Opening a brokerage account is as simple as opening a checking account.
Filling Out the Form
The broker-dealer will ask the potential client to fill out a form with this standard information:
- Phone number
- Type of account
- Identification number from a driver's license or other state-issued card
- Social Security or IRS tax ID number
- Owner's signature
The broker-dealer will also require a prospective customer to disclose the following:
- Employment information
- Annual income
- Net worth
- Investment objectives
Many jurisdictions permit confidential, numbered accounts for which the name of the investor is shielded by the financial institution in which the account resides.
The investor must acknowledge in writing that he owns the account and provide all the information listed above to his broker-dealer, but the broker-dealer can then ensure that all confirmations and statements are printed with an alias instead of the account owner's true name. Swiss bank accounts are the most famous example of this practice, but there are plenty of other countries that allow for secrecy in banking. A lot of people do not know that the NYSE permits coded accounts too.
If the prospective client is an employee of an SRO or another financial institution, he must declare this and the broker-dealer must receive approval from the individual\'s employer.
Joint and Custodial Accounts
On a joint account, information for both (or all) owners will be required. All customers must be at least 18 years old - in all but a couple of low-population states - and either a
In most states a custodian for a minor must be 18, but in
Exam Tips and Tricks
In recent years, the NYSE has clarified that the rule that was once understood to cover only employees of other member firms now includes not just employees of exchanges, but also employees of mutual fund companies, insurance companies and even credit unions.
- Cash - this account allows only for cash purchases of securities. No purchases on margin are permitted.
- Margin: is one in which the investor may purchase stock on margin, e.g., with borrowed money.
- Options: this type of account allows the individual to establish options positions separate from or in addition to securities positions. This means that the individual could use options to preserve capital or enhance returns, or simply trade the options like common shares to achieve similar exposure at a lower cost.
- Retirement: this is a brokerage account established within a retirement plan, such as an Individual Retirement Account, Simplified Employee Pension (SEP), Keogh or 401(k).
- Day Trading: this account type allows for rapid trading in and out of securities positions on an intraday basis to capture gains. Transaction costs and the risks of trading in such accounts can be considerable and must be disclosed to the prospective client. This type of account must permit margin purchases and maintain a minimum balance of $25,000 in cash and stock.
- Prime Brokerage: a complement of brokerage services provided to hedge funds.
- Delivery versus Payment (DVP): an account type where the buyer pays for securities upon delivery, paying the bank which acts as the buyer's agent. The rationale for such an account is to reduce the risk to both buyer and seller that the transaction will not be consummated.
- Discretionary: The broker has complete discretion over trades in the account.
Account Registration Types
- Individual: this is a non-qualified brokerage account in the name of one person only.
- Institutional: this type of account is established for large investment institutions in execute trades (e.g., mutual funds, hedge funds).
- Joint Tenants with Rights of Survivorship (JTWROS): On a joint account, information for both (or all) owners will be required. All customers must be at least 18 years old, in all but a couple of low-population states, and either a U.S. citizen or a legal resident with a current U.S. address. In most states a custodian for a minor must be 18, but in California, the District of Columbia, Virginia and many other states, the custodian must be at least 21. This type of account is a will substitute to the extent that assets of the decedents pass to the survivors directly, avoiding probate.
- Joint Tenants in Common (TIC): On a joint account, information for both (or all) owners will be required. All customers must be at least 18 years old, in all but a couple of low-population states, and either a U.S. citizen or a legal resident with a current U.S. address. In most states a custodian for a minor must be 18, but in California, the District of Columbia, Virginia and many other states, the custodian must be at least 21. This type of account arrangement is not a will substitute. Assets in the account of a decedent would need to pass through probate. No survivorship rights exist.
- Community Property: when married individuals own an equal undivided interest in all property accumulated during marriage. This includes the income of each spouse. Property acquired prior to the marriage or received through gift or inheritance is deemed separate. This statutory regime is followed in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Brokerage accounts must specify if a community property arrangement is involved.
- Sole Proprietorship: this is a brokerage account established for a self-employed individual
- Partnership: this is a brokerage account established specifically for a partnership organization that reports K-1 income. Identification of the partners is required including a copy of the partnership agreement.
- Corporation: this is a brokerage account established specifically for a partnership corporation. Identification of the shareholders is required, including a copy of the corporate resolution.
- Unincorporated Associations: this is a brokerage account for these types of organizations.
- Trust: this account specifies that the brokerage account that it establishes, is to serve the investment needs of the trust. Documentation of the trustee's capacity is needed, including a copy of the trust document.
- Numbered (confidential): Many jurisdictions permit confidential, numbered accounts for which the name of the investor is shielded by the financial institution in which the account resides. The investor must acknowledge in writing that he owns the account and provide all the information listed above to his broker-dealer, but the broker-dealer can then ensure that all confirmations and statements are printed with an alias, instead of the account owner's true name. Swiss bank accounts are the most famous example of this practice, but there are plenty of other countries that allow for secrecy in banking. A lot of people do not know that the NYSE permits coded accounts too.
- Transfer on Death (TOD): a type of account registration that specifies that the account assets pass directly to beneficiaries upon the account holder's death. This type of an arrangement is a will substitute, as assets pass outside of the probate process.
- Estate Accounts: this type of account indicates that the proceeds reside in an estate account of the decedent. The basis in any assets in this type of account ‘steps up' at the decedent's date of death.
Customer Identification Procedures (CIP)
Broker/dealers are required to establish, document and maintain a written policy for customer identification. Specific items must be obtained from each customer when a registered representative opens an account
- Date of birth
- Individual (residential or business street address) or Army Post Office (APO) or Fleet Post Office (FPO) box number for individuals without a residential or business address. Address of next of kin or another contact individual is permissible, as well.
- Business: a principal address at which the business operates
- Identification Number
- Individual: taxpayer identification number (social security number in the United States), taxpayer identification or passport number, for non-US residents, alien identification number
- Business: employer identification number.
- The customer's citizenship (residency status)
- If the client is an employee of another broker/dealer or self-regulatory organization: if so, his or her employer must grant permission for that employee to open the account.
- Whether the client is a key person of a publicly traded company (corporate insider): this encompasses officers, directors and anyone else who owns 10% of outstanding company securities. By virtue of their insider status, these individuals are privy to material information that may impact the price of their company's shares. Accordingly, their ability to trade such shares is subject to specific restrictions under Rule 144
- They must have owned the shares for at least one year.
- The buyer must have access to current financial information (10-Ks and 10-Qs)
- The seller must file Form 144 "Notice of Proposed Sale of Securities" with the SEC no later than the first day of the sale. The filing remains in effect for 90 days.
- The sale of the securities may not be advertised.
- If the shares were owned between one and two years, the quantity of shares sold may not exceed the greater of 1% of all outstanding shares or the average weekly trading volume for the prior four weeks. A possible exam scenario could involve a fact pattern with a quantity of shares and trading volumes, asking the candidate to evaluate whether a sale would be permissible.
Know Your Customer (KYC) (FINRA Rule 2090): broker/dealer firms must use "reasonable diligence" when opening and maintaining accounts, know essential information about the customer, including what is needed to service the customer, any unique circumstances, special instructions, the remit of whomever is handling the account (accountants, attorneys, estate administrators, etc.) and complying with all applicable rules and regulations. Suitability determination (FINRA Rule 2111) is required, entailing a reasonable basis for believing that a transaction recommended for a client is appropriate, in light of his or her circumstances and risk/return requirements. The purpose of these rules is to protect the investor and promote best practices and fair dealing. For the purposes of suitability determination, the representative must take into account the investor's age, other investments, financial situation and needs, tax status, investment objectives, experience and time horizon, liquidity needs, risk tolerance and any other information the customer may disclose to the member or associated person, in connection with such recommendation. Representatives are accountable for any strategy that they may recommend to the client based upon his or her circumstances. Three suitability obligations come into play under Rule 2111:
- Reasonable basis: the broker should have a reasonable basis to believe that the strategy or investment be suitable for at least some investors
- Customer-specific: the broker should have a basis to believe that the strategy or recommendation be suitable for the customer, based upon his or her circumstances and investment profile.
- Quantitative: this suitability consideration takes into account quantitative factors such as trading frequency, cost, etc. and for a broker who has control over a client's account to ascertain that the recommended transactions are suitable in light of the client's profile.
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