Customer Accounts

The exam loves the “which account can’t use margin?” filter. The tell is a customer type plus a borrowing strategy: a custodial UGMA/UTMA or a retirement account (IRA) flagged for margin is the wrong answer, because the question hinges on what the account legally permits, not on whether margin “seems risky.” (A few brokers now offer “limited margin” IRAs that only sidestep settlement timing, but the SIE answer is still: retirement and custodial accounts trade as cash accounts.)

The classic trap is blurring three siblings. Regulation T is the numbers layer — the 50% initial requirement set by the Federal Reserve; cash-vs-margin is the account-type layer; freeriding is what happens when you trade a cash account like a margin account — buying a security and selling it before paying triggers a 90-day freeze (during which purchases need cash up front). Memory hook: margin = “buy now, pay when you sell or get called”; cash account = settle up, no IOUs.

Expect a “who sets it?” trap: the answer hinges on the Fed (Federal Reserve Board) owning the initial Reg T requirement, while FINRA owns maintenance and the SEC owns disclosure/anti-fraud oversight — pick the wrong regulator and you miss. Calculation items hand you a market value and ask for the deposit, or test the $2,000 minimum equity floor to open a long margin account — except the deposit can never exceed 100% of a cheap purchase (full cash payment satisfies it even if equity stays under $2,000). The classic move is a maintenance call: equity slips below the floor, and you deposit cash/marginable securities or get sold out.

Don’t confuse this with freeriding, a cash-account Reg T violation — selling before paying triggers a 90-day freeze; no margin involved. Short selling must occur in a margin account. Opening one requires the agreements first: the credit and hypothecation agreements are mandatory, the loan-consent agreement optional — versus a cash account paying in full. Memory hook: Fed = Initial, FINRA = Final upkeep.

The exam loves the catch that disqualifies a deduction or a contribution. A traditional-IRA deduction phases out only when the saver (or spouse) is an active participant in an employer plan and income is too high — without a workplace plan, anyone with earned income deducts in full at any income. Roth eligibility, by contrast, phases out by income itself (MAGI), so a high earner can be barred from contributing directly. Two more “tells”: contributions run up to the tax-filing deadline (typically April 15) for the prior year, and excess contributions draw a 6% excise tax each year until corrected.

Don’t confuse the tax angle with the cash-only mechanics of the sibling terms: like custodial accounts, an IRA must be a cash account — no margin, no naked options (a tax-code prohibited-transaction rule, not just firm policy). The classic trap is Roth RMDs — the owner has none for life, but non-spouse beneficiaries must still empty the account, generally within 10 years. Memory hook: Roth = pay tax now, withdraw growth tax-free.

The exam loves the death scenario: an owner dies and you must say who inherits. The tell is the registration acronym in the stem — JTWROS routes everything to the surviving owner outside probate, while TIC sends the decedent’s share to that owner’s estate (so a TIC heir can be a child or business partner, not the co-owner). A second favorite tests the mechanics of a living account: any one tenant may place orders or request a withdrawal, but distribution checks and securities must be issued to ALL owners, never to one alone. Watch for the trap that one owner can pocket a check solo — they cannot.

Don’t confuse a joint account with a custodial UGMA/UTMA (one custodian, one minor, no co-owners) or with discretionary authority (a rep trading on prior written authorization). A joint owner trades by virtue of ownership, not delegated power. Memory hook: “Survivor takes all” = JTWROS; “Tenants split, estate gets a Cut” = TIC.

The exam loves that one adult can be the donor AND the custodian of the same account — that combo is allowed — but it punishes the one-custodian, one-minor limit: a stem showing two minors or two custodians is the wrong answer. Watch for the classic “can the custodian trade on margin or write options?” stem — the answer is no, because the account must stay cash-only and non-speculative (short sales are off-limits too). Another favorite: assets are registered in the custodian’s name as custodian for the minor, taxed under the minor’s SSN, and held as the minor’s irrevocable property.

Don’t confuse the irrevocable custodial gift with the revocable, owner-controlled flexibility of a personal cash or margin account, and don’t blur it with retirement accounts — an IRA needs the owner’s own earned income, while a custodial account needs none (anyone can gift in). Versus JTWROS/TIC joint accounts, a custodial account has exactly one beneficial owner — the minor — so no survivorship or estate-transfer logic applies. Memory hook: UTMA = “Ultimate” — more asset Types, later Age than UGMA.

The exam loves the “is this discretion?” sorting question — which order needs prior written authorization? The tell is who chose the security, the buy/sell, or the share/dollar amount — if the rep did, it is discretionary; if the customer specified those and left only when or at what price to the rep, that is a time-and-price (not-held) order, good only for that trading day (carry it past the day and it becomes discretionary). The timing trap: the customer’s written authorization (FINRA Rule 3260) must be on file BEFORE the first discretionary order — don’t confuse it with the principal’s prompt post-trade approval, and there is no “trade now, paper it later” grace period.

Two confusables. Opening authority (CIP) is not trading authority — name, DOB, address, and TIN open the account, not trade it. In a joint account any owner can enter orders without a POA because they own it; a third party needs one. Discretion spun for commissions is churning. Memory hook: discretion = the rep picking Asset, Action, or Amount (AAA).

The exam loves to make you separate what is required to OPEN an account from what is required to TRADE or RECOMMEND. A firm collects identity up front but may verify within a reasonable time before or after the account is opened — so a customer can sometimes transact while verification is still pending, and an incomplete suitability profile blocks recommendations, not the opening itself. Watch the documentary vs. non-documentary distinction: a driver’s license or passport is documentary, while cross-checking a credit bureau or public database is non-documentary, and a firm may use either or both.

Don’t confuse CIP triggers with Reg BI, which fires only on a recommendation to a retail customer, or with discretionary accounts, which need separate prior written authorization. CIP is the identity gate that lives inside the firm’s AML program, while OFAC sanctions screening runs alongside it — so a name hitting the OFAC/SDN list blocks the account regardless of how clean the paperwork looks. Memory hook: CIP catches WHO you are; Reg BI governs WHAT you’re told to buy.