Accounts and Customer Suitability
Account Types and Ownership
Accounts may be individual or joint, and joint registrations differ in how ownership passes at death. In joint tenants with rights of survivorship (JTWROS), a deceased owner's interest passes automatically to the survivor, while tenants in common directs a deceased owner's fractional share to the owner's estate. Custodial accounts under the Uniform Transfers to Minors Act have one custodian and one minor, with the assets belonging to the minor. Corporate, partnership, and trust accounts require documentation establishing authority. Discretionary authority requires prior written authorization from the customer and firm approval before the representative may choose security, amount, or action.
Margin Accounts and Regulation T
Margin accounts let customers borrow from the broker-dealer to buy securities, governed by the Federal Reserve's Regulation T, which currently sets a 50% initial requirement for marginable equities. FINRA imposes a minimum maintenance requirement of 25% of market value for long positions; when equity falls below this level a maintenance call is issued. Opening a margin account requires a credit agreement, a hypothecation agreement, and optionally a loan consent form. Freeriding, buying in a cash account and selling without paying, violates Regulation T, and pattern day traders must maintain at least $25,000 in equity.
Retirement and Education Accounts
Traditional IRAs may offer deductible contributions and tax-deferred growth, with withdrawals taxed as ordinary income and required minimum distributions in retirement; early withdrawals before age 59 1/2 generally incur a 10% penalty plus tax. Roth IRAs use after-tax contributions, provide tax-free qualified withdrawals, and have no lifetime RMDs. Employer-sponsored 401(k) plans are defined contribution plans governed by ERISA. Coverdell ESAs and 529 plans provide tax-advantaged growth for qualified education expenses, with 529 plans offering tax-free qualified withdrawals and potential state tax benefits.
Suitability and Regulation Best Interest
Regulation Best Interest requires broker-dealers to act in a retail customer's best interest when making a recommendation and not to place the firm's interests ahead of the customer's, incorporating disclosure, care, conflict, and compliance obligations. Suitability depends on the customer's investment objectives, financial situation, risk tolerance, time horizon, liquidity needs, and experience. Capital preservation objectives favor high-quality, short-term instruments, while long-horizon growth objectives support diversified, equity-weighted portfolios. Concentrating in a single speculative position conflicts with sound diversification.
Options Account Approval
Before a customer trades options, a Registered Options Principal must approve the account based on the customer's suitability profile, and the firm must deliver the options disclosure document at or before approval. The customer must return a signed options agreement, generally within 15 days. Because options strategies range from conservative covered calls to high-risk uncovered writing, firms assign approval levels aligned to the customer's experience and financial capacity, reinforcing the suitability and best-interest framework.
Last updated: July 2026