Study guide
Operations work begins the moment a customer decides to open an account and continues every time money or securities move in, out, or between accounts. This chapter covers how accounts are opened and documented, how retirement accounts differ from ordinary ones, how firms maintain and sometimes freeze accounts, and how cash and full accounts move between firms under strict regulatory timelines.
Opening the Account: CIP, KYC, and Documentation
Before a broker-dealer can do business with a customer, it must know who that customer is. The Customer Identification Program, or CIP, required by Section 326 of the USA PATRIOT Act, obligates the firm to collect four pieces of information before opening an account: the customer's name, date of birth for an individual, physical address, and an identification number, which for a U.S. person is a Social Security or taxpayer identification number and for a non-U.S. person may be a passport number or similar government ID. The firm must then verify the customer's identity within a reasonable time, using documents such as a driver's license, non-documentary methods such as database checks, or both, and it must keep records of what it did. CIP is separate from the know-your-customer obligation in FINRA Rule 2090, which requires the firm to use reasonable diligence to learn the essential facts about every customer and about anyone authorized to act for the customer. Account records under FINRA Rule 4512 must show, among other things, the customer's name and residence, whether the customer is of legal age, the registered representative assigned, and the signature of the principal who approved the account. Different account types demand extra paperwork. When Dana, an operations associate at a clearing firm, opens an account for a small corporation, she needs a corporate resolution naming the officers authorized to trade. A trust account needs the trust document or a certification of trust, and a margin account needs a signed margin agreement before the firm can lend.
Retirement Accounts, RMDs, Transfers, and Rollovers
Retirement accounts carry tax advantages, and operations staff must handle them carefully because mistakes can create taxable events for customers. Traditional IRAs and most employer plans hold pre-tax money that is taxed on withdrawal, while Roth IRAs hold after-tax money that can come out tax-free if conditions are met. Owners of traditional IRAs and most workplace plans must begin required minimum distributions, or RMDs, at the age set by current federal law, which is 73 for most people reaching that age now; Roth IRAs are not subject to RMDs during the owner's lifetime. Missing an RMD triggers an excise tax on the shortfall, so firms typically calculate and remind. The distinction between a transfer and a rollover appears constantly on the exam and in daily work. A direct trustee-to-trustee transfer moves retirement money straight from one custodian to another; the customer never touches it, there is no limit on how many can be done, and nothing is withheld. An indirect rollover means the customer receives a distribution and has 60 days to redeposit it into another retirement account. Only one indirect IRA-to-IRA rollover is permitted in any 12-month period, and a distribution paid directly to a participant from an employer plan is generally subject to 20 percent mandatory federal withholding. Consider Priya, who wants to move her IRA from one firm to another. If operations processes it as a direct transfer, nothing is withheld and no rollover clock starts. If a check is cut to Priya personally, she now has 60 days and has used her once-per-year rollover.
Account Maintenance, Escheatment, and Freezing Accounts
Accounts require ongoing care. Address changes should be verified, and many firms send confirmation of the change to both the old and the new address so a fraudster cannot quietly redirect mail. Under SEC recordkeeping rules, firms must furnish certain account record information to the customer for verification within 30 days of opening and periodically thereafter. When an account goes quiet, unclaimed property law takes over. If a customer cannot be located and the account shows no activity or contact for a dormancy period, the assets must be escheated, meaning turned over to the customer's state of last known address. Dormancy periods and due diligence requirements vary by state, but in most states the period is roughly three to five years, and firms are generally expected to attempt to contact the owner before remitting property. Escheated property is not destroyed; the owner or heirs can usually reclaim it from the state. Accounts can also be frozen. A cash account is frozen for 90 days under Regulation T when a customer freerides, meaning buys securities and sells them without ever paying; during the freeze the customer must have cash in the account before any purchase. Legal freezes arise from court orders, tax levies, or the death of an account holder, where the firm typically requires a death certificate and appropriate estate documents before releasing assets. Separately, FINRA Rule 2165 permits a firm to place a temporary hold on disbursements from the account of a senior or other specified adult when it reasonably suspects financial exploitation.
Moving Money: Wires, ACH, Journals, LOAs, and Currency Reporting
The cashiering department moves funds, and each method carries different speed and risk. A Fedwire transfer settles the same day and is essentially irrevocable once sent, which makes outgoing wires a favorite target for fraud; a request to wire funds to a third party, meaning anyone other than the account holder, deserves heightened scrutiny and usually a verbal callback to the customer at a known phone number. ACH transfers move in batches, take a day or more, and can be returned or reversed in limited circumstances, which makes them cheaper but slower. A journal entry moves cash or securities between two accounts on the firm's own books; when the accounts have identical registration this is routine, but a journal to a differently registered account requires a signed letter of authorization, or LOA, from the delivering customer, and unexplained journals between unrelated customers are a classic red flag. Currency, meaning physical cash and certain equivalents, brings Bank Secrecy Act duties. A firm must file a Currency Transaction Report, FinCEN Form 112, for currency transactions by or on behalf of one person that exceed 10,000 dollars in a single business day, aggregating multiple deposits, and the report is generally due within 15 days. Breaking deposits into smaller pieces to evade the report is called structuring and is a federal crime, and an operations employee who notices it must escalate. Because of these burdens, most broker-dealers simply refuse to accept physical cash. Checks deserve care too: customer checks should be made payable to the firm or its clearing firm, never to an individual representative.
Account Transfers: ACATS, Rule 11870, and Prohibited Practices
When a customer moves an account between two firms that both participate in the National Securities Clearing Corporation, the transfer runs through the Automated Customer Account Transfer Service, or ACATS. The customer signs a transfer instruction, often called a transfer initiation form, at the receiving firm, which submits it into ACATS. Under FINRA Rule 11870, the carrying firm must, within one business day, either validate the transfer or take exception for a limited list of reasons, such as an unrecognized account number or a mismatched Social Security number; disliking the transfer is not a valid exception. Once validated, the transfer must generally be completed within three business days. Assets normally move in kind, exactly as held. Some assets are nontransferable, such as a proprietary mutual fund the receiving firm cannot hold, and the customer must be given choices, such as liquidating it or leaving it behind. Dividends and interest that arrive at the old firm after the account has left are called residual credits, and the carrying firm must periodically sweep them to the new firm rather than letting them sit. Transfers involving banks, mutual fund companies, or other non-ACATS parties are handled manually and take longer. Changing registered ownership of certificated securities usually requires a medallion signature guarantee, a stamp from a bank or broker enrolled in a recognized guarantee program that warrants the signature is genuine and shifts liability to the guarantor. Finally, FINRA Rule 2140 flatly prohibits interfering with a customer's request to transfer an account; holding up a validated transfer so a representative can try to win the customer back violates the rule.
Key terms
- Customer Identification Program (CIP)
- — The PATRIOT Act Section 326 requirement that a firm collect and verify a customer's name, date of birth, address, and identification number before opening an account.
- Know Your Customer (FINRA Rule 2090)
- — The obligation to use reasonable diligence to know the essential facts about every customer and every person authorized to act on the account.
- Required minimum distribution (RMD)
- — The annual withdrawal that owners of traditional IRAs and most employer plans must begin taking at the age set by federal law, currently 73 for most individuals; Roth IRAs are exempt during the owner's life.
- Trustee-to-trustee transfer
- — A direct movement of retirement assets between custodians that the customer never receives; it is unlimited in frequency and involves no withholding.
- Rollover
- — A retirement distribution paid to the customer that must be redeposited within 60 days to stay tax-deferred; only one indirect IRA-to-IRA rollover is allowed per 12-month period.
- Escheatment
- — Turning over dormant, unclaimed account assets to the customer's state of last known address after a state-defined dormancy period, commonly three to five years in most states.
- Letter of authorization (LOA)
- — A signed customer instruction authorizing a specific movement of funds or securities, required for journals or wires to accounts with different registration.
- Journal entry
- — A book movement of cash or securities between two accounts held at the same firm, requiring an LOA when the registrations differ.
- Currency Transaction Report (CTR)
- — FinCEN Form 112, filed for currency transactions exceeding 10,000 dollars by one person in one business day, generally due within 15 days.
- Check kiting
- — Writing checks against uncollected or nonexistent balances across accounts to create the illusion of funds; a prohibited fraudulent practice operations staff must watch for.
- ACATS
- — The Automated Customer Account Transfer Service operated by NSCC, which standardizes account transfers between member firms on a validate-then-deliver timeline.
- Medallion signature guarantee
- — A stamp from an institution in a recognized signature guarantee program warranting that a signature on a securities transfer is genuine, with the guarantor accepting liability.
Exam tips
- Keep transfer and rollover straight: the 60-day deadline and once-per-12-months limit apply only to indirect rollovers, never to direct trustee-to-trustee transfers.
- Memorize the ACATS clock under Rule 11870: the carrying firm validates or takes exception within one business day, then completes the transfer within about three business days.
- A CTR is triggered only by currency over 10,000 dollars in a day; checks and wires do not count, and intentionally splitting cash deposits to avoid the report is structuring.
- Know the four CIP elements cold: name, date of birth, address, and identification number, collected before opening and verified within a reasonable time after.
- Expect a question on prohibited conduct around transfers: Rule 2140 bars interfering with a customer's transfer, and holding a valid transfer instruction to give a rep time to save the business violates it.