Series 63

AAA

Business Practices - Compliance and Custody of Client Funds

Margin
Any time a client is an owner of a cash account, an agent cannot open a margin account for that client without written authorization from the client. Without the client having signed a margin account agreement, an agent would NOT be in compliance if he/she were to effect any transactions on margin.

As a standard part of the margin account agreement, a broker-dealer usually has a client sign a hypothecation agreement, which allows the broker dealer to hold the margined securities in the street name (that is, in the name of the broker-dealer) and use the securities held as collateral for the loan from the broker-dealer to the customer. This is very much like a bank's name appearing on the title to an automobile for which it has made a loan. The car is held as collateral for the loan. Additionally, the client's stock may be used as collateral, by the broker-dealer, to borrow money from a bank - the primary source for the money loaned to the client.

Complaints
Any time a customer files a complaint with or broker-dealer, the complaint must immediately be reported to the firm's compliance department. In addition, the broker-dealer must promptly respond to the customer's complaint.

Look Out!
Specifically, the reply to a client must be in writing.

Custody of Client Funds
Investment advisers have different rules than broker-dealers. They must notify their Administrator if they will have direct possession of client funds (custody). If an investment adviser does have direct possession (custody) of a client's funds, an administrator may require that a surety bond be posted, or may completely disallow custody.

Because of the rules governing investment advisers, many firms choose to have a broker-dealer hold client's funds, while the investment adviser merely maintains discretionary authority over the accounts.

Discretionary (Managed) Accounts
A discretionary (managed) account allows a broker to buy and sell securities without the client's direct consent for each transaction.

There are two types of discretionary accounts:

  1. Limited accounts merely allow an investment adviser or broker to place orders, but DO NOT provide any authority to withdraw money.
  2. Full access accounts DO allow a broker or investment adviser access to the client's funds. This is analogous to an unlimited power of attorney.

In most situations, investment advisers ONLY have limited discretionary authority.

Introduction
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