Series 7 Study Guide Navigation
- Series 7 Study Guide Home
- 1.1 Contact with potential and current customers, marketing material development, approval, and distribution
- 1.2 Describing investment products to potential and current customers
- 2.1 Tells potential customers about the account types available and discloses their restrictions
- 2.2 Secures and updates information about customers along with relevant information and documents
- 2.3 Gather customer investment profile information
- 2.4 Get necessary supervisory approval to open accounts and make account changes
- 3.1 Passing on all investment strategy information to customers
- 3.2 Analyze customer’s portfolio of investments as well as product options to determine suitability
- 3.3 Disclose to clients characteristics and risks of investment products
- 3.4 Communications with customers
- 4.1 Providing current quotes for investors
- 4.2 Processing and confirming customers’ transactions as per regulations
- 4.3 Notifies the correct supervisor, helps with solving discrepancies, disputes, errors, and all complaints
- 4.4 Dealing with margin issues
Requirements for opening accounts
When it comes to opening accounts for natural persons, what are the legal requirements?
Well, there is a process that needs to be followed.
New account form
That process starts with a new account form.
Member firms must create a separate record for each account as stipulated by FINRA Rule 4512.
These individual records will contain the following information:
- Customer name
- Customer address
- If they are of legal age
- The associated person of the firm responsible for the account (if any)
- Names of persons allowed to transact business on behalf of an entity (if a partnership, corporation, or other legal entity)
- Partner, officer, or manager’s signature to show that, in acceptance of procedures and policies relating to the member’s acceptance of accounts, everything is in order
- Name and contact information for a trusted contact person for the entity subject to the Trusted Person Contact Rule (2165)
A copy of the account information must be delivered to the SEC within 30 days of the account opening as per Rule 17a-3.
Following that, the SEC must be sent account information every 36 months.
FINRA also asks for a good faith effort to get additional information (if possible):
- Social security and tax identification number of the customer
- Customer’s occupation
- The name and address of their employer
- Do they belong to another FINRA member and are they an associated person
If the customer refuses to provide this information, that’s fine, as long as an effort was made to obtain it.
Let’s start with making changes to accounts that would need supervisory approval.
Changes in account name: The necessary approvals and documentation required
The safety of their customer accounts has always been a critical part of being a broker-dealer, even before the internet and hackers came to the fore.
For example, as an early strike in an upcoming divorce, one party might have called the firm handling a JTWROS account and asked for their spouse’s name to be removed.
Another scenario that often played out saw children of seniors with their cognitive abilities diminished attempting to add themselves to an account.
That’s why FINRA rules exist.
Should an account change take place, it can only do so if a qualified registered principal appointed by the member makes the change.
But this can only take place after the principal has received all the relevant details related to the requested change and that they give their approval in writing.
These details must be kept with the customer account records.
Another important area where the correct approvals and documentation are necessary comes with internal transfers between accounts.
While there are reasons why a client might want funds transferred into another account, gaining the proper authority to do so is critical.
For example, if a transfer is to be made into an account and the recipient is not a signatory, similar documents and approvals are necessary, similar to those used in a change in designation.
When the securities held in a customer’s account are sold, they receive cash representing what those securities were worth.
Most of the time, that money is put in a money market fund so it can earn interest until it is either used or withdrawn to finance a new purchase.
This is commonly known as a sweep account.
On some occasions, the broker-dealer might want to put the money in a different money market fund and it’s not practical to contact all of their clients to do so.
Luckily, in a situation like this FINRA rules allow for bulk transfers to be made at the net asset value of the money market funds without the need to gain consent.
To do this, however, they utilize negative response letters and also need to meet specific conditions as laid out by FINRA.
Let’s just quickly define what a negative response letter is.
If an impending action is planned by a broker-dealer, it’s this letter that informs recipients about it.
If a recipient is not happy with the activities planned, they need to respond within a certain time frame.
If they don’t, the recipient is judged to have given their consent.
As for the conditions laid out by FINRA, well they are the following:
- Only limited situations are the preface to a bulk exchange. These include mergers and the acquisition of funds, sweep account fund exchange, and changes to clearing members
- A tabular comparison of the nature of each fund and the fees they charge must be contained in the negative response letter to give receipts all the information they need to make an informed decision
- Recipients are given 30 days to act on the negative response letter before the broker-dealer takes action