Customer Agreements and Account Types

The whole unit on one sheet: what gets documented, who signs, the timing rules, and the two prohibited representations the exam loves.

New Account Requirements

• The firm records the customer's identity, financial profile, investment objectives, risk tolerance, and whether anyone else has trading authority.
• A principal of the firm must approve the opening of every new account. Approval is supervisory, not something the customer performs.
• A cash account needs no customer signature to open; the firm opens and trades it on the gathered information plus principal approval.
• The firm makes a reasonable effort to obtain a trusted contact person (TCP) for each retail account, part of protecting vulnerable adults from financial exploitation.
• The TCP must be a natural person age 18 or older; the customer may decline and still open the account.
• Eligible adults protected by the trusted-contact framework are those age 65 or older, or adults covered under a state adult-protective-services law.

Margin Accounts

• A margin account requires the customer to sign the margin agreement before trading on margin.
• Credit agreement (loan terms and interest) and hypothecation agreement (pledging securities as collateral) are required.
• The loan consent agreement (letting the firm lend the customer's margin securities to others) is optional; a customer can have a fully functioning margin account without it.
• The firm delivers a margin risk disclosure statement at or before opening: the customer can lose more than deposited, the firm can sell securities without contacting them, the customer cannot pick what is sold, and the firm can change margin requirements anytime.

Options Accounts

• Deliver the Options Disclosure Document (ODD) to the customer at or before the account is approved for options trading.
• A Registered Options Principal (ROP) must approve the account before the first options trade.
• The customer must sign and return the options account agreement within 15 days after approval.
• If the signed agreement is late, the account may only close existing positions until it is on file.

The One-Liners That Win Points

• Registration becomes effective; it is never approved. The Administrator does not pass on the merits or endorse any person, security, or transaction.
• An agent may truthfully say they are registered or that a security's registration is effective; they may not imply that registration means approval, endorsement, or merit review.
• Guaranteeing a customer against loss, promising a specific rate of return, or claiming gains are certain is a prohibited practice.
• Sharing in a customer's losses to cushion a bad investment counts as a performance guarantee, even without the word "guarantee."
• Describing an issuer feature ("this bond pays a 5% coupon") is fine; an agent personally guaranteeing an outcome ("you are guaranteed to earn 5%") is prohibited.

Numbers to Lock In

Memory Aid: R does not equal E

Registration does not equal Endorsement. Registration is a legal filing; endorsement is a quality judgment. The Administrator does one, never the other.

Top Gotchas

• ODD timing: delivered at or before options-account approval, never afterward.
• Options approval comes from a Registered Options Principal, not just any principal.
• Margin needs a signature before trading; a cash account needs none. Do not confuse principal approval (required for every account) with the customer signature (only for margin and options).
• The loan consent agreement is the optional piece; the credit and hypothecation agreements are mandatory.
• "Effective" is the only correct word for a completed registration; "approved" is always wrong.
• A customer may decline a trusted contact and still open the account, provided the firm made a reasonable effort.

One-Breath Recap

A principal approves every new account, but the customer signs nothing to open a cash account. A margin account needs the margin agreement signed before trading, where the credit and hypothecation pieces are required and only the loan consent is optional. An options account needs the Options Disclosure Document delivered at or before approval, a Registered Options Principal to approve, and the signed agreement returned within 15 days or the account can only close positions. The firm makes a reasonable effort to name a trusted contact person aged 18 or older to help protect eligible adults 65 or older. And two lines never move: registration is effective, never approved, and no agent may guarantee performance or share in a customer's losses.

Need more than the recap? This is a condensed summary. If it is not enough, read the full Customer Agreements and Account Types unit for the complete lesson.