Account approvals and documentation
About This Lesson
Chapters 3 and 4 decided whose account it is and proved their identity; this chapter is the paperwork layer that makes the account real. A principal has to approve it, customer authority has to be documented in writing, and once assets arrive, the firm holds them under strict safeguarding rules. The exam treats this chapter as a documentation quiz: for each situation it hands you, what must be in writing, who signs, and by when?
What you'll cover
- account opening approvals and the safeguarding of customer funds and securities, including the 140% rehypothecation limit and free credit balances
- power of attorney (full versus limited) and discretionary accounts, including the written-authorization requirement and the one-factor discretion test
- the three things that always require written documentation, and the 15-day options agreement deadline
This is the third chapter of the accounts module.
Account Opening & Asset Safeguarding
Account Opening: Approval Requirements
Before a customer can begin trading, the account must receive proper supervisory review. The timing and level of review depends on the account type. These requirements are among the most testable procedural rules in Function 2.
New account documentation must be sent to the customer within 30 calendar days of account opening. The customer should review it for accuracy and return corrections. The firm must re-send updated documentation within 30 days of any material change.
Physical Receipt and Safeguarding of Customer Assets
Once customer money or securities land at the firm, the handling rules take over, and every one of them exists for the same reason: if the firm fails, customer assets must be untouched and findable. Four rules carry the exam weight, and the numbers inside them are what you get tested on:
- Prompt deposit of funds: Customer cash must be deposited promptly — generally the next business day after receipt, unless the funds are part of a transaction being immediately processed
- Segregation of securities: Customer securities held in "street name" must be segregated from the firm's proprietary securities. The firm cannot use customer securities for its own purposes without authorization (hypothecation)
- Hypothecation: When customers buy securities on margin, they pledge those securities as collateral for the margin loan. The firm may re-pledge (rehypothecate) up to 140% of the customer's debit balance to finance its own borrowings — this is the standard rehypothecation limit under Regulation T
- Free credit balances: Cash in customer accounts that has not been invested (free credit balances) must be kept separate from firm funds. The firm must send customers a quarterly statement showing their free credit balance
A principal approves a customer's account for options trading on Monday. The customer begins trading immediately. When must the customer return the signed options agreement?
An employee of a broker-dealer wants to open a brokerage account at another firm. Under FINRA Rule 3210, which of the following is required?
A broker-dealer purchases securities in a margin account for a customer. The securities are held in street name by the broker-dealer. Under Regulation T, the maximum amount of the customer's securities the firm may rehypothecate is:
POA, Discretion & Required Documentation
Power of Attorney: Full vs. Limited
A power of attorney (POA) grants a third party the legal authority to act on behalf of the account owner. There are two types tested on the Series 7 — the distinction is how much authority is granted.
Discretionary Accounts
A discretionary account is one where the registered representative has been granted authority to make investment decisions — selecting the security, the quantity, and whether to buy or sell — without obtaining the customer's approval for each individual trade. This authority carries significant regulatory obligations.
Time and Price Discretion
A narrow exception exists: a customer may grant time and price discretion for a single trading session without a full written discretionary agreement. If a customer says "buy 100 shares of XYZ today at whatever price you think is best," the rep can use judgment on timing and price — but not on which security or how many shares to buy. This discretion expires at the end of the trading day.
Documentation questions repeat on every administration, and these three items are never verbal, never implied, always written, and the exam will offer you a verbal version of each as a wrong answer:
1. Discretionary authority: written authorization from the customer before the first discretionary trade. A verbal "go ahead" is not sufficient.
2. Power of attorney: must be in writing and on file with the firm. A verbal POA has no legal effect for a securities account.
3. Options agreement: the customer must sign a written options agreement within 15 days of account approval. Without it, the account is restricted to closing transactions only.
An order is discretionary if the registered representative decides any one of three things without customer input: which security, how many shares or units, or whether to buy or sell.
If the customer specifies all three, "buy 200 shares of Apple," then the rep choosing the price and the moment of execution is not exercising discretion. That is time and price discretion, which does not count as full discretionary authority.
The exam likes to describe a rep who "decided to buy a larger position than the customer mentioned" or "switched from the stock the customer named to a similar one." Both are unauthorized discretion, even if the customer never complains in writing.
A registered representative has been granted a limited power of attorney over a customer's account. The customer calls and asks the rep to wire $10,000 from the account to the customer's bank account. Can the rep execute this request?
A customer tells her registered representative: "Use your judgment — buy whatever tech stock you think is best for me today." The rep buys 200 shares of a semiconductor company. Which of the following best describes this order?
A customer gives a registered rep verbal instructions to "buy whatever you think is best" in her account. The rep executes trades based on his own judgment without confirming each decision with the customer. Which rule has most likely been violated?
Chapter Summary
- New account form: Must be approved by a principal promptly after first trade (next business day as a practical standard). Contains customer's name, address, DOB, investment objective, financial situation, and risk tolerance.
- Discretionary authority: Must be in writing before the first discretionary trade. Time and price discretion (choosing when/how to execute a customer-specified order) is permitted same-day without formal authorization.
- Full vs. limited POA: Full POA allows attorney-in-fact to make deposits and withdrawals. Limited POA (trading authorization) allows trading only — no asset removal.
- DVP/RVP accounts: Delivery vs. Payment / Receipt vs. Payment. Institutional accounts that settle by delivering securities against simultaneous payment. Rep must note DVP/RVP at time of order entry.
- FINRA Rule 3210 (employee accounts): Registered persons must notify their employing firm before opening an account at another broker-dealer. Employer may request duplicate statements.
Test yourself with exam-style questions on this topic.