Chapter 6 CUSTOMER ACCOUNTS Section 1: Account Basics.
If suspicious activity is viewed on a client account how long is the temporary hold that the member firm can place on the account? And what
- 15 days - The member firm must contact the clients "emergency contact as fast as possible.
In order to open any account the __________ Manager must sign the account form. If its an options account then its required that the ________ sign the account form. If its a municipal account then its required that the ________ sign the account form.
- Branch Manager - ROP ( Registered Options Principal) - registered municipal securities principal
What are the FOUR MOST CRITICAL PIECES OF INFORMATION that a member firm must collect on a customer when wishes to open an account
- Customer Name - Tax ID number or social security - Address - Date of Birth
What type of customer information goes into the "FINRA Investment Profile Info"?
- Investment Objectives - Investment experience/ other investments - Customer Age - Financial situation and needs - tax status - investment time horizon - Liquidity needs - Risk tolerance - Any other info disclosed by the customer
What is the SIPC and what do they do?
- Securities Investor Protection Corporation. - The SIPC insures customer accounts against broker-dealer failure.
Once a problem regarding the mental capacity of a senior citizen has been IDENTIFIED what should the firm do?
- They should communicate with the customers designated emergency contact person about the situation - maintain frequent contact with the investor to assess the situation and notify legal or compliance about these conversations - consult appropriate state statutes to determine the next steps, which may include alerting appropriate authorities, including government protective services.
A member firm must disclose in writing to a client that the firm will be authorized to contact the "trusted contact person" in order to:
- disclose information about the clients account to address possible financial exploitation - confirm the specifics of the clients current contact information or health status - obtain the identity of any legal guardian, executor, trustee or holder of a power of attorney.
What are the recommendations to senior citizens that are considered "red flags" and that the member firm must be able to strongly defend such a recommendation?
- variable annuities, equity indexed annuities and real estate limited partnerships - variable life settlements - Complex Products like CDO's - Mortgage their residence to obtain funds for investment purposes - use retirement savings, including early withdrawals from IRA's to invest in high-risk investments
Pattern Day Trading Account
-Used by a person that does 4 complete day trades in 5 business days - Customers trading experience and knowledge is needed in order to determine suitability. - Customer must receive a Pattern Day Trading Risk Disclosure Document at or before account opening - In order to open the account customer must deposit $25,000 of equity into the account. - Upon discovery that a pattern day trading account has not been qualified, it has 10 days to qualify the account after the discovery.
What does a customer relationship summary (CRS) detail?
-Whether the firm is in a broker-dealer or Investment Advisor relationship with the customer. - That the firm must adhere to suitability standard when making recommendations as a broker-dealer or a fiduciary standard if they're an Investment Advisor - The fees and costs that the customer will pay and any conflicts of interest that the firm may have in providing services to the client. - Whether the firm or its associated persons has had any reportable disciplinary events.
The suitability rule does NOT apply to?
-institutional customers -unsolicited transactions - investment analysis tools (computer models that based on the input, come up with recommendations for asset allocation or investment recommendations)
1) When an account is closed, how long must the corresponding new account forms be held onto by the member firm? 2) When an account is closed, how long must the corresponding Customer Statements be held onto by the member firm?
1) 3 years 2) 6 years
What are the documents that must be sent to customers within 30 days after opening a new account?
1) Arbitration Agreement 2) Customer Profile
What is the specific paper work needed to transfer account assets into the name of an executor for the estate of an individual account or Tenants in Common account?
1) Certified copy of death certificate 2) Copy of the will 3) Probate Court Papers 4) Get an affidavite of domicile
Depending on the situation, other information is required on the form as part of the account opening procedure. What information is this?
1) Citizenship ( more paperwork is required for non-us citizens 2) Each customer must be asked if they are a director, officer, or shareholder of 10% or more of a publicly traded company.
What is the BASIC information required on a "New Account Form"
1) Customer Name and Address (if it's a joint account then you need the names of both people) 2) Must specify if its a cash or margin account 3) Date of Birth (must be at least 18) 4) Social Security or Tax I.D. Number 5) Occupation (Specifically looking for if the customer is employed another financial firm because this could raise additional concerns)
What is the process of transferring an account from one brokerage firm to another?
1) Customer completes transfer form (and signs it) with the new brokerage firm and they must immediately submit these transfer instructions to the firm that the firm that the account is currently held at (called the carrying firm) 2) The carrying firm then freezes the account and no new orders are allowed to be entered 3) The positions within the account must be validated within 1 business day 4) In 3 business days the carrying firm must transfer the positions and account to the new firm 5) "failed to receive" positions (securities bought an margin) must be bought in whole within 10 business days in order to be transferred to the new account 6) IRAs and 401ks take longer to transfer over because their has to be trustee approval 7) if a customer has an in-house mutual fund or ETF, they must liquidate the position before they can transfer the accounts over.
What is the "other" info that must be sent to a customer upon account opening?
1) Privacy Statement (Reg SP) (tells the customer what information the member firm will gather from the customer, customer has option to opt out of this). 2) SIPC Brochure (Securities Investment Protection Corporation)
The suitability rule (FINRA Rule 2111) states that there are 4 main components to determining suitability for a client. What are these 4 components?
1) Reasonable Basis Suitability 2) Customer-specific suitability 3) Quantitative Suitability 4) Customers balance sheet
If an employee at a member firm wants to open a brokerage account at another member firm what must occur in order for this to occur ethically and correctly under MSRB and FINRA rules?
1) The associated person must notify the executing member in writing of their association with a different member firm 2) Written consent of the employer must be obtained by the executing member prior to account opening. 3) The executing member must transmit duplicate trade confirmations and statements to the employer member on written request.
A firm opening an account for a client must independently verify a customer's identity using what?
1A) Valid Government Issued I.D. (Drivers license or any other government issues photo I.D) 1B) As an alternative, the firm can match info to "database providers" like credit score companies to verify.
A customer who just opened a new account must verify the account profile within ___________ days of account opening. AND send account information every _____________ months for verification.
30 days ; 36 months
What is a "Margin Account"
A Margin account is an account where the customer makes partial payment and is loaned the balance by the brokerage firm.
What is "Cash Account"
A cash account is an account where customers pay in full for purchases of various securities/ other financial instruments
Who can open a Municipal Bonds account?
A person with the series 53 or the series 9 and 10 or the series 24
What is the technical definition of an "insider"
An insider is someone who owns 10% or more of a publicly traded companies stock.
During the account opening process, it is NOT MANDATORY that a customer sign an _____________________.
Arbitration agreement
FINRA requires that each member firm create and maintain a __________________ that identifies procedures to be followed if there is an emergency or significant business disruption.
Business Continuity Plan (BCP)
The required verification of a customers identity is called the ______________ and it was put in place due to what historical event?
CIP (Customer Identification Program) ; 9/11 Attacks
FINRA requires that customers receive a ___________ at the VERY BEGINNING PERIOD of making a recommendation or opening an account
CRS (Customer relationship summary)
Investment Advisors are held to a ______________ Standard
Fiduciary Standard
If a customer signs an arbitration agreement, what must be provided to the customer BY LAW
If the customer signs an arbitration agreement, a copy of the arbitration agreement must be provided to the customer within 30 days of signing.
A broker-dealer (BD) can or cannot sell securities from its companies inventory to the customer?
It can
A member firms Business Continuity Plan (BCP) must be disclosed to a customer opening an account at what time?
It must be disclosed at account opening, IN WRITING.
SEC Rule 17a-3 states what?
It states that the following information must be collected from a new client: - Customer Name - Tax ID number - Address - Date of Birth - Phone number -Occupation and Employer - Annual income - Net worth - Investment Objectives -Signature of associated person responsible for the account - Signature of the customer, (IF THIS IS A DISCRETIONARY ACCOUNT)
there is (no/ a) requirement for a customers signature on a new account form.
NO
If a customer refuses to disclose any of the information needed in SEC Rule 17a-3 (other then the "critical pieces" of information) is the firm obligated to obtain the rest of the information.
NO, if the customer doesn't provide them with the information other then the "critical pieces" the firm doesn't have an obligation to acquire this information and can open an account for the customer without it.
If a customer of a MUNICIPAL BROKER doesn't provide sufficient personal information on their financial status or investment objective, can the broker make recommendations to the customer?
NO, the municipal broker cannot make recommendations to a customer if the customer doesn't provide sufficient financial status and investment objective info.
Is their a requirement for no customer signature on new account forms?
No there is no requirement for a customer signature on a new account form. (However, in a discretionary account, the customer MUST SIGN the form before discretion can be exercised).
Regulation BI (Best Interest) to effect in mid-2020. It requires broker-dealers and investment advisers in their dealings with customers to do what?
Regulation BI requires broker-dealers and investment advisers to always put the customers interests first and minimize conflicts of interest.
A Branch Manager must have passed what exam?
Series 9 and 10 Exam
The registered representative who performs suitability determination must _______________ the new account form.
Sign
Broker-Dealers are held to a _______________ Standard
Suitability Standard
A registered options principal must have passed what exam?
The Series 4 exam OR the series 9and10
If a customer wishes to execute trades that the broker feels are unsuitable for that customer what does the broker have to do?
The broker HAS to voice their opinion that this trade is unsuitable for the client, but if the client insists then they can execute the trade, they just have to mark the order ticket as "unsolicited". (And sometimes record the phone call or require the specific written authorization of the client).
At the time a customer account is opened, what must the customer be notified of?
The customer must be notified, IN WRITING, that there account is covered by the SIPC Insurance and that if they must contact SIPC to obtain information about them (Securities Investor Protection Corporation Insurance) - Information regarding SIPC must be made available to the customer annually after the account is opened up
Who is the person within a FINRA member firm that can approve a New accounts being opened at the firm?
The general principal (must have passed the Series 24)
What is a "customers balance sheet?
The member firm or associated person must create a customer balance sheet to determine the persons "liquid net worth". This is used as a way to tell if the customer has the capital needed to execute a trade. If they don't have the capital you cant commit the trade.
If a senior citizen wants to assume risk (buy equities/ or other "risky" securities) what must the registered representative do?
The registered representative must make sure the client fully understands the product being recommended. This includes a fair and balanced picture of the risks costs, and benefits associated with the recommended product or transaction.
A registered municipal securities principal must have passed what exam?
The series 53
If an options disclosure document (supposed to be delivered to customer at or prior to account opening) is not returned within the 15 days after the account is opened what can the customer do?
They customer can only make an open purchase and closing sale
In regard to "FINRA Rule 2090", what are the "essential facts" that a registered representative must know of every customer?
They must know: - How to effectively service the customers account; - act in accordance with any special handling instructions on the account - understand the authority of each person acting on behalf of the customer - comply with applicable laws, regulations, and rules
What must a registered representative do if they learn that a customer has died?
They must: 1) Cancel all open orders 2) Freeze the account from removal of assets 3) Note that the customer is "deceased" with the date on the new account form 4) Await further instructions from the executor of the estate
What is "Quantitative Suitability" ?
This is a "legalistic" way of saying that an associated person cannot recommend a transaction to "churn" a customer's account (i.e excessive trading with the main intent of earning higher commission income).
What is the "MSRB Suitability Rule"?
This is similar to FINRA's "Know your customer rule". This states that every municipal broker dealer must have knowledge or inquire about the customers financial background, tax status, investment objectives etc. before making a recommendation to that customer. Essentially MUST HAVE KNOWLEDGE OF CUSTOMER TO MAKE A RECOMMENDATION
Liquid Net Worth
This is the maximum amount of immediate funds that the customer has to commit to an investment.
What is "Reasonable Basis Suitability?"
This means that a registered representative is under the obligation to fully understand the features, returns, risks, and costs associated with any product or strategy that is being recommended.
What is "Customer Specific Suitability?"
This means that the member firm or associated person must have reasonable basis to recommend a transaction or strategy based on an evaluation of the customers "INVESTMENT PROFILE"
What does FINRA Rule 2111 (A.K.A "FINRA Suitability Rule") require?
This rule requires that the member firm or associated person "must have a reasonable basis to believe that a recommended transaction or investment strategy is suitable for the customer, based on the information obtained from the customers investment profile". ****suitability rule******
What is "FINRA Rule 2090" (a.k.a the "Know your customer rule")
This rule states registered representatives and the member firm must use reasonable due diligence to know the "essential facts" relative to every customer.
If an investment advisor recommends that a customer buy a security, it cannot be from the inventory of the company that the advisor works (T/F)
True
Business Continuity Plans (BCP's) must be posted on the members ______________ and must be mailed to customers upon _________________
Website ; request
What do you do if a senior citizen customer is suspected of having diminishing mental capacity?
You must document suspected diminished capacity (suspicious activity) and escalate it immediately to a designated individual in your firm.
Broker-dealers can charge _____________ and _____________ to customers in transactions where an investment advisor can only charge ___________________ to the customer.
commissions and mark-ups; fixed fees.
A Investment Advisor (IA) can or cannot sell securities from its companies inventory to the customer?
it cannot
The name of the registered representative assigned to the account must be _____________
recorded (this is so FINRA knows who is responsible if there is an "issue" with the account.
Customer Relationship Summaries (CRS') are required to be provided to ______________ clients, but not to _____________ clients
retail ; institutional
FINRA allows member firms to place _____________________ on client accounts which suspect fraud
temporary holds.