Account Opening

Introduction

• Process of opening accounts still very similar

• Disclosure statement required

• Written approval/disapproval

Disclosure Statement

• Standardized Disclosure Statement– Drafted by NFA, NASDR, and other SROs

• NFA Compliance Rule 2-30(b)– Amended to require Member to provide it

at or before approval of account to trade security futures (SF)

Disclosure Statement

• For existing clients – Member can give it before or when they

approve account to trade security futures

• Member does not have to get acknowledgement of receipt– Must be able to demonstrate that Member

has provided SF disclosure statement to the customer

Disclosure Statement

• Content of SF disclosure statement:– Risks of SF transactions– Description of security futures– Margins– Customer account protection– Other issues such as corporate events

Segregation vs. SIPC

• Final rules have not yet been issued

• Under currently proposed rules : – FCM Notice Registered Broker-Dealers:

• Customer will not have a choice as to the type of account

• Automatically defaults to a futures account

– Fully Registered Broker-Dealer FCM:• Customer will have a choice between

futures and securities account

Segregation vs. SIPC

• Under the proposed rules a Fully Registered Broker-Dealer FCM would be required to:– Establish written policies stating how

customer positions will be held,

– Make certain disclosures to customers regarding the nature and applicability of the protections that may be available to customers, and

Segregation vs. SIPC

– Obtain a signed acknowledgement from each customer stating that the customer understands

• Which regulatory scheme governs the account, and

• That the account will not be protected under the alternative regulatory scheme

Customer Account Information

• Additional customer information required under NFA Compliance Rule 2-30(c)(5)-(9)– (5) Whether the customer account is for

speculative or hedging purposes

– (6) Customer employment status (name of employer, self-employed, retired)

– (7) Customer’s estimated liquid net worth (cash, securities, other)

Customer Account Information

– (8) Customer’s marital status and number of dependents

– (9) Other information used/considered by Member in making recommendations to customer

Customer Account Information

• Existing customer accounts:– Member can obtain the additional

information required under 2-30(c) through an addendum to the account agreement

• Members must document the information or create a written record that the customer declined– Now required for non-U.S. customers who

trade security futures

Account Approval

• New Compliance Rule 2-30(j)• Under 2-30(j)(1)

– The Member must exercise due diligence to learn essential facts relative to customer including:

• customer’s investment objectives, and• financial situation

– And based on those facts (and information obtained under 2-30(c)) a supervisory person must approve or disapprove the account for trading SF

Account Approval

• Under this rule a Member FCM/IB is required to:– Have the account approved/disapproved

by a DSFP (under Compliance Rule 2-7(b) or equivalent for NASD Members)

– Maintain a written record of the approval/disapproval

– Identify the person approving/disapproving the account, and

Account Approval

• The customer account records must contain information about the account including:– The name of the Associate

– How the customer’s information was obtained

– The date the disclosure statement for SF was provided

Account Approval

• Must adopt and enforce procedures that require:– Specific criteria and standards to be used

in evaluating the suitability of a customer to engage in security futures,

– Specific procedures for approving accounts to engage in SF, including requiring approval by a DSFP,

Account Approval

– The DSFP must explain in writing why he/she approved account that does not meet the specific criteria and standards set forth in procedures, and

– Specific financial requirements for initial approval and maintenance of customers account that engage in SF

Account Approval

• For existing accounts:– The Member must establish the

procedures and apply them to those accounts.

– The Member must obtain the additional information and then, based on the criteria or standards it has adopted, approve/disapprove each account in accordance with those standards

Case Study

Account Approval

• Account documentation under Compliance Rule 2-30(j)(2)– Unless the customer account information was

received in writing, Members must forward:• The background and financial information

upon which the customer’s account has been approved to each customer who is an individual for verification within 15 days after being approved

• And, within 15 days, for any material change in the customer information that the Member becomes aware of

Account Approval

• Absent any notification to the contrary from the customer, the information is deemed verified

QUESTIONS?