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Account Opening

Account Opening. Introduction. Process of opening accounts still very similar Disclosure statement required Written approval/disapproval. Disclosure Statement. Standardized Disclosure Statement Drafted by NFA, NASDR, and other SROs NFA Compliance Rule 2-30(b)

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Account Opening

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  1. Account Opening

  2. Introduction • Process of opening accounts still very similar • Disclosure statement required • Written approval/disapproval

  3. Disclosure Statement • Standardized Disclosure Statement • Drafted by NFA, NASDR, and other SROs • NFA Compliance Rule 2-30(b) • Amended to require Member to provide it at or before approval of account to trade security futures (SF)

  4. Disclosure Statement • For existing clients • Member can give it before or when they approve account to trade security futures • Member does not have to get acknowledgement of receipt • Must be able to demonstrate that Member has provided SF disclosure statement to the customer

  5. Disclosure Statement • Content of SF disclosure statement: • Risks of SF transactions • Description of security futures • Margins • Customer account protection • Other issues such as corporate events

  6. Segregation vs. SIPC • Final rules have not yet been issued • Under currently proposed rules : • FCM Notice Registered Broker-Dealers: • Customer will not have a choice as to the type of account • Automatically defaults to a futures account • Fully Registered Broker-Dealer FCM: • Customer will have a choice between futures and securities account

  7. Segregation vs. SIPC • Under the proposed rules a Fully Registered Broker-Dealer FCM would be required to: • Establish written policies stating how customer positions will be held, • Make certain disclosures to customers regarding the nature and applicability of the protections that may be available to customers, and

  8. Segregation vs. SIPC • Obtain a signed acknowledgement from each customer stating that the customer understands • Which regulatory scheme governs the account, and • That the account will not be protected under the alternative regulatory scheme

  9. Customer Account Information • Additional customer information required under NFA Compliance Rule 2-30(c)(5)-(9) • (5) Whether the customer account is for speculative or hedging purposes • (6) Customer employment status (name of employer, self-employed, retired) • (7) Customer’s estimated liquid net worth (cash, securities, other)

  10. Customer Account Information • (8) Customer’s marital status and number of dependents • (9) Other information used/considered by Member in making recommendations to customer

  11. Customer Account Information • Existing customer accounts: • Member can obtain the additional information required under 2-30(c) through an addendum to the account agreement • Members must document the information or create a written record that the customer declined • Now required for non-U.S. customers who trade security futures

  12. Account Approval • New Compliance Rule 2-30(j) • Under 2-30(j)(1) • The Member must exercise due diligence to learn essential facts relative to customer including: • customer’s investment objectives, and • financial situation • And based on those facts (and information obtained under 2-30(c)) a supervisory person must approve or disapprove the account for trading SF

  13. Account Approval • Under this rule a Member FCM/IB is required to: • Have the account approved/disapproved by a DSFP (under Compliance Rule 2-7(b) or equivalent for NASD Members) • Maintain a written record of the approval/disapproval • Identify the person approving/disapproving the account, and

  14. Account Approval • The customer account records must contain information about the account including: • The name of the Associate • How the customer’s information was obtained • The date the disclosure statement for SF was provided

  15. Account Approval • Must adopt and enforce procedures that require: • Specific criteria and standards to be used in evaluating the suitability of a customer to engage in security futures, • Specific procedures for approving accounts to engage in SF, including requiring approval by a DSFP,

  16. Account Approval • The DSFP must explain in writing why he/she approved account that does not meet the specific criteria and standards set forth in procedures, and • Specific financial requirements for initial approval and maintenance of customers account that engage in SF

  17. Account Approval • For existing accounts: • The Member must establish the procedures and apply them to those accounts. • The Member must obtain the additional information and then, based on the criteria or standards it has adopted, approve/disapprove each account in accordance with those standards

  18. Case Study

  19. Account Approval • Account documentation under Compliance Rule 2-30(j)(2) • Unless the customer account information was received in writing, Members must forward: • The background and financial information upon which the customer’s account has been approved to each customer who is an individual for verification within 15 days after being approved • And, within 15 days, for any material change in the customer information that the Member becomes aware of

  20. Account Approval • Absent any notification to the contrary from the customer, the information is deemed verified

  21. QUESTIONS?

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