Study guide
Approving new accounts and keeping them compliant is the core daily work of a sales supervisor, and the Series 10 devotes heavy coverage to it. This chapter follows the account lifecycle: identity verification and know-your-customer duties, suitability under Regulation Best Interest, margin mechanics, special account types including seniors and fiduciaries, and the maintenance layer of complaints, transfers, and records.
Account Approval, CIP, and Know Your Customer
Two FINRA rules frame account opening. Rule 2090, know your customer, requires reasonable diligence to know the essential facts about every customer and every person authorized to act on the account, facts needed to service the account effectively and comply with applicable rules. Rule 4512 specifies the account record itself: name, address, whether the customer is of legal age, the name of the associated person responsible for the account, and, for non-institutional accounts, a reasonable effort to obtain the name of a trusted contact person the firm may reach about possible exploitation or diminished capacity. The customer identification program, required by the Bank Secrecy Act as part of the firm's anti-money laundering program, collects at minimum name, date of birth, address, and an identification number such as a Social Security number, then verifies identity through documents or non-documentary means within a reasonable time. Identity records are retained for five years after the account closes. For legal entity customers, the beneficial ownership rule requires identifying individuals owning 25 percent or more plus one person with managerial control. AML duties continue after opening: suspicious activity involving 5,000 dollars or more with no apparent lawful purpose triggers a Suspicious Activity Report to FinCEN, generally within 30 days, and the customer must never be told. Imagine a supervisor, Colin, reviewing a new entity account funded by a series of just-under-10,000-dollar cash equivalents from unrelated third parties. Approving that account without escalation is the exam's wrong answer; structuring patterns demand AML review before, not after, trading begins. A principal must accept each new account in writing, evidencing supervisory review of the information gathered.
Suitability and Regulation Best Interest
Regulation Best Interest, the SEC standard for broker-dealer recommendations to retail customers, requires that recommendations of securities transactions or investment strategies, including account-type recommendations such as rollovers, be in the retail customer's best interest without placing the firm's or representative's interest ahead. Reg BI has four component obligations. Disclosure: give retail customers, at or before the recommendation, full and fair written disclosure of material facts about the relationship, including capacity, fees, and conflicts, anchored by the Form CRS relationship summary. Care: exercise reasonable diligence, care, and skill, understanding the product, having a reasonable basis to believe it is in the best interest of the particular customer given their investment profile, and avoiding excessive trading. Conflict of interest: maintain policies to identify and at minimum disclose conflicts, mitigate incentives for personnel, and eliminate certain practices outright, such as sales contests tied to specific securities within limited periods. Compliance: maintain policies reasonably designed to achieve compliance with the whole rule. FINRA Rule 2111, the traditional suitability rule, still governs recommendations to non-retail customers and remains the analytical vocabulary supervisors use: reasonable-basis suitability (understand the product), customer-specific suitability (match the profile), and quantitative suitability (trading level not excessive). A supervisor reviewing recommendations from a representative named Farrah should check the documented investment profile, age, other investments, financial situation, tax status, objectives, time horizon, liquidity needs, and risk tolerance, against what was sold, and should treat costly, complex, or illiquid products recommended to modest-profile customers as automatic review items. Documentation of the reasonable basis, not just the outcome, is what examiners and regulators look for.
Margin Accounts and Regulation T
Margin lets customers borrow against securities, and supervisors own both the paperwork and the arithmetic. At opening, a margin account requires a margin agreement, including the hypothecation consent that lets the firm pledge customer securities, and a credit agreement stating interest terms; a loan consent permitting the firm to lend the customer's securities to short sellers is optional. FINRA Rule 2264 requires a margin disclosure statement, explaining risks such as forced liquidation without notice and the fact that customers are not entitled to choose which securities are sold, delivered at or before opening and again annually. Regulation T, the Federal Reserve rule, sets initial margin at 50 percent for most equity securities, and payment for purchases is due within the Reg T window, generally two business days after the regular-way settlement date; with U.S. settlement now at one business day, verify current timing conventions when you study. If a customer fails to pay, the firm cancels or liquidates and freezes the account for 90 days, meaning purchases require cash up front. FINRA maintenance rules require minimum equity of 2,000 dollars to open, 25 percent equity for long positions and 30 percent for short positions, and firms commonly impose stricter house requirements. Pattern day traders, customers executing four or more day trades within five business days where those trades exceed six percent of total activity, must maintain 25,000 dollars minimum equity, and firms promoting day-trading strategies must deliver a special risk disclosure and approve accounts for that strategy. A supervisor watching an account that repeatedly meets maintenance calls by depositing and withdrawing the same funds should recognize potential check kiting or unmet capital, both escalation events.
Discretionary, Fiduciary, and Senior Investor Accounts
Discretionary authority, the power to choose the security, the amount, or the action without customer approval of each trade, requires the customer's prior written authorization and the firm's written acceptance, and every discretionary order must be marked as discretionary when entered. A principal must review discretionary accounts frequently to detect excessive trading. Time-and-price discretion on a customer-directed order is not discretionary but is generally valid only that trading day. Fiduciary accounts add documentation: a trustee needs the trust instrument or certification showing authority, an executor needs court-issued letters, and a guardian or conservator needs the appointing documents; in most states, fiduciaries are bound by a prudent investor standard, and margin or options trading is permissible only if the governing document and applicable law allow it. Custodial accounts under UTMA or UGMA are managed by one custodian for one minor, use the minor's Social Security number, and must avoid speculative strategies; assets are irrevocable gifts to the minor. Senior investors receive layered protection. Rule 4512's trusted contact request gives firms a person to call when something seems wrong, and Rule 2165 permits, but does not require, a temporary hold on disbursements of funds or securities, and on securities transactions, when the firm reasonably believes financial exploitation of a specified adult, someone 65 or older or an adult with impairments, has occurred or will be attempted. The initial hold runs up to 15 business days, with extensions available, including where a state regulator or court becomes involved, and the firm must open an internal review and notify parties on the account and the trusted contact unless they are suspected of the exploitation. Suppose an 82-year-old client of a representative at fictional Brightstone Wealth suddenly wires savings to a new overseas payee. The supervisor can place a hold, call the trusted contact, and document everything.
Complaints, Account Transfers, and Books and Records
A customer complaint, for FINRA purposes, is a written grievance, including electronic messages, involving the member or an associated person in connection with securities activities or the account. Rule 4513 requires firms to keep complaint records, or clear references to where they are kept, for at least four years, and Rule 4530 adds two reporting layers: quarterly statistical summaries of customer complaints, filed by the 15th day of the month following each calendar quarter, and prompt reporting, within 30 calendar days, of specified events such as complaints alleging theft, misappropriation, or forgery. Supervisors must route every written complaint to a principal; a representative negotiating a quiet settlement with a customer is a classic violation fact pattern. Account transfers run through ACATS, the Automated Customer Account Transfer Service. When a receiving firm submits a transfer instruction, the carrying firm must validate the instruction or take exception within one business day and complete the transfer within three business days of validation. The carrying firm cannot block a transfer because it dislikes losing the client, though nontransferable assets, such as proprietary funds, may be liquidated or left behind at the customer's direction. Books and records requirements come from SEC Rules 17a-3 and 17a-4: blotters, general ledgers, and stock records are kept six years; most other records, including order tickets, confirmations, and communications, are kept three years, with the first two years readily accessible; account record information is furnished to customers for verification periodically, generally at least every 36 months. Customers must receive confirmations at or before completion of each transaction and account statements at least quarterly. Holding a customer's mail is allowed on written request for a specified period, with firm verification safeguards, but never to hide activity.
Key terms
- FINRA Rule 2090 (Know Your Customer)
- — Requires reasonable diligence to know the essential facts about every customer and every person authorized to act on the customer's behalf.
- Customer identification program (CIP)
- — The AML process collecting at minimum name, date of birth, address, and identification number, with identity verified within a reasonable time and records kept five years after account closure.
- Suspicious Activity Report (SAR)
- — A confidential filing with FinCEN, generally within 30 days, for transactions of 5,000 dollars or more that the firm suspects involve illicit funds or lack a lawful purpose.
- Regulation Best Interest
- — The SEC standard requiring broker-dealer recommendations to retail customers to be in the customer's best interest, built on disclosure, care, conflict-of-interest, and compliance obligations.
- Form CRS
- — The customer relationship summary describing services, fees, conflicts, and disciplinary history, delivered to retail investors at or before specified relationship milestones.
- Regulation T
- — The Federal Reserve rule setting initial margin, generally 50 percent for equities, and payment deadlines for securities purchases in cash and margin accounts.
- Pattern day trader
- — A customer executing four or more day trades in five business days exceeding six percent of account activity, subject to a 25,000 dollar minimum equity requirement.
- Trusted contact person
- — An individual, requested for non-institutional accounts under Rule 4512, whom the firm may contact about possible exploitation, diminished capacity, or inability to reach the customer.
- FINRA Rule 2165
- — Permits a temporary hold on disbursements or transactions, initially up to 15 business days with extensions, when exploitation of a specified adult is reasonably suspected.
- ACATS
- — The automated system for customer account transfers, requiring validation or exception within one business day and completion within three business days of validation.
- Rule 4530 reporting
- — FINRA's requirement to report specified events within 30 calendar days and to file quarterly statistical complaint summaries by the 15th of the following month.
- Discretionary authority
- — Power to decide the security, amount, or action in a customer account, requiring prior written customer authorization, firm acceptance, and frequent principal review.
Exam tips
- Keep Reg BI's four obligations in order: disclosure, care, conflict of interest, and compliance, and remember it applies to recommendations to retail customers, including account-type and rollover recommendations.
- Margin numbers to memorize: 50 percent Reg T initial, 2,000 dollar minimum equity, 25 percent long and 30 percent short maintenance, 25,000 dollars for pattern day traders, and a 90-day freeze after an unmet payment.
- The trusted contact is someone the firm asks about the customer; Rule 2165 holds are permissive, not mandatory, and start at up to 15 business days.
- ACATS timing is one business day to validate and three to complete after validation; the carrying firm cannot stall to retain the client.
- Complaint questions usually test routing and retention: written complaints go to a principal, records are kept four years, and theft or forgery allegations are reported to FINRA within 30 days.