Overview
Customer accounts form the foundation of the broker-dealer relationship, governing how accounts are opened, managed, and monitored. This section covers account ownership structures, documentation requirements, suitability standards, and recordkeeping obligations. Mastery of these concepts is essential for both the SIE exam and ethical practice in the securities industry.
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Account Types & Ownership
Joint Accounts
| Account Type | What Happens at Death | Key Feature |
|---|---|---|
| Tenants in Common (TIC) | Share passes to deceased's estate/heirs | Each owner holds a specified percentage |
| Joint Tenants with Rights of Survivorship (JTWROS) | Share passes to surviving owner(s) | Bypasses probate entirely |
• TIC = Each co-owner has a defined stake; heirs inherit it
• JTWROS = The surviving owner(s) absorb the deceased's share automatically
> Watch Out For: The exam loves to test TIC vs. JTWROS. Remember: TIC → To the Estate. JTWROS → Survivors get everything.
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Custodial Accounts (UGMA/UTMA)
• UTMA (Uniform Transfers to Minors Act): Account opened in a minor's name, managed by an adult custodian
• The custodian controls all assets until the minor reaches the age of majority (typically 18 or 21, depending on state)
• UGMA is the older version; UTMA allows a broader range of asset types
Key Tax Disadvantage — The "Kiddie Tax":
• Unearned income above a threshold is taxed at the parent's (higher) tax rate
• This eliminates the tax-shifting benefit parents once used these accounts for
> Watch Out For: Students often confuse UGMA and UTMA. On the SIE, UTMA is broader (can hold real estate, patents, etc.), while UGMA is limited to financial assets. The kiddie tax applies to both.
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Trust Accounts
• Created by a legal document (trust agreement)
• Grantor = transfers assets into the trust
• Trustee = manages assets; has a fiduciary duty to the beneficiary
• Beneficiary = the party who benefits from the trust
Key Terms:
• Fiduciary duty — obligation to act in the best interest of the beneficiary
• Trust agreement — the governing document that dictates how assets are managed
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Discretionary vs. Non-Discretionary Accounts
| Account Type | Who Makes Decisions? | Prior Approval Required? |
|---|---|---|
| Discretionary | Registered Representative | No — trades without contacting customer |
| Non-Discretionary | Customer | Yes — must approve each trade |
The "AAA" Rule — What Makes a Trade Discretionary:
A trade is discretionary if the broker chooses any of the following without customer approval:
• Asset (which security)
• Action (buy or sell)
• Amount (number of shares)
> Watch Out For: Choosing only the price or timing of a trade is NOT discretionary. This is a classic exam trick.
Required Documentation:
• Customer must sign a written Power of Attorney (trading authorization) before a broker can exercise discretion
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Partnership & Business Accounts
• Partnership Account: Opened in the name of a business partnership
• Required document: Partnership Agreement or Resolution identifying authorized traders
Key Terms:
• Partnership agreement — identifies which partners may trade on behalf of the entity
• Corporate resolution — similar document required for corporate accounts
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Account Opening & Documentation
Know Your Customer (KYC) — FINRA Rule 4512
Purpose: Collect sufficient information to understand the customer and make suitable recommendations.
Required Information to Collect:
• Name, address, date of birth
• Social Security / Tax ID number (the only optional item)
• Employment status and employer
• Annual income and net worth
• Investment objectives
• Investment experience and risk tolerance
> Watch Out For: The SSN/Tax ID is the only technically optional piece of information. Firms must still make reasonable efforts to obtain it. All other items are required.
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Customer Identification Program (CIP) — USA PATRIOT Act
Purpose: Verify the identity of each customer to prevent money laundering and terrorist financing.
Four Required Identifiers:
1. Name
2. Date of Birth
3. Address
4. Social Security / Tax ID Number
• Verification must be completed within a reasonable time before or after account opening
• Part of the broader Anti-Money Laundering (AML) framework
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New Account Documentation Timeline
| Requirement | Timeframe |
|---|---|
| Send new account record to customer for verification | Within 30 days of account opening |
| Customer must verify or correct the information | Upon receipt |
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Margin Account Documentation
A customer must sign three documents (a margin agreement) before trading on margin:
| Document | Purpose | Required? |
|---|---|---|
| Credit Agreement | Outlines loan terms and interest charges | Yes |
| Hypothecation Agreement | Customer pledges securities as collateral | Yes |
| Loan Consent Agreement | Allows firm to lend customer's securities | No — Optional |
> Watch Out For: The Loan Consent Agreement is the only optional document in the margin agreement. The firm uses it to lend margined securities to other clients (e.g., for short selling). This appears frequently on the exam.
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Numbered Accounts
• Uses a number or symbol instead of the customer's name
• Customer must provide a signed written statement affirming they are the true account owner
• Firm retains this statement on file
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Employee of Another FINRA Member Firm
When opening a margin account for an employee of another FINRA member:
1. The firm must notify the employer in writing
2. The firm must provide duplicate account statements upon the employer's request
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Suitability & Recommendations
FINRA's Three Suitability Obligations
| Obligation | What It Means |
|---|---|
| Reasonable Basis Suitability | The investment must be suitable for at least some investors |
| Customer-Specific Suitability | The investment must be suitable for this particular customer |
| Quantitative Suitability | No excessive trading — protects against churning |
Suitability Profile — What to Gather:
• Age and time horizon
• Financial situation (income, net worth, liquidity needs)
• Tax status
• Investment objectives
• Investment experience
• Risk tolerance
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Churning
• Definition: Excessive trading of a customer's account primarily to generate commissions for the broker
• Violates the quantitative suitability obligation
• Also considered a breach of fiduciary duty and fraudulent practice
> Watch Out For: Churning is about frequency of trading relative to the customer's objectives — not just a high number of trades. Context matters.
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Regulation Best Interest (Reg BI)
• Applies to broker-dealers making recommendations to retail customers
• Standard: Must act in the best interest of the customer at the time of the recommendation
• Cannot place the firm's or representative's financial interest ahead of the customer's
• Higher standard than the old suitability rule — goes beyond simply "suitable"
Key Terms:
• Reg BI — SEC rule elevating the standard of conduct for broker-dealers with retail customers
• Form CRS (Customer Relationship Summary) — must be delivered to retail customers; describes services, fees, and conflicts of interest
> Watch Out For: Reg BI applies to retail customers only. It does NOT replace the Investment Advisers Act fiduciary standard — that applies to RIAs, not broker-dealers.
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Account Restrictions & Special Situations
Frozen Accounts (Regulation T)
• Cause: Customer buys securities and sells them before paying (called freeriding)
• Consequence: Account is frozen for 90 days
• During the freeze: Customer must pay cash upfront before any future purchases
> Watch Out For: Freeriding is specifically buying and selling without ever intending to pay. A simple late payment has different consequences.
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Pattern Day Trader Rules
• Definition: A customer who executes 4 or more day trades within 5 business days, if those trades represent more than 6% of total trades in the account
• Minimum Equity Requirement: Must maintain $25,000 in their margin account at all times
• Applies to margin accounts only
Key Terms:
• Day trade — buying and selling (or short selling and covering) the same security on the same day
• Pattern day trader — triggers enhanced requirements after meeting the threshold above
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Account Records & Statements
Account Statements
| Situation | Statement Frequency |
|---|---|
| Account with positions but no activity | At least quarterly |
| Account with any activity in a month | Monthly statement required |
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"Hold Mail" Requests
• Customer must provide a written request with a valid reason (e.g., extended international travel)
• Firm must have procedures ensuring the customer can still access their statements
• Firm must periodically review the arrangement to ensure it remains appropriate
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Trade Confirmations
• Purpose: Confirms details of a completed transaction
• Must include: Security name, price, quantity, trade date, settlement date, commissions/markups
• Delivery: Must be sent at or before settlement of the trade
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Recordkeeping Requirements
| Record Type | Retention Period |
|---|---|
| New account records (SEC Rule 17a-3) | 6 years from account closure |
| General books and records | 3 years (most), 6 years (blotters/ledgers) |
> Watch Out For: The 6-year retention period for new account records begins from the date the account is closed, not when it was opened.
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Key Terms Master List
• Tenants in Common (TIC) — Joint account where each owner's share goes to their estate
• JTWROS — Joint account where survivor inherits deceased's share
• UTMA/UGMA — Custodial accounts for minors managed by an adult
• Kiddie Tax — Unearned income above threshold taxed at parent's rate
• Trust Account — Grantor transfers assets to trustee for beneficiary's benefit
• Discretionary Account — Broker authorized to trade without prior approval (AAA rule)
• Power of Attorney — Written document granting trading authority to another party
• KYC (Know Your Customer) — Rule requiring collection of customer financial information
• CIP (Customer Identification Program) — Identity verification under the PATRIOT Act
• Hypothecation Agreement — Customer pledges securities as collateral for margin loan
• Loan Consent Agreement — Optional; allows firm to lend customer's securities
• Churning — Excessive trading to generate commissions; violates quantitative suitability
• Reg BI — Requires broker-dealers to act in retail customer's best interest
• Freeriding — Buying and selling before paying; causes 90-day account freeze
• Pattern Day Trader — 4+ day trades in 5 business days; requires $25,000 minimum equity
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Quick Review Checklist
• [ ] Know the difference between TIC (share to estate) and JTWROS (share to survivor)
• [ ] Understand UTMA/UGMA custodial structure and the kiddie tax disadvantage
• [ ] Identify the grantor, trustee, and beneficiary in a trust account
• [ ] Apply the AAA rule: choosing asset, action, or amount = discretionary
• [ ] Memorize that SSN is the only optional item under FINRA Rule 4512
• [ ] Know the four CIP identifiers required by the USA PATRIOT Act
• [ ] Distinguish the three margin agreement documents and which one is optional (Loan Consent)
• [ ] Understand Reg BI applies to retail customers and requires broker to act in their best interest
• [ ] Know the three suitability obligations (Reasonable Basis, Customer-Specific, Quantitative)
• [ ] Define churning and link it to quantitative suitability
• [ ] Recognize freeriding triggers a 90-day account freeze under Regulation T
• [ ] Know pattern day trader threshold (4 trades/5 days) and minimum equity ($25,000)
• [ ] Confirm account statements are sent monthly (with activity) or quarterly (without)
• [ ] Recall trade confirmations must be delivered at or before settlement
• [ ] Remember new account records must be retained for 6 years from account closure
• [ ] Know that opening a margin account for another firm's employee requires written notice to employer