5.3 New Accounts, Customer Authority, Discretion, and Order Handling

Investment Company and Variable Contracts Products Principal Series 26

Track your progress as you read

Finished sections get a check mark.

1 Chapter 1: Registration of the Broker-Dealer and Its Associated Persons

1.1 Broker-Dealer Registration, FINRA Membership, and Firm Filings 1.2 Individual Registration: Forms U4 and U5, Registration Categories, and Exempt Persons 1.3 Pre-Hire Screening, Fingerprinting, and Statutory Disqualification 1.4 Heightened Supervision, Interim Plans, and the Taping Rule 1.5 Broker-Dealers, Investment Advisers, Dual Registrants, and Unregistered Entities

2 Chapter 2: Training, Continuing Education, and Product Knowledge

2.1 Continuing Education (Rule 1240), the Maintaining Qualifications Program, and the Annual Compliance Meeting 2.2 The Investment Company Act of 1940: Classifications, Registration, and Fund Governance 2.3 Mutual Fund Pricing, Redemption, Exchanges, Sales Charges, and Share Classes 2.4 Variable Annuities and Variable Life Insurance: Structure, Charges, and Rule 2320 2.5 Closed-End and Interval Funds, UITs, Money Market Funds, 529 Plans, and Investment Risks

3 Chapter 3: Supervisory System, Conduct Standards, Insider Trading, and Discipline

3.1 The Supervisory System, Written Supervisory Procedures, and Standards of Conduct 3.2 Insider Trading, Information Barriers, and Personal Trading Supervision 3.3 FINRA Investigations, Disciplinary Proceedings, Sanctions, and Exemptions

4 Chapter 4: Communications with the Public

4.1 Communications Categories, Principal Approval, Filing, and Recordkeeping (Rule 2210) 4.2 Content Standards, Investment Company Advertising, and Professional Designations 4.3 Variable Contract Communications, Fund Rankings, Bond Fund Volatility Ratings, and Investment Analysis Tools 4.4 Correspondence and Internal Communications, Social Media, Public Appearances, and Telemarketing

5 Chapter 5: Recommendations, Customer Accounts, and Product Sales Supervision

5.1 Regulation Best Interest, Conflicts, and Form CRS 5.2 Know Your Customer, FINRA Suitability, and Institutional Accounts 5.3 New Accounts, Customer Authority, Discretion, and Order Handling 5.4 Mutual Fund Breakpoints, Share Classes, and Switching Supervision 5.5 Deferred Variable Annuities and the Seven-Business-Day Principal Review 5.6 Prospectuses, Summary Prospectuses, SAIs, and Ongoing Disclosures

6 Chapter 6: Compensation, Outside Activities, and Personal Conduct

6.1 Cash Compensation, Distribution Arrangements, and Conflicts 6.2 Gifts, Gratuities, and Business Entertainment (Rule 3220) 6.3 Training Meetings, Sales Contests, and Non-Cash Compensation 6.4 Referral Payments, Bank Networking, and Unregistered Persons 6.5 Outside Business Activities, Private Securities Transactions, and Rule 3290 Transition 6.6 Outside Accounts, Borrowing and Lending, Account Sharing, and Guarantees

7 Chapter 7: Customer Account Operations, Transfers, and Privacy

7.1 Account Records, Trusted Contacts, Confirmations, and Statements 7.2 Cash Accounts, T+1 Settlement, Regulation T, Extensions, and Freeriding 7.3 ACATS Transfers, Transfer-on-Death Accounts, and Account Changes 7.4 Regulation S-P, Incident Response, Service Providers, and Identity Theft

8 Chapter 8: Anti-Money Laundering, Customer Identification, and Sanctions

8.1 AML Program, Independent Testing, Training, and Governance 8.2 Customer Identification, Due Diligence, and Beneficial Ownership 8.3 SARs, CTRs, OFAC, Information Sharing, and AML Red Flags

9 Chapter 9: Supervisory Controls, Business Continuity, and Regulatory Reporting

9.1 Supervisory Controls, Annual Testing, and CEO Certification 9.2 Business Continuity, Systems Resilience, Cybersecurity, and Vendors 9.3 Rule 4530, FOCUS and Annual Reports, and Customer-Asset Events

10 Chapter 10: Office Classifications, Inspections, and Records

10.1 OSJs, Branches, RSLs, and Inspection Cycles 10.2 Inspection Reports, Independent Review, Signage, and Office Files 10.3 Broker-Dealer Books and Records, Electronic Storage, and Correspondence

11 Chapter 11: Complaints, Arbitration, Mediation, and Expungement

11.1 Customer Complaints, Investigation, Retention, and Reporting 11.2 Predispute Agreements, Arbitration Codes, Eligibility, Panels, and Awards 11.3 Mediation and Customer-Dispute Expungement

12 Chapter 12: Financial Responsibility, Membership Changes, and Investor Protection

12.1 Net Capital, Minimum Tiers, Haircuts, and Early Warning 12.2 Customer Protection, Possession or Control, Reserve Formula, and Exemptions 12.3 New-Product Review and Continuing Membership Applications 12.4 SIPC, Fidelity Bonds, Proxy Materials, and Financial Reports

5.3 New Accounts, Customer Authority, Discretion, and Order Handling

Key Takeaways Explain This Topic AI

Rule 4512 requires identifying information, associated-person approval, trusted-contact efforts for non-institutional accounts, and records of who may transact.

Rule 3260 requires prior written customer authorization and written acceptance of a discretionary account, prompt written approval of each discretionary order, and frequent review for excessive trading.

Time-and-price discretion over a definite amount of a specified security expires at the end of the business day unless the customer signs and dates a written instruction extending it.

Representatives may not exercise authority for an incapacitated or deceased customer without valid legal authority from the appropriate fiduciary.

Rule 3250 permits a numbered account only with a signed customer statement attesting ownership, and Rule 4514 requires express written authorization before drafting a customer's bank account.

Last updated: September 2026

Required Account Information

FINRA Rule 4512 requires each account record to preserve the customer's name and residence; whether the customer is of legal age; the names of associated persons responsible for the account; and the signature of the partner, officer or manager who accepted the account. For a corporation, partnership, trust or other legal entity, the firm must know the entity's legal existence and the authority of each person acting for it. Tax identification, employment and investment-profile information arise from tax, SEC record-making, AML, KYC and recommendation rules.

For each non-institutional account , the member must make reasonable efforts to obtain the name and contact information of a trusted contact person age 18 or older. The customer may decline. A trusted contact is not a power of attorney: the firm may contact the person about possible exploitation, the customer's health status, identity of a legal representative or current contact details, but the trusted contact cannot trade or withdraw funds merely because listed.

Under Rule 2165, a qualified person may place a temporary hold on certain disbursements or transactions when the firm reasonably believes an older or otherwise specified adult is being financially exploited, after following the rule's notice, review and record requirements. The existence of a trusted contact supports that process but is not required for the hold.

Who May Act

• Account Evidence of authority
• Individual The owner, or an agent under a valid power of attorney

Joint Each owner's rights depend on the registration and agreement; one owner generally cannot change ownership unilaterally

• Corporation or partnership Resolution, agreement or other governing document naming authorized persons
• Trust Trust instrument and trustee certification; transactions must fit trustee powers
• Estate Court appointment of executor or administrator
• Custodial account Custodian acts under the governing statute for the minor's benefit

A power of attorney generally ends at death and may end at incapacity unless durable. When death is reported, the firm should restrict activity, verify the death, identify the estate representative and follow transfer procedures. A representative must not “help” by accepting a pre-signed form or logging in as the customer.

Discretionary Accounts

FINRA Rule 3260 and Exchange Act Rule 15c1-7 govern discretion over the security, quantity, or buy/sell decision. Under Rule 3260(b), no one may exercise discretion unless the customer has given prior written authorization to a stated individual or individuals and the member, or a partner, officer or manager it designates, has accepted the account in writing . Rule 3260(c) requires the designated person to approve each discretionary order promptly in writing and to review all discretionary accounts at frequent intervals to detect transactions that are excessive in size or frequency in view of the account's financial resources and character, which Rule 3260(a) prohibits. Rule 15c1-7 adds that a record of each discretionary transaction, showing the customer, the security, the amount, the price and the date and time, must be made immediately after the trade.

Time-and-price discretion is narrower. If the customer decides the security, the definite amount and whether to buy or sell, the representative may choose time and price without a discretionary-account agreement. That authority expires at the end of the business day on which it was granted unless the customer gives a specific written instruction, signed and dated by the customer , extending it; the one-day limit does not apply to good-till-cancelled, not-held orders in an institutional account. Any exercise of time-and-price discretion must be noted on the order ticket. Choosing the quantity or changing from one fund to another is not time-and-price discretion.

Orders, Designations, and Confirmations

Orders should identify the account, security, side, quantity, order terms, time received and time entered. Rule 4515 requires account-name or designation changes to be authorized by a qualified registered principal and documented with the essential facts. Post-execution changes deserve heightened review because they can hide trade allocation or favor one account.

Mutual fund and variable contract orders also require prompt transmission. A representative may not hold several customer fund orders to see which NAV is favorable. Customer checks should be payable to the product sponsor or clearing firm under the firm's procedures, not to the representative. An incomplete variable annuity application must be resolved promptly without treating customer funds as the firm's working capital.

Numbered Accounts and Negotiable Instruments

Two short operational rules from the outline often appear as exam details:

Rule 3250 (Designation of Accounts) prohibits carrying an account in the name of anyone other than the customer, except that an account may be designated by a number or symbol if the member has on file a written statement signed by the customer attesting to ownership . A numbered account keeps the name off routine records; it does not hide the owner from the firm or excuse CIP.

Rule 4514 (Authorization Records for Negotiable Instruments) forbids obtaining or submitting for payment a check, draft or other negotiable paper drawn on a customer's checking, savings, share or similar account without the customer's express written authorization , which may be the customer's signature on the instrument. A separate written authorization must be kept for three years after it expires . A representative who drafts a customer's bank account on telephone instructions alone violates the rule.

Principal New-Account Review

The review should reconcile the registration, customer identity, beneficial owners, authority, essential facts, tax status, trusted contact effort and product eligibility. Red flags include a third party funding an unrelated person's account, an elderly customer abruptly granting broad authority to a new acquaintance, a trust transaction outside the trustee's powers, or a representative repeatedly requesting after-the-fact designation changes.

Approval is not permanent. Rule 2090 and SEC Rules 17a-3 and 17a-4 require account information to remain accurate and accessible. Section 7.1 covers periodic updates, statements and confirmations after the account is open.