Series 7 Customer Accounts Notes

Customer Accounts

Margins (10 questions)

Documentation/Suitability (15 questions)


  1. New Account Form: first form necessary to open acct
    1. 4 critical pieces necessary to open
      1. Customer name
      2. Street Address (work or residence address)
      3. DOB
      4. SSN or Tax ID number
    2. Pieces must then be used to verify identity
    3. Promptly after acct opening, must verify identity by:
      1. Documentary means
        1. Matching to a government issued photo ID, must be valid
      2. Non-documentary means
        1. Use database service to match identity
    4. Occupation & Employer
      1. If individual is employee of a financial services firm:
        1. Employee must notify their employer that they are opening an account at another firm
        2. Firm opening the account must get written approval from the employing firm
        3. Firm opening account must make available duplicate confirmations and statements available to the employer
      2. MSRB: same as above, but must SEND confirms to the employing firm
        1. Nothing is sent to the MSRB!!
    5. Citizenship
      1. If non-US citizen
        1. Must get a copy of passport
        2. Must have a US tax ID number
    6. Suitability Determination
    7. Required Signatures:
      1. No customer signature requirement – cash account only
        1. Unless firm has customer sign a “pre-dispute arbitration agreement” – must be a separate document (30 days)
      2. Registered suitability rep must then sign the form
      3. Approving manager must sign the accepting account form
      4. Margin accounts must have customer signature


Only applies when you are recommending trades to a customer!!

No suitability if they are only executing the trade

  1. Applies if you are recommending transactions to customers
    1. “Solicited”
    2. Un-solicited means you did not recommend (no suitability)
    3. Generic FINRA Rule: 3 level suitability rule
      1. 1st: reasonable basis suitability – product level suitability
        1. Must do an assessment of the features and risks of the product and can only recommend the “best ones”
      2. 2nd: customer specific suitability
        1. Investment objective
        2. Investment experience
        3. Financial situation / needs
        4. Risk tolerance
        5. Investment time horizon
      3. 3rd: Quantitative suitability
        1. Can the customer afford the strategy?
          1. Income
          2. Net worth
          3. Liquid net worth
          4. Other investments, etc.
          5. “personal balance she et”
        2. If the customer doesn’t want to disclose this, you cannot recommend it, but you can accept an unsolicited trade. Can only make a recommendation on the level of disclosure a customer gives you. No recommendation if you get no information.

Generic FINRA Rule does not apply to below: they have their own rules

  1. Options
    1. Separate options new account form:
      1. Questionnaire that asks: (use reasonable efforts to obtain)
        1. Income
        2. Net worth
        3. Liquid net worth
        4. Marital status / # of dependents
        5. Tax status
        6. Investment objective
        7. Investment experience
        8. Financial situation / needs
      2. You are qualifying the customer for a certain level of options trading
        1. Level 1-3, from beginner to advanced
        2. Must redo suitability if customer wants to move from one level to a higher one
      3. Supposed to use “reasonable efforts”, if can’t get info then the manager (ROP) is allowed to make the decision to open acct or not
      4. New account form must have the date that you gave the customer the latest ODD (options disclosure document)
        1. Must send the customer the ODD at or prior to account opening!!
    2. Options Agreement
      1. Must be signed and returned within 15 days
      2. If not returned in 15 days – can close existing transactions, but cannot open new positions in the account
        1. Account isn’t frozen, just can’t accept opening trades
  2. Pattern day trading: 4+ day trades in 5 business days or less
    1. Minimum equity to open the account is $25,000
    2. Must do suitability determination that is same as options
      1. Plus, trading experience
    3. Must provide customer with pattern day trading risk disclosure document
      1. At or prior to account opening!
    4. Complete an annual review on continuing suitability!!
      1. Audit the activity in the accounts to detect pattern day trading
        1. If you catch a customer PDT and they are not qualified, you have 10 business days to qualify them, or shut the account down
  3. Non-managed fee based accounts (NMFBA)
    1. Non-managed account that is charged an annual fee basis, rather than a trade per trade commission charged by places like ETRADE
    2. Rules:
      1. Must determine the customer is suitable – aka that they are an active trader (doesn’t make sense if you aren’t active)
      2. Must provide customer with a non-managed fee based account disclosure document
        1. At or prior to account opening!
      3. Must do an annual review of continuing suitability
  4. Structured products
    1. 3 level suitability rule that is the general rule!!
  5. Variable annuities (6 or 7 questions)
    1. Characteristics:
      1. Can’t be too young or too old (45-65 typically)
      2. Essentially an add-on retirement account – must have need for additional retirement income
      3. Customer must be maxed out in their qualified retirement plans
        1. Qualified is contributions are deductible, taxes are 100% when pulled out in the future
      4. Sold by insurance companies (hybrid insurance / security product)
      5. Insurance company takes premium from the customer, and invests it into a separate investment account of its own that is essentially a mutual fund
      6. Returns of the investment account determine how much annuity payments the customer will get. Payments are variable, based on returns
      7. Purchaser wears the investment risk – must be sold with a prospectus!!
      8. Must be registered with the SEC!
      9. Non-qualified: no deductions for putting money in, distributions are taxed. Can start taking distributions whenever you want
      10. GMIB: guaranteed minimum income benefit: fee of 1% a year and we will guarantee a minimum return percentage in your annuity
    2. Suitability Rule:
  6. Senior citizens
    1. Can’t recommend variable annuities to seniors
    2. Can’t recommend mortgaging their property to get investment funds
    3. When making recommendations you must take into account
      1. Shortened investment time horizon
      2. Lowered risk tolerance
    4. Can’t hand out bogus personal titles
    5. Can’t make a recommendation if the senior does not seem competent / able to understand what are you are saying
  7. Penny stocks
    1. Non-exchange listed, non-NASDAQ, under $5
    2. Must do a detailed suitability determination as to why it is appropriate to the customer
    3. Must provide suitability determination to customer who must sign it prior to confirmation or purchase
    4. Provide customer with risk disclosure document
      1. Called a Form 15g-6
    5. Bona-fide customer exemption: if you have signed three times at the firm, you don’t have to sign anymore or if customer has acct at the firm for 1 year

New account deal must be sent to the customer within 30 days of open, and then it must be redone/reverified every 36 months thereafter

Margin Account Opening

  1. Customer must sign the hypothecation (margin) agreement
    1. At or prior to settlement of the first trade in the acct
  2. Customary but not mandatory that the customer sign a “loan consent agreement”
    1. Consents to have securities lent out on short sales
  3. Provide a credit disclosure document
  4. Provider margin risk disclosure document

If Joint Account

  1. Must be signed joint account agreement
  2. Don’t need collective decision making
    1. Any owner can make an order, draw a check, etc.

JTWROS (Joint tenants with rights of survivorship)

  1. Each tenant 100% owns the account
    1. If one dies, the other 100% owns the account
  2. Typical for husband and wife
  3. Bypasses the estate, bypasses probate
  4. Does not automatically bypass taxes!

Tenants in Common

  1. Typical for business partners
  2. Specified percentage ownership for each tenant
    1. If one dies, the percentage goes to the estate
    2. Passed by will
    3. Goes through probate, subject to tax

Four Tools for Fed to Control Credit

  1. Discount rate for member banks borrowing from fed
  2. Open market operations (repos) (most used)
  3. Reserve requirements (almost never change, least changed)
  4. Margin on securities (under Reg T) (least effective, smallest change on credit avail)

Hierarchy of Interest Rates (high to low)

Prime > Broker Loan > Discount rate > Fed funds

Power of Attorney

  1. 1st party to acct: Brokerage firm
    1. Customer can sign a first-party trading authorization which gives power of attorney to the broker
    2. This is a discretionary account
      1. Must have written power of attorney
      2. Each order ticket must be marked as discretionary
      3. Principal (manager) must review and endorse the order promptly (end of day)
      4. Goes on until customer dies or the power is revoked in writing
      5. Orders cannot be taken over voicemail, text, email, etc.
      6. In regard to making a trade (as a registered rep)
        1. Size: need POA
        2. Security: need POA
        3. Price: no POA
        4. Time: no POA
  2. 2nd party to acct: Customer
  3. 3rd party to acct: Anyone
    1. Customer can authorize a third-party trader to trade on behalf of the account
    2. Must name a specific individual who is allowed to trade
    3. Is a power of attorney over the account
      1. Can be full, or limited
        1. Full: can trade and draw checks (in name of acct holder)
        2. Limited: can only trade, no checks
      2. Can be durable, non-durable
        1. Durable: continues upon mental incapacitation (of owner)
        2. Non-durable: ceases upon mental incapacitation (of owner)
    4. When someone dies, the powers of attorney die with them

Corporate Accounts: Opening Documentation

Need proof that the corporation really exists:

  1. Copy of the corporate charter
  2. Corporate resolution with corporate seal
    1. Names of all individuals allowed to trade the acct

Partnership Account: Opening Documentation

  1. Copy of the partnership agreement
    1. Clause that includes who can trade in the acct
    2. People other than the partners can trade, if authorized

Fiduciary Accounts: Opening Documentation

Default settings:

-Cash accounts, no margin

-No third-party trading authorizations

  1. Trust Account
    1. Copy of trust document
  2. Guardian Account
    1. For orphan or person legally incompetent
    2. Need court order appointing the guardian
  3. Custodian Account
    1. No special paperwork
    2. Can be opened by any adult for any minor
    3. Either:
      1. UGMA (Uniform Gifts to Minors Act)
        1. Assets transferred to new adult at age 18
      2. UTMA (Uniform Transfers to Minors Act)
        1. Custodian sets the transfer age
    4. ALL securities in acct must be registered!
      1. One for one registration (only one adult per one minor)
      2. Minors social security number goes on account
    5. Kiddie Tax
      1. If parent is the custodian, if the kid is 18 or under, if account has substantial income: then income is taxed at the parents bracket, not the kids

Account Statements

  • Must go to customers quarterly is there is no trading activity
  • Monthly if there is trading activity
    • Dividend reinvest does not count as trading activity
  • First point of contact with account discrepancy: compliance
  • Change in address has to be confirmed by the manager
  • You can hold the mail up to 3 months on customer request
    • If longer than 3 months, customer has to give a written signed valid reason for holding longer than 3 months


  • If trade confirmation has an error, the broker will correct and then reconfirm. Errors in confirmation are not binding
  • Errors in execution (say gonna buy it at 50 but broker buys at 60). Will be taken out of customer account, put in brokers error account
    • If trade could have been filled at 50 that day, broker is liable to customer the shares at 50, and take the loss

Closing an Account

  • Notified that a customer has died
    • Notification has to come from next of kin!
    • If its not, then you need a copy of the death certificate
    • If verified, take these steps:
      • Cancel all open orders (do this first)
      • Note date of death on the account
      • Freeze the account
      • Wait for instructions
  • Transfer of Assets at Death
    • Individual or Tenants in Common
      • Don’t know who the beneficiary is here
      • 1. Copy of death certificate
      • 2. Copy of a will
      • 3. Proof that the will has gone through probate
      • (Do not need a power of attorney!)
    • Individual w/TOD or JTWROS
      • TOD = transfer on death registration (get to name who the beneficiary is)
      • In this instance, you know who the beneficiary is
      • 1. Certified copy of the death certificate

ACATS (Automated Customer Account Transfer System)

  • System that moves customer accounts from one broker to another
  1. Customer completes and signs a transfer request
  2. Signature is guaranteed
  3. Sent to the carrying firm IMMEDIATELY
  4. Upon receipt, carrying firm must freeze the account
  5. Carrying firm has 1 business day to validate the positions
  6. Then 3 business days to transfer the assets
    1. Once its validated, the new firm can start executing trades for the cust.
  7. Under certain circumstances, this can take longer
    1. Signatures don’t match
    2. Positions don’t match
    3. Flat balance (zero assets shown)
    4. Retirement plan assets
    5. Proprietary assets

Patriot Act (came after 9/11)

  • If it’s a new account:
    • Must match the customer name to the terrorist watch list
    • If you are suspicious about the customer:
      • Must file a SAR (suspicious activities report) with FinCEN
    • If you have a customer who is depositing or withdrawing cash:
      • Amounts in excess of $10,000 over 2-week window, then you must file a CTR (currency transaction report) with FinCEN
      • You can execute transactions, but have to file

Regulation T – Margin Rules

  • Covers credit on securities from brokers to customers
  • Set by the FRB!! (Not finra)
  1. Tells you which securities are marginable
    1. Have to be either exchange or NASDAQ listed
    2. Pink/OTC are not marginable!
    3. New issues are not marginable for 30 days
      1. Applies to all mutual fund investments
  2. Defines types of accounts
    1. Cash account
      1. Buy any security, paid in full
      2. Sell long, can’t sell short
    2. Margin account
      1. Can buy marginable securities
      2. Sell long, and sell short
      3. Pay in part
    3. Arbitrage account
      1. Can short against the box: 5% minimum maintenance margin, set by FINRA
      2. Tax is due the day you go short against the box
  3. When you buy in one of the above accounts, you must pay promptly, but no later than S + 2 (settlement plus 2) (5 days after trade is latest, settlement is 3, then 2)
    1. If there is no payment, then under extraordinary circumstances, you can get an extension from FINRA
    2. An extension is not a right!! It’s a courtesy
    3. If there is still no payment, you sell the unpaid position, but not the entire account and you freeze the account for 90 days
      1. Can still trade if account is frozen, but you have to put cash upfront!


Reg-T Initial Margin

Long: 50%

Short: 50%

FINRA Minimum Maintenance Margins

Long: 25%

Short: 30%

$2,000 minimum equity to open an account

$25,000 to open a day trading account

On the long side: you never pay more than full, so $2,000 min

Override by payment in full

Short: $2,000 is rock bottom

Special short minimums if stock is under $10

-from $10-5, minimum is $5/share

-from $4.99-0, minimum is greater of 100% or $2.50/share

Short 1000 shares at:

$10 – 5,000

$9 – 5,000

$8 – 5,000

$7 – 5,000

$6 – 5,000

$5 – 5,000

$4 – 4,000

$3 – 3,000

$2 – 2,500

$1 – 2,500

LMV – Debit = Equity

SMA (Special Memorandum Account)= how much more can you borrow against your stock position

SMA locks, and doesn’t decrease in a falling market. Once you get SMA, it stays there

Can borrow out of SMA as long as it doesn’t drop the account below the 25% minimum

Restricted account = when acct is below initial margin (retention requirement)

If you sell, you must retain 50% of the proceeds to reduce the debit

Question Notes

Long account equity = LMV – Debit

Short account equity = Credit – SMV

To open an options account, you need info on: investment objective, financial needs, marital status, liquid net worth

If a customer refuses to disclose sufficient financial info, recommendations are not permitted!!

Account can still be opened, just not advice/recommendations

SMA will not be affected by a decline in market value!!

To calculate SMA increase, after an initial open, just take 50% of the value of equity increase

Margin requirement for levered ETFs is 75%

The extension request is sent to FINRA, and the regular extension period is 3 business days

Margin in an arbitrage account is 5% minimum maintenance on the long side under FIRNA rules – there is no Reg T requirement when the customer has a net 0 position

Bonds are exempt, so there is no Reg T on margin. Only margin minimum is set by exchanges. FINRA sets it at the grater of 7% of face value or 15% of market value (Munis)

A partnership account is not a joint account!

Long margin account is restricted if it falls below 50%

Wrap account is one where the customer is charged a single annual fee for all account services, regardless of activity

The maximum amount of customer securities that can be pledged to a bank by a broker is 140% of the customer’s debit balance.

Options and Stock

  • Buy option
    • Deposit 100% of premium, the next business day (can’t borrow against it)
    • Unless LEAP with over 9 months expiration, then deposit 75% (can borrow 25%)
      • Bring deposit up to 100% once the expiration falls under 9 months
  • Sell option
    • Must ask question: is the option I’m selling covered or naked?
      • If naked, you are exposed to market risk, and must put up margin
      • Margin is 20% of the mkt value of the underlying stock + the premium
      • If covered, you are not exposed to market risk! = no margin on option, but you must pay for whatever covers you
    • What covers a short call?
      • Buy 100 shares of the stock (long the stock) – can be held by brokerage firm or have an escrow receipt of the stock
      • Buy a call, at the same strike price or lower, same expiration or later
    • What covers a short put?
      • Shorting the underlying stock (covered put writing)
      • Buy a put, with the same strike or higher, same expiration or later
      • Deposit enough $$ in the account to buy the shares of the underlying, in case the put gets exercised
      • Cash can be used to cover a put, not a call

Buy 100 shares ABC stock @60 and you sell 1 ABC call 60 @6 on the same day in a margin account. What is the deposit? Answer: $2,400.

$3,000 for the stock, but because it is covered, you can use the premium to draw down on the margin requirement ($600).

With debit spreads, you only have to deposit your debit amount!

With credit spreads, you are never required to deposit more than you can lose! So deposit is equivalent to maximum potential loss (difference in strike less credit)

Pattern Day Trading Margin

Minimum equity is the greater of $25,000 or 25% of high-water mark (FINRA rule)

High water mark = 25% of the maximum amount of your highest trade size

Portfolio Margin

If you have an equity portfolio that is hedged using options or derivatives, or diversified then:

Get a lower margin

Minimum equity to open: $100,000

Must be qualified and opened as an options account: must be level 3!! (ROP approv)

Must give customer portfolio margin risk disclosure document – must sign that they read and understand how it all works

Can’t take positions in listed bonds!!

Leveraged ETF Margin:

Take leveraged % of ETF x FINRA Minimum (long= 25%, short= 30%)

Bond Margins

Corporate bonds: 7% of face or 20% of market value, greater of

Muni bonds: 7% of face or 15% of market value, greater of

Short Margin Accounts

Proceeds of a short sale get credited to your acct!

You have no equity on the credit of the shares! (so must deposit 50% of sale)

In short acct, every $1 the portfolio drops, you get $1.50 of SMA!! (0.50 for long)

Credit – SMV = Equity % SMA

60,000 – 60,000 = 0 (sell shares, so u get 60k)

30,000 30,000 0 (have to deposit 50%)

90,000 – 60,000 = 30,000 50% 0

90,000 – 50,000 = 40,000 80% 15k (if mkt value drops 10k)