Broker-Dealer

Havenbrook Quill Securities files a broker-dealer registration application in State P. The Administrator writes back directing the firm, before its registration may become effective, to publish an announcement of the pending application in two named daily newspapers published in State P. The firm's principal objects that the Uniform Securities Act contains no such requirement and that the demand must be an overreach. Under the Act, may the Administrator do this?

1. A.No. The Administrator may require filings, fees, bonds and examinations, but publication is not among the permitted conditions.Publication of an announcement of the application is expressly authorised by the Act, in addition to those other conditions.
2. B.Yes. The Act permits the Administrator, by rule or order, to require an applicant to publish an announcement of the application in specified newspapers published in the state.Correct. This is an express statutory power, exercisable by rule or by order directed to a particular applicant.
3. C.No, because requiring publication would disclose a pending application that is confidential until effectiveness.Applications are not confidential in that sense, and the statute contemplates exactly this kind of public notice.
4. D.Yes, but only where the Administrator has already found grounds to deny the application.The power is not conditioned on adverse findings. It may be imposed by rule generally or by order on an ordinary pending application.

Why: Yes. The Uniform Securities Act expressly authorises the Administrator, by rule or order, to require an applicant for registration to publish an announcement of the application in one or more specified newspapers published in the state. The purpose is straightforward public notice: it lets customers, creditors and competitors of the applicant learn that the firm is seeking to do securities business in the state and come forward with anything the Administrator ought to know before the registration takes effect. The requirement sits alongside the Administrator's other conditioning powers over applications and is not an overreach.

A customer of Pellingham Rowe Securities sells a large position and leaves the $180,000 of proceeds sitting uninvested in her cash account for several months. She later complains that she had forgotten the money was there and that the firm never told her she could have it. What obligation does a broker-dealer have with respect to uninvested customer cash of this kind?

1. A.None. Cash the customer chooses to leave uninvested is her own responsibility to monitor.The firm has an affirmative, recurring notice obligation with respect to free credit balances.
2. B.It must send a written notice at least quarterly stating the free credit balance and that the funds are payable on demand.Correct. Quarterly written notice of the balance and of its availability on demand is required.
3. C.It must automatically sweep the balance into a money market fund within five business days.A sweep may be offered as a service but is not required. What is required is the periodic notice.
4. D.It must segregate the cash in a special customer account and may not use it in its business.Free credit balances are not segregated, and the required notice says so expressly.

Why: Uninvested customer cash held by a broker-dealer is a FREE CREDIT BALANCE, which means it is money the firm owes the customer and which the customer may demand at any time. A broker-dealer must give each customer holding such a balance a written notice, not less often than quarterly, stating the amount of the free credit balance and making clear that the funds are not segregated, that the firm may use them in its business, and that they are payable to the customer on demand. The requirement exists precisely for the situation described: cash left idle is easy for a customer to forget, and the periodic notice ensures she is reminded that the money is hers and available.

Ombersley Vane Securities carries two retail accounts. The first belongs to a buy-and-hold customer who has not traded in two years and holds three dividend-paying stocks. The second belongs to an active customer who trades several times most months. To save postage, the firm proposes to send statements to the inactive customer once a year and to the active customer twice a year. Is the proposal acceptable?

1. A.Yes, provided each customer consents in writing to the reduced frequency.The quarterly minimum is not waivable by customer consent.
2. B.Yes as to the inactive account, since statements are required only when there has been activity in the period.The quarterly requirement applies whether or not there has been activity in the account.
3. C.No. Statements must be sent at least quarterly regardless of activity, and activity ordinarily calls for monthly statements.Correct. The quarterly floor applies to every account, and active accounts ordinarily receive monthly statements.
4. D.No, because every customer must receive a statement monthly without exception.Monthly statements accompany activity. The universal minimum standard is quarterly, not monthly.

Why: No, on both counts. A broker-dealer must send an account statement to each customer AT LEAST QUARTERLY, and that minimum applies whether or not there has been any activity. The dormant account is not exempt: the customer still holds positions whose value changes, still receives dividends, and still needs a periodic record showing what the firm says it is holding for her. Where there has been activity in a period, statements are ordinarily provided monthly so that the customer sees the transactions promptly. The firm's proposal fails the minimum for the inactive account and provides less frequent reporting for the more active one, which inverts the sensible relationship between activity and reporting.

Two of the four partners of Halliwell and Rooke, a general partnership, come into a branch of Denbrook Securities to open a brokerage account for the firm. They present the partnership's tax identification number and a cheque drawn on the partnership's bank account. Before accepting orders, the broker-dealer should obtain:

1. A.nothing beyond the tax identification number and a specimen signature from each partner presentA tax identification number establishes identity for reporting, not authority to trade.
2. B.a corporate resolution adopted by the partnership's board of directorsA general partnership has no board of directors and adopts no corporate resolution.
3. C.written confirmation from the partnership's bank that the two partners are signatories on its bank accountBanking signature authority is a different grant and does not establish securities trading authority.
4. D.a copy of the partnership agreement or an authorization under it identifying the partners permitted to trade the account and any limits on that authorityCorrect. The partnership agreement or an authorization under it is what establishes who may act for the partnership.

Why: A partnership account is opened for an entity, and the firm needs documentary proof of two things: that the partnership exists and who among the partners is authorised to act for it in securities transactions. That comes from the partnership agreement, or a partnership resolution or authorization executed under it, naming the individuals who may give orders and specifying any limits on their authority. A tax identification number identifies the entity for reporting; it says nothing about authority. And the presence of two partners in the branch proves nothing about what the partnership agreement permits them to do alone.