Section 2Function 2: Opens Accounts and Evaluates Customer Profiles
Account types and registrations
41 min read
· Lesson 1 of 5
About This Lesson
Module 2 shifts from bringing securities to market to bringing customers in the door. Before a single trade, the account itself has to exist, and the way it is titled decides everything downstream: who can place orders, who can take money out, what happens at an owner's death, and which rules the firm must follow. The exam tests titling by handing you a customer situation and asking which account structure fits, so read this chapter as a matching exercise.
What you'll cover
ownership structures: individual, JTWROS, tenants in common, community property, custodial (UGMA/UTMA), corporate, plus cash, margin, fee-based, prime brokerage, and DVP/RVP
authority and account mechanics: powers of attorney (limited, full, durable), pattern day trader rules, and transfer-on-death registration
customer protection: the trusted contact person, Rule 2165 temporary holds, Regulation SP privacy notices, and bulk account transfers
The simplest structure first. An individual account has one owner with sole authority over every trading decision and full rights to the assets, and most retail brokerage accounts take this form. Four facts carry the exam weight:
Only the account owner can authorize transactions.
At death, the assets are part of the owner's estate and pass by will or intestacy.
A third party can be granted authority through a power of attorney, but ownership never moves; the account owner keeps it.
Cash and margin are the two subtypes, and a customer must apply separately for margin privileges.
Numbered accounts are permitted under FINRA rules as long as the firm keeps a written record of the actual owner. What you can never open is a truly anonymous account.
Joint Accounts: JTWROS vs. Tenants in Common
Joint accounts have two or more owners. The form of ownership
determines what happens to the assets when one owner dies — and this distinction
is the most frequently tested concept in this chapter.
Joint tenants with right of survivorship (JTWROS)
Most common joint form
Each owner has an undivided interest in the whole account
At death, the surviving owner(s) automatically inherit the deceased's share
Assets pass outside of the estate — cannot be willed away
Most common for married couples and domestic partners
Tenants in common (TIC)
Each owner has a distinct share
Each owner holds a specified percentage interest (need not be equal)
At death, the deceased's share passes to their estate — not to the surviving owner
Assets CAN be willed to a third party
More common among business partners or non-married co-investors
Exam trap: All owners of a joint account must sign the new account form.
All owners must sign instructions to close the account or transfer assets out.
However, any single owner may enter trades — you do not need all signatures for individual trade orders.
Multiple-Owner Accounts: JTWROS, TIC, and Community Property
The cards above put JTWROS and TIC head to head; community property is the third tested form. Here are all three side by side, with the operating mechanics that apply to every joint account, whichever form it takes:
Joint Tenants With Rights of Survivorship (JTWROS)
Undivided interest; survivor takes all
All parties have an undivided interest in the entire account.
At death, the deceased’s share passes automatically to surviving owners outside of probate.
Most common between spouses.
Tenants in Common (TIC)
Specified percentage; estate keeps share
Each party owns a specified percentage (e.g., 60/40, 33/33/34).
At death, the deceased’s share goes to their estate, not the other owners.
Common among unrelated business partners.
Community Property
Spousal 50/50 in CP states
Spouses own assets 50/50 regardless of titling, in nine community-property states (AZ, CA, ID, LA, NV, NM, TX, WA, WI).
Each spouse can dispose of their half by will; surviving spouse receives the other half by state law.
Practical Mechanics for All Joint Accounts
Any owner can enter buy or sell orders. Each tenant has authority to direct activity in the account.
Checks and distributions must be made payable to all parties and require endorsement by all parties for negotiation.
Suitability information must be obtained from every owner — not just one or the largest contributor. The new account form requires data on all account holders.
Death distinction trap: JTWROS, the survivors take everything, with no probate. TIC, the deceased's percentage goes to the estate, through probate. Community property, the surviving spouse keeps half automatically and the deceased's will governs the other half. The exam flags which one it wants with "passes outside of probate" or "goes to the estate" language, so train on those phrases.
Custodial Accounts: UGMA vs. UTMA
Custodial accounts allow an adult (the custodian) to hold and manage assets
for a minor. The assets are an irrevocable gift to the minor — they cannot
be taken back. The key distinction is what types of assets each act permits.
UGMA
Uniform Gifts to Minors Act
Permits: cash, securities, insurance policies
Does NOT permit real estate or other tangible property
Available in most states; older and more limited
Control transfers to minor at age of majority (18 or 21 depending on state)
UTMA
Uniform Transfers to Minors Act
Permits: all UGMA assets PLUS real estate, patents, royalties, tangible property
Broader and more flexible than UGMA
Available in all states; has largely replaced UGMA
Control may transfer later — state law can allow up to age 25
Key rules for both: Only one custodian and one minor per account.
The custodian has full control until the minor reaches the age of majority.
The gift is irrevocable — assets cannot be returned to the donor.
Margin trading, short selling, and speculative options strategies are generally not permitted.
Income generated in a custodial account may be subject to the "kiddie tax" for minors.
Other Account Registration Types
Corporate accounts
Require a corporate resolution authorizing specific individuals to trade. The resolution names who can act on behalf of the corporation and what securities activities are permitted.
Partnership accounts
Require a partnership agreement identifying authorized partners. Not all partners may have trading authority — the agreement specifies who can act.
Trust accounts
Require a copy of the trust agreement. The trustee manages the account for the benefit of the beneficiary and has a fiduciary duty to act in the beneficiary's best interest.
Estate accounts
Require letters testamentary or letters of administration from the probate court. The executor or administrator manages the estate's assets for distribution.
Investment adviser accounts
Fee-based accounts where an investment adviser manages the portfolio. The IA has discretion per the advisory agreement. DVP/RVP (delivery vs. payment) accounts are a subtype used by institutional investors.
Prime brokerage accounts
Consolidated accounts for institutional clients (often hedge funds) that execute trades through multiple executing brokers but settle and custody assets through one prime broker.
Account Type Map: Five Tested Account Structures
Five account structures, and the exam tests them as a matching exercise: each exists to solve a specific customer problem. Cash and margin anchor the list; the other three appear whenever a question describes the customer they were built for, and your job is to match the card to the customer:
Cash account
Pay in full at settlement
No borrowing, no short selling. The default account type, suitable for most retail customers. Required for all retirement accounts.
Margin account
Borrowing permitted
Required for short selling, options writing, and any borrowing. Subject to Reg T and FINRA maintenance rules. Hypothecation agreement required at opening.
Fee-based account
Asset-based fee in lieu of commissions
Customer pays an annual percentage of assets under management instead of per-trade commissions. Suitable for active traders and households with diversified portfolios; less suitable for buy-and-hold investors.
Prime brokerage account
One BD administers; many BDs execute
An institutional structure: one broker-dealer (the prime) handles clearance, custody, recordkeeping, and margin financing while the customer routes individual trades to multiple executing brokers. Used by hedge funds and institutions.
DVP / RVP account
Delivery vs. payment
Settlement happens through a third-party agent (typically a custodian bank). Used by institutions where the agent holds the cash and only releases it on receipt of securities. Up to 35 days for payment under Reg T COD rules if delivery is delayed.
Prime brokerage recognition: when a question describes an institution that wants one firm to administer the account but multiple firms to execute the trades, the answer is prime brokerage. Fee-based, advisory, and DVP accounts solve different problems, so do not let them pull you off the scent.
The Survivorship vs. Estate Question
The exam loves to test JTWROS against TIC with one scenario: "A joint account owner dies. What happens to their interest?" For JTWROS the answer never changes: the surviving owners inherit automatically, and the interest does NOT pass through the estate. For TIC, the deceased's proportional share passes to their estate and is distributed by their will, or by intestacy laws if no will exists.
A second trap hides in the signatures: all owners must sign to open or close a joint account, but any single owner can enter trade orders. If a question asks whether one co-owner can place a buy order without the other's signature, the answer is yes.
Concept Check
A husband and wife open a joint brokerage account. The account registration form states "Joint Tenants with Right of Survivorship." The husband dies. What happens to his interest in the account?
In a JTWROS account, the right of survivorship means the deceased owner's interest automatically passes to the surviving owner(s) outside of the probate process. The assets do not pass through the estate or per the will. This is the defining feature of JTWROS and the most tested aspect of joint account registration. In contrast, a Tenants in Common account would allow the deceased's share to pass through the estate and be distributed by will.
Concept Check
Two business partners open a joint account. Partner A contributes 70% of the assets and Partner B contributes 30%. If Partner A dies, what happens to the account under a tenants in common (TIC) registration?
Under tenants in common (TIC), each owner holds a defined, divisible percentage of the account. When a TIC account owner dies, their share passes to their estate and is subject to probate — it does NOT automatically transfer to the surviving account holder. This is the key distinction from joint tenants with right of survivorship (JTWROS), where the surviving owner inherits the full account regardless of contribution percentage.
Concept Check
Several investors open a single account titled as tenants in common (TIC). For suitability purposes, financial information must be obtained from
Suitability information is required from every owner of a joint account, whether titled JTWROS, TIC, or community property. The new account form requires financial data, investment objectives, and other Know-Your-Customer information from each holder — each tenant has authority to direct trades, so each must be assessed for suitability. The "largest investor only" or "majority" approaches would leave smaller-share owners exposed to unsuitable trades they did not agree to. Limiting suitability data to the one trading the account ignores that all owners share liability for the positions established.
Concept Check
A customer wants to open a custodial account for her 10-year-old nephew and transfer a rental property she owns into the account. Which type of custodial account would permit this transfer?
The UTMA (Uniform Transfers to Minors Act) permits a broader range of assets than the UGMA, including real estate, patents, royalties, and other tangible property. The UGMA is limited to cash, securities, and insurance policies. Because UTMA is broader and available in all states, it has largely replaced UGMA in most jurisdictions. Both accounts hold assets as irrevocable gifts for the minor, and neither permits margin trading or speculative options strategies.
Concept Check
A parent wants to open an investment account for their 14-year-old child and retain control of the assets until the child reaches the age of majority. Which account type is most appropriate?
UGMA and UTMA custodial accounts allow a custodian (parent or other adult) to manage assets for a minor until the minor reaches the age of majority (18 or 21 depending on the state). The assets are irrevocably transferred as a gift to the minor — the custodian cannot reclaim them. A joint account with a minor requires the minor to have legal capacity to contract. Trust accounts require legal documentation and are more formal structures.
Concept Check
A corporate client wants to open a brokerage account. Which document must the firm obtain to determine who is authorized to trade on behalf of the corporation?
A corporate resolution is required to open a corporate brokerage account. The resolution is a formal document approved by the board of directors that identifies which officers or employees are authorized to transact business on behalf of the corporation and what types of securities activities are permitted. Annual reports and officer financials are not required for account opening.
Concept Check
An institutional customer wishes to use one broker-dealer to handle the administration and clearance of its account but to use various other broker-dealers to execute trades for different security types. Which type of account meets this need?
A prime brokerage account is the standard institutional structure for this arrangement. One broker-dealer (the prime) handles clearing, custody, recordkeeping, and margin financing while the customer routes trades to multiple executing brokers. An advisory account places investment decisions with an investment advisor under fiduciary duty — unrelated to the multi-executor model. A fee-based account substitutes an asset-based fee for commissions but does not involve multiple firms. A DVP account governs settlement timing through a custodian bank but does not centralize administration across executing brokers.
Section 2 of 3~8 min · 3 concept checks
Authorization, PDT & Death Mechanics
Powers of Attorney: Limited, Full, and Durable
A power of attorney (POA) hands someone other than the owner the authority to act on the account, and the Series 7 tests three types. Two questions sort them for you: what can the holder do, and what event switches the authority off?
1
Limited POA (Limited Trading Authorization)
Authorizes the agent to enter buy and sell orders only. Does not permit withdrawal of funds or securities. Most common form granted to a registered representative who has discretionary authority over a customer’s account.
2
Full POA
Authorizes the agent to enter orders AND withdraw funds or securities from the account. Granted to attorneys-in-fact, financial advisors with full discretion, or trusted family members. The greater authority requires more demonstrated trust.
3
Durable POA
A limited or full POA that survives the grantor’s mental or physical incompetence — specifically structured to remain in force when the grantor can no longer make decisions. Used in estate-planning contexts. The "durable" attribute is a layer added to either limited or full authority.
Death always terminates a POA, even a durable one. Durability covers incompetence only, never death. Once the firm is notified that the grantor has died, no further orders can be accepted under the POA, even if the decision was made before death, and any pending unfilled orders must be cancelled at notification.
Pattern Day Traders and Transfer on Death Accounts
Pattern Day Traders
FINRA defines a pattern day trader (PDT) as a customer who executes four or more day trades within five business days, when those day trades make up more than 6% of total trading activity for the period. The designation is mechanical; once it attaches, four consequences follow:
Minimum account equity: $25,000 must be maintained at all times
Buying power: up to 4:1 intraday for day trades (vs. 2:1 standard margin)
If equity falls below $25,000, the account is restricted to closing transactions only until the minimum is restored
The PDT designation is applied to the account, not the individual
Transfer on Death (TOD) Accounts
A TOD designation lets an account owner name a beneficiary who receives the assets automatically at death, bypassing probate entirely. The exam will test you on what the beneficiary can and cannot do while the owner is alive:
The beneficiary has no rights to the account during the owner's lifetime
The owner retains full control and can change the beneficiary at any time
Assets pass directly, outside of the will — similar to JTWROS in that respect
Most broker-dealers offer TOD designations on individual accounts
Concept Check
A customer grants a registered representative a limited power of attorney over the account. Under this authorization, the representative may
A limited power of attorney — also called limited trading authorization — grants the agent only the authority to enter buy and sell orders. Withdrawal of funds or securities requires a full power of attorney. Transferring an account between firms requires the customer’s direct authorization through the standard ACATS process, not a POA. Changing account registration similarly requires the customer’s direct signature. The limited POA exists specifically to grant trading authority while protecting the customer’s assets from unauthorized withdrawals.
Concept Check
A registered representative manages a customer account under a durable power of attorney. Several days after the grantor’s death, the agent calls in an order to sell shares the agent had previously decided to sell. The order
A durable power of attorney survives the grantor’s mental or physical incompetence but does not survive death. Once the firm is notified of the grantor’s death, all authority under the POA terminates immediately, regardless of when the trade decision was made. Pending orders entered before notification of death are also cancelled. The executor of the estate must open a new estate account through proper probate procedures to direct any further activity — verbal consent from the executor cannot revive authority that ceased at death.
Concept Check
A customer's brokerage account shows a pattern of frequent intraday trading. Over the past five business days, the customer executed six day trades out of a total of 15 trades. The current account equity is $18,000. What is the consequence?
Four or more day trades in five business days, where day trades exceed 6% of total trading activity, triggers the pattern day trader designation. Here, 6 day trades out of 15 total = 40%, well above the 6% threshold. A PDT account requires minimum equity of $25,000. With only $18,000, the account is restricted until the shortfall is cured by depositing additional funds.
Section 3 of 3~10 min · 3 concept checks
Privacy, Protection & Account Transfers
Trusted Contact Person and Regulation SP
Trusted Contact Person (FINRA Rules 4512 and 2165)
Two customer-protection regimes sit side by side here, and the exam expects you to know the numbers in both. First, the trusted contact. Since February 2018, FINRA member firms have been required to request, not require, the name and contact information of a Trusted Contact Person age 18 or older when opening or updating a non-institutional account. The trusted contact is who the firm may approach if it suspects financial exploitation or diminished capacity affecting the customer.
Rule 2165 Temporary Holds: If the firm reasonably believes that
financial exploitation has been attempted on a specified adult (age 65+,
or 18+ with a mental or physical impairment that affects financial decision-making),
the firm may place a temporary hold on disbursements:
• Initial hold: up to 15 business days
• Optional extension: up to an additional 10 business days
• Total maximum: 25 business days (or up to 55 BD with court extension)
Customers cannot be required to provide a trusted contact — they may decline.
But the firm must ask.
Regulation SP — Privacy of Consumer Financial Information
Regulation SP is the privacy half. Broker-dealers must deliver a privacy notice at account opening and annually after that, explaining what nonpublic personal information the firm collects, who it is shared with, and how the customer can opt out of certain information-sharing.
The 30-day opt-out window: If the initial privacy notice contains
an opt-out provision, the firm must give the customer a reasonable opportunity to
opt out before sharing nonpublic personal information with non-affiliated third
parties. 30 days from the mailing date is the standard reasonable
period the SEC recognizes. During those 30 days, the firm may not disclose nonpublic,
personal information about the customer.
What Reg SP does not cover: sharing with the firm's affiliates is generally permitted (subject to FCRA notice requirements), and sharing for routine processing such as settlement, clearing, and regulatory reporting is exempt. The opt-out aims at one thing: marketing arrangements with non-affiliated third parties.
Bulk Transfers and the Negative Response Letter
When one FINRA member acquires another, or moves a block of accounts between affiliated firms, collecting affirmative consent from every customer would be impractical. The negative response letter procedure solves the problem, and it works in three steps:
The Negative Response Letter Mechanism
1
Notice sent at least 30 days before the transfer
The transferring firm sends each affected customer a written notice describing the transfer and identifying the receiving firm. Notice must be delivered at least 30 calendar days before the bulk transfer takes effect.
2
Customer silence = consent
If the customer does not respond within the notice window, consent is implied and the account transfers automatically. This "negative response" mechanic gives the procedure its name.
3
Customer may opt out at no charge
If the customer responds and elects to transfer to a different firm instead, the transferring firm cannot charge a fee. The customer’s right to choose where the account goes is preserved at no cost.
When negative response is NOT acceptable: the procedure cannot be used for material changes to account terms, fee changes beyond the standard schedule, or anything that materially affects the customer's rights. It is limited to administrative transfers in a merger, acquisition, or affiliated-firm reorganization.
Concept Check
One of a firm’s customers is a specified adult under FINRA Rule 2165. The firm reasonably believes that an attempt at financial exploitation has been made. Without seeking an extension, the firm may place a temporary hold on disbursements from the account for up to
FINRA Rule 2165 permits an initial temporary hold of up to 15 business days on disbursements when the firm reasonably believes a specified adult is the target of financial exploitation. The hold may be extended for an additional 10 business days (25 BD total) if the firm continues its internal review, and a court may extend further. The 3 business day window does not exist in Rule 2165. The 55 business days figure is the maximum extension available only with court order — not the initial hold without seeking an extension. The rule is measured in business days, not calendar days.
Concept Check
Under Regulation SP, when a broker-dealer sends a customer an initial privacy notice that contains an opt-out provision, the firm may not disclose nonpublic personal information about that customer for how many days from the mailing?
Regulation SP recognizes 30 days as the standard reasonable opportunity window. After mailing the initial privacy notice with an opt-out provision, the firm must give the customer 30 days to elect not to have their nonpublic personal information shared with non-affiliated third parties before any such sharing may occur. The 10, 15, and 20-day periods do not match the SEC’s reasonable-opportunity standard. The window protects customer privacy from third-party marketing while allowing routine intra-firm and processing-related data flows that are exempt from the opt-out.
Concept Check
After being acquired by a larger FINRA member, a firm wishes to bulk-transfer its customer accounts to the acquiring firm using a negative consent procedure. FINRA rules require the transferring firm to
The negative consent procedure requires written notice to each affected customer at least 30 days before the bulk transfer takes effect. Customers who do nothing are presumed to consent, while those who object may direct their accounts elsewhere at no fee. Affirmative written consent from every customer would defeat the purpose of negative consent — the procedure exists precisely to handle situations where collecting individual consent is impractical. Charging a fee to customers who elect a different firm is specifically prohibited. Newspaper publication is not an accepted notification method under the rule.
SummaryExam Essentials — high-yield review
Chapter Summary
Ch 3 Exam Essentials — Account Types and Registrations
JTWROS vs. TIC: JTWROS — surviving owner inherits entire account (right of survivorship), no probate. TIC — each owner's share passes to their estate; no automatic transfer to survivor.
Custodial accounts (UGMA/UTMA): One custodian, one minor, one account. Gift is irrevocable. Custodian manages assets; control transfers to minor at age of majority (18 or 21 by state). UTMA allows more asset types.
Corporate accounts: Require corporate resolution authorizing trading and designating who may act for the corporation. Without the resolution, the rep cannot accept orders.
Trust accounts: Rep must receive and review the trust agreement before opening. Can only follow the instructions of the designated trustee(s) named in the agreement.
Pattern Day Trader: 4+ day trades in 5 rolling business days where day trades > 6% of total trades. Minimum $25,000 equity required. 4:1 intraday buying power.
Account Type Exam Traps — Consolidated
The Series 7 returns to a small set of distinctions in the account chapter. If
a question feels familiar, it is probably testing one of these:
1. Prime brokerage = one administers, many execute. When an
institutional customer wants centralized clearing/custody but freedom to execute
trades through multiple firms, the answer is prime brokerage — not advisory,
not fee-based.
2. JTWROS undivided; TIC specified percentages. JTWROS owners
each hold an undivided interest in the whole account; TIC owners hold stated
percentages. The death rules differ accordingly: JTWROS to survivors, TIC to
estate.
3. Community property is automatic in nine states. Spouses own
50/50 regardless of titling. Common-law states default to whatever titling
chosen.
4. All joint owners = full suitability data. Financial information
is required from every account holder, not just the largest contributor
or the one entering trades. Joint accounts require joint diligence.
5. Limited POA = orders only; full POA = orders + withdrawals.
Most RR discretion is limited authorization. Full power requires deeper trust
and is rare in commercial broker-customer relationships.
6. Durable POA survives incompetence, not death. No POA —
even a durable one — survives the grantor’s death. Once death is reported,
no further trades can be accepted under the POA, even if previously decided.
7. Trusted contact is requested, not required. FINRA Rule 4512
obligates firms to ask; customers may decline. Rule 2165 permits
temporary holds of up to 15 business days (extendable to 25).
8. Reg SP 30-day opt-out. The window between privacy notice
delivery and information-sharing with non-affiliated third parties is 30 days.
9. Bulk transfer requires 30-day notice and silence = consent.
The negative response letter procedure transfers accounts unless the customer
opts out. No fee may be charged to customers who choose to transfer elsewhere.
10. Customer signature not required on cash account form. Only
the principal’s signature accepting the account is required by FINRA rules.
Margin accounts do require customer signature on the hypothecation agreement.
11. DVP/RVP is institutional-grade settlement. Used when a
custodian bank holds the institution’s cash and releases payment only on
delivery of securities. Up to 35 days for payment under Reg T COD if delivery
is delayed.
12. TOD designations bypass probate. Transfer-on-death registration
on individual accounts allows assets to pass directly to named beneficiaries
without probate, similar to the joint-survivor effect of JTWROS.