Before a customer can trade, the firm has to open and document the account. The state-law focus is on what information the firm gathers, who approves the account, and which documents must be signed.
New Account Documentation
When opening a new account, the firm records the information it needs to know the customer and meet its suitability and recordkeeping obligations. A new account record typically captures:
- The customer's name, residential address, and contact information
- Date of birth / legal age and Social Security or tax identification number
- Employment status and whether the customer is associated with another broker-dealer
- Financial profile: income, net worth, and the customer's investment objectives and risk tolerance
- Whether anyone other than the customer has trading authority over the account
The agent who opens the account and a principal of the firm are responsible for the accuracy of this record.
Account Approval and Signatures
- A principal must approve the opening of a new account. Approval is a supervisory function, not something the customer performs.
- For a basic cash account, the customer's signature is not required to open the account. The firm can open and trade a cash account based on the information gathered and the principal's approval.
- A customer's signature is required to open a margin account (the margin agreement) and to trade options (the options account agreement), covered in the next two sections.
Exam Tip: Gotchas
- Do not confuse approval with signatures. A principal must approve every new account, but the customer does not have to sign to open a cash account. The signature requirement kicks in for margin and options accounts.
Trusted Contact Person (TCP)
Opening an account is also when the firm requests a trusted contact person (TCP), part of protecting customers, especially older or vulnerable adults, from financial exploitation. This is the account-opening side of the NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation.
- The firm makes a reasonable effort to obtain a TCP for each retail customer account
- The TCP must be a natural person age 18 or older
- The firm may open and maintain the account even if the customer declines to name a TCP, provided reasonable efforts were made. Naming a TCP is requested, not a hard prerequisite
At account opening, the firm discloses in writing that it is authorized to contact the TCP to:
- Address possible financial exploitation of the customer
- Confirm the customer's current contact information
- Confirm the customer's health status
- Confirm the identity of any legal guardian, executor, trustee, or power of attorney holder
The TCP supports the protection of eligible adults: those age 65 or older, or adults eligible for protection under a state's adult-protective-services law. The trusted contact gives the firm a designated person to reach when it suspects an eligible adult is being financially exploited.
Exam Tip: Gotchas
- A customer can decline to name a TCP and still open the account, as long as the firm made a reasonable effort to obtain one.