Series 26

AAA

Mutual Fund Accounts - Opening a New Account and Account Types


Opening a New Account

Every new account requires a new account form. The function of the new account form is twofold: first, it helps the registered representative establish a trusting relationship with the client and, second, it fulfills a number of regulatory requirements.

Despite differences from firm to firm in the content or format of the new account form, the basic customer information that must be collected before an order is placed remains the same. Lack of proper documentation may result in disciplinary action, including fines, dismissal and injunctions against performing securities transactions.

Information Required
NASD (now known as FINRA) Rule 3110 requires the registered representative to provide the following information when opening a new account for a customer:

  • Customer's name and residence
  • Customer's legal age
  • The signature of the registered representative opening the account
  • The signature of the principal approving the account
  • Whether distributions should be reinvested or paid out as cash
  • Customer's occupation and name and address of the employer
  • Whether or not the customer is affiliated with another FINRA member
  • Citizenship of the customer
  • Name of any person with authority to make transactions in the account

Furthermore, according to NYSE Rule 405, the registered rep should have a basic understanding of the customer's present financial situation, risk tolerance, investment objectives, current income, investment holdings and net worth, tax status, and financial needs.

Account Types

The principal types of account ownership are the following:


  • Individual
  • Joint
  • Corporate
  • Partnership
  • Fiduciary or Custodial

Individual Accounts
An individual account has one beneficial owner; this is the only person who can control investments within the account and request distributions of cash or securities from the account.

Joint Accounts
Two or more adults may act as co-owners of a joint account, with each allowed some form of control over the account. Joint accounts may be designated as tenants in common (TIC), joint tenants with right of survivorship (JTWROS) or tenants by entirety (TBE).

  • When one owner in a TIC account dies, the remaining interest passes to the decedent's estate in a proportion that matches the proportion of his or her ownership while alive. The percentage of ownership is not passed to the surviving account co-owner(s).
  • This is not the case with a JTWROS account, in which case the remaining rights are passed in equal amounts to the surviving account co-owner(s).
  • Finally, TBE accounts may only be established by married couples. When one spouse dies, the surviving spouse simply retains ownership of the account.

Corporate Accounts
The corporate resolution will specify which officers may trade in the corporation's account. In addition, a certified copy of the corporate charter and the company's bylaws are required to open a margin account.

Partnership Accounts
A partnership account differs from a corporate account in that it is the unincorporated association of two or more individuals. The partnership account agreement will specify which partners can make transactions for the account. Partnerships can open cash, margin or retirement accounts, provided all investment limitations are disclosed.

Custodial Accounts
Member firms will not allow minors to open accounts in their own name, as they are not considered legally responsible and may void contracts at their discretion as a result. However, you will come across many accounts for minors as a registered representative, so you should understand them thoroughly.

There are two approaches to opening accounts for minors: UGMA/UTMA accounts and trust accounts. Accounts for minors are usually opened under the Uniform Gifts to Minors Act (UGMA) or the newer version of this law, the Uniform Transfers to Minors Act (UTMA), so we will focus on these.

Under the UGMA, an adult donor gifts an irrevocable sum of cash or securities to a minor and appoints an adult to act as custodian for the minor. There are no limitations to the amount of the gifts given; however, once they are assigned to the minor's account, they cannot be revoked and become the full property of the minor.

There can only be one custodian and one minor per UGMA or UTMA account. The donor may act as the custodian if he or she so chooses. In any case, the account is registered in the name of the custodian as custodian for the benefit of the minor, but the account is opened under the minor's Social Security number. As such, the minor is responsible for income taxes generated from the account. The custodian is responsible for maintaining prudent investment standards.

The custodial relationship is terminated when the minor reaches the age of majority - an age that is determined by individual state law. At that time, the custodian transfers the securities to the beneficial owner's individual name.


Exam Tips and Tricks
One of the most common types of accounts you will deal with as a registered principal is the UGMA/UTMA custodial account. Knowing the ins and outs of these accounts will go a long way on the Series 26 exam.


Types of Account Agents
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