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

| Citation | Subject |
|----------|---------|
| USA PATRIOT Act §326 / CIP Rule | Customer identification |
| FINRA Rules 2090/2111 | KYC and suitability |
| Regulation Best Interest | Recommendation standard (four obligations) |
| SEC Rule 15c3-3 | Customer protection / segregation |
| Reg T / FINRA Rule 4210 | Margin requirements |
| SEC Rules 15g-2–15g-9 | Penny stock requirements |
| FINRA Rule 2360 | Options |
| SEC Rule 606 | Order routing disclosure |
| FINRA Rule 3260 | Discretionary authority |
| SEC Regulation S-P | Privacy |
| SEC Rule 17a-4 | Records retention |
| E-SIGN Act / UETA | Electronic signatures |
| Federal Arbitration Act | Arbitration enforceability |

## 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`.