Business Practices- Conduct of Customer Accounts, Payment/Margin/Commingling Rules

To open a new account for a customer, 4 "critical" pieces of information must be obtained:
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To open a new account for a customer, 4 "critical" pieces of information must be obtained:
Customer Name
Customer Address
Date of Birth
Social Security Number


This information must be used to independently verify the customer's identity promptly after the account is opened
If the customer refuses to provide any of this information, the account cannot be opened
is a customer signature required when opening a cash account
NO- There is no customer signature required to open a cash account - this permits firms to open cash accounts over the phone. On the new account form, the agent who performs the suitability determination and the approving manager must sign; but the customer is not required to sign.
is a customer signature required when opening a margin account
YES- If a customer wishes to open a margin account, then the customer must sign the margin (hypothecation) agreement, where the customer legally pledges the securities in the account as collateral for the loan from broker to customer
If the customer refuses to sign the margin agreement, a margin account cannot be opened for that customer (however, a cash account could be opened).
NASAA wording states that the signed margin agreement must be obtained
promptly after the first transaction in account.
can a third party open an account for a customer
NO- Only the named customer can open an account; a third party cannot open an account for a customer.

However, if the customer has given a full power of attorney in writing to a third party, then that third party would be authorized to open an account on that customer's behalf.
The signed third party power of attorney would be required to be kept by the broker-dealer or investment adviser if this were to occur.
An agent cannot exercise discretion in a customer account unless
the customer gives the agent a written power of attorney.
can an agent accept verbal power of attorney from a customer
NO- An agent cannot accept a verbal power of attorney from a customer.

Of course, an agent must follow a customer's verbal directions directing a specific action, such as a customer telling the agent to do a specific trade or to issue a check.
Verbal instructions in an individual account can only be accepted from
the named customer, unless that customer has given trading authorization, in writing, to another person.

The named customer on the account cannot give a verbal trading authorization to another individual.
The firm must keep the copy of the signed third party trading authorization for the account on file.
The joint account agreement permits
The joint account agreement permits any one of the named owners to enter trades in the account - it is not required that consent of all of the named owners be obtained to effect a trade.

The joint account agreement permits any one of the named owners to order that a check be drawn on the account - but the payee on the check must be the full account name - that is, all of the owners are named as payees on the check.
does a customers attorney have implicit power of attorney over the account
NO- A customer's attorney does NOT have an implicit power of attorney over the account. For an attorney to trade a customer's account, the customer must give written trading authorization.
A trade is considered to be "discretionary" and a written power of attorney is required if the agent selects either:the size of the trade; or the security to be traded.No written power of attorney is needed for an agent to select either:the price of execution; or the time of execution.NASAA rules permit investment advisers to accept verbal discretion from a customer, as long asthe adviser gets a written power of attorney from the customer within 10 business days of the adviser beginning to exercise discretion.Before recommending a security to a customer, the agent must first determine that the investment is "suitable" for the customer. Actions that violate the "suitability rule" include:failure to inquire as to a customer's financial situation, needs, and investment objective. recommending securities without regard to the customer's financial situation or objective. recommending a security without having a reasonable basis for the recommendation.When constructing a portfolio for a customer, consideration must be given to the customer's:investment objectives investment needs current portfolio holdings tax considerationsA customer has a joint account with her husband. She discusses with you a specific NYSE stock in which she wants to invest. She wants to wait for it to move lower before making a purchase. One week later, the stock begins to rise in price and you try, unsuccessfully, to contact the customer. You are concerned that the stock may keep increasing in value, thereby losing an opportunity for your customer. Which action is appropriate? Purchase the stock since this is what the wife expressed in the phone conversation with you Purchase the stock upon verbal authorization from the customer's husband Purchase the stock in your own account and transfer the shares to the customers' joint account upon her approval Do nothing unless approval to purchase the shares is obtained from both the husband and the wifePurchase the stock upon verbal authorization from the customer's husbandA client of a RIA dies. His attorney calls the RIA and instructs him to sell 500 shares of ABC at the market and deposit the proceeds to the client's checking account. The RIA should: accept the trade verbally and follow the attorney's instructions get a copy of a power of attorney that authorizes the attorney to act on behalf of the client get a copy of the client's will to see what is allowed and what is not allowed require the attorney to send the instructions in writing either by e-mail or faxget a copy of the client's will to see what is allowed and what is not allowedA Registered Investment Adviser has discretionary control over 50 accounts that range in value from $200,000 to $1,500,000. She receives a free due diligence trip from a real estate limited partnership sponsor to inspect a property in Florida. She is enthusiastic about the investment potential and purchases a $50,000 real estate limited partnership unit in the property for each of her accounts. The RIA disclosed the fact that she received the free trip to each of her customers before making the purchases. Which statement is TRUE? This is unethical because taking the free due diligence trip and then buying the partnership units for her clients is a conflict of interest This is unethical because the adviser did not determine the suitability of the investment for each account This is unethical because the adviser violated her fiduciary responsibility to her clients This is an ethical business practiceThis is unethical because the adviser did not determine the suitability of the investment for each accountThe Federal Reserve sets the rules for payment of customer securities purchases in both cash and margin accounts. Payment is required WHEN"promptly," but no later than the 4th business day past trade date.If payment of customer securities purchased is not received, what happensIf payment is not received, the unpaid position must be sold and the account must be frozen for 90 days.putting a CUF"putting a CUF" on the account - CUF standing for Cash Up Front. A customer can make purchases in a frozen account, but must deposit the cash amount in advance. If the customer behaves for 90 days, the freeze comes off the account, and the customer is again expected to pay for purchases "promptly," but no later than 4 business days from trade date.margin account prohibitionsA customer cannot buy a security without intending to pay by settlement - either by making full payment in a cash account or by depositing the required margin in a margin account A customer cannot sell a security without intending to deliver the security on settlement A customer cannot sell short a security unless it is first determined that the security to be sold short can be borrowed and delivered by settlementcan a broker dealer commingle its funds or securities ?It is prohibited for a broker-dealer (or agent) to commingle (mix-up together) its funds or securities with customer funds or securities. It is permitted for a broker-dealer to commingle one customer's securities with those of another customer, as long as those customers signed a margin agreement (where the customer authorizes this). An agent cannot take personal custody of customer funds or securities - these must be forwarded directly to the broker-dealer.In order for customer securities to be "transferred and shipped," they mustbe fully paid If there is a margin loan against them, the firm cannot honor such a request, since the securities are held in "street name" by the firm as collateral for the loan.