Investment Account Management: Supervisory Rules & Requirements

Instructor: LeRoy Rands

Bill has taught college undergraduate and MBA classes in finance, economics & management, 40 years of finance experience and has a MBA degree.

People interested in trading in the securities markets have to go through a process for opening an investment account with a broker/dealer. There are also restrictions on what trades can be done through the account.

Investment Accounts

Marge works at XYZ Financial and oversees the opening of trading accounts for new customers. She has to ensure that all information is collected to open an account and that the account is properly managed and supervised.

The SEC is involved in the regulation and oversight of U.S. investment firms and, in particular, the handling of money put into trading accounts by the investing public. The U.S. Investment Act of 1940 requires that that brokers and dealers are properly trained and supervised so that customers are treated honestly and fairly.

One of Marge's functions is to ensure that XYZ Financial employees provide all the information needed to open an account for a new customer and that the account information is saved and maintained.

Opening a Trading Account

Marge trains her traders to get information from a potential customer and analyze it before any account is opened. This required information includes:

  • Verification of identity.
  • Employment status, net worth and financial condition.
  • Clarification on investment objectives.

This information is for account managers to direct the customer toward suitable investments. Since Marge oversees the program, she has to make sure that the account brokers accurately set up and retain customer information.

Supervision of Accounts

Marge has to ensure the training and supervision of all investment professionals so that they:

  • fully disclose all information to customers and are making suitable investments for them.
  • avoid any misuse or fraud concerning client funds.
  • maintain client information, trades and activities in that account.

Supervision is critical in the investment industry. A manager who is found lacking in training or failing to oversee employee activities could be sanctioned by the SEC and lose the right to work in the securities industry.

Types of Investment Accounts

Marge has all the application information for two new customers. She has also received all the approvals from superiors to open the accounts, of which there are two types. Jerry is opening a cash account, while Laurie is opening a margin account.

  1. Cash account - Jerry can only buy securities up to the amount of cash in the account.

  2. Margin account - Laurie can borrow up to half of the price of securities she is buying from the broker so she can get more securities with the money put into the account. However, she must maintain a minimum of $2,000 in equity and more than 25% equity in her account based on the value of the account.

Violations of Trading Rules.

Investors might be caught making some common mistakes that could prevent them from making trades and, in some cases, might result in their account being shut down. Some of this violations include:

  • Free Riding

Tom, a customer of XYZ Financial, has a cash account. He sold some stock and the proceeds showed up in his account that day, although the actual funds would take around three days to clear. Tom is able to buy other securities with that money before it's back in his account, however, if he buys something and then sells it a day or two later he would be guilty of free riding and could be prevented from doing trading in his account for 90 days.

  • Trade liquidation

Tom would also get into trouble if he bought securities without enough cash in his account to purchase them and then sold some securities later to get the cash. Funds have to be in a cash account before executing new purchases. This could also result in a suspension on the account.

  • Margin calls

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