Customer Accounts

Account Types

Broker-dealers offer a variety of account types to meet the needs of different customers. Understanding these account types, their features, and the rules governing each is essential for the SIE exam. This section covers the most common types you need to know.

Individual Accounts

An individual account is owned by a single person who has sole authority over the account. Only the account owner can make investment decisions and authorize transactions (unless they grant someone else power of attorney). Upon the death of the account owner, the account becomes part of the estate and is frozen until the executor or administrator provides proper documentation.

Joint Accounts

Joint accounts are owned by two or more individuals. All owners must sign the new account form, and all parties typically have equal authority to conduct transactions. However, checks and securities are mailed in the names of all account holders. There are several types of joint ownership:

Tenants in Common (TIC): Each owner has a specific, defined ownership percentage (which can be unequal, such as 60/40). When one owner dies, their share passes to their estate or heirs as specified in their will -- it does not automatically pass to the surviving account holder. This is common for business partners or unrelated individuals.

Community Property: Available in certain states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin, and Alaska by agreement). Property acquired during the marriage is considered owned equally (50/50) by both spouses, regardless of who earned the income. Upon death, the deceased spouse's half passes according to their will or state intestacy laws.

Custodial Accounts (UGMA/UTMA)

Custodial accounts are established by an adult (the custodian) for the benefit of a minor (the beneficiary). The two legal frameworks are the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA).

Key rules for custodial accounts on the SIE exam:

• Only one custodian and one minor per account (no joint custodians, no joint beneficiaries)
• Gifts to the account are irrevocable -- once given, the custodian cannot take the money back
• The custodian must manage the account in the best interest of the minor
• When the minor reaches the age of majority, the assets transfer to them with no restrictions
• Margin trading and short selling are prohibited in custodial accounts
• Income is taxed at the minor's rate, but the "kiddie tax" rules may apply, taxing unearned income above a threshold at the parent's rate

Retirement Accounts

Retirement accounts offer tax advantages to encourage long-term savings. The most common types include:

Traditional IRA: Contributions may be tax-deductible (depending on income and whether the contributor has an employer-sponsored plan). Earnings grow tax-deferred. Withdrawals in retirement are taxed as ordinary income. Required Minimum Distributions (RMDs) must begin at age 73. A 10% early withdrawal penalty applies to distributions before age 59½ (with limited exceptions).

Roth IRA: Contributions are made with after-tax dollars (not deductible). Earnings grow tax-free. Qualified withdrawals in retirement are completely tax-free. No RMDs during the owner's lifetime. Contributions (but not earnings) can be withdrawn at any time without tax or penalty. Income limits apply to eligibility.

Employer-sponsored plans: The 401(k) is the most common employer-sponsored retirement plan for private-sector employees. Contributions are made with pre-tax dollars, reducing current taxable income. Many employers match a percentage of contributions. The 403(b) is the equivalent for employees of public schools, non-profit organizations, and certain churches. Both have similar rules regarding contribution limits, early withdrawal penalties, and RMDs.

Opening Customer Accounts

The process of opening a customer account involves regulatory requirements designed to protect both the customer and the broker-dealer. Understanding these requirements is heavily tested on the SIE exam.

New Account Form

Every new customer must complete a new account form before any transactions can be executed. The form collects essential information including:

• Personal information: Full legal name, date of birth, Social Security number (or tax identification number), home address, phone number, email, citizenship status
• Employment information: Employer name, occupation, whether the customer or an immediate family member is employed by another broker-dealer (requires duplicate statements to be sent to the employing firm)
• Financial information: Annual income, net worth (liquid and total), tax bracket
• Investment profile: Investment objectives, risk tolerance, time horizon, liquidity needs, investment experience

Customer Identification Program (CIP)

Under the USA PATRIOT Act, all financial institutions must implement a Customer Identification Program (CIP) to verify the identity of new account holders. The minimum information that must be collected and verified includes:

1. Customer's name
2. Date of birth (for individuals)
3. Address (residential or business)
4. Identification number (Social Security number for U.S. persons; passport number, alien identification number, or government-issued ID for non-U.S. persons)

Firms must verify this information within a reasonable time using documentary methods (reviewing a government-issued photo ID) or non-documentary methods (checking databases, credit reports). Firms must also check customer names against government lists of known or suspected terrorists (OFAC Specially Designated Nationals list).

Suitability and Regulation Best Interest (Reg BI)

Before recommending any investment, a broker-dealer and its associated persons must ensure the recommendation is suitable for the customer. Regulation Best Interest (Reg BI), adopted by the SEC in 2019, requires broker-dealers to act in the best interest of the retail customer when making a recommendation, without placing the broker-dealer's financial interest ahead of the customer's.

Reg BI has four component obligations:

1. Disclosure obligation: Provide the customer with a relationship summary (Form CRS) and disclose all material facts about the recommendation.
2. Care obligation: Exercise reasonable diligence, care, and skill in making the recommendation, considering the customer's investment profile.
3. Conflict of interest obligation: Establish policies to identify, disclose, and mitigate conflicts of interest.
4. Compliance obligation: Establish policies and procedures to achieve compliance with Reg BI.

The investment profile that must be assessed includes the customer's age, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other relevant information the customer discloses.

Margin Accounts

A margin account allows customers to borrow money from their broker-dealer to purchase securities. The securities in the account serve as collateral for the loan. Margin trading amplifies both gains and losses, making it a higher-risk strategy. Understanding margin requirements is critical for the SIE exam.

Key Margin Terminology

• Long Market Value (LMV): The current market value of securities held long in the margin account.
• Debit Balance: The amount borrowed from the broker-dealer. This is the customer's loan.
• Equity: The customer's ownership stake. Equity = Long Market Value - Debit Balance.
• Initial Margin (Reg T): 50% of the purchase price must be deposited by the customer.
• Maintenance Margin: The minimum equity that must be maintained in the account. FINRA/NYSE rules set the minimum at 25% of the current market value, though most firms set higher "house requirements" (typically 30-35%).
• Margin Call: A demand by the broker-dealer for the customer to deposit additional funds or securities when the account equity falls below the maintenance margin requirement.

Special Memorandum Account (SMA)

The SMA is a line of credit that builds up in a margin account when the account's equity exceeds the Reg T requirement. If the market value of securities increases, excess equity is credited to the SMA. The customer can use SMA to purchase additional securities or withdraw cash without depositing additional funds. However, using SMA is a loan against the account and increases the debit balance. SMA never decreases when the market value of securities declines (it is a "high-water mark" concept).

Restricted Accounts

A margin account is "restricted" when the equity falls below the Reg T requirement (50%) but remains above the maintenance margin requirement (25%). In a restricted account, the customer is not required to deposit additional funds immediately (no margin call), but any new purchases require 50% initial margin under Reg T. The customer cannot withdraw cash or securities that would further reduce equity below the maintenance level.

Fiduciary and Discretionary Accounts

Power of Attorney

A power of attorney (POA) is a legal document that grants another person the authority to act on behalf of the account owner. There are two types:

• Limited power of attorney (trading authorization): Allows the designated person to make investment decisions (buy and sell securities) in the account but does not permit withdrawals of cash or securities. This is the most common type granted to financial advisors.
• Full power of attorney: Allows the designated person to make investment decisions and withdraw funds or securities from the account. Full POA provides complete control over the account.

A power of attorney remains in effect until the account owner revokes it in writing or dies. It does not survive the death of the account owner (unless it is a "durable" power of attorney, which specifically states it continues if the principal becomes incapacitated, but even a durable POA terminates at death).

Discretionary Accounts

A discretionary account gives the broker-dealer or registered representative the authority to make trades without obtaining the customer's specific approval for each transaction. This authority covers the selection of the security, the quantity, and whether to buy or sell.

Fiduciary Accounts

Fiduciary accounts are managed by a person or institution acting in a fiduciary capacity on behalf of another. Examples include:

• Trust accounts: Managed by a trustee according to the terms of the trust document. The trustee has a fiduciary duty to act in the best interest of the beneficiaries.
• Estate accounts: Managed by an executor (if named in the will) or administrator (if appointed by the court) to settle the deceased's affairs.
• ERISA accounts: Retirement plan assets governed by the Employee Retirement Income Security Act of 1974. ERISA imposes strict fiduciary standards on those who manage employee benefit plans, requiring them to act solely in the interest of plan participants and beneficiaries.
• Guardian/conservator accounts: Court-appointed individuals who manage the financial affairs of a minor or incapacitated adult.

Account Transfers and Documentation

ACATS (Automated Customer Account Transfer Service)

ACATS is a system operated by the National Securities Clearing Corporation (NSCC) that automates and standardizes the transfer of customer accounts between broker-dealers. When a customer wants to move their account from one firm to another:

1. The customer initiates the transfer by completing a Transfer Initiation Form (TIF) at the receiving firm.
2. The receiving firm submits the transfer request through ACATS.
3. The delivering firm (the current firm) must validate the account information within one business day.
4. The delivering firm has three business days to complete the transfer after validation.
5. Total transfer time: generally within six business days (though complex accounts may take longer).

Firms cannot refuse to transfer an account or unduly delay the process. Refusing to process a legitimate ACATS transfer is a violation of FINRA rules.

Account Statements and Confirmations

Account statements must be sent to customers on a regular basis. Active accounts must receive statements at least quarterly, though most firms send monthly statements. Accounts with no activity in a given quarter must still receive a quarterly statement.

Trade confirmations must be sent to the customer at or before the completion of the transaction (settlement date). Confirmations include details such as the security name, quantity, price, commission or markup/markdown, trade date, settlement date, and whether the firm acted as agent or principal.

Proxy Voting

When a company issues a proxy (a request for shareholders to vote on corporate matters), the broker-dealer holding shares in street name must forward the proxy materials to the beneficial owner (the customer). The customer has the right to direct how their shares are voted. If the customer does not respond, the broker-dealer can vote on "routine" matters (such as ratification of the auditor) but cannot vote on "non-routine" matters (such as executive compensation or mergers) without the customer's instructions.

Customer Complaints

All written customer complaints must be handled according to FINRA rules. The firm must:

• Acknowledge the complaint in writing
• Maintain a complaint file that includes the complaint, the firm's response, and the resolution
• Report certain complaints on the registered representative's Form U4/U5 (including customer arbitration claims, settlements over $15,000, and any complaints alleging theft or fraud)

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