Broker-Dealer Customer Agreement

Broker-Dealer Customer Agreement

Drafts the master contractual agreement between a registered broker-dealer and its customers, covering all regulatory requirements under SEC, FINRA, Reg BI, and AML frameworks.

Prerequisites

Gather before drafting:

• Firm registration — Form BD, FINRA CRD, state registrations, dual-registrant status
• Business model — execution-only vs. full-service, order routing, PFOF, principal trading
• Product catalog — all offered security types (equities, options, mutual funds, ETFs, penny stocks, alternatives)
• Fee schedule — commissions, account fees, margin rates, revenue sharing
• Existing docs — current applications, margin/options agreements, privacy policy, Form CRS
• Regulatory history — exam findings, deficiency letters, enforcement actions

Quick Start

1. Confirm firm's business model and capacity (execution-only, recommendation-making, or dual registrant)
2. Identify all offered products and applicable special rules
3. Draft agreement sections per the structure below
4. Tailor provisions to firm's actual services — omit inapplicable sections
5. Verify all statutory/rule citations against current law
6. Ensure margin and arbitration warnings use prominent formatting (bold/caps, separate signature)
7. Cross-check consistency with Form CRS, Reg BI disclosure, fee schedule, and privacy policy

Agreement Sections

1. Party Identification & Account Establishment

• BD identification: legal name, principal office, SEC reg number, FINRA CRD
• Customer identification per CIP Rule (USA PATRIOT Act §326): name, address, DOB, SSN/TIN, citizenship
• Entity customers: beneficial owners ≥25% or control persons
• Account types: cash (Rule 15c3-3), margin (Reg T), retirement, joint (JTWROS/TIC)
• KYC/suitability data per FINRA Rules 2090/2111
• Firm reserved rights: reject applications, restrict activities, close accounts

2. Service Relationship & Obligations

• Capacity disclosure: execution-only, recommendation-making (Reg BI), or dual registrant (BD vs. IA)
• If recommendations made: Reg BI four obligations — Disclosure, Care, Conflict of Interest, Compliance
• Product-specific rules: penny stock (Rules 15g-2–15g-9), options (Rule 2360 + ODD), mutual funds (share class/12b-1), leveraged ETFs (compounding risk), day trading ($25K minimum)

3. Trading Authorization & Order Handling

• Order channels with authentication requirements (MFA, recording disclosure)
• Best execution obligations: price, speed, execution likelihood, order size, total cost
• Order routing disclosure per SEC Rule 606; PFOF conflict disclosure
• Order type risks: market (no price protection), limit (no fill guarantee), stop (becomes market), GTC (monitor intent)
• Discretionary authority per FINRA Rule 3260 if applicable

4. Fee & Compensation Disclosure

• Commissions, markups/markdowns, account fees (exact amounts or fee schedule reference)
• Margin interest: base rate, spread, calculation method, tiered rates
• PFOF, revenue sharing, 12b-1 fees, underwriting concessions, proprietary product conflicts
• Cross-reference Reg BI disclosure and Form CRS

5. Margin Lending

• Regulatory framework: Reg T (50% initial), FINRA 4210 (25% maintenance), house requirements
• Include concrete margin call example showing equity erosion and call trigger
• Firm rights: charge interest, hypothecate securities per Rule 15c3-3, no lending of fully paid without consent
• Liquidation rights (PROMINENT): firm may sell without notice/consent; sole discretion on securities/timing; not required to minimize loss
• Bold risk warnings (require separate signature): losses can exceed investment; may owe more than deposited; firm can force sale; customer cannot choose securities sold

6. Risk Disclosures & Acknowledgments

• Product-specific risks: market, liquidity, equity, options (unlimited on uncovered writes), fixed income, penny stock, leveraged ETFs, international
• Required acknowledgments (signature/initial): understood agreement, received ODD/penny stock disclosure, total loss possible, sole responsibility in non-discretionary accounts

7. Corporate Actions & Account Maintenance

• Dividends, mandatory/voluntary actions, proxy voting, securities lending
• Confirmations (T+1) and statements (monthly/quarterly); must review for errors
• Error reporting deadlines: confirmations 5 business days, statements 30 days

8. Privacy & Data Security

• Draft per SEC Regulation S-P
• Cover: information collected, uses, sharing categories (providers, regulators, affiliates, non-affiliates)
• Opt-out procedures, security measures, breach notification per state laws

9. Amendment, Assignment & Termination

• Amendments: 30 days' notice; continued use = acceptance; regulatory changes may take immediate effect
• Assignment: customer needs consent; firm may assign in mergers/acquisitions
• Termination: customer-initiated (settle trades, ACATS 5-7 days) and firm-initiated (violations, suspicious activity, death)
• Records retained per SEC Rule 17a-4 (6 years post-close)

10. Mandatory Arbitration

• Include FINRA-required all-caps disclosure (waiver of jury trial, limited discovery, binding awards)
• Scope: all controversies, all legal theories
• Forum: FINRA Dispute Resolution; >$100K three arbitrators (majority public); ≤$100K single arbitrator
• Limited judicial review: vacatur only for fraud, partiality, or excess of powers
• Preserved rights: customer may still file with SEC/FINRA/state regulators
• Governing law and severability provision

11. Execution & Acknowledgments

• Customer representations: legal capacity, accurate information, understands risk
• Entity-specific: signatory authorization, governing document compliance, supporting docs
• Signature requirements by account type (individual, joint, entity)
• E-signature compliance per E-SIGN Act/UETA; click-to-agree accepted; right to withdraw e-delivery consent
• Integration clause: agreement + incorporated documents = entire agreement
• Non-waiver provision

Key Regulatory Citations

Pitfalls

• Omitting penny stock provisions — required if firm offers penny stocks (Rules 15g-2–15g-9); must not be skipped
• Weak margin warnings — liquidation rights and risk warnings must be prominent (bold/caps) with separate signature/initial
• Inconsistent documents — agreement must align with Form CRS, Reg BI disclosure, fee schedule, and privacy policy
• Unverified citations — always verify statutory and rule citations against current law before finalizing
• State law variations — enforceability varies by jurisdiction, especially arbitration; flag issues
• Retail comprehensibility — agreement must be understandable by investors with limited financial sophistication
• Including unused provisions — omit provisions for services the firm does not offer

For detailed per-section drafting specifications including field-level requirements, example language, and product-specific tables, see references/SECTION-SPECS.md.