Lesson 11: Customer Accounts
Margin
Margin Accounts: allow the purchase of securities using money borrowed from a Broker-dealer. -Reg T requires the customer deposit 50% of the purchase price -The broker dealer can loan the other 50%
Broker-dealer Z has become insolvent, and SIPC has been notified. Customer claims for SIPC coverage will be based on the market value of eligible securities held with the firm as of the date
the bankruptcy court filing date
Margin Account
-securities are purchased with borrowed funds MARGIN AGREEMENT: -hypothecation agreement: pledge securities as collateral -Credit agreement: terms of the loan (interest rates) -Loan consent agreement (optional): firm may lend customer securities to others MARGIN DISCLOSURE STATEMENT: -At account opening? -Annually thereafter?
Customer Trade Confirmations
After a trade, firms must send a written trade confirmation It provides all the trade DETAILS 1. Trade date 2. settlement date 3. the name of the seucirty and CUSIP ID 4. The amount of securities 5. Transaction Price 6. the time of the trade (or that is available upon request) 7. Execution market (NYSE or NASDAQ 8. Broker Dealer Capicity 9. Fees What is the latest a firm can send a trade confirmation? A: Settlement (T+2)
A customer has an individual cash account at Firm XYZ consisting of $200,000 of securities and $300,000 of cash. She also has a joint account at XYZ with her husband, Fred, which has a market value of $375,000 and $125,000 in cash. If XYZ goes bankrupt, SIPC would protect?
$450,000 in cash and securities for her individual account and $5000,000 for the joint account
Cash Account
-all securities are paid for in full -accounts that must be cash accounts -retirement accounts -custodial accounts (UGMA/UTMA)
A client purchases $30,000 of stock in her margin account. What is the initial margin requirement?
A: $15,000 (Reg T = 50%)
A client purchases $3,000 of stock in her margin account. What is the initial margin requirement?
A: $2,000 (Reg T, FINRA min of 2,000)
A client purchases $300 of stock in her margin account. What is the initial margin requirement?
A: $300 (FINRA min 100% under $2k)
A clients margin account is long $30,000 of stock. What is the account's maintenance margin requirement?
A: $7,500 (25% x $30,000)
A client's margin account is short $30,000 of stock. What is the account's maintenance margin requirement?
A: $9,000 (30% x $30,000)
A rep who has discretion over a client's account identifies an attractive trading opportunity. What is required prior to placing the trade in the client's account?
A: Nothing, the rep can place the trade without the client's knowledge
Q: If an individual has a cash account and a margin account at the same firm how many "separate customers" would this be for SIPC?
A: ONE What if accounts at different firms? =TWO
How frequently must firms send account statements?
A: Quarterly
What is the latest a firm can send a trade confirmation?
A: Settlement (T+2)
If a rep places a trade on a discretionary basis without the client's knowledge, is the client responsible for all brokerage charges and fees associated with the trade?
A: Yes
In the event of possible financial exploitation and the imposition of a temporary hold on an account, the firm should contact?
All parties authorized to transact business on the account, the Trusted Contact person, and the account owner
Account Types
Cash Account: -all securities are paid for in full -accounts that must be cash accounts -retirement accounts -custodial accounts (UGMA/UTMA) Margin Account: -securities are purchased with borrowed funds MARGIN AGREEMENT: -hypothecation agreement: pledge securities as collateral -Credit agreement: terms of the loan (interest rates) -Loan consent agreement (optional): firm may lend customer securities to others MARGIN DISCLOSURE STATEMENT: -At account opening? -Annually thereafter?
A brokerage firm's Customer Identification Procedures require all of the following EXCEPT A) Obtaining customer identification documentation from each customer prior to account opening B) Determining whether the customer's name appears on the OFAC list of known or suspected terrorists or terrorist organizations C) Maintenance of records of the documents used to verify identity D) Verification of customer identity prior to account opening
D) Verification of customer identity prior to account opening A firm's Customer Identification Procedures require that the customer's identity is verified either before or within a reasonable time of account opening.
To avoid frozen account status or a possible sell out, Reg T requires that a customer make payment for a purchase A) on the trade date. B) the business day after the trade date. C) three business days after the trade date. D) four business days after the trade.
D) four business days after the trade.
Cold Calling
Firms and reps may cold call clients When can you cold call? -8am-9pm customer's time zone Who can you cold call? -Anyone BUTTTT>... No calls to anyone on. 1) firms DO NOT Call list or 2) FTC's DO not call list What do you disclose? "this is a telemarketing call" How? 1.) Rep and firms name 2.) reps address or phone number 3.) reason for the call (securities soliciation)
Which TWO of the following statements are TRUE of a principal's approval of a new opened account? I. It must be in writing. II. It indicates that all the account information is complete and correct. III. It indicates that the account is appropriate for the person opening the account based on the information collected. IV. It must be kept in the customer account file that is maintained by the representative who opened the account. A) I and III B) II and IV C) II and III D) I and IV
I and III
Discretion (Discretionary Account)
In a discretionary account the customer gives trading authorization to a RR If a rep places a trade on a discretionary basis without the client's knowledge, is the client responsible for all brokerage charges and fees associated with the trade? A: Yes (churning - excessive trading based on the customer's investment objectives) A rep who has discretion over a client's account identifies an attractive trading opportunity. What is required prior to placing the trade in the client's account? -A: Nothing, the rep can place the trade without the client's knowledge
Customer Account Titles
Individual Account -single ownership w total account authority -100% death to will Joint Tenants in Common (JTIC) -divided ownership -assets pass to named beneficiary at ones death and beneficiary gets their share Joint Tenants with Rights or Survivorship (JTWROS) -undivided ownership -assets remain in others account at ones death, 0% to beneficiary
What can a RR decide for a client even if she does not have discretion?
Price & Time
Securities Investor Protection Corporation
Protects against losses of cash and securities held by a brokerage firm in the event of the firm's failure (bankruptcy/liquidation) No SIPC coverage for: -market losses -innapropriate recommendations -Fraud by issues (ponzi scheme) -accounts held at foreign BDs -currency and commodities Each separate customer is protected for $500,000 total -of which up to $250,000 is the limit for cash coverage Examples of separate customers: 1. individual account 2. joint account 3. IRA 4. Roth IRA 5. Minor's account Q: SIPC protects customers in the event of? A: A broker-dealer bankruptcy Q: If an individual has a cash account and a margin account at the same firm how many "separate customers" would this be for SIPC? A: ONE if at different firms? = TWO A customer has an individual cash account at Firm XYZ consisting of $200,000 of securities and $300,000 of cash. She also has a joint account at XYZ with her husband, Fred, which has a market value of $375,000 and $125,000 in cash. If XYZ goes bankrupt, SIPC would protect?
Initial & Maintenance Margin
Reg T initial Margin (federal reserve) -Long and short is 50% and FINRA Initial Minimum Equity -Long Account: lesser of: -2,000 or 100% of the purchase price OR -Short account -2,000 (regardless of sale amount) Maintenance Requirements: -Minimum maintenance (set by FINRA) -Long maintenance is 25% - short maintenance = 30% House minimums (set firm by firms) -e.g., long and short is 35% DROP BELOW MAINTENANCE? = maintenance call or margin call A client purchases $30,000 of stock in her margin account. What is the initial margin requirement? A: $15,000 (Reg T = 50%) A client purchases $3,000 of stock in her margin account. What is the initial margin requirement? A: $2,000 (Reg T, FINRA min of 2,000) A client purchases $300 of stock in her margin account. What is the initial margin requirement? A: $300 (FINRA min 100% under $2k) A clients margin account is long $30,000 of stock. What is the account's maintenance margin requirement? A: $7,500 (25% x $30,000) A client's margin account is short $30,000 of stock. What is the account's maintenance margin requirement? A: $9,000 (30% x $30,000)
In a cash account, which TWO of the following rules of settlement apply to the purchase of corporate securities? I. Regular way settlement of T + 1 II. Regular way settlement of T + 2 III. Payment is required by T + 3 IV. Payment is required by T + 4
Regular way settlement of T + 2 and . Payment is required by T + 4 The rules of settlement that apply to corporate securities in a cash account are regular way settlement of T + 2 and payment is required two business days later (T + 4). Failure to pay by T + 4 results in the firm selling out the customer's securities and freezing the account.
Regulation S-P Information Security
Regulation S-P establishes privacy standards to ensure the security and confidentiality of customer data Privacy Notice: at account opening & annually Q: Firms may not require which of the following for clients wishing to opt out of data sharing? -Mailing written instructions (too difficult)
Federal Deposit Insurance Corporation (FDIC)
The Federal Deposit Insurance Corporation (FDIC) insures deposits in banks (e.g., checkings and savings accounts) How much does the FDIC protect? -$250,000 Who backs the FDIC guarantee? -US Gov't What is backed by the FDIC? -Bank products -money mkt account -bank issued CDs checking + savings accounts
Account Opening Continued
The client wants to proceed with opening a new account. 1.) New Account form -rep confirms info w/ client 2.) Who approves/ who signs? -a principal approves and signs -rep does NOT sign -Client does NOT sign within 30 days... 3.) Request for verification -customer verifies account info is accurate every 36 months 4. Reverify -client re-verifies account info every 36 months
Who is responsible for making sure that any securities sold short can be borrowed?
The broker-dealer for the selling customer
Opening an Options Account
The following steps are required to open an account to trade options.
Account Opening
The rep can then collect the new account information (still on the phone): 1. full legal name 2. address/phone number 3. DOB 4. SS # 5. Citizenship status 6. Employment & occupation -insider status 7. annual income 8. net worth -excluding val of primary residence 9. tax bracket 10. investment objectives 11. Investment experience 12. Risk tolerance 6-12 is all SUITABILITY INFORMATION A client wishing to open a new account would like to maintain as much privacy as possible. Can the client open a new account that will be identified as: A. Symbol: YES (req statement of ownership) B. Number: YES (req statement of ownership) C. Alias: NO
Minor Account (UTMA/UGMA)
UTMA/UGMA Minor = account owner Custodian = fiduciary to minor, manages account, low risk tolerance
Protection of Vulnerable Investors
When opening an account firms must make reasonable efforts to include the name and information of a trusted contact person -especially for those aged 65 or older How can firms protect vulnerable investors? -Firms may place a temporary HOLD on distributions if there is reasonable belief of financial exploitation In the event of possible financial exploitation and the imposition of a temporary hold on an account, the firm should contact? A:All parties authorized to transact business on the account, the Trusted Contact person, and the account owner
Customer Account Statements
a "snapshot" of the account: -purchases -sales -interest or dividends received -funds in or out How frequently must firms send account statements? A: Quarterly
Q: SIPC protects customers in the event of?
a broker-dealer bankruptcy
Trust Account
a trust is a legal entity created to benefit another person(s) -the SETTLOR contributes the property (assets) into the trust (AKA maker, grantor, trustor, donor) -the trustee holds legal title to the property in the trust -the property is held in trust for the trust's beneficiaries
Churning
excessive trading based on the customer's investment objectives
Holding Customer Mail
firms may hold customer mail on written request -account statements, trade confirmations, disclosures
A customer has purchased securities in a margin account and owes $800 as of the Reg T settlement date (T+4). In this situation, the broker-dealer
is permitted to waive the Reg T call since the amount that is owed is less than $1,000.
For a new issue of municipal securities, the CUSIP number is typically obtained by the
underwriter
