Customer Accounts

Cash and margin accounts

In a cash account the customer pays in full for every purchase. It is the default, the only account permitted for a custodial or most retirement accounts, and the only one available for certain products.

In a margin account the customer may borrow from the firm against the securities as collateral. Three documents attach: the credit agreement, disclosing the loan terms, which must be signed; the hypothecation agreement, pledging the securities as collateral and permitting the firm to repledge them, which must be signed; and the loan consent, permitting the firm to lend the customer's securities to others, which is optional.

A margin disclosure statement must be provided at or before opening and annually thereafter. It states that the customer can lose more than they deposited, that the firm can sell without contacting them, and that the customer does not choose which securities are sold.

Regulation T sets the initial requirement — currently 50 percent for a margin equity security — and FINRA sets minimum equity and maintenance requirements on top. Short sales must be effected in a margin account, because a short position is an obligation rather than an asset.

A pattern day trader — someone executing four or more day trades in five business days where those exceed six percent of activity — must maintain minimum equity of $25,000, and must receive a day-trading risk disclosure statement before the account is approved for that strategy.

Other account types the outline names: prime brokerage, where an institution executes with several firms and clears at one; delivery versus payment and receive versus payment, where each transaction settles against simultaneous payment at a custodian; and advisory or fee-based accounts, which charge an asset-based fee instead of commissions and are inappropriate for a customer who trades rarely.

Registrations

An individual account has one owner who alone may instruct it. On death, the assets pass to the estate.

A joint account has two or more owners, all of whom may instruct and trade, with mail to one agreed address and any cheque payable to all owners.

Joint tenants with right of survivorship gives each owner an undivided equal interest, and on death the whole account passes to the survivors outside probate. It is the standard registration for spouses.

Tenants in common gives each owner a stated fractional interest, and on death the decedent's share passes to their estate rather than to the other owner.

The exam's question is nearly always which registration sends the deceased's share to the estate — tenants in common.

Transfer on death registration lets an individual name beneficiaries who receive the assets directly on death, bypassing probate, while the owner keeps complete control during life.

Community property registration exists in some states and treats property acquired during a marriage as owned equally.

Business and fiduciary accounts turn on documentation. A corporate account needs a corporate resolution naming who may trade; a partnership account needs the partnership agreement; a trust account needs the trust document establishing the trustee's powers; an estate account needs the letters appointing the personal representative. The firm's obligation is to act only within the documented authority — a trustee whose document does not permit margin may not open a margin account.

Custodial accounts under the Uniform Gifts or Uniform Transfers to Minors Acts have one custodian, one minor and one account. Gifts are irrevocable, the minor is the beneficial owner and is taxed, the account is registered under the minor's social security number, it must be a cash account, and control passes to the former minor at the state's age of majority.

On any owner's death the firm must be notified, the account is frozen, open orders are cancelled, and documentation is required before assets are released.

Discretion and third-party authority

An order is discretionary if someone other than the customer decides any of three things: the security, the amount, or whether to buy or sell.

Choosing only the time or only the price is not discretion — and that exception is good only for the day the instruction is given.

Discretionary trading requires prior written authorization from the customer and prior written acceptance by a principal, each discretionary order must be marked as such, and the accounts must be reviewed frequently by a supervisor.

A limited power of attorney permits trading only; a full power of attorney also permits withdrawal. Every such authority terminates on the customer's death.

A trusted contact person is not an authorization. The firm may contact them to confirm the customer's whereabouts and health, or to raise a suspicion of financial exploitation, but they may not trade, withdraw or instruct.

Retirement and education accounts

A traditional IRA gives a deduction subject to limits, grows tax deferred, and taxes distributions as ordinary income. A Roth IRA gives no deduction but qualified distributions are tax free — requiring a five-year holding period and age 59½, disability, death, or a first home purchase up to $10,000. Roth contributions, as distinct from earnings, may always be withdrawn tax and penalty free.

Distributions before age 59½ generally attract a 10 percent penalty on the taxable amount, with defined exceptions.

Employer plans: a defined benefit plan promises a benefit and the employer bears the risk; a defined contribution plan such as a 401(k) promises a contribution and the employee bears the risk. A 403(b) serves public school and certain non-profit employees, a 457 serves government employees, and SEP and SIMPLE IRAs serve small employers. The Employee Retirement Income Security Act of 1974 governs private-sector qualified plans, setting participation, vesting, funding and fiduciary standards.

Moving retirement money: a direct trustee-to-trustee transfer has no withholding and no frequency limit. A rollover distributes the money to the owner, who must redeposit it within 60 days, is limited to one IRA-to-IRA rollover per twelve months, and faces 20 percent mandatory withholding from an employer plan. The direct transfer is almost always the right advice.

Required minimum distributions must begin from traditional IRAs and most employer plans at the applicable age; Roth IRAs have none during the owner's lifetime.

Education accounts: a 529 plan is a state-sponsored qualified tuition program with after-tax contributions, tax-free growth and tax-free qualified distributions; it is a municipal fund security regulated under MSRB rules, and buying an out-of-state plan may forfeit state tax benefits — which must be disclosed. A Coverdell account permits a smaller annual contribution with similar treatment. ABLE accounts serve people who became disabled before a specified age.

One standing suitability rule: a municipal bond does not belong in a tax-deferred account, because the customer would accept a lower yield for an exemption they already have.