Account opening and customer information
About This Lesson
Before the first trade, the paperwork — and the exam knows every form by name. This chapter is document-driven: for each account type there's a specific set of information to collect, a specific disclosure to deliver, a specific agreement to sign, and a specific supervisor to approve it. The winning skill is mapping: hear "margin account," produce the credit and hypothecation agreements; hear "options," produce the OAD and the 15-day rule. Learn the map and these questions become retrieval, not reasoning.
What you'll cover
- FINRA Rule 4512 — what every account must record, what recommendation accounts add, and the 30-day / 36-month / 6-year cadence
- margin accounts — Reg T's 50% initial and $2,000 minimum, FINRA 4210's 25%/30% maintenance, and the three customer agreements
- options accounts — the OAD, the Registered Options Principal, and both 15-day rules
- options valuation basics: intrinsic value, time value, and moneyness
- advisory contracts — the 5-business-day penalty-free exit and the assignment-consent rule
The know-your-customer information gathered here isn't box-checking — it's the raw material every suitability question in the next chapters assumes you have.
New account opening — FINRA Rule 4512
FINRA Rule 4512 (Customer Account Information) sets what a broker-dealer must collect, record, and update for every customer account — and it earns its keep twice: the information enables suitability and best-interest determinations, and it builds the audit trail regulators walk in every examination and enforcement action.
Information required at account opening:
- Customer's name and residence address
- Whether the customer is of legal age
- Customer's tax identification number (typically SSN for individuals, EIN for entities)
- Occupation of the customer, and the name and address of the employer
- Signature of the registered representative responsible for the account
- Signature of a principal of the firm signifying acceptance of the account
Information required for accounts where the firm will make recommendations (typically all retail accounts):
- Annual income and net worth (and liquid net worth)
- Investment objectives
- Risk tolerance
- Investment time horizon and liquidity needs
- Other holdings, investment experience, and tax status
And the maintenance cadence — three numbers worth owning:
- Customers must be sent the recorded account information within 30 days of opening and at least every 36 months thereafter
- The firm must request updates and incorporate any material changes the customer reports
- Records must be retained for at least 6 years after the account is closed
New account opening
FINRA Rule 4512 · SEC Rule 17a-3(a)(17)
Collect customer information, profile, and signatures
Margin upgrade
Reg T · FINRA Rule 4210
Add margin authority — customer must sign before any margin trade
Options upgrade
FINRA Rule 2360 · OCC OAD
Options approval requires ROP signoff and disclosure delivery
Margin accounts — Regulation T and FINRA Rule 4210
A margin account lets the customer borrow part of the purchase price from the broker-dealer, with the security itself serving as collateral — and two regulators split the oversight. The Federal Reserve's Regulation T governs the moment of purchase; FINRA Rule 4210 governs every day after.
Regulation T — initial margin:
- 50% initial margin requirement for marginable equity securities (long or short)
- Reg T applies at the time of purchase — the customer must deposit at least 50% of the purchase price, with the remainder financed by the firm
- The minimum equity to open a margin account is $2,000, or 100% of the purchase if the security costs less than $2,000
- Not all securities are marginable: most listed equities and many OTC securities are; new IPO shares are not marginable for 30 days; options generally cannot be purchased on margin (premium paid in full)
FINRA Rule 4210 — maintenance margin:
- 25% minimum maintenance margin for long positions
- 30% minimum maintenance margin for short positions of stock priced $5 or more
- If equity falls below the maintenance level, a maintenance margin call requires the customer to deposit additional funds or have positions liquidated
- Firms may set house requirements above the FINRA minimums
Paper before leverage — the agreements required before any margin trade:
- Margin (Credit) Agreement — sets the terms of the lending arrangement, interest rate calculation, and the firm's right to liquidate
- Hypothecation Agreement — authorizes the firm to pledge customer securities as collateral for loans the firm takes to finance the margin
- Loan Consent Agreement — optional; authorizes the firm to lend the customer's securities to third parties for short selling
Options accounts — FINRA Rule 2360 and the OAD
Options carry unique leverage and loss profiles, so opening an options account stacks extra disclosure and supervision on top of the standard FINRA 4512 requirements. FINRA Rule 2360 governs the entire options sales practice — and the exam tests its paperwork sequence relentlessly.
The Options Account Document (OAD) — formerly called the OCC Options Disclosure Document (ODD) — is the standardized risk disclosure prepared by the Options Clearing Corporation. Timing is the tested fact: it must be delivered at or before the time the firm approves the customer's account for options trading. The OAD covers the risks, characteristics, and strategies of standardized options.
The Options Account Agreement is a separate, customer-signed document confirming the customer's understanding of the OAD and acknowledging the special risks. Under Rule 2360, it must come back within 15 days after the account is approved — and here's the twist candidates miss: miss the 15 days and the account isn't frozen, it drops to a closing-transaction-only basis. Positions can be unwound; nothing new goes on.
The approval workflow, in order:
- Customer profile information collected, including investment objectives, experience, and risk tolerance specific to options
- OAD delivered at or before approval
- Account approved by a Registered Options Principal (ROP) — the supervisor responsible for options activity
- Options Account Agreement returned within 15 days
- Suitability determination tied to the specific options strategy permitted (Level 1 covered calls and protective puts; up through Level 4 uncovered writing for sophisticated customers)
Options valuation basics
Relax — the Series 63 doesn't want pricing models. It tests a small set of valuation concepts: the language and arithmetic of premiums. Two components, three vocabulary words, one subtraction.
The premium of any option is the sum of two components:
- Intrinsic value — the option's in-the-money amount, which is the positive difference between the market price and the strike price. A call has intrinsic value when market > strike; a put has intrinsic value when market < strike. Intrinsic value is never negative.
- Time value (also called extrinsic value) — the portion of premium attributable to remaining time until expiration. Time value erodes ("decays") as expiration approaches.
Moneyness terminology:
- In-the-money (ITM) — the option has intrinsic value. Call ITM when market > strike; put ITM when market < strike.
- At-the-money (ATM) — market price equals strike price.
- Out-of-the-money (OTM) — the option has no intrinsic value. Call OTM when market < strike; put OTM when market > strike. The entire premium of an OTM option is time value.
Work the example. A call option on XYZ has a $50 strike. XYZ is trading at $54. The call is in-the-money by $4 (intrinsic value). If the premium is $5.50, the time value is $1.50 ($5.50 premium minus $4 intrinsic). If XYZ falls to $48, the same call becomes out-of-the-money — intrinsic value is now $0 and the entire remaining premium is time value. That one subtraction — premium minus intrinsic — is the whole exam skill here.
What Advisory Contracts Must Include
Switch hats for a moment: on the advisory side, the contract itself is the regulated document. Every investment advisory contract must contain:
- Description of services to be provided
- Compensation arrangement — how fees are calculated and when they are charged
- Term and termination clause — the contract must allow the client to terminate without penalty within 5 business days
- No assignment without consent: The contract cannot be assigned to another adviser without the client's written consent
- Disclosure of conflicts of interest
And watch how far "assignment" stretches: a change in control of the adviser — a sale of the advisory firm, for instance — constitutes an assignment under the law. So when an adviser is acquired by another firm, each client must consent before the new firm can manage their assets. Clients are people, not inventory; they don't transfer with the sale.
Customer-account answer framework
Account questions almost always test a specific document or rule. Identify the account type first, then produce its paperwork:
- Cash account → FINRA Rule 4512 customer info + Form CRS at account opening.
- Margin account → Add the margin (credit) agreement and hypothecation agreement. Reg T initial 50%, FINRA 25% maintenance long / 30% short.
- Options account → Add the OAD at or before approval, and the signed Options Account Agreement within 15 days. ROP approves the account.
- Advisory account → Form ADV Part 2A delivered before or at contract; written contract describing services, compensation, and assignment terms.
And when a fact pattern has an existing customer reaching for a new product, the answer is nearly always the same three-beat sequence: deliver the relevant disclosure, get the relevant agreement signed, obtain principal/ROP approval — in that order. The Series 63 loves testing the order as much as the documents.
Under the SEC Marketing Rule, an investment adviser may use client testimonials in advertising if:
A broker-dealer is opening a new individual brokerage account for a customer who will receive recommendations. Under FINRA Rule 4512, which of the following must be collected and recorded at account opening?
A customer wants to purchase 1,000 shares of a marginable stock at $40 per share in a margin account. Under Regulation T, what is the minimum initial cash deposit required?
A customer holds 500 shares of a $30 long stock position in a margin account. Under FINRA Rule 4210, what is the minimum maintenance margin requirement?
A customer's new options account is approved by the Registered Options Principal on May 1. The Options Account Document (OAD) was delivered on May 1, but the customer has not yet returned the signed Options Account Agreement. As of May 20, under FINRA Rule 2360:
Under the USA PATRIOT Act and FinCEN regulations, a broker-dealer opening a new customer account must:
A married couple opens a joint brokerage account. They request that, upon the death of either spouse, the surviving spouse automatically become the sole owner of the account. The appropriate account type is:
Under FINRA Rule 2165 (Financial Exploitation of Specified Adults) and parallel state rules, a broker-dealer opening a new account should: