Account opening

When an investor fills out a new account form, they must decide what type of account to open.

Cash accounts are standard brokerage accounts that require the customer to pay 100% of the purchase price for any securities they buy.

Margin accounts allow the investor to borrow money from the broker-dealer for investment purposes. Borrowing can increase both potential gains and potential losses (this is called leverage). Margin accounts are covered in more detail later in this chapter.

After the account type is selected and the new account form is completed, the firm follows a specific process to open the account.

First, the account application may be signed by the registered representative and must be approved by a principal (supervisor).

In some situations, the registered representative assisting the customer signs the form and attests that the information is correct to the best of their knowledge. This isn’t always required, but it’s commonly done when the representative will be servicing the account on an ongoing basis. In many cases, there is no registered representative signature (especially when the customer opens the account online).

Next, the principal reviews the new account form to confirm that all required information was provided and that the firm’s account-opening procedures were followed. If the form is “in good order,” the principal signs it, which effectively approves the account.

There’s no legal requirement for the customer to sign the new account form. This allows firms to open accounts over the phone.

After the account is approved, the firm must send the customer a confirmation of the information provided on the new account form within 30 days of opening the account. The confirmation includes language asking the customer to review the information for accuracy and notify the firm if anything is incorrect.

The firm is also required to verify customer information every three years. To do this, the firm sends another form showing the current information on file and asks the customer to contact the firm if anything needs to be updated.

When a customer opens an account at a brokerage firm, they’re likely to be asked to sign an arbitration agreement. Signing is voluntary, but if the customer signs, any disputes between the customer and the firm must be resolved through binding arbitration. This means the customer generally can’t sue the firm in court. Instead, the customer can seek restitution through FINRA’s arbitration system.

Arbitration is typically faster and more efficient than a lawsuit, but customers are only required to use arbitration if they sign an arbitration agreement.