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.
Advertisment - ExamPrep continues below.
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:
- Limited accounts merely allow an investment adviser or broker to place orders, but DO NOT provide any authority to withdraw money.
- 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.
by
No writer biography is available.
