1
Q
Basic information on new account form
A
- customer name and address
- cash or margin account indicator
- customer date of birth
- social security or tax id
- Occupation - is the person employed by another fin services frm?
- for a non us citizen: citizenship
- if the custoemr is an office, director or 10% shareholder of a publicly traded company
2
Q
4 Critical pieces of infomration related to customer accounts are required
A
- customer name
- address
- SSN or Tax ID
- DOB
-must be obtained prior to account opening
3
Q
Customer information must be verified
A
Member firm must independently verify the customers identify useing the 4 critical required pices of information (name, dob, ssn/tax id, address)
must be done in a reasonable time after account opening
4
Q
How can identity verfication be done?
A
- can be done by matching the information provided by the customer to a copy of the customers drivers licence, passport or other gov id.
ID must not be expired
- also a “non documentary “ method through some credit score companies i.e. experian, trans union or equifax
5
Q
CIP
Customer Identification Program
A
- US partriot act requires each broker dealer to have a customer idenfitication program (CIP) for verying the identities of new customers.
- firm must use name, address, dob and ssn/tax id to independently verify the customers identity.
- the firm must require the new customer to provide ID (current drivers licence, passport or other gov issued id within a reasonable amount of time)
- member firm required to check if the person is known or suspected terrorist list provided byt he Office of Foreign Assets Control (OFAC)
6
Q
SIPC information provided at account opening
A
- customers must be notified in wirting at account opening that the account is covered by SIPC
- the notice must state:
- that info may be obtained by SIPC including a copy of the SIPC brocure by contacting SIPC
- SIPC insures the customer against BD failure
- must provide the address and telephone number of SIPC
7
Q
SIPC information must be provided
A
at account opening and annually thereafter
8
Q
Arbitration Agreement
A
- not mandatory that a customer sign an arbitration agreement as part of the account opening process
- virtually every firm requires this becuase it is cheaper and faster
*
9
Q
Pre-dispute arbritration agreement disclosure requirements
A
*If a member firm includes a predispute arbitration agreement, it must highlighted (not hidden) and must include the following disclosure:
- the customer is giving up the their right to sue
- arbitration is final and binding
- arbitrators do not have to explain th reason for the award
- arbitration panels include a minority of individuals who were or are affiliated wiht the securities industry
10
Q
Requirements once arbitration agreement is singed
A
- within 30 days of signing an arbitration agreemetn as part of the account opening process the customer must be provided with a seperate stand alone copy fo the predispute arbitration agreement, and the customer must sign an acknowledgement of receipt of the copy of the agreement.
*
11
Q
At account opening the customer must be provided with:
A
- firms privacy statement
- firms business continuity plan
12
Q
If an account being opened is a joint account information ….:
A
- for each party must be obtained
- only 1 SS number is used for reporting to the IRA
*
13
Q
KYC
A
- Know your customer
- firm / rep must use reasonable due dilegence to know and retain essential facts relative to every customer
- essential facts are those rquired to:
1. effectively service the customer account
2. act in accordance wiht any special handling instructions for the account
3. understand the authority of each person acting on behalf of the customer
4. comply with accplicable laws, regs and rules
14
Q
SEC New Customer information
Rule 17a-3
A
information that must be collected from a new client:
1. customer name
2. Tax ID
3. address
4. DOB
5. phone number
6. occupation and employer (is the person a fin services employee)
7. annual income
8. net worth
9. investment objective
10. signature of associated person responsible for the account
11. signature of the customer, if this is a discretionary account
15
Q
Critical pieces of information collected at account opening
A
- name
- tax id
- address
- dob
used to verify the customer identify under the firms CIP
16
Q
If a customer does not with to disclosure information reuired for account opening
A
- if a customer refuses to disclose information the firm is not obligated to collect it
- ONLY FOR net worth and income
- information required to verify the customers identify woudl be required
17
Q
Reg Rep signatures for new account forms
A
- reg rep singature is required if they complete a suitabilty determination
- approving managers signature must be on the form before accepting the acount for the firm
18
Q
Customer signature on account form
A
- no requirement for a customer signature on the form
- However: in a discretionary account the customer gives the representative a power of attorney over the account this must be in writing (cannot be verbal)
19
Q
Cusomer verification of account profile
A
- SEC requires that the customer be given a copy of the account profile for verification within 30 days of account opening
- firm is permitted to exclude the DOB and SSN (to reduce identity theft)
20
Q
what information can be excluded from account profile for customer idenfication
A
DOB and SSN
21
Q
how often is reverification of account profile sent to client
A
every 36 months
22
Q
FINRA Suitabilty Rule
A
- Rule 2111
- requires that a 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 information in the clients investment profile
- must have a reasonable basis to believe that the customer has the financial ability to meet such a commitment ( must include a personal balance sheet of the customer)
23
Q
FINRA Investment Profile
Must include
A
- investment objectives
- investment experience
- customer age
- other investments
- financial situation / needs
- tax status
- investment time horizon
- liquidity needs
- risk tolerance
- any other information disclosed by the customer
24
Q
Three components to suitability
A
- reasonable basis suitability
- customer specific suitability
- quantative suitability
25
Reasonable Basis Suitability
* "big picture"
* requires member firm / assoc person to:
- determine the recommneded strategy or investment is one that has been reviewed and assessed
- comparing risk vs return
- and that the recommendation makes 'sense' for the 'right' investor.
* "the recommendation must be suitable for at least some investors"
26
Customer Specific Suitability
* once a reasonable basis suitability determination is completed
* member firm/ assoc person must have a reasonable basis to recommned a transaction or strategy based on an evaluation of that customers investment profile
27
quantitative suitabilty
even if a recommended transactin to a customer is suitable one-time may not be the case for an entire series of similar recommendations
avoiding churning / excessive trading
28
Suitability: Personal Balance Sheet
* FINRA suitability requires that the member / assoc person has reasonable basis to believe that hte customer has the financial ability to meet such a commitement
* must include a personal balance sheet
* understanding of the customers liquid net worth: max amount of immediate funds that the customer has to commit to an investment
29
FINRA 3 step suitability Determination
* step 1: reasonable basis suitability
* step 2: customer specific suitability
* step 3: quantitative suitability
30
Suitability rules do not apply to
* institutional customers: sophisticated investor and institution signs a statement that its exercising independent judgement
* unsolicited trades (customer placed trade that was not a recommendation)
* investmnet analysis tool (e.g. retirement calculator)
31
Specific FINRA product and customer suitability rules apply to recommendations of
* penny stocks
* structured products
* PIPE (private investment in public equity)
* Pattern Day Trading
* non-managed fee based accounts
* investments to senior citizens
32
Suitability for Sales of Penny Stocks
* BDs must pre-qualify new customers that want to purchase penny stocks
* SEC rule 15g01 through 15g-6 are designed to prevent high pressure telephone sales tactics when selling low price securities
33
"designated securities"
* not exchange listed
* not included on the NASDAQ
* price less than $5 per share
34
if a firm wishes to sell designated securities to someone who is not an established customer it must first:
* obtain detailed information from the customer about their financial situation, investment experience and investment objectives
* determine based on the above information that the proposed transactions are suitable for the customer and that the customer has sufficient knowledge and experience in financial matters to evaluate the risks and merits of the recommended investments
35
Sale of Penny Stocks:
requirements
* deliver a written suitablity statement to the customer: setting forth the basis upon which suitability was determined and stating in boldface that it is unlawful for the BD to effect the trade until the customer signs the statement and that the customer should not sign unless the statement is accurate
* **must be obtained this written signed statement before the trade can be effected**
36
Sale of Penny stocks to established customers
* exempts them from the written suitability statement
37
Established Customer
* has effected a securities transaction or made a deposit of funds or securities wiht the borker dealer more han one year previously
* has made three pruchases of designated securities of different issuers on seperate days
38
Rule 15g-2
Requires that a broker dealer provide customers that wish to buy penny stocks with a standard risk disclosure document
39
Rule 15g-3
* Requires a BD to dislcose the current bid and ask quote in that security
* must be made orally or in writing prior to effecting the trade
* must be disclosed in writing on the comfirmation
40
rule 15g-4 and 5
* require that the compensation earned by the sales person and BD are disclosed in the transxation
* disclosure must be made orally or in wriring prior to effecting the trade
* must be dislosed in writing in the comfirmation
*
41
rule 15g-6
requires account statements be sent monthly
within 10 days of month end
detailing the issuers name, number of shares held and estimated mkt value
**more stringent requirement then for regular securities (acct statements are required quarterly)
42
What does rule 15g-1 exempts the following from the 15g rules
* BD whose transactions in penny stocks comprise less than 5% of rev
* transactions where the customer meets the definition of accredited investor under the private placement rule
* transactions with "insiders"
* transactions that were not recommended
43
Structured Products
* derivative security
* securities based on, or dervied from, a basket of securities, an index, or other securities, commodities or currencies.
* generally consist of a "bond" portion which pays interest based on the performance of a well known index such as the S&P 500.
AND a derivative component (embedded option) that allows the holder to sell the security back to the issuer at maturity.
44
strucutred products are often marketed as
debt instruments
45
Reverse Convertible Note
* structured product
* $1K par debt instrument that pays a higher rate of interest because the buyer assumes an unusual risk.
* the note specifies a "knock in" price of the equivalent shares of stock, if the stock price is below this at matruity, the holder gets the stock back not the par value
* the holder takes the risk of a decline in the stock price
46
Structured products require FIRMS to perform:
a reasonable basis suitability determination to evaluate the products rewards/risks relative to other similar structured products offered by other firms
47
Suitability for Structured Products
Require:
1. Reasonable Basis suitablity
2. Customer specific suitability
48
ETN
* listed structured product
* Exchange Traded Note
49
Main Consideration / Risk for Structured products
* credit / default risk
* no underlying portfolio, just the firms promise to pay
50
PIPE offerings
* Reg D PIPE offering
* Private Investment in Public Equity
* Quick way for a public compnay to get an injection of investment capital in a private placement
* Investors get restricted stock at a discount and part of the deal is the issuer aggres to file a Rule 415 shelf registration for the privately placed shares so the purchaser can sell them in the market within the next 3 years as registered shares.
* Benefits:
issuer- quick injection of cash
buyer - marketable shares at a discount
51
Suitablity for PIPE
1. reasonable basis (reasonable for at least some clients)
- reviews :
~ issuer and managment
~ buiness prospects of the issuer
~assets held or to be aqcuired by the issuer
~claims being made
~intended use of the proceeds of the offering
2. Customer level suitability for both accredited and non accredited investors
52
Client suitablity for PIPE
* applied to both accredited and non accredited investors
must consider:
customer's other holdings
risk tolerance
investment objectives
financial situation and needs
tax status
53
Pattern Day Trader
* 4 or more day trades in 5 business days or less
*
54
Day Trading Disclosures
* before opening the account the member firm must give the customer a disclosure statement that states:
- 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 promoting the strategy
- day trading on margin can result in losses greater than the investment amount
- persons who day trade for others must be registered as investment advisor or BD
55
Day Trading Suitability
* In addition to the required disclosure the firm must exercise reasonable dilligence to ascertain the essential facts relative to the customer:
* investment objectives
* investment and trading experience/knowledge
* financial situation, estimated annual income/ net worth and liquid net worth
* tax status and employement status
* age, marital status and number of dependents
56
if a member firm identifies an account that was not qualified for day trading is engaged in day trading:
* it must approve the account for day trading as soon as possible
* but no later than 10 days following teh date that the member became they are engaged in day trading
57
Non-managed fee based accounts
(NMFBA)
* imposes an annual flat fee for all trade executions (rather than per trade commission charge)
58
Prior to opening an NMFBA account the firm must:
* Provide disclosure docuemnt
* either a new or existing cstomer
* describes the types of NMFBA programs available from that member firm and how the fees are computed
59
NMFBA suitability
member firm is obligated to determine customer suitability
60
NMFBA annual review requirement
* member firm must monitor account activity and maintain written procedures for contacting those customers that are not in appropriate accounts at least every 12 months
61
# *
if an nmfba account is determined to be more costly than a per trade commission account...
* the customer shoudl be contacted and the situation should be discussed.
* if the customer wishes to maint the account the firm following the customers instructions.
62
Reverse Churning
* reverse churning in a fee based account is a violation
* customers with infrequent trades being placed in fixed fee accounts
63
Flat Fee Accounts are condsidered to be brokerage or advisory?
* Advisory
* these can be managed or non managed
* to offer these accounts the firm must be registered as an investment adviser
* and the rep must be an adviser representative (state licensing requirement)
64
Senior Citizen Suitability
* FINRA has stated that a customers age and life stage are important factors when performing a suitability determination for a senior citizen.
65
FINRA Rules for recommendations to senior citizens
* do not have to be shielded from risks they want to take
* must fully understand the product being recommended
* must include a fair and balanced picture of the risks, costs, and benefits associated with the recommended product / transaction.
* does NOT prohibit specific products as long as they are suitable
* certain recommendations are red flags and the firm should be able to defend the recommendation to the client
66
Typically unsuitable recommendations for seniors:
* purchase variable annuities, equity indexed annuities and real estate limited partnerships
* purhcase variable life settlements
*purchase complex structured products such as CDOs
* mortgage their residence to obtain funds for investment purposes
* use retirement savings, including early withdrawals from IRAs to invest in high risk investments.
67
Investors who FINRA believes are susceptible to financial explaoitation
* 65 years and older
* 18 years or older w/ mental or physical impairment that makes the individual unable to protect their own interests
68
if a member firm suspects fraudulent activity for a senior citizen
* it may place a 15 business day hold on teh disbursement of fund from a client account.
* only applies to suspicious disbursements.
* if the reivew suppports the belief that the cleint is being financially exploited the member can extend the temporary hold for another 10 business days.
* if there is a state or fed investigation it can be extended to an additional 30 days
* total of 55 business days
69
what must be done if a hold is put on an account for potential senior citizen fraud?
member must document why it has done so and notify the trusted contact named on the account and the customer no later than 2 business days after the hold is placed.
70
Trusted Contact Person
* members must make reasonable efforts to obtain the name and contact info for a trsuted contact person
* The member must disclose in writing to the client that the firm or associated person will be authorized to contact the trusted contact person in order to:
- disclose information about the client's account to address possible financial exploitation
- confirm the specifics of the clients current contact information or health status
- obtain the idnetify of any legal guardian, executer trustee or holder of power of attorney
71
Certifications
reps cannot use bogus certifications (ii.e. certified senior advisor)
72
what is prohibited when marketing to senior citizens?
* bogus designations
* ghostwritten articles/ books
* free lunch seminars (strongly discouraged)
*
73
Suspected Diminished Capacity
if diminished capacity is suspected:
* document suspicions
* escalate immediately
* stop trading until the concern no longer exists
then:
* communicate with the customers designated emergency contact or poa
* maintain frequent contact wiht the investor w/ notification to legal or compliance
* consult appropriate state statutes for next steps
74
New Account Approval
* manager must have the appropriate license to approve new accounts
* must be a series 24 or series 9 and 10 sales supervisor (BOM Branch office manager)
75
account approvals by license
* series 24: can approve all new accounts except for options . Can supervise underwritings, trading, research and marketing etc.
* Series 9 and 10 BOM: can sign the new account form. can only supervise sales activities of the branch. Can approve options accounts.
* Series 4 ROP: registered options principal. can apporve any options account and can supervise other options activites. (a series 24 must have a series 4 to do this)
76
Documentation for margin accounts
* to open a cash account only the new account form is required
* to open a margin account additional documentation is required
77
Margin securities are held
in street name
78
# ma
margin securities
* customer deposits a portion of the funds to buy a security and the balance is loaned to the cusotmer by the brokerage firm
* the firm charges interest on the loans
* collateral for the loan is all the securities in the account
* margin secuities are held in street name
* if the loan isnt paid the brokerage firm has the right to sell the securities and use the proceeds to repay the loan
79
Margin agreement
* it is mandatory that the customer signs a margin agreement ( cusotmers agreement)
* the margin agreement must be signed by the customer before the account can be opened
80
Loan Consent Agreement
* customers are also reuquired to sign a loan consent agreement in addition to the margin agreement.
* by signing the customer gives the bd the right to loan out his securities to make short sales for other customers
* the BD agrees if the customer ever wants the securities they will replace them
* While the BD requires this it is not MANDATORY
81
Credit Disclosure statement
* provided when opening a margin account
* explains how the loan balance is computed and how interest is charged on the loan balance
* "truth in lending" statement
*
82
Notice of interest rate increases for margin accounts
* if the credit agreement is changed to permit interest rate charges to be increased the customer must be given 30 days advance notice.
* if it is changed to premit decreases no advance notice is required.
83
Margin Risk Disclosure Statement
* one page document that explains basic facts about a margin account
* that the customer can lose more than the cash deposited
* that the firm can sell out any securities in th account to meet a margin call
* that the firm does not have to notify the customer to do so
* that the firm can increase house margins at any time
* that the customers are not entitled to margin call extensions
84
Margin Dislcosure statement must be:
* furnished to the customer at account opening either as an individual doc or as seperate page in the larger document
* posted on the firms website in a clear and conspious manner
* delivered to each non-institutional customer at least annually hwere it may be delivered wihtin or as part of other account documetnaiton and is not required to be provided in a seperate document or on a seperate page
85
Joint acount requirements
* if more than one party is named onthe account new account information must be obtained for each party on the account -- includes social security number of each account owner
* for tax reporting the irs accepts one ssn
* W9 must be signed by the primary account owner and the BD will send annual 1099 to both the IRS and primary account owner
86
ownsership choices for joint accounts
1. Joint Tenancy with rights of survivorship: each party has undivided interest in the account. if one parties dies the other has sole ownership of the account. most common for married couples
2. tenancy in common: each party specifies an ownership percentage interest in the account. if a person dies his percentage is included in his estate then can be passed on by will to any named person. Common for business partners
87
Joint Tenancy with rights of survivorship
* each party has undivided interest in the account. if one parties dies the other has sole ownership of the account.
* most common for married couples
88
tenancy in common:
* each party specifies an ownership percentage interest in the account
* if a person dies his percentage is included in his estate then can be passed on by will to any named person.
* Common for business partners
89
Decision making on a joint account
a single tenant can enter orders or draw checks in a joint account
collective decision making is not required
all checks must be drawn to the full account name - all owners must endorese the check if its going to be cashed.
90
Owners of a joint account divorce
* BD firm legal depts will palce a withdrawal restriction on an account for a fixed period of time
* typicall 14 to 28 days
* pending written instructions from BOTH parties to the account
* BOTH parties will not have to agree to the withdrawal of any funds
91
Transfer on Death
* an individual account, often with trading authorization given to the named beneficiary
* TOD registration allows an elderly parent to maintain full control over an account
* registration transfers to the name of the beneficiary only upon death and alos avoids probate since the estate is bypassed
* used many times for elerly parent and child or in second marriages naming the children in teir first marriage as a benificiaarry to assure their assets will go directly to the child from the first marriage
92
Corporate Account
* must obtain proof that the corporation exists
* a copy of the corp charter is required
* must know who is legally responsible unter the corp bylaws to trade the account
* the corp must pass a resolution authorizing the account to be open and designating trading authority
* resolution must be signed by the secretary and the corp seal must be affixed
*
93
Partnerhip Account
* A copy of the partnership agreement must be obtained
* the agreement will ahve a clause allowing the opening of the account and naming the partners authorized to trade
* most partnership agreements are amended annually, each year the agreement must be obtained
*
94
Third party trading
* a customer allows someone other than themselves or the BD o trade
* autorization is required in writing and must be signed by the customer
* types of trading authorization:
1. limited trading authorization
2. full trading authorization
95
Limited trading authorization
* orders to buy or sell can be made
no funds can be withdrawn
96
Full trading authorization
* orders can be entered and funds can be withdrawan
* checks from the account are drawn in account name - not the 3rd party name
* if a check is cashed the customer must endorse the check
97
Durable vs non durable power of attonery
* power of attorney can be "durable" or "non-durable"
* durable: if the grantor becomes mentally incompentent the person with POA retains control over the account
* Non-durable: if the grantor becomes incapcitated the power ceases
POAs cease upon death of the grantor
98
Duplicate confirmations
a customer can authorize in writing that a thrid party receive confirmations or get a duplicate
99
Fiduciary Account
an account where a third party is acting for and in the best interest of the owner of the account
* Trust account
* Guardian Account
* adminstrator of estate
* conservator for incompetnt
* receiver in bankruptcy
100
What is required to open a fiduciary account
* proper documentation appointing the fiduciary is received by the firm
* only the fiduciary can trade the account
* the fiduciary cannot give trading authorization to another person (however, many states now allow trading authorization in these accounts to be given to an investor adviser)
101
Fiduciary accounts and Margin
* generally margin is prohibited
* only cash accounts are permitted
* to open a margin account for a fiduciary the documents appointing the fiduciary must specifically authorize margin trades
102
Prudent Man Rule
* only investments that would be made by a prudent individual are permitted
103
Legal list
* states can restrict investments in fidcuiary accounts to its legal list
* generally the legal list consists of debt rated in the top 4 ratings categories or better
104
what can fiduciaries trade in an account
state law will say either follow prudent man law or the legal list
105
Split Rated bonds
institutions often prohibit from purchasing a bond issue unless it is rated investment grade by at least two nationally recognized ratings agencies
106
Prudent Investor Rule
* Many states have moved to a "prudent investor rule"
* rule allows fiduciaries to use modern portfolio theory for investment making decisions applying a risk return analysis assessing overall portoflio return vs individual securities
107
Specific requirements for Trust Accounts
* a copy of the trust agreement must be obtained
* the agreement will specifiy the types of transactions that hte trustee is allowed to perform
* these accounts cannot be margin accounts unless specifically authorized by the trust agreement
108
specific requirments for a guardian account
* a legal guardian is appointed by a court to protect the assets of a minor or impaired adult.
* to open the account a copy of the court order appointing the guardian must be obtained
* the account cannot be opened only in the name of the minor or incompentent
109
aapointment of a secondary guardian
in many states the appointment of a guardian becomes void if the account is not open within 60 days of the appointment
if this happens the cout must appoint a successor guardian over the account
110
Discretionary Accounts
* customer gives the BD trading authorization
* customer must sing a trading authorization before any discretionary trades take place
* POA is typically a limited trading authorization
111
When is a trade considered to be discretionary
when a broker chooses more than the price and time of execution.
4 elements that are decided:
1. size of trade
2. security
3. price
4. time
if they choose more than price and time its considered discretionary
and trading authorization must be in place
considered discretionary if size or security is chosen by th BD
112
Market not held order
*these orders, if given verbally, must be executed that day
* if the length of time is more than a day a written POA is needed from the customer to accept the order
* required for price and time discretion that is longer than 1 day in an individucal customer account
* an exeption is given to instiutional accounts (becuase those orders are typically large)
113
Discretionary Account trade approval
* principal approval is required for every oder tickt and must be completed promptly
* trades are reveiwed and approved by the principal at the end of each trading day
114
Prohibited trades for discretionary accounts
* trades unsuitable for the account
* trading too frequent in the account
* trades of excessive size for the account
115
If a principal finds trades / activity that is prohibited in a fiduciary account
* broker is diciplined and trades are removed from the customer account
* placig them in a house account to be reversed out the next trading day
* if there are any losses they are charged to the rep
116
bulk transfers of money fund assets using negative consent
* bulk exchange is limited to situations inolving mergers and acquisitions of funds, changes of clearing members, exchanges of funds used in sweep accounts, and was also permitted by FINRA for funds in "trouble'
* a negavie response letter may be used (if the customer doesnt response the exchange will occur) and must be include a tabular copmarison of the fees by fund
* the letter must contain a compartive description of teh investment objectives of each fund and a prospectus of the fund to be purchased
* the negative consent feature cannot be activated until at least 30 days after the letter is mailed
117
when opening an account for employees of other member firms:
the firm must:
* written notice to executing member: the associated person must notify the executing member in writing of their association with the employer member
* written consent of employer member: written consent of the employer member must be obtained by the executing member prior to account opening
* Dupe confirms and statements sent on request: the executing member must transmit duplicate trade confirmations and statements to the employer member on written request
118
exception to requiements when opening an account for an employee of another member firm
* if the associated person of another firm simply wants to buy investment compnay securitis or municipal fund securities they are exempt
becuase the investor isnt selecting specific securities
119
Restrictions on accounts of FINRA employees
FINRA employees, either directly or through accounts they control :
* cannot have a debt or equity interest in BDs, or companies with BD subsidiaries that contribute 10% or more of the parent revenue and cannot take options positions on these firms
* cannot purchase stock in an IPO
* Duplicate account statements must be sent to FINRA
120
UGMA
* Uniform Gift to Minors Act
* allows custodial accounts to be opened for the benefit of a minor
* UGBMA allows any adult to open the account for the minor
* Custodian has trading authorization
* once the minor reaches adult age in the state the account becomes the property of the minor
121
Rules for custodial accounts
* any adult can open custodial account (does not need ot be related)
* all securites registered in account name
* no free credit balances: cash balances canno be held in the account for an extended period of time. Monies must be invested in a registered security (MM or Mutual fund)
* One custdian for one minor on an account
* successor custodian can be appointed
* Cash Account only - no margin unless state law specifically permits it.
* Gifts are irrevocable
* custoidan can be reimbursed for expenses running the account
* SSN of minor appears on the account (minor is considered to be the owner)
* Prudent investor: the custodian can deem any trades they deem proper and prudent.
* at legal age, the account transfereed into the name of new adult
* no third party trading authorization
* options trading generally not considered appropriate
* if common stock is held it is subject to rights offering, the custodian acts as they see fit - either selling the rights or exercising They CANNOT let the rights expire (not in the best interest)
*
*
122
Who can open an ugma account
* any adult can open an ugma account
* one adult to one minor for an account
* doesnt need to be related
123
Cash in ugma account
cash balances cannot be held and must be invested (can be money market)
124
types of securities for ugma accounts
funds must be invested
securities must be registered
typically options are not found to be appropriate
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Gifts to ugma accounts
are irrevocable
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who can trade ugma
custodian only
no third party trading
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If common stock is held in an ugma account is subject to a rights offering
the custodian must sell them or exercise they cannot expire as that is not in the best interest of the account
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UTMA account
* Uniform transfers to minors act
* supersedes UGMA
* Allows any type of gift
* sets transfer age, usually 21
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UGMA vs UTMA
transfer age
* UGMA: specifies the account transfer occur at legal age in that state (typically 18)
* UTMA: allows the state to set the transfer age (most use 21)
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UGMA vs UTMA
gifts allowed
* UGMA: limits gifts to bank deposits, securities and insurance
* UTMA: allows almost any asset to be transfered (copyrights, real estate, art)
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Benefit of later transfer age of UTMA
* later age provides more peace of mind
* with UTMA the parent can require the child reach regular college graduation age before they receive the money
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Omnibus Account
* established to handle investmnet adviser clients
* financial institution pools multiple customer trades or holdings into one master account, rather than holdign each customers assets in seperate individually titled accounts
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How does an omnibus account work?
* the account is open in the name of the intermediary (BD, clearing firm, bank, custodian)
* client positions are combined at the custodian or clearing level
* the intermediary maintains sub-account records for each client
* regulators and counterparties see the aggregated position, not each client
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why do firms use omnibus accounts
* operational efficiency
* lower cost
* faster trading and settlement
* scalabiltiy
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Common uses of omnibus accounts
* clearing firms
* 401K / retirement plans
* mutual funds / ETFs
* foreign BDs
* crypto exchanges
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Opening an Omnibus account
* indiviudual new account forms must be filled out for each customer
* third party trading authorization must be provided
*
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Wrap accont
* annual investment management fee
* IA trades the accounts for the clients as they see fit
* confirms are sent to the IA and customer
* all account services (trade execution, asset allocation, and port rebalancing) are included under the annual management fee
*REP must be an IA - series 7 and 65 or 66
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Prime Brokerage Account
established to allow an insititonal investor to be able to direct transations to numerous market centers.
customer selects one firm as the prime borker - to maintain custody and to provide financing (margin) however trades can be directed to executing brokers chosen by the customer
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Numbered Accounts
* if a customer wants to keep their name confidential they can maintain a numbered account for the client
* firm must keep a record of the true owner
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Regulation S-P
* Statement of Privacy
* requires BDs and financial institutions to provide retail customers with a privay notice (policies and practices)
* not required for insitutional investors
* FIRMS cannot share non-public information about customers to non-affiliated third parties unless the firm has given notice to the customer that htis may happen and the customer has not elected to opt out
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Delivery of privacy notice
* at account opening and annually
* must include all of the types of infomraiton collected about hte customer
* and give the customer the right to opt out of data collection and disclosure
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Acceptable opt out notices for privacy
* including a reply form together wiht the opt out notice
* providing an electronic means to opt out, if the consumer agrees to electronic delivery of information
* providing a toll free number that consumers may call to opt out
* including a desingated check-off box in a prominen position on the relevant forms wiht the opt out notice
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Reg S P
unacceptable opt out notices
* having the consumer write a letter exercising their opt out right
* having the consumer use a check-off box on a form only included in the initial notice, but not included in subsequent annual notices
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Reg S & P
disctinction between customer and consumer
* customer: have funds / securities in the custody of the firm
* Consumer: the person doesnt have an account ex: wants the firm to sell securities and remit a check
Conusmer gets the privacy notice at the time of the transaction
Customer gets the annual privacy notice
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Reg SP
BD policies and procedures that must be adopted
* ensure the security and confidentiality of customer records
* protect the integrity and security of customer records and information
* protect customer records against unauthorized access
* rule applies to individual information
* privacy rule does not apply to requests by FINRA / SEC
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CAT records
* Condolidated Audit Trail system
* every member firm must record for each order received or executed:
1. an identification of the reg person who received the order (rep ID)
2. an identification of teh reg person who executes the order
3. the idenfitication of the department that orginated the order (when applicable)
4. an identification of the customer
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Customer information on CAT
* CAT requires that customer accounts be linked to each order and trade report
* not done with OATS
* firm must use a customer ID
* NOT client SSN, DOB or account number
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Confirms must be recieved
Customers must receive written confirmation of each transaction in the account no later than the completion of the transaction (settlment date)
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Account statements must be sent:
* customers must receive account statements showing positions in the account at their current market value
* statements must be mailed in any month a trade takes place
* if there were no trading they are required to be mailed quarterly
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Statements must be sent by
* physical mail
OR
if the customer requests, the statements can be sent electronically to an e-mail address provided by the customer
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Account Statement Discrepencies
* legend must be included telling the customer to report inaccuracies promptly
* the phone number given cannot be the rep
*
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Borkerage Firm and customer mail
* FINRA rule customer mail must be sent to the customer address on teh new account form or to a post office box desingated by the customer.
* Mail cannot be held at a borkerage firm / cannot be directed to the reps office.
* Mail can be held for up to 3 months.
* If the customer needs longer than 3 months they must provide written instructions with an acceptable reason (convenience is not an acceptible reason)
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Address change
* firms must monitor address changes diligently and must verify them directly with the cusotmer either in writing, in person or by phone
* the use of PO boses should be discouraged and is permitted only if the firm approves the PO box is verified with the customer
* customer mail cnanot be sent to the member firm addresses
* any change of address to a c/o in care of should be monitored closely
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Customer that cant be located
* if a customre cant be located the firm must follow the proper procedure to make a resaonable effort to find the customer
* if the customer can't be located and the account remains inactive, then the account becomes the property of the state typically 3-5 years of no activity (varies state to state)
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Error in confirmation
* if an error is found a ocrrected confirm must be sent to the customer
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Error in execution
* the firm is obligated to make good on the orginal order as long as the market would have allowed that trade to be executed.
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Error account
* firm must take erroneous transactions out of the customer account and place it in the firm's error account
* correcting trades shoudl be executed in teh firms error account and the resulting position is transfered to the customer account -
* any loss restuling from the correcting trade remains in the error account
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Written customer complaints
* a customer complaint is one that is received in wirting
* each written complain must be resolved under teh supervision of a principal (the registered repo cannot resolve the complaint on their own).
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Written complain received by a clearing firm about one of its introducing brokers
* the clearing firm must:
* send a copy of the complaint to the introducing firm
* a copy to finra
* acknoweldgement to the cusomter that the complaint was forwarded to both
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Acocunt Transfer
Proedure for a transfer of an account:
1. ACATS transfer form: customer fills out the transfer instruction at the receiving firm (ACATS form / TIF Form)
2. the cusotmers signature must be guaranteed (medallion signature guarantee). If an account is joint all owners must sign.
if its a ret plan asset the signuatre of the plan custodian or trustee is reuquired.
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if an asset is non transferrable
The cusotmer can keep the position at the carrying firm
or authorize that the position be liquidated and the proceeds transferred to the new firm
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Non Transferable assets
* proprietary products of the carrying firm
* a 3rd party mutual fund or MM fund with which the receiving member cant carry
* an asset tha tmay not be received due to regulatory limitations on receiving members business
* an asset that is a bankrupt issue for which the carrying member does not possess the proper denominations or quntity of shares necessary to effect delivery and no transfer agent is available to re-regiser the shares
* an asset that is an issue fo rwhich proper demoninations cannot be obtained pursuant to gov regulation or issuance of security (i.e. foreign securities)
* limited partnership interest in retail accounts
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if there is a differnece in the name of the account of the carrying fimr and the recieving firm then:
the owners must provide appropirate documentation to support the change
(i.e. divorce, divorce certificate must be provided)
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TIF must be sent by to whom when?
by the receivign frim to the carrying firm immidiatly
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what happens when the TIF / ACAT is recievd
* upon receivet of the form the carrying firm has 1 buseinss day to verify the positions and validate them or take exception to the listing
* if exceptions are found they must be resolved promptly
* upon receipt of ACATS form at the carrying firm, that firm must freeze the account and cannot execute any new orders
* new orders must be entered through the receiving firm
* within 3 days of validation of the informatino on the form transfer must be completed.
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customer positons not at the firm during a tranfer (TIF / ACAT out)
(Fails to receive)
* any customer positions that are not physically at the firm must be brought in and delivered within 10 business days of the validation date
* (e.g. shares that were loaned out on short sales)
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