The various stock markets and the NASD are what is called self regulatory organizations. They investigate and adjust all customer complaints. They standardize practices between firms. They make sure all the member firms observe all Federal and State securities laws. They try to prevent fraud by member firms. Basically, their objective is to keep their own house in order rather than have outside governmental agencies mixing about. And for the most part, these organizations have done a very good job at it.

In order for a firm to become a member and conduct business, it must be a member of the exchange or the NASD. One member of the firm must own a seat on the stock exchange. Without this seat, the firm has no access to the floor of the exchange. This is important because the self-regulating exchange or NASD can fine a member firm, suspend them, or even expel the firm from the exchange. This differs, by the way, from the powers of the SEC. 

The Securities and Exchange Commission has the power to arrest anyone, take that person to court, and if they are convicted, they may go to jail. Generally, the exchange or NASD will investigate the case first. After that, if criminal charges are appropriate, they will bring to the SEC.

Insider trading is serious business. Even if you have the opportunity to do it, don't do it. If you have access to information that is confidential and not public, you may not trade based on this knowledge. If someone with this knowledge passes it along to someone else, that in of itself is a crime. If the person with the insider information passes it along to you and you trade based on this information, it is a crime. You don't even have to know that it was insider information. And the exchanges and the NASD are very good at catching people engaged in this practice. I have observed behind the scenes what goes on in the investigative area of the NYSE. This area has the ability to monitor every transaction that occurs. They monitor unusual changes in stock price or volume, large transactions, and unusual transactions.

Employees of member firms must disclose all their personal trades. This is so whether the individual opens an account at another firm or not. If the transaction takes place at another firm, a duplicate copy of the transaction is sent to the individual’s employer. It is the duty and responsibility of each firm to know the details of all transactions their employees are engaged in.

If you as a customer want another person not named on your account to have trading authority you must provide written authorization. There are three common levels of written authorization.  They are: Limited authorization, Full authorization, and Discretionary authorization. 

Limited authorization grants limited powers to another person only to initiate trades. Someone with limited authorization cannot withdraw money and/or securities from the account. Full authorization means that the person can not only initiate trades but also withdraw money and/or securities from the account. Discretionary authorization is used when you open a discretionary account with the broker/dealer. A discretionary account is one in which you give the broker/dealer the discretion to trade for your account without first consulting you. Personally, I don't think that this is a good power to give your broker. It's how a lot of problems creep up.

When you open your account, you will make certain decisions regarding what to do with the securities in your account and the proceeds of liquidation's. 'Transfer and Ship' instructions means that the securities will be registered in your name and shipped to you.

'Transfer and Hold' instructions means that the securities will be registered in your name and held by the firm for safekeeping 'Register in Street Name' means that the securities are registered in the name of the broker/dealer and held by the firm for safekeeping.  You also have several options with respect to liquidation's. You can choose to have proceeds sent to you by check. Or you can have the proceeds kept in the account as a credit balance. These funds will usually be transferred into a money market fund.

You cannot trade options in your regular stock trading account. You must open up a separate options account. To do this, the firm is going to ask you to sign an 'Options Disclosure Document'. You must indicate that you have a certain degree of experience as to how securities markets operate. You must also sign that you understand how risky trading in stock options is. A 'Registered Options Principal' (ROP) must also approve the account. Within 15 days of the opening of an options account you must sign a 'Customer Option Agreement'. Basically, this says that you are going to abide by the rules of the various exchanges.

You may also remain anonymous on your account and identified by a number only. This can only be done with a member firm of the NYSE. However, you must also sign a letter setting forth your true name and identity and attest to ownership of the account.

The NYSE member firms are also allowed to hold customer mail for up to 60 days if you are traveling within the United States and for up to 90 days if you are traveling abroad.

Fiduciaries and trusts can open brokerage accounts. However, the broker/dealer will require a copy of the trust agreement setting forth the objectives of the trust.

The Uniform Gifts to Minors Act (UGMA) allows a custodian to open an account for a minor. The rules for these accounts are: The donor of the gift may act as custodian of the account or may appoint someone else. The donor of the gift must be an adult. The gift must be irrevocable. There can only be one minor listed on the account. There cannot be joint custodians. Taxes due on the account are the responsibility of the minor whose name and social security number are on the account. If the minor is under 14 years of age, any income over the $1,200 per year is taxable at the parent's tax rate. The minor owns the property, not the custodian. The custodianship ends when the minor reaches age of majority.  UGMA accounts may be cash accounts only. Margin accounts are not permitted. Securities must be registered with the name of the custodian, the name of the minor, and the state of residence. The custodian must use the 'Prudent Man Rule' and attempt to maximize returns. The custodian cannot be paid for his services. The Uniform Transfer to Minors Act (UTMA) offers more flexibility than UGMA. However, it operates very similar to the UGMA.

Rule 405 of the NYSE is the 'Know Your Customer' rule. What it mandates is that the registered rep. must learn as much as possible about his clients in order to pinpoint their investment objectives and keep them away from investments that are not in line with their objectives. You should help your stockbroker out. The more they know about your objectives, lifestyle, assets, and expenditures, the better able they are to help you meet your financial objectives.

Disputes with your broker/dealer are settled through arbitration. This is binding arbitration that cannot be appealed. However, if the firm has a complaint against a client, it cannot force the client into binding arbitration. Only you can force the broker/dealer into binding arbitration.

B. R. Bowers & Company

122 East Maumee St.
Adrian, MI  49221
Phone: (517) 265-7683
Toll Free:  800-392-6230
Fax:  (517) 264-5095

3225 Walker Avenue NW
Suite 200
Grand Rapids, MI  49544
Phone:  (616) 784-0652
Fax:  (616) 784-0674

Email:  bryan@brbowerscompany.com

http://www.brbowerscompany.com