Quick Answer
Before opening a non-institutional customer's account, a firm that promotes day trading must deliver the risk disclosure and either approve day trading as appropriate with a written record of the basis or obtain a written non-intent statement. If the firm knows the customer intends to day trade, it must use the approval path. These rules apply to promoting firms.
Now that you know the general requirements for opening accounts, this section covers the additional rules that apply specifically to firms promoting day-trading strategies. Two FINRA rules govern this area: the day-trading approval rule and the day-trading risk-disclosure rule.
When Must a Firm Approve a Day-Trading Account?
The day-trading approval rule applies to members that promote a day-trading strategy, directly or indirectly.
For this approval rule, a day-trading strategy means an overall strategy characterized by regular intraday orders to buy and sell the same security. A single isolated same-day round trip does not, by itself, establish that strategy.
What Counts as "Promoting"?
- Advertising
- Website content
- Trading seminars
- Direct outreach to customers
What Must the Firm Do Before Opening the Account?
Before opening a day-trading account for a non-institutional customer, the member must do one of two things:
| Option | What the Firm Must Do |
|---|---|
| Option A: Approve the account | Determine that day trading is appropriate for the customer, and prepare a written record of the basis for approval |
| Option B: Obtain a written agreement | Get the customer's written statement that they do not intend to use the account for day trading; unavailable if the firm knows of contrary intent |
What Facts Support an Appropriateness Determination (Option A)?
The firm must exercise reasonable diligence to ascertain:
- Investment objectives
- Investment and trading experience and knowledge
- Estimated annual income from all sources
- Estimated net worth (excluding family residence)
- Estimated liquid net worth
- Tax status
- Employment status
- Marital status and number of dependents
- Age
Exam Tip: Gotchas
- The day-trading approval rule only applies to firms that promote day trading. A firm that simply allows day trading without actively promoting it is not subject to these approval procedures. But if the firm promotes day trading in any way (even on its website), the approval rule kicks in.
- Net worth for the appropriateness determination excludes the family residence. The rule specifically says "exclusive of family residence."
What Must the Risk Disclosure Statement Say?
The risk disclosure must be furnished to each non-institutional customer individually (paper or electronic) before the account is opened. It must also be posted on the member's website in a clear and conspicuous manner.
What Must the Disclosure Statement Tell the Customer?
The disclosure statement must inform the customer that:
- Day trading is generally not appropriate for someone with limited resources, limited experience, and low risk tolerance
- The customer should be prepared to lose all funds used for day trading
- An investment of less than $50,000 will significantly impair a day trader's ability to profit
- Day trading requires in-depth knowledge of securities markets, techniques, and strategies
- The customer will be competing with professional, licensed traders
How Do the Approval and Disclosure Requirements Relate?
- The risk disclosure must be delivered before the account is opened (when the firm promotes day trading)
- The approval or written agreement is a separate requirement on top of the disclosure
- Both requirements target firms that promote day trading to non-institutional customers
Exam Tip: Gotchas
- The $50,000 figure in the risk disclosure is a warning, not a regulatory minimum. The warning is a required part of the risk disclosure, but it does not set a minimum account size.
- A firm cannot rely on Option B if it knows the customer intends to use a day-trading strategy. If it later learns the customer is using such a strategy, it must approve the account under Option A as soon as practicable and within 10 days. That deadline is calendar days, not business days.
- This knowledge test also applies before the account opens, not only after. If a prospective customer says they intend to use a day-trading strategy, the firm must use Option A even if the customer offers to sign a non-intent agreement. The test is known intent, not merely the possibility of future day trading.
- A single same-day round trip is not a day-trading strategy. The approval rule asks whether the firm knows the customer is using a regular day-trading strategy.
- The risk disclosure must come before the account opens. The disclosure is a prerequisite, not something that can be delivered after the fact.
What Should You Check on Exam Day?
- These rules apply only to firms that promote day trading, not firms that merely allow it
- Before opening a non-institutional customer's account, every promoting firm must deliver the risk disclosure and either approve day trading with a written record of the basis or get a written non-day-trading statement; known day-trading intent requires approval
- The $50,000 figure is a warning in the risk disclosure, not a minimum balance requirement
- If a firm later learns a "no day trading" customer is day trading, it has 10 days (not business days) to complete the appropriateness approval