What Is a Trading Authorization?
Trading authorization refers to the level of power entrusted to a broker or agent by a client. Trading authorization dictates what actions an agent may perform, such as buying or selling. This can be similar to the concept of power of attorney and will often be discussed when an investor engages with a new financial advisor or broker. In simple terms, trading authorization refers to whoever is given access to trade on the behalf of the investor and what permissions they have.
How a Trading Authorization Works
Trading authorization levels allow an investor to give certain types of access to a third party for the purpose of trading on a designated account. Trading authorization typically becomes a consideration when an individual chooses to engage with a financial professional for financial advisory services. An individual may wish to grant this professional access to investment accounts that are already established or they may choose to open a new account with the intention of designating access.
Generally, there are typically two types of trading authorization levels, full trading authorization and limited trading authorization. Establishing these trading authorization levels requires the primary account holder to consent to the authorization through a formally documented agreement.
Trading Authorization Levels
An individual can typically grant a third party either limited trading authorization or full trading authorization.
Limited trading authorization: This type of authorization allows a broker, financial advisor or other designated agent to place trades with funds held in an investment account. Limited trading authorization gives a third-party agent the ability to act on profitable trading opportunities on behalf of the primary account holder.
Full trading authorization: Full trading authorization is the broadest authorization available to an agent. It can sometimes also be referred to as power of attorney. With full trading authorization the agent can perform all of the account activities available for the primary account holder. With full trading authorization an agent can also access and withdraw funds.
Authorization Processes and Procedures
Trading authorization documentation is a common practice with most brokerage firms. Brokerage firms across the industry from Edward Jones to Morgan Stanley will all offer their clients the option to designate trading authorization to an agent. In some instances, trading authorization may be given to a broker of the firm while in other cases the agent will be an unaffiliated third party. Additionally, in some instances, trading authorization can be given to a family member.
Authorization processes and procedures for designating trading authorization will also vary across brokerages. Generally, most brokerage firms will have a trading authorization form found with other important forms and documents available through their client portal. Investors can authorize an agent by filling out the required documentation and following the firm’s submission process. Typically, investment firms will contact the client with confirmation that trading authorization has been established which allows the agent to begin acting on behalf of the client.
Basic information required on the new account form
- Customer Name And Address
- Cash Or Margin Account
- Customer Date Of Birth
- Social Security Or Tax I.D. Number
- Occupation - Employed By Another Financial Services Firm?
- Possibly citizenship
- Possibly officer, director or 10% shareholder of any company
where the customer pays in full for purchases
where the customer makes a partial payment and is loaned the balance by the brokerage firm
A new customer wants to open an account at your firm. When you ask him for a street address, he tells you that he will be moving soon to a different apartment complex and wants to use his business address.
The business address can be used for Customer Identification purposes and the account can be opened
A new customer has come into your firm to open an account. He tells you that he is 21 years old, recently graduated from college and that he is looking for a job. He is contacting you because he recently inherited $250,000 and wants to invest it for growth and income. When you are completing the new account information, you ask him for his street address and he tells you that he was just evicted from his apartment and has moved into a long-stay hotel until he finds a new place to live.
The address to be used for Customer Identification purposes is the address of a close relative
A customer wishes to open a new account, but refuses to give his or her social security number and date of birth, claiming that the release of such information would allow the customer's identity to be stolen
The account cannot be opened. This is one of the 4 critical pieces of information
Independent verification of a new customer's identity can be satisfied by obtaining a photocopy of
passport , driver's license, military ID
A customer that wishes to open a new account is asked by the registered representative for a government-issued photo identification. The customer gives the representative a copy of his driver's license, which the representative notes has expired 3 months ago
As long as another non-documentary method is used to verify the customer's identity, the account can be opened
To open a partnership account, the social security number(s) or tax identification number to be used is (are) the number(s) of
The partnership. To open an account for any legal business entity such as a corporation, partnership or trust, the tax identification number of the entity must be used.
A married couple opens a joint margin account. The brokerage firm will send the Internal Revenue Service Form 1099 (Report of Interest and Dividends Earned) to the
person whose social security number was given on the account form
A FINRA member firm uses a structure for its wealthy client group where a “team” of registered representatives with differing specializations services those accounts. In order to do this, the member firm must
document the role and responsibilities of each member of the team
Under FINRA rules, all of the following are "essential facts" needed to open a customer cash account
Customer citizenship , Customer social security number, Customer date of birth.
Customers must be given information about SIPC
at, or prior to, account opening
paperwork is customarily needed to open a margin account
Margin agreement, loan consent agreement, credit agreement
Regarding arbitration agreements between member firms and customers
Each member firm can require each customer to sign an arbitration agreement as part of the account opening process . Industry arbitration is preferred over litigation as a means of settling disputes because it is cheaper and faster
Under SEC rules, customer account information must be verified by the member firm
Within 30 days of account opening and every 36 months
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 to ascertain the customer's investment profile."
customer's "investment profile" includes:
- 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.
3 main components to determining suitability for a client
- Reasonable-Basis Suitability;
- Customer-Specific Suitability; and
- Quantitative Suitability.
Reasonable-Basis Suitability
This covers the "big picture." It requires the member firm or associated person to determine that the recommended strategy or investment is one that has been reviewed and assessed, comparing the risks versus potential returns, and that this recommendation makes "sense" for the "right" investor.
Customer-Specific Suitability
the member firm or associated person must have a reasonable basis to recommend a transaction or strategy based on an evaluation of that customer's "investment profile."
Even if a recommended transaction to a customer is suitable as a 1-time transaction, it may be the case that a series of similar recommendations to that customer, when taken together, will result in excessive activity. This is a "legalistic" way of saying that an associated person cannot recommend transactions to "churn" a customer's account (excessive trading with the main intent of earning higher commission income).
A representative meets a potential client at a convention. The client is interested in an investment giving life-long income, and the representative recommends a variable annuity contract. The customer opens an account and completes the purchase, but 30 days later, the customer calls the representative, telling him that he is not happy and he wants to move to another firm. What action should the representative take?
The representative should talk to the manager to determine if there was a Know Your Customer violation. This question is judgmental, but this was a new client that was met at a convention. The client made an investment, and then 30 days later, wants it moved to another firm because he is "not happy." Before an account is opened for a client, the representative is supposed to go through extensive fact-finding to determine that the variable annuity recommended is suitable for the client. Since this client is "not happy" 30 days later with the investment, it appears that the KYC (Know Your Customer) rule was not followed. The situation should be discussed with the manager.
Under FINRA rules, "suitability" means that
Investment recommendations made to a customer are appropriate for that investor
A registered representative is soliciting a customer to purchase a security that has just been placed on his firm's "recommended" list, and which the representative feels is suitable for that customer. After discussing the recommendation, the customer is still resisting making a purchase. Which action by the registered representative is appropriate?
The registered representative should accede to the customer's wishes. representative should not "bully" the customer into making a purchase.
The main risk of investing in an ETN is
Credit risk, lots can go wrong in 7 years
Exchange Traded Notes, index linked structured product, that is listed and trades on an exchange. These products are only as good as the guarantee of the issuing bank. They typically have a 7 year life - and a lot can go wrong in 7 years
The definition of a pattern day trader is a person who executes at least
4 day trades in a 5 business day period . Day traders take on greater risks than normal customers and are therefore subject to a more stringent suitability determination and must receive a risk disclosure document prior to account opening.
When comparing fixed fee accounts to wrap accounts
Fixed fee accounts generally only cover transaction costs. Wrap accounts generally cover transaction costs, asset allocation and portfolio management
Non-Managed Fee Based Accounts (NMFBA)
A fee-based account imposes a flat annual fee for all trade executions, rather than a "per trade" commission charge. Sometimes this is cheaper than paying per commission. The member firm is obligated to determine that a NMFBA is appropriate for the customer, taking into account services provided, anticipated costs, and the customer's investment objectives. Account activity must be reviewed for appropriateness at least every 12 months
If it is determined that a customer account that is paying an annual flat-fee would have been cheaper if the customer paid a commission on each trade, then the member firm
must contact the customer, providing the information needed to determine if the customer should maintain the fee based account.
FINRA states that member firms do not have an obligation to shield their senior citizen customers from risks that they want to take, but the customer must fully understand the product being recommended. This must include a fair and balanced picture of the risks, costs, and benefits associated with the recommended product or transaction.
An elderly customer normally comes into your branch office each week on Monday to discuss his account and place trades. This week, he comes in on Wednesday, looking confused and disoriented. However, the trade that he wishes to place conforms to his normal investment practice. The representative should
Immediately contact the firm's compliance department for guidance on how to handle the situation. Once the problem is identified, the next step for the firm is to stop trading in the account until the concern no longer exists. Then the firm should contact next of kin.
Under FINRA rules, if a member suspects that a senior citizen is being financially exploited
A temporary hold may be placed on disbursements from the account for up to 15 business days . Any hold placed on the account, if supported by the member's review of the situation, can be extended for another 10 business days
To prevent financial exploitation of seniors, FINRA requires that when opening an account for a client, reasonable efforts must be made to obtain the name, phone number, and mailing or e-mail address of
To open an options account, the customer must be sent the Options Disclosure Document
To open an options account, the customer must be asked specifically about
- Investment Objective;
- Investment Experience;
- Financial Situation;
- Financial Needs;
- Marital Status;
- Net Worth;
- Liquid Net Worth;
- Estimated Annual Income.
- Tax Bracket
A customer must sign and return what documents within 15 days after opening an options account
Options agreement. The Options Agreement is a recap of the customer new account profile including the suitability determination and it qualifies the customer for a level of options trading, detailing which options transactions are permitted. If the agreement is not returned, the registered representative is prohibited from accepting new opening trades - only closing transactions are allowed.
account can only sell covered calls (the most conservative and popular options strategy) or buy puts to hedge existing stock positions;
sell covered calls (the most conservative and popular options strategy) or buy puts to hedge existing stock positions; Can also buy calls and buy puts to speculate;
sell covered calls (the most conservative and popular options strategy) or buy puts to hedge existing stock positions; Can also buy calls and buy puts to speculate; can also take spread positions
sell covered calls (the most conservative and popular options strategy) or buy puts to hedge existing stock positions; Can also buy calls and buy puts to speculate; can also take spread positions. can do anything, both covered or naked.
A client has an options account that is qualified to buy options and sell covered calls. The client calls his representative, telling him that he wants to sell naked calls in the account
The customer must be sent a new Options Agreement which must be signed and returned within 15 days. The Registered Options Principal must reapprove the account for naked options writing. The “Special Statement for Uncovered Options Writers” must be provided before executing the transaction.
Under the rules of the Options Exchanges, if a customer's financial condition changes materially, then what will be amended
Options Agreement and New Account Form Information
Recommendations by a registered representative to a customer about uncovered call writing strategies are unsuitable if the
Customer has not received the Options Disclosure Document Opening of the account has not been approved by the Registered Options Principal Representative is unsure about the client's ability to assume the risk associated with this strategy
A woman in the 15% tax bracket wishes to buy a municipal bond. The registered representative tells her that such an investment is not appropriate. The registered representative can execute the trade
At the specific direction of the customer. We call this the MSRB "Do It!" rule.
A customer wishes to a buy a municipal bond that the registered representative feels is unsuitable for that customer. After explaining this, the registered representative is told by the customer "Just do the trade; let me worry about it."
No recommendations are permitted. Unsolicited transactions can still be accepted in the account.
Who can approve the opening of an account
Branch office manager and general principal (24)
Approval of new accounts for MSRB member firms can be performed by
the registered municipal securities principal 53, 9/10 (Branch Office Manager) or 24 (General Securities Principal)
Which documents are completed when opening a margin account?
I new account form II margin agreement III loan consent agreement IV credit disclosure statement
Joint Tenancy With Rights Of Survivorship and Tenancy In Common
Joint Tenancy With Rights Of Survivorship
Each party owns an "undivided interest" in the account. If one party dies, the other person is the sole owner of the account. This ownership option is most common for husband and wife. Another name for this type of account is "Tenants by Entirety."
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. This ownership option is most common for business partners.
registration allows the elderly parent to maintain full control over the account. The registration transfers to the name of the beneficiary only upon death (and also avoids probate, since the estate is bypassed). Used by Elderly Adults
To open an account for a corporation, proof that the corporation exists must be obtained. This takes the form of a "corporate resolution." The corporation must pass a resolution authorizing the opening of the account and designating the persons authorized to trade. The "resolution" is signed by the Secretary of the corporation and the corporate seal must be affixed to the resolution. In addition, it is highly recommended that a copy of the corporate charter be obtained for the account file.
A copy of the partnership agreement must be obtained. The agreement will have a clause allowing the opening of the account and naming the partners authorized to trade. Most partnership agreements are amended annually, so each year an amended agreement must be obtained. Also note that if the account is for a limited partnership (which must have at least 1 general partner who is the manager, and can have any number of limited partners, who are the passive investors), the only signature required to open the account is that of the general partner, who has the power to bind the partnership.
To open an account for a limited partnership, the required signatures are those of the
Institutional investors often maintain accounts with a number of different brokers, because some firms are better at trading different types of assets (e.g., a bond firm that specializes in corporate bond trades, a municipal bond firm, a corporate equities firm) and because, in return for sending commission trades to different firms, the institution gets valuable research or recommendations. The problem is that the institution's assets get scattered across different broker-dealers. A "prime" brokerage account designates a single broker as "primary" - a place where all assets are consolidated. The institution names its executing brokers in advance to its "prime broker" and the prime broker settles all trades, maintains custody and provides lower financing costs on margined positions because all positions have been consolidated at the "prime broker."
First party in brokerage account
second party in brokerage account
third party of brokerage acount
anyone other than the broker or customer
third party trading authorizations
Limited Trading Authorization and Full Trading Authorization
Limited Trading Authorization
Orders to buy and sell can be entered, bu funds cannot be withdrawn
Full Trading Authorization
Orders can be entered and funds can be withdrawn. Any checks from the account are drawn in account name - not third party name. Thus, if the check will be cashed, the customer must endorse the check.
durable power of attorney
if the grantor becomes mentally incompetent, the person to whom power of attorney was granted retains control over the account
non-durable power of attorney
if the grantor becomes mentally incompetent, the power ceases
customer account with a "full power" third party trading authorization?
Checks drawn on the account can only be made out to the name of the customer, not to the third party. Upon the death of the customer, the power of attorney is revoked. The third party can enter orders in the account. The customer can designate that confirmations be sent only to the third party
customer account with a "limited power" third party trading authorization?
The third party can enter orders in the account and Upon the death of the customer, the power of attorney is revoked
A nephew has been given a durable power of attorney over his uncle's brokerage account. Upon the death of the uncle, the power of attorney
An elderly customer has a discretionary account with your firm. The power of attorney signed by the customer for the account is non-durable. If the customer becomes mentally incapacitated, the registered representative handling the account
can no longer effect discretionary trades for that customer
requiring a written power of attorney, an account in which an investor gives the broker authority to choose the amount and/or the security to be traded in the account. Note that no power of attorney is needed for a broker to select the price and time of execution in an account - this is not considered to be "discretionary."
required for discretionary accounts
every order ticket initiated by the registered representative must be marked "discretionary" . Every discretionary order ticket must be approved by the manager or principal. A written power of attorney must be obtained from the customer before discretionary trades are effected
a written power of attorney is required for a registered representative to choose what order related items
Security to be traded and size of the order
An individual customer says the following to his broker: "Buy 100,000 shares of ABC stock whenever you think the time is best. This order is good unless I call you to cancel."
The order must be executed by the close of the market on that trading day. Discretion over price and time of execution can be given verbally. However, the order must be filled by the close of the market on that day or it is canceled. If price and time discretion are given for a time period that is longer than 1 day, then a written power of attorney from the customer is required to accept the order.
If a retail customer gives a market-not held order
the order is treated as a "day" order
When completing a new account form, you discover that the customer is an accounting supervisor at another FINRA member firm. Under FINRA rules
Prior to opening the account, written approval of the employing member must be obtained . The associated person opening the account must give written notice to the executing member of his or her association with the employer member. Duplicate confirmations and statements must be sent to the employer member on request.
The MSRB requires that if an employee of another municipal broker-dealer wishes to open an account at your firm
Duplicate copies of each confirmation must be sent to the employer
Types of fiduciary accounts
- Trust Account
- Guardian Account
- Administrator of Estate
- Conservator for Incompetent
- Executor of Estate
- Receiver In Bankruptcy
Trading authorization cannot be given to a third party other than the fiduciary. No margin accounts are allowed unless the account documentation authorizes the opening of a margin account
An officer of a trust wishes to open a margin account with your firm. This is allowed
if the trust agreement specifically authorizes the opening of a margin account
A copy of the trust agreement must be obtained. The agreement will specify the types of transactions that the trustee is allowed to perform. These accounts cannot be margin accounts unless specifically authorized by the trust agreement.
To open a new account for a trust
The tax identification number of the trust must be obtained. Trusts are legal entities that are taxed under the Internal Revenue Code, thus they have their own tax identification numbers.
A married registered representative with 2 children has a client who is her father-in-law. The father-in-law wants to establish a Trust account for his son (the representative's husband) and his 2 grandchildren. The grandfather wants to appoint the representative as the trustee and pay her a trustee fee.
The registered representative cannot act as the trustee because of the conflict of interest.
A legal guardian is a person appointed by a court to protect the assets of a minor or an incompetent adult. To open such an 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 incompetent. An account for an individual declared incompetent in a court proceeding
No third party can trade in the account. Only an individual can be a custodian. The social security number used can be the minors. when the minor reaches age of majority they must take control of the account. Tax liability is the responsibility of the minor; the income is taxed at the parent's rate
If a customer wishes to open an account for a minor without additional documentation, the account must be opened as a
An aunt wishes to open a custodian account to give a gift to her minor niece
Any adult can open an account for a minor. The adult does not have to be related to the minor.
Uniform Gifts to Minors Act (UGMA)
allows "custodian" accounts to be opened for the benefit of a minor.
Difference between UTMA and UGMA
UGMA limits gifts to bank deposits, securities and insurance; while UTMA allows almost any kind of asset to be transferred, including real estate, fine art, copyrights and patents. UGMA specifies that account transfer occur at "legal age" in that state, which is most often age 18, while UTMA allows the state to set a transfer age (most states use age 21).
Person that a customer entrusts to manage his money. The investment adviser will open an account with a brokerage firm to perform trades for that customer. It is not uncommon for an adviser to have hundreds of customers.
An account established with a broker-dealer by an investment adviser and used to make trades for his or her customers. The broker-dealer firm essentially serves as a back office for the investment adviser - accepting checks from customers, sending out confirmations and monthly statements, and keeping account records.
Methods for opening an investment adviser account?
Each individual client of the adviser opens an account under the client's name. The adviser opens an Omnibus account holding all of his clients' funds and securities
a brokerage account where all customer services are "wrapped" into one account with an annual fee typically based on a percentage of total assets invested with the firm. No separate commission charges are imposed for each transaction performed in the account. No separate charges are imposed for safekeeping of securities in the account.
Under FINRA rules, numbered accounts are
permitted if the firm maintains a written statement of the customer attesting to ownership
A customer sends an IM to his registered representative with an order to buy 500 shares of ABCD at the market
The order cannot be accepted because the firm cannot verify that it was the customer who actually sent the order.
A registered representative receives an order to sell 100 shares of ABC stock that has been "transferred and shipped" to the customer. Before executing the order, the registered representative must
Ascertain the location of the stock and ascertain that the securities can be delivered in 2 business days
Under FINRA rules, order tickets must be prepared
Under FINRA rules, order tickets (which are now electronic) must be prepared in writing prior to entry. Once an order has been executed, no alterations are permitted to the ticket unless a manager approves in writing.
A registered representative ("RR") has entered an order to buy 100 shares of ABC at $50 per share for a customer. The transaction is executed at $50 per share, and when the representative is reporting the trade to the customer, she notices that the account number on the executed order ticket is wrong
The "RR" may change the account number on the order ticket to the correct number if the branch manager approves in writing. Alterations to executed order tickets are prohibited unless the manager knows the reason for the change; and approves, in writing, of the change on the order ticket.
A registered representative takes an order from a customer to buy 100 shares of PSSS stock at $40 and writes the order ticket for processing. The registered representative fails to include the number of shares to be purchased on the ticket.
The order will be returned to the representative for entry of the order amount. Incomplete order information on an order ticket will result in the ticket not being processed. It will be returned to the representative for entry of all of the required information.
What conditions must be met to send a confirmation solely to a person holding a power of attorney in a customer account?
The customer must request the sending of the confirmation in writing
A customer places an order to buy 100 shares of ABC at the market. The execution report shows the trade occurring at $45.63. The firm sends out a confirmation which states that the trade occurred at $45.38
The customer will pay $4,563 plus any applicable commissions. The firm sends the customer a corrected confirmation.
A customer places an order to buy 100 shares of ABC stock at $50 per share when the market price of the stock is at $60. The member firm fills the order at $58. By the time the error is discovered the next day, the stock is trading at $48.
The customer must be offered the $48 price per share. This is an example of an error in execution. If an erroneous execution occurs, it is the responsibility of the firm to correct the error. Due to the fact that the error is discovered the next day when the stock is offered at a price ($48) better than the customer's limit price ($50), the customer must be offered the stock at the price at which it is currently trading.
A customer places an order to buy 1,000 shares of a stock at $40. The registered representative enters the order. After execution, the registered representative notices that he had erroneously entered the wrong number of shares on the order ticket. The amount read 100 shares, and this amount was purchased.
The firm is obligated to provide 1,000 shares at $40. Any additional cost of filling the remaining 900 share order is the responsibility of the firm. The firm is obligated to make good on the order and provide the customer with 1,000 shares at $40 - as long as the market would have allowed that particular order to be executed. This is an error in execution, and such errors are the responsibility of the firm.
If an execution report shows that an erroneous execution has occurred, the responsibility for the trade rests with the
brokerage firm executing the transaction
A customer has 1,000 shares of a stock and wishes to sell 100 of the shares. He places a limit order to sell 100 shares at $52. The order is placed, but is erroneously executed as "Sell 1,000 shares at $52." The confirmation to the customer states that 1,000 shares were sold at $52.
Any loss due to the firm's error must be absorbed by the firm. The firm must replace the shares that were erroneously sold.
A customer who has previously placed an order calls back and cancels. The representative informs the customer that the order already has been filled.
The order is binding on the customer and the order cannot be canceled by the customer
mailing of account statements to customers?
If there is no trading activity in the account, statements must be mailed quarterly and If there is trading activity in the account, statements must be mailed monthly.
A customer wishes to have his mail held for 6 months
The mail can be held upon the customer's written request as long as the customer gives a valid reason for making the request. If a customer requests in writing and no specific reason is given, that customer's mail can be held for a maximum of 3 months. A client who wishes to have mail held must give a valid reason for the request if the time period of the hold exceeds 3 months, when aggregated with any hold requests received over the prior year.
A customer has been receiving confirmations and statements by mail and asks the registered representative if these can be sent by e-mail. The proper response is that this
Can be done if the customer requests by e-mail.
If a customer discovers an error on his or her account statement, the error must be reported promptly to
The member firm that maintains the account. The issue at hand is that FINRA is concerned about registered representatives that do unauthorized trading in their customer accounts to generate commission income, without the customer knowing about or authorizing the transactions. So FINRA requires that a legend be placed on customer account statements that any errors found must be reported to the member firm promptly. The person to whom the report cannot be made is the registered representative, since if he or she is effecting unauthorized trades, then the report just might get "lost."
FINRA defines a "customer complaint" as one that is received by the member firm
In writing by mail or by e-mail
If a customer calls his registered representative and states the following: "I just got my account statement and I see that your recommendations have lost 15% in value. Clearly, you have made unsuitable recommendations and you will be hearing from my attorney." how should the representative should handle this?
No action need be taken by the representative because the customer has not complained in writing.
A registered representative, about to retire, is transferring his "book" to a younger representative at his firm. The representative that is assigned these accounts must
Update the customer account records. The transfer of accounts within a firm from one registered representative to another simply requires the approval of the manager and requires that the new representative update the customer's account records (new account form information). To transfer accounts from one firm to another requires the completion of detailed account transfer forms by the customer.
A customer has completed an account transfer instruction form at broker-dealer "B," instructing that his account be transferred from broker-dealer "A." Broker-dealer "A" has validated the positions, but has not yet completed the physical transfer. If the customer wishes to sell any of his securities positions prior to the physical transfer
The sell order must be placed with broker-dealer "B"
A customer has a proprietary position in an account that he wishes to transfer. He would be notified that the account
proprietary position must either be liquidated or retained at the carrying firm
A customer account is required to be frozen and closed upon the customer's
Written instruction , Death, Legal incapacitation
When the holder of an individual account dies, the account is frozen and no more trading can occur. The account assets go to that individual's estate, which must go through probate. To transfer the assets into an account for the estate
- A copy of the death certificate must be provided
- An executor's letter, which authorizes the named individual to act on behalf of the estate as the executor.
- An Affidavit of Domicile must be completed. It declares the state of residence of the individual, therefore that State's laws will apply to the estate.
A registered representative is notified verbally by the niece of a client that her uncle has passed away
The niece must provide a certified copy of the customer's death certificate before the assets in the account can be frozen
A registered representative is notified verbally by the nephew of a client that his uncle has passed away.
The registered representative cannot freeze the assets in the account because the nephew is not considered to be an immediate family member . A certified copy of the customer’s death certificate must be provided before the assets in the account can be frozen.
A customer has opened an individual account held TOD with 3 named beneficiaries who are to share equally in the account upon the client's death. The customer dies and the beneficiaries call the representative, asking that they be sent checks for their respective amounts. What should the representative do?
Wait for a copy of the death certificate and any other necessary paperwork and then open an account in the name of each beneficiary holding 1/3rd of the assets from the deceased client's now-closed account
At all times the registered representative must keep the following records relating to each existing customer account under FINRA rules:
- Copy of new account form information;
- Chronological record of trades;
- Current account statement showing securities positions; and
- Physical location of securities positions held.
Brokerage firms are divided into a number of areas to handle customer orders and accounts. These are:
Order department, purchase and sale department, margin department, cashier, proxy department, and reorganization department.
Receives orders from registered representatives, verifies the completeness and correctness of the order, and transmits the order to the exchange or OTC trader for execution. Once the order is executed, the order department sends a copy back to the registered representative and forwards a copy to the Purchase and Sales (P&S) department.
Purchase And Sales Department
From the executed order ticket copies, P&S prepares and mails the customer confirmation to be sent out no later than the business day after trade date. The trade is also recorded in the firm's purchase and sales ledgers. The firm removes the trade from these ledgers on settlement date, by which date the information is transferred to the customer account record.
The margin department is a bit of a misnomer since this department is responsible for keeping customer account records. From the P&S confirmation copy, trades are posted to the customer accounts. The margin department keeps a record of all stock positions, debit and credit balances in customer accounts.
Receives and delivers cash and securities.
Margin customer securities are held in "street name." Therefore, when a shareholder vote is being taken, the brokerage firm is listed as owner of record to receive the voting materials. The firm then re-mails the voting materials to the beneficial owners of the stock.
Reorganization Department
Notifies customers of companies whose stock they own that are the subject of takeovers or tender offers; of bonds that are being called; etc. Any unusual situation affecting the customer should be communicated by this department.
A tender offer has been made for PDQ common shares. The brokerage firm department that would handle the tendering of shares is the
Reorganization department, handles corporate reorganizations
such as tender offers and takeovers.
Under the requirements of the USA PATRIOT Act, to open an account for a non-resident alien
Verification Of Name And Address, Non-Resident Alien Passport Number, Matching To Terrorist Watch List. The Department of Treasury's Office of Foreign Assets Control (OFAC) maintains a list of named countries, organizations, and individuals with whom anyone in the U.S. is prohibited from doing business. Need tax identification number and telephone contact number
Suspicious Activity Reports (SARs)
must be filed within 30 days of the date of the initial detection of suspicious activity
indicators of potential money laundering:
- Unusual concern w/ firm's compliance w/ govt
- Reluctant to reveal information about business
- Unusual /suspect ID /business docs
- Wish to engage in transactions that lack business sense
- Acting as agent for another entity but reluctant to give info about them
- Difficulty describing their business /lacking general knowledge of their industry.
Depositing or withdrawing cash to or from an account in amounts just below Federal reporting requirements (10k)
A new customer opens an account and buys a variable annuity contract, investing $20,000. 90 days later, the client calls and tells the representative that he wants to surrender the contract. The representative explains that this is not a good idea, since there will be a high surrender fee of 8% imposed. The client tells the representative that he does not care about the surrender fee and that he wants the net proceeds wired to an account at a bank in another country. What should the representative do?
Have the firm file a SAR (Suspicious Activity Reports) with FinCEN
The purpose of OFAC (Office of Foreign Assets Control) is to
impose economic sanctions against hostile foreign countries and groups
Statement of Privacy, requires broker-dealers and other "financial institutions" to provide retail (not institutional) customers with a notice of the firm's privacy policies and practices. Firms cannot divulge non-public information about customers to third parties unless the firm has given notice to the customer that this may happen; and the customer has not elected to opt out of the disclosure.
Delivery of the privacy notice required under Regulation SP is required for
notification to customers of a member firm's privacy policies and practices