Corporate and Partnership Accounts in Securities: A Comprehensive Guide
Explore the intricacies of corporate and partnership accounts in the securities industry. Understand documentation, legal authority, and compliance with FINRA rules for institutional accounts.
6.1.4 Corporate and Partnership Accounts
In the realm of securities and investment management, understanding the nuances of corporate and partnership accounts is crucial for financial professionals. These accounts are distinct from individual accounts due to their unique structures, documentation requirements, and regulatory considerations. This section provides a comprehensive overview of corporate and partnership accounts, emphasizing the importance of legal authority verification and compliance with regulatory standards, such as those outlined by FINRA.
Corporate Accounts
Definition and Purpose
A corporate account is an investment account opened by a corporation. Corporations, as legal entities, engage in various investment activities to manage excess cash, generate returns, or fulfill specific financial strategies. These accounts allow corporations to invest in securities, mutual funds, and other financial products.
Required Documentation
Opening a corporate account involves several critical steps and documentation to ensure compliance with legal and regulatory requirements. The following documents are typically required:
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Corporate Resolution: A corporate resolution is a formal document that outlines the decisions made by a corporation’s board of directors. It specifies the authorization for opening an investment account and designates the individuals who have the authority to act on behalf of the corporation in managing the account.
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Articles of Incorporation: This document serves as the corporation’s charter, providing essential information about the corporation, such as its name, purpose, and structure. It is necessary to verify the corporation’s legal existence and authority to engage in investment activities.
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Tax Identification Number (TIN): Corporations must provide their TIN, which is used for tax reporting purposes and to comply with the IRS regulations.
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Authorized Signatories List: A list of individuals authorized to transact on behalf of the corporation. This list must be kept up-to-date to ensure only designated individuals can make investment decisions.
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Bylaws: While not always required, bylaws can provide additional information about the corporation’s governance and operational procedures.
Legal Authority Verification
Verifying the legal authority of individuals opening and managing the corporate account is paramount. Financial institutions must ensure that the individuals acting on behalf of the corporation have the proper authorization as per the corporate resolution and other governing documents. This verification process helps prevent unauthorized transactions and ensures compliance with regulatory standards.
Partnership Accounts
Definition and Purpose
Partnership accounts are investment accounts established by partnerships, which are business entities formed by two or more individuals or entities. These accounts are used to manage the partnership’s investments and financial activities. Partnerships may include general partnerships, limited partnerships, and limited liability partnerships (LLPs).
Required Documentation
To open a partnership account, the following documentation is typically required:
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Partnership Agreement: This is the foundational document that outlines the terms and conditions of the partnership, including the roles and responsibilities of each partner. It specifies who is authorized to open and manage the account, making it a critical document for account setup.
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Tax Identification Number (TIN): Like corporations, partnerships must provide their TIN for tax reporting and compliance purposes.
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Certificate of Limited Partnership (if applicable): For limited partnerships, this document is filed with the state and provides details about the partnership’s structure and the roles of general and limited partners.
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Authorized Signatories List: A list of individuals authorized to act on behalf of the partnership in managing the account. This list must align with the partnership agreement.
Legal Authority Verification
Similar to corporate accounts, verifying the legal authority of individuals managing partnership accounts is essential. Financial institutions must ensure that the individuals have the authority as specified in the partnership agreement. This step is crucial to prevent unauthorized transactions and maintain compliance with regulatory requirements.
Regulatory Considerations
FINRA Rules on Institutional Accounts
The Financial Industry Regulatory Authority (FINRA) provides guidelines for managing institutional accounts, which include corporate and partnership accounts. According to FINRA Rule 4512, firms must maintain accurate records of the account’s ownership and the individuals authorized to act on behalf of the account. The rule emphasizes the importance of obtaining and verifying the necessary documentation to establish the account’s legitimacy and the authority of its representatives.
Customer Identification Requirements
In compliance with the USA PATRIOT Act and other regulations, financial institutions must adhere to customer identification requirements. The SEC’s FAQ on the Bank Secrecy Act outlines the necessity for firms to implement a Customer Identification Program (CIP). This program involves verifying the identity of individuals opening accounts, maintaining records, and cross-referencing information against government lists of known or suspected terrorists.
Practical Examples and Scenarios
Example 1: Opening a Corporate Account
A corporation, ABC Enterprises, decides to open an investment account to manage its surplus funds. The corporation’s board of directors passes a resolution authorizing the CFO and the Treasurer to manage the account. ABC Enterprises provides the financial institution with the corporate resolution, articles of incorporation, TIN, and a list of authorized signatories. The financial institution verifies the documents and the authority of the CFO and Treasurer before opening the account.
Example 2: Partnership Account Compliance
XYZ Partnership, a limited partnership, seeks to open an investment account. The partnership agreement specifies that only the general partner, John Doe, has the authority to manage the account. XYZ Partnership provides the partnership agreement, certificate of limited partnership, TIN, and a list of authorized signatories. The financial institution verifies John Doe’s authority and the partnership’s legal status before proceeding with the account setup.
Best Practices and Common Pitfalls
Best Practices
- Maintain Up-to-Date Documentation: Regularly update corporate resolutions, partnership agreements, and authorized signatories lists to reflect any changes in authority or structure.
- Verify Authority Rigorously: Always verify the authority of individuals managing the account to prevent unauthorized transactions.
- Adhere to Regulatory Standards: Ensure compliance with FINRA rules and customer identification requirements to avoid regulatory penalties.
Common Pitfalls
- Failure to Update Documentation: Not updating the list of authorized signatories can lead to unauthorized individuals managing the account.
- Inadequate Verification Processes: Skipping thorough verification of legal authority can result in compliance issues and unauthorized transactions.
Conclusion
Understanding corporate and partnership accounts is essential for financial professionals managing institutional investments. By adhering to regulatory requirements, maintaining accurate documentation, and verifying legal authority, professionals can ensure compliance and effectively manage these accounts. This knowledge is not only crucial for passing the Series 6 Exam but also for succeeding in the securities industry.
Glossary
- Corporate Account: An account owned by a corporation for investment purposes.
- Partnership Account: An account owned by a partnership for managing its investments.
References
- FINRA Rule 4512: Books and Records Requirements for Institutional Accounts
- SEC FAQ on Bank Secrecy Act and Customer Identification Requirements
