Customer Accounts & Suitability Flashcards

What is a 'power of attorney' (POA) in the context of brokerage accounts?

Answer: A document granting a designated person authority to make investment decisions on behalf of the account owner

A power of attorney grants a designated person (the attorney-in-fact) the legal authority to act on behalf of the account owner, including making investment decisions, deposits, and withdrawals.

What is the purpose of a 'new account form' (NAF) in the broker-dealer registration process?

Answer: To collect comprehensive customer financial and personal information required for KYC compliance and suitable recommendations

The new account form collects required customer information including identity, financial background, investment objectives, and risk tolerance, forming the foundation for KYC compliance and suitable investment recommendations.

What is a 'margin agreement' and what three components does it typically include?

Answer: A contract governing margin account use; hypothecation agreement, loan consent, and credit agreement

A margin agreement governing credit accounts typically includes the hypothecation agreement (pledging securities as collateral), loan consent (allowing the broker to lend the securities), and a credit agreement (terms of the loan).

Which type of account registration passes assets directly to named beneficiaries upon the account holder's death, bypassing probate?

Answer: Transfer on Death (TOD) or Payable on Death (POD) designation

A Transfer on Death (TOD) or Payable on Death (POD) designation allows account assets to pass directly to named beneficiaries upon the account holder's death, completely bypassing the probate process.

What is the SIPC (Securities Investor Protection Corporation) and what does it protect?

Answer: A non-profit membership corporation that protects customers of failed broker-dealers by restoring missing cash and securities up to $500,000

SIPC is a non-profit corporation that protects customers of financially failed broker-dealers by restoring missing cash and securities up to $500,000 per customer (with a $250,000 cash sublimit) — it does not cover investment losses.

What is a 'beneficiary designation' and why is it important in retirement accounts?

Answer: A named person who will inherit the account assets upon the owner's death, superseding instructions in a will

A beneficiary designation names who will inherit account assets upon the owner's death and overrides will provisions — keeping beneficiary designations updated is critical, especially after major life events like marriage or divorce.