Account Registration Changes and Internal Transfers

After an account is open, customers often ask to change the registration (individual to joint, joint to IRA) or authorize the firm to draw checks from their outside bank. The customer account records rule and the negotiable-instrument authorization rule govern how those changes are approved and documented.

What does the customer account records rule require to change an account name or designation?

No change in account name or designation may be made unless:

• The change has been authorized by a qualified and registered principal designated by the member firm
• The approving principal must be personally informed of the essential facts relative to the change
• The principal must indicate approval in writing on the order or similar record
• The essential facts relied upon must be documented in writing and preserved per the broker-dealer recordkeeping rule's retention requirement

Timing and format rules:

• For changes that take place prior to execution of a trade, the essential facts must be documented prior to execution
• Electronic approval is permitted to satisfy the customer account records rule

Exam Tip: Gotchas

• The customer account records rule requires a registered principal (not any associated person) to approve account name or designation changes. The principal must be personally informed of the essential facts and document them in writing. A registered representative (including a Series 6 rep) cannot initiate a re-designation unilaterally. Principal pre-approval is mandatory.

How are internal transfers between accounts at the same firm handled?

Moving securities or cash between two accounts held at the same firm (for example, individual account to an IRA, or joint account to individual account) requires:

• Principal approval for any name or designation change under the customer account records rule
• Written customer authorization for most transfers, especially between accounts with different ownership
• Proper tax reporting if the transfer is a taxable event (for example, moving a mutual fund from a taxable account into a customer's Roth IRA would be a contribution, not a transfer)

Think of it this way: An "internal transfer" sounds harmless, but the IRS and FINRA treat it like any other movement of assets. Moving a fund from Jane's taxable account into Jane's Roth IRA is a contribution, subject to annual contribution limits. Moving it from Jane's account to her husband's account requires both customer authorizations and can trigger gift-tax reporting.

What does the negotiable-instrument authorization rule require for drawing checks on a customer account?

Before a firm or associated person can obtain from a customer or submit for payment a check, draft, or other negotiable paper drawn on the customer's checking, savings, share, or similar account, the firm must have:

• The customer's express written authorization

The authorization may be provided in one of two formats:

• The customer's signature on the negotiable instrument itself OR
• A separate authorization form

Preservation requirements:

• Where the authorization is separate from the negotiable instrument, the firm must preserve the authorization for 3 years following the date the authorization expires
• The rule does NOT require the firm to preserve copies of negotiable instruments bearing the customer's signature

Exam Tip: Gotchas

• For the negotiable-instrument authorization rule, the written authorization must be retained for 3 years after expiration, not 3 years after the first draft is submitted. If a customer authorizes recurring check withdrawals for 5 years, the 3-year preservation clock starts at the end of year 5.

How do the negotiable-instrument authorization rule and the customer account records rule differ?

Exam Tip: Gotchas

• The two rules are commonly confused. The customer account records rule = account name/designation changes (principal approval). The negotiable-instrument authorization rule = negotiable instruments drawn from outside customer accounts (written customer authorization, 3-year retention after expiration).