Required Approvals and Documentation for Account Opening
Now that you understand how the supervisory system is structured, let's look at the specific approvals required when customers open and operate accounts.
New Account Approval
- All new customer accounts must be approved by a registered principal, typically at the Office of Supervisory Jurisdiction (OSJ) level
- The principal reviews the new account form for:
- Completeness - all required fields filled
- Accuracy - information appears consistent and reasonable
- Appropriateness - the account type suits the customer
- Approval must be documented in writing (signature, initials, or electronic equivalent) with the date recorded
Account Types Requiring Heightened Principal Approval
Certain account types carry additional risk and require specialized principal approval beyond the standard new account process:
| Account Type | Who Must Approve | Key Rule | Special Requirements |
|---|---|---|---|
| Options | Registered Options Principal (ROP) | Chicago Board Options Exchange (Cboe) Rule 9.2 | Review financial status, objectives, and options experience |
| Margin | Principal | FINRA Rule 4210 | Customer must sign margin agreement and hypothecation consent |
| Discretionary | Principal (written acceptance) | FINRA Rule 3260 | Customer must provide prior written authorization |
| Day trading | Principal | FINRA Rules 2130, 2270 | Risk disclosure statement must be delivered and acknowledged |
| Municipal securities | Municipal securities principal or general securities principal | Municipal Securities Rulemaking Board (MSRB) Rule G-27 | Supervision of all muni transactions |
Exam Tip: Gotchas
- Options accounts require a Registered Options Principal (ROP), not just any principal. The ROP holds a Series 4 license specifically for options supervision.
- Margin accounts require both principal approval AND signed agreements (margin agreement + hypothecation consent). Approval alone is not enough.
- Day-trading accounts require delivery of a written risk disclosure - a verbal warning does not satisfy the requirement.
Discretionary Account Requirements (FINRA Rule 3260)
Discretionary accounts receive the most scrutiny because the representative is making investment decisions on behalf of the customer:
- The customer must give prior written authorization to a stated individual
- The account must be accepted by a principal in writing
- Each discretionary order must be promptly approved in writing by the designated principal
- All discretionary accounts must be reviewed at frequent intervals to detect transactions that are excessive in size or frequency relative to the account's financial resources
Exam Tip: Gotchas
- Discretionary authority requires written authorization BEFORE any discretionary trading begins. The authorization must name a specific individual, and each order still needs prompt principal approval.
Time-and-Price Discretion Exception
- Time-and-price discretion means choosing when and at what price to execute a customer's specified order (e.g., "Buy 100 shares of XYZ at the best price today")
- This does not require written discretionary authority, but only if exercised by the end of the business day on which the customer granted it
- If the representative holds the order to the next day, full discretionary authorization is required
- Exception for institutional accounts: Good-Till-Cancelled instructions may extend time/price discretion beyond the same day
Exam Tip: Gotchas
- Time-and-price discretion is same-day only for retail customers. A customer says "Buy 100 shares of XYZ sometime today at the best price you can get" - no written authority needed. But if the rep waits until tomorrow to execute, that requires full written discretionary authorization.
Account Registration Changes (FINRA Rule 4515)
- Changes to the name or designation of any customer account require principal approval
- The firm must obtain documented customer verification before implementing changes
- This prevents unauthorized transfers or name changes on accounts