Series 7 Customer Accounts
New account profiles must be verified by the customer within how many days
30 days
What is Third Party Trading with regard to Prime Brokerage Accounts
A customer allows someone other than himself or the brokerage firm to trade. Authorization must be given in writing and must be signed by the customer it remains in force unless revoked in writing by the customer
What is the definition of an Insider
An individual that is a director, officer, or shareholder of 10% or more of a publicly traded company stock
How often does the customer have to be informed of SIPC coverage
Annually
Define a Day trader
Any engaging in a pattern of trading with 4 or more day trades in a 5 business day period
How only is the form kept on file?
As long as the account is open
Why is the customer provided a Credit Disclosure statement
Basically a truth in lending document describing how interest is charged on the loan balance.
Who usually uses a Tenancy in Common Joint account
Business partners
How is the illiquidity of structured products solved
By listing them on an exchange as an Exchange Traded Note (ETn)
Fiduciary accounts are usually what type of accounts
Cash accounts
What are the 4 basic pieces of information related to a customer account
Customer Name Address Social Security Number or Tax ID Number Date of Birth
What the critical pieces of information needed to open an new account?
Customer Name Tax ID Number Address Date of Birth
What does SEC Rule 17a-3 state regarding what information must be collected from a new client?
Customer name; Tax identification number; Address; Date of birth; Telephone number; Occupation and employer (Is this person employed in the securities industry? If so, special procedures must be followed.); Annual income; Net worth (excluding primary residence); Investment objectives; Signature of associated person responsible for the account; Signature of the customer, if this is a discretionary account.
What are the disclosures that must be given to a day trader
Day trading can be extremely risky Be wary of exaggerated claims about the potential profits of day trading Day trading requires knowledge of the securities markets and the firms operations Day trading will generate substantial commissions to the firm promotion the strategy Day trading on margin can result in losses greater than one's investment Person who day trade for other must be registered as an Investment Adviser or a Broker Dealer
How is a TOD account used with regard to second marriages
Each adult place their children as beneficiaries which ensures that upon death their assets go to their children
How does a Tenancy in Common Joint account work
Each party specifies a percentage interest in the account. If a person dies his percentage interest is included in his estate. It can then be passed by will to any named person.
Who usually uses a Transfer on Death (TOD) account
Elderly Adults
What is the purpose of the CIP Program
Enacted after September 11th to impede terrorists from having bank or brokerage accounts to transfer monies that further terrorism
Describe a Non Managed Fee Based Accounts
FINRA rule stated Non managed fee based accounts (NMFBA) found some firms were placing customers into fee based accounts when it would have been less expensive for those customers to be paying a fee on each trade. This was designed to prevent this from happening
What two methods can be used by firms to verify a customer's identity?
Government ID: Driver's license (cannot be expired), passport, or other government ID and As an alternative the firm can match information to database providers (Non documentary Method)
What type of account has an individual appointed by the court to protect the assets of a minor or incompetent adult
Guardian Account
Institutional customers want what type of brokerage accounts
Hedge funds
When is a trade considered Discretionary
If the size and/or security are chosen by the broker
What items must a customer be asked about when opening and options account
Investment objective investment experience financial situation financial needs marital status net worth liquid net worth estimated annual income
What information does the FINRA Investment Profile contain
Investment objectives; Investment experience / Other investments; Customer age; Financial situation and needs; Tax status; Investment time horizon; Liquidity needs: Risk tolerance; Any other information disclosed by the customer.
What is a non durable power of attorney
It does not remain in force if an individual becomes mentally in competent. The power ceases
What is Quantitative Suitability
It means the agent cannot recommend transactions to churn a customers account with the intent of earning higher commissions
What is a durable power of attorney
It remains enforce if an individual becomes mentally incompetent and the person granted control remains in control
What is FINRA RULE 2090
KNOW YOUR CUSTOMER RULE states the registered representative and the member firm must use reasonable due diligence to know and retain the essential facts about their customers there are 4 essential facts
What are the types of trading authorized in a prime brokerage account with third party trading
Limited trading authorization full trading authorization
Is there a regulation requiring customers to sign an Arbitration Agreement
NO. there is no mandatory requirement but firms typically put a mandatory clause in their account paperwork
Can a member recommend a transaction if they do not believe the customer has the financial ability to meet the commitment
No
Does the Suitability Rule apply to institutional clients?
No as long as they sign a wavier stating they are acting on their own judgement
What is the time limit for signing an options agreement with the CBOE
No later than 15 days after the account is opened
Are fiduciary accounts usually margin accounts
No only if the proper paperwork authorizes it
What authority does a power of attorney have if an individual dies
None. Powers of attorney cease upon death
What must the customer do if they are trading in a options account and they have a significant change in financial status
Notify the CBOE of the change
What is Customer Specific Suitability
Once the Reasonable Basis Suitability test is complete then the Customer Specific Suitability test is performed to make sure the investment is right for a specific customer
What is the Prudent Man rule
Only investments that would be made by a prudent person are permitted
To open a cash account what paperwork is required
Only the new account form
What is the FINRA Suitability Determination step in sequence
Reasonable Basis Suitability Customer Specific Suitability Quantitative Suitability
What type of suitability test must be performed on a derivative product under FINRA rules
Reasonable suitability test
What are the 3 FINRA main components to determining suitability for a client
Reasonable-Basis Suitability; Customer-Specific Suitability; and Quantitative Suitability.
Whose signature is required on the new account form
Registered Representative is the only signature required
Describe Annual Account Review
Rule requires the firm to monitor account activity and maintain written procedures for contacting customers who are not placed in appropriate accounts at least every 12 months
What organization protects the customer against broker-dealer failure
Securities Investor Protection Corporation (SIPC)
What is the MSRB Suitability rule
Similar to FINRAs "KNOW YOUR CUSTOMER RULE" States every broker dealer must have knowledge of their customers financial back ground, tax status, investment objectives, etc before making recommendation to that customer
What is another name for a Joint Tenancy account
Tenants by Entirety
What does FINRA require with regard to an Arbitration agrreement
That within 30 days of signing an arbitration agreement as part of the account opening process the customer must be provided a separate stand alone copy of the predispute arbitration agreement. This prevents the I DIDN'T KNOW WHAT I WAS SIGNING EXCUSE.
What is the required verification of customer identity called
The Customer Identification Program (CIP)
What is Reasonable Basis Suitability
The big picture. Does this recommendation make sense for the right investor
What is a loan consent form
The brokerage firm can require the customer to sign a second agreement called a loan consent form This gives the brokerage firm the right to loan out the customer's securities to make short sales for other customers The firm agrees that if the customer ever wants those securities it will replace them
Discuss Day Trading Suitability
The firm must exercise reasonable diligience to ascertain the essential facts relative to the customer including: Investment objectives Investment and trading experience and knowledge Financial Situation, including estimated annual income, net worth, and liquid net worth Tax status and employment status Age, Martial status, and number of dependents
What does a brokerage firm use as collateral for a margin account
The securities in the margin account if the customer does not pay the brokerage firm can sell the securities and use the proceeds to repay the loan
Is the customer required to sign the new account form
There is no requirement for the customer to sign the new account form. There may be a requirement for them to sign other forms like option agreements
Legal list are usually rated how
Top 4 ratings BBB or better
Name the types of fiduciary accounts
Trust Guardian Administrator Conservator for Incompetent Executor Receiver in Bankruptcy
Can a Trust Account be margined
Trust accounts are not marginable
How many options are available for joint ownership accounts
Two Joint Tenancy (with rights of survivorship) Tenancy in Common
How long is the broker allowed to trade a discretionary account (what period of time)
Until the power of attorney is revoked in writing by the customer
When is an account considered opened
When the first trade is made
What must the partnership agreement contain to open a partnership account
a clause allowing the opening of the account and naming the partners authorized to trade
In establish a corporate account what actions must a corporation take?
a corporate resolution must be passed by the corporation authorizing the opening of the account and designating the persons authorized to trade
Discuss duplicate confirmations
a customer can authorize in writing that a 3rd party can get confirmations or duplicate confirmations
Describe how a margin account works
a customer deposit a portion of the funds into the account to buy securities The balance is loaned by the security firm and they charge interest on the loan. The brokerage firm will not lend money unless it has collateral
What is the prudent investor rule
a modernized version of the prudent person rule. Instead of a legal list of approved securities for investment it allows fiduciaries to use modern portfolio theory for investment decision making
Are flat fee accounts considered to be an advisory product or a brokerage product
advisory product
Describe a fee based account
an account that imposes a flat annual fee for all trade executions rather than a per trade commission charge
Define a fiduciary account
an account where a 3rd party is acting for and in the best interest of the owner of the account
Discuss Bogus certifications
an agent cannot use false or bogus certifications. They can only use independently conferred designations that require rigorous training such as certified financial planner or certified public accountant, etc
What is required annually for a partnership account
an amended agreement
When must the margin agreement be signed by the customer
at or prior to the settlement of the first trade in the account
Why are different procedures used to open an Options account
because there of the greater leverage and greater risk that options provide
What should an agent do if they suspect diminished mental capacity
document and escalate immediately
What are 4 essential facts covered under FINRA RULE 2090
effectively service the customer's account act in accordance with any special handling instructions for the account understand the authority of each person acting on behalf of the customer and comply with applicable laws regulations and rules
When the firm sends the Options Disclosure Document to the customer what must the firm do
enter the date the ODD was sent to the customer on the new account form
How often must the customer profile be reviewed by the customer
every 36 months
Before making a municipal recommendation to a customer the dealer must
have reasonable grounds for recommending the muni must have reasonable grounds to believe the recommendation is suitable for the customer
Define Legal list
if a state restricts investments to its legal list then only securities on the list are available for investment
Are structured products liquid or illiquid
illiquid
What are some advantages of a Transfer on Death (TOD) account
it avoids probate avoids the ability of an ex spouse attempting to claim rights to the account during divorce proceedings
What is a discretionary account
one in which the customer gives the brokerage firm trading authorization However the customer must sign a trading authorization form
What is full trading authorization
orders can be entered and funds can be withdrawn. Any checks drawn are drawn on the account name not the third party. Therefore if the check is cashed the customer must endorse it
What is limited trading authorization
orders to buy and sell can be entered but funds cannot be withdrawn
When a customer opens a cash account what are they agreeing to do
pay in full for all purchases
List the red flags or NO NO's for Senior Citizens
purchase of variable annuities, equity indexed annuities and real estate limited partnerships purchase variable life settlements purchase complex structured products such as CDOs (Collateralized Debt Obligations) mortgage their residence to obtain funds for investment purposes and use retirement savings including early withdrawals from IRAs to invest in high risk investments
Who completes the new account form
registered representative
What is FINRA RULE 2111
requires the firm or associate person to have a reasonable basis to believe that a recommended transaction or investment strategy is suitable for the customer based on information obtained from the customers investment profile
What action should the firm take if they suspect diminished capacity
stop trading the account until the concern no longer exists then they sould contact the next of kin or a person with power of attorney over the account to discuss the issue 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 including alerting the authorities including government protective services
With regard to Market not Held orders when must they be filled for retail clients
that day
How must an agent identify Tax Status of a customer under MSRB
the agent must ask the customer for their tax bracket and state of residence
If a customer fails to disclose requirement information who decides if an options account can be opened
the approving manager This is called the CBOE's YOU DONT HAVE TO TURN AWAY A PAYING CUSTOMER RULE
If a customer desires to implement trades that the agent believes inappropriate what actions must be taken
the customer must be informed the trades are not appropriate. In this case it is normal for the ticket to be marked unsolicited. tape recording or requiring specific written directive may also be required before executing the trade
Before an options account can be opened what must happen
the customer must receive the latest Options Disclosure Document (ODD)
Who decides the best price and time of execution for Market not held orders
the floor broker
If the partnership is a limited partnership the only signature required is _____________
the general partner
In a joint tenancy account what happens if one party dies
the other party becomes the sole owner
What should be the main concern for an individual purchasing a structured product
the risk of default (Credit Risk)
How are margin securities held (what name)
they are held in street name- the name of the brokerage firm
What is a hedge fund
they use aggressive investment strategies which are only open to very wealthy investors
