments made by corporations to their shareholders - They are typically paid on a quarterly basis - However, unlike interest payments, corporations are not obligated to make dividend payments Realized/Unrealized Gains or Losses - Refer to the change in value of the holdings in an investor's account - It is classfied as realized or unrealized depending on whether the investor has sold the security Return on Capital - Broad term to describe what investors make or lose on their investment - For bondholders it's the interest they receive and for stockholders it's the dividends - When they sell their investment, the profit or loss of that sale would be included in their return on capital calculation

Join Accounts

Joint Tenants with Rights of Survivorship (JTWROS) - An account for two or more people, generally a husband and wife - Upon the death of either party, the surviving tenant becomes the sole owner of the securities - The surviving tenant must present a death certificate and an affidavit of domicile (certifies the decendent's place of residence at the time of death) and then the securities can be registered in the name of the surviving tenant - In handling a joint tenant with rights of survivorship account: * 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 the correspondence * All checks must be drawn payabe to the owners of the account (both names) Tenants in Common - In a tenancy in common, if one of the tenant dies, his interest will pass to his estate and not to the other joint owner - There is no right of survivorship in a tenancy in common - Either owner can place orders Transfer on Death (TOD) - Upon the death of an individual investor, or the last surviving account owner in a joint account, the assets in the account are passed on to beneficiaries according to the written TOD agreement, thus eliminating the need for probate - Beneficiaries remain responsible for any estate taxes - Assets NOT eligible for a TOD include Limited partnership interests, precious metals, variable annuities, fixed annuities, and commodities - A TOD is used for basic securities including stocks, bonds, and mutual funds Note: - A TOD is appropriate for an investor who wants to leave securities to a specific person but maintain control of the assets while they are alive

Proxies (absentee voting) Defined

Legal authorization for one party to act on the behalf of another. Shareholders who do not attend a company's annual shareholder meeting can elect to vote their shares via a proxy

Limited Partnership Accounts

Limited Partnership Accounts - Require the signature of the General Partner(s) when establishing a new account - Do not require the signature of each limited partner since the general partner(s) manage(s) and controls the partnership Note: - In other accounts with multiple owners the signatures of all owners who will be authorized to trade the account must be obtained

Limited Trading Authorization Limited Power of Attorney vs Full Power of Attorney

Limited Trading Authorization Limited Power of Attorney - Gives a registered rep the right to make purchase and sale decisions for the account - RRs cannot withdraw any cash or securities from the account - Checks must be disbursed payable to the owner of the account Note: - When a power of attorney is granted, the RR must know essential facts anout both the customer and the agent that is granted the power of attorney Limited Trading Authorization Full Power of Attorney - Allows a registered rep to make purchase and sale decisions for the account and also withdraw cash or securities from the account - An approved discretionary account does not mean that the registered rep has unlimited trading privileges

SIPC Information Requirement

Member firms are required to advise all new customer in writing at the time that the account is opened and annually thereafter that they may obtain information about SIPC, including the SIPC brochure, by contacting SIPC and providing SIPC's website address and phone number

New Account Report Form Requirements

New account report forms must contain the following information: 1) Customer's name- complete customer name, and any titles - A broker cannot open an account in the name of a person - The account name must match the name that appears in the account documentation - New accounts may not be opened in the name of a third party, an alias, or a minor - Numbered Account- If a customer wants to open an account bearing only a number or symbol rather than his or her name, the customer must submit a written statement attesting to the ownership of the account - This statement will be kept on file by the broker-dealer. A number or symbol would be allowed but NO FALSE NAMES 2) For an individual, a residential or business street adress - For an individual who does not have a residential or business street address, an Army Post Office (APO) or Fleet Post Office (FPO) box number - If an APO or FPO is used, the customer does not need to provide another address. A post office box is not a valid address but can be used for mailing purposes - If an individual does not have a residence, APO, FPO, or business address, the residence or business address of a next kin or another individual contact may be used 3) Email address 4) Telephone numbers- residence, business, & mobile 5) Annual income, net worth, and bank references (excluding primary residence) 6) Occupation and employer 7) Whether the person is a citizen 8) Date of Birth 9) The customer's social security number or Tax ID number. For non-U.S. Citizens, a tax ID, passport number or alien ID is sufficient 10) Customers must provide government issued photo ID and it must be verified that the customer does not appear on a terrorist list 11) The identity of the associated person(s) (RR) responsible for the account 12) Trusted Contact Person- This is optional. FINRA Rule 4512 states that a "trusted contact person" can be provided at the time of account opening if the customer chooses - Authorizes the firm, at its discretion, to contact the trusted contact person to: * Disclose information about the customer's account to address possible financial exploitation * Confirm the specifics of the customer's current contact information * Discuss the customer's health status * Identify any legal guardian, executor, trustee or holder of a power of attorney on the account Note: - Firms do not need: * the names of other broker-dealer firms or * the educational background of the customer * the tax return or tax bracket for the previous year * designation of beneficiaries

Responsibilities

Once an account has been opened the RR must manage many customer account issues and requests as part of his or her professional responsibilities All transactions in a customer's account must be reveiwed and initialed by a principal or supervisory person of the broker-dealer

Order Ticket

Order tickets must indicate: 1) Buy or Sell 2) Number of shares 3) The security 4) If the order is for a discretionary account 5) The account number 6) Time the order was entered 7) Time the order was executed (if available) or cancelled 8) Any terms and conditions of the order Note: - Order tickets do not have to indicate the name of the Designated Market Maker or market maker who executed the trade or if the account is a cash or margin account

Mitigation of Risk- Portfolio Rebalancing

Portfolio Rebalancing - Most portfolios are constructed according to an asset allocation that meets the investment objectives and risk appetite of the investor

Customer Account Statements

Quarterly Statements - Customers must receive statements of their accounts at least quarterly Statements Must Disclose - Current securities positions in the account - Any and all money & debit balances - Any activity such as margin interest, interest, and dividend payments Note: - The statements would not be required to show the original price paid for the securities or year to date income in the account

Components of Suitability Obligations

Reasonable-Basis Obligation - Requires a member or associated person to have a "reasonable basis" to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors - In order to satisfy reasonable diligence the member or associated person must have an understanding of the potential risks and rewards associated with the recommended security or strategy - The lack of such an understanding when recommending a security or strategy violates the suitability rule Customer-Specific Obligation - Requires that a member or associated person have a reasonable basis to believe that the recommendation is suitable for "a particular customer" based on that customer's investment profile Quantitative Suitability - Requires a member or associated person who has actual or de facto control over a customer account to have a reasonable basis for believing that a series of recommended transactions, even if suitable, when viewed in isolation, are not excessive and unsuitable for the customer when taken together in light of the customer's investment profile - Considerations for excessive activity include: * The turnover rate * The cost-equity ratio * Use of in and out trading

Cost Basis

Refers to what an investor paid to purchase an investment If an investor buys 100 shares of stock at $50 per share, the investor has a cost basis of $5,000. The cost basis is needed to determine the investor's tax liability upon realization of a gain or loss when the stock is sold. The following items can affect cost basis: Stock Splits Stock Dividends

Revenues & Trustees

Revenues - SIPC obtains its revenues by assessing broker-dealers a percentage of their gross revenues or by a nominal annual assessment depending on the level of the SIPC fund SIPC Trustee - If a broker-dealer fails, the local Federal District Court will appoint a SIPC Trustee to liquidate the firm. - The SIPC Trusteee is responsible for: * The orderly liquidation of a failed firm * Distribution of customer securities * Notifying customers of a firm in SIPC liquidation

Mitigation of Risk- Diversification

Risk is inherent to investing. It can be mitigated by employing any of the following strategies: Diversification - Spreads the risk across several asset classes

Securities Investor Protection Corp.

SIPC - Created by the Securities Investor Protection Act of 1970 for the purpose of protecting public customers against the risk of loss due to the failure of a broker-dealer

SPIC Protection Provided

SPIC provides protection on a seperate customer basis, not on a per account basis

Confirmations

Sending Confirmations - Confirmations of transactions must be sent out to customers at or before the completion of any transaction in any security effected for or with the account of a customer - All customers must be sent confirmations whether they are individual customers or institutional customers - Such confirmation must disclose the settlement date of the transaction and disclose if the security is callable Note: - This requirement does not apply to Direct Participation Programs Broker-Dealer Capacity - Confirmations must show the capacity in which the broker-dealer acted - The broker-dealer may have acted as the customer's agent, agent for another person, bona fide market maker, or as principal Prepared to Furnish Transaction Info - When acting as a broker, the member firm must furnish or be prepared to furnish information as to the date and time of the transaction, the source and amount of commission received by the member from all sources, and the identity of the purchaser or seller Disclose Markup - A member must disclose the amount of a markup charged to a customer if it is not a market maker and engages in a riskless or simultaneous transaction with the customer DK Notice - When trade comparisons between broker-dealers do not match (such as a price discrepancy), a DK (Don't Know) notice is sent to the confirming broker-dealer Duplicate Confirmations - If a customer requests that duplicate confirmations and statements be sent to an Investment Advisor, the firm must keep on file the written notice of the request along with the Investment Advisor's address

Cold Calling

Telemarketing -To build their customer base, registered reps can make unsolicited telephone calls to potential customers. This practice is regulated by Federal and FINRA rules

Investment Objectives

The RR needs to understand what the customer investment objectives are as these can vary significantly from customer to customer - Preserve wealth - Fund retirement or educational needs - Generate current income - Grow wealth over time - Speculation

Types of Investment Risks

The degree of risk varies depending on the investment product or security. As an RR you must be able to understand and explain those risks to your customers 1) Capital Risk - The risk of loss of the principal value of an asset or security 2) Interest Rate Risk - A loss of market value on fixed income securities because of a rise in competitive interest rates, especially on securities with long-term maturities 3) Inflationary Risk - a.k.a Purchasing Power Risk - The risk of loss of buying power, especially on fixed income securities with long-term maturities - If an investment value decreases and the income decreases, the investor's purchasing power would also decrease 4) Liquidity Risk - The risk that an investor will not be able to sell or liquidate a security at the fair market value. - Thinly-traded stocks and DPPs are examples of securities that have greater liquidity risk as compared to a Blue Chip common stock. 5) Systematic Risk - A securities market risk common to all securities of the same general class and therefore cannot be eliminated with diversification 6) Non-Systematic Risk - Company specific risk, meaning that the value of a single investment choice wil decline. - Non-systematic risk can be minimized with diversification 7) Credit Risk - The risk that a company will declare bankruptcy or financial obligations won't be met 8) Economic & Social Risk - Generally refers to how domestic and world affairs affect investments as well as fiscal and monetary policies 9) Risk/Reward Relationship - Greater the risk, greater the reward - The less risk, the less the reward 10) Reinvestment Risk - The risk that interest rates will decline and income received from existing investments will earn less when reinvested than the original investment - Treasury Bills do not have reinvestment risk until maturity 11) Call Risk - The risk that a bondholder will have their bond called or redeemed prior to maturity - The bonds would be redeemed by the issuer if interest rates declined - This would leave the bondholder reinvesting their money at a lower return 12) Currency Risk - Risk that changes in the exchange rates will adversely affect your investment 13) Regulatory or Legislative Risk - Risk that legislative changes may adversely affect your investments 14) Market Timing Risk - Risk incurred trying to time the market, or a particular investment - Investors may enter the market too soon or too late and that would negatively impact their portfolios 15) Business Risk - Associated with the unique circumstances of a particular company as they might affect the price of that company's securities - It may relate to the execution of its business plan and consequently will experience a period of poor earnings and resultant failure

Confirmations- Retail Customers Only

The following ar required in trade confirmations of corporate and agency debt securities for retail customers only (FINRA Rule 2232): Mark-Up/Down - The member firm must disclose the amount of mark-up or mark-down if the member also executes an offsetting principal trade in the same security on the same trading day - The mark-ep/mark-down must be expressed as in total dollar amounts AND as a percentage of the prevailing market price Must Contain: - Hyperlink Reference to FINRA hosted trading data on the security - Execution Time expressed to the second

Communication With the "Trusted Contact"

The member firm is permitted to communicate with the "trusted contact person" identified with this customer account to discuss its concerns about actual or possible financial exploitation Oral or Written Communication - The trusted contact person, for example, can be reached (orally or in writing) if a temporary hold is imposed

Time and Price Discretion

Time and price discretionary orders are orders where the RR only determines the time when the order will be entered and the price of the security at the time of entry Security & Shares - The broker does not decide which security or how many shares or whether to buy or sell - This type of order does NOT require written discretionary authority from the customer Good For the Day - Time & Price discretion orders are good for the day of entry only - If a customer wants a Time & Price discretionary order to be good for more than one day, written instructions would be required from the customer

Trust Account

Trust - An arrangement in which property is managed by one person for the benefit of another person - The trustee is a fiduciary who holds title to the trust assets for the benefit of the trusts beneficiaries - In order for a trustee to establish margin accounr for the trust, it must be authorized in the trust agreement Types of Trust: - revocable (changeable) - irrevocable (unchangeable) - living (revocable or irrevocable trust set-up while the grantor is "living" - testamentary trusts (a trust created from a will)

Financial Exploitation of Specified Adults

Under FINRA Rule 2165 Financial Exploitation of Specified Adults, member firms must have written procedures on handling and escalating the financial exploitation of two specific groups of adult customers: - 65 years old and older - 18 years old and older * who the member firm reasonable believes has a mental or physical impairment that renders these individuals unable to protect their own interests If a member firm believes financial exploitation of these adults has occured, is occuring or will occur, Rule 2165 allows (but does not require)... Temporary Holds - The member firm can place temporary holds on disbursement of funds or securities from the accounts Note Some Specifics of the Hold: - It can be imposed up to 15 business days - The member firm can extend it 10 additional business days if it believes it has grounds to do so - The member firm must contact all authorized individuals in the account within two business days of the imposition of the hold

Making Recommendations

Under FINRA Rule 2310, a member who makes a recommendation to a customer must have a reasonable basis (FACTS) that the recommendation is suitable for the customer The governing factor in a proposed transaction must always be in the best interest of the customer Prior to executing a transaction with a retail customer, the RR must make reasonable efforts to obtain the following information: 1) Customer's financial status 2) Customer's tax status 3) Customer's investment objectives 4) Any other pertinent facts the member knows about the customer

UGMA and UTMA

Uniform Gifts to Minors Act (UGMA) Uniform Transfer to Minors Act (UTMA) Allow the opening of a securities account for a minor The accounts are commonly used to transfer securities or cash to a minor upon reaching legal age without involving an attorney to establish a special trust Any account that includes an adult and a minor must be set up as a UGMA/UTMA, not as a joint account

RRs Sharing in Customer Accounts

When registered representatives want to share in a customer's account, they must obtain prior written authorization of their employing member and obtain prior written authorization of the customer Financial Contribution - RR's can share only in direct proportion to their financial contribution to the account Profits & Losses - They must share in the profits and losses Note: - Sharing is allowed with prior written authorization BUT rebating any part of the registered respresentative's compensation is strictly prohibited

Discretionary Accounts

a. They are immediately terminated upon death of the owner of the account b. Checks (withdrawals) must always be paid to the owner of the account c. Account owners may waive their right to receive confirmations and statements upon written request d. Although discretionary authorization has been granted, the owner of the account may still initiate orders e. The RR must designate each discretionary order as "discretionary" on the order ticket f. Discretionary authorization is good until revoked in writing by the customer g. The RR must never make transactions which are excessive in size or frequency - this is called "Churning" - Firms must have procedures in place to monitor RR trading activity for possible churching and maintain a heightened supervisory review of discretionary accounts h. All discretionary orders must be reviewed by a principal of the firm Note: - If an RR does not have discretionary Authorization the RR cannot enter orders on behalf of a customer without the customer's consent - Discretionary agreements that have been signed and dated by the customer must be maintained on file at the firm as evidence of discretionary authorization for a third party - The "quality" of the securities traded is not a factor. Churning can happen with penny stocks and blue chip stocks