New Account Forms and the Series 7 Exam

By Steven M. Rice

The Series 7 examiners seem to be focusing more and more on the handling of customer accounts. You need to know what to do to open accounts. When you’re opening any new account for a customer, the new account form needs some basic information.

Broker-dealers may, in accordance with the Patriot Act, require a customer to provide proof of identification. Getting this information is your responsibility (or the responsibility of the broker-dealer). Here’s a list of the items that need to be on the new account form:

  • The name(s) and address(es) of the individual(s) who’ll have access to the account

  • The customer’s date of birth (the customer must be of legal age to open an account)

  • The type of account the customer is opening (cash, margin, retirement, day trading, prime brokerage, DVP/RVP, advisory or fee-based, discretionary, options, and so on)

  • The customer’s Social Security number (if the customer is an individual) or tax ID number (if the customer is a business)

  • The customer’s occupation, employer, and type of business (certain limitations are placed on customers who work for banks, broker-dealers, insurance companies, SROs, and so on)

  • Domestic or foreign residency and/or citizenship

  • Bank references and the customer’s net worth and annual income

  • Whether the customer is an insider of a company

  • Investment objectives

  • The signatures of the registered representative and a principal

You need this information to open an account. If anything changes (for example, a customer’s address), the account records need to be updated. Additionally, only individuals who are legally competent may open accounts.

The following question tests your ability to answer a question about opening a new account.

  1. Which of the following people must sign a new account form?

    I. The customer

    II. The customer’s spouse

    III. The registered representative

    IV. A principal

    (A) I and II only

    (B) III and IV only

    (C) I and IV only

    (D) I, III, and IV only

The correct answer is Choice (B). When you’re opening a new account for a customer, the new account form requires only your signature and a principal’s (manager’s) signature. Make sure you don’t assume extenuating circumstances. You need the customer’s signature on a new account form only if the customer is opening a margin account. Additionally, you need the spouse’s signature only if you’re opening a joint account. Because the question doesn’t say that the account is a margin or joint account, you can’t assume that it is.

Word on the street: Numbered accounts

A street name or numbered account is an account registered in the name of the broker-dealer with an ID number. Street name accounts give the investor a certain degree of privacy and help facilitate the trading of securities (because the brokerage firm, not the customer, signs the certificates). You need to know a few rules about street name accounts for the Series 7:

  • You need a written statement from the customer attesting to the ownership of the account.

  • With the exception of margin accounts, a street name account may be changed by the customer into a regular account at any time.

  • All margin accounts must be in street name.

The Patriot Act

The Patriot Act was enacted in 2001 to help identify and catch terrorists. As part of the Patriot Act, broker-dealers are required to

  • Keep records of the information used to identify the customer (via customer identification programs, or CIPs). The CIP is a program used by financial institutions to verify the identity of customers who wish to conduct financial transactions.

  • Verify that a customer doesn’t appear on any list of known terrorists or terrorist organizations (the U.S. Treasury keeps this list)