Account opening

When an investor fills out a new account form, they must determine what type of account they will open. Cash accounts are regular brokerage accounts that require the customer to pay 100% for any securities they purchase. Margin accounts allow the investor to borrow from the broker-dealer for investment purposes, leading to increased gain and risk potential (leverage). We’ll discuss margin accounts in detail later in this chapter.

After the account type is picked and the new account form is properly filled out, the firm goes through a specific process to open the account.

First, the account application must be signed by the registered representative and their principal (supervisor). In some situations, the registered representative assisting the customer signs the form and states the information on the form is correct to the best of their knowledge. This is not always required but typically accomplished if they will be servicing the account regularly. In many instances, there will be no registered representative signature (especially if the account is opened online by the customer).

Next, the principal reviews the new account form to ensure all required information was submitted and that normal account opening protocols were followed. If the form is “in good order,” the principal will sign the form, which effectively approves the account. There’s no legal requirement for the customer to sign the new account form, which allows firms to open accounts over the phone.

After the account is approved, the firm must send the customer a confirmation of the information they provided on the new account form within 30 days of account opening. Language is included on the confirmation that requests the customer review the information for accuracy and notify the firm if something is incorrect. The firm is also required to verify customer information every three years. To do so, they send another form disclosing current information on file and request the customer contact them if anything needs updating.

When a customer opens an account at a brokerage firm, they’re likely to be asked to sign an arbitration agreement. Although signing is voluntary, arbitration agreements force any disputes between the customer and the firm into binding arbitration. The customer will be unable to sue the firm in court, but they can gain restitution for any disputes with the firm through FINRA’s arbitration system. Arbitration is a faster and more efficient process than a lawsuit, but customers are only forced into arbitration if they sign an arbitration agreement.