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Question

Difficulty: Very hardCustomer Account Types and Ownership Structures

Three business associates—David, Sarah, and Thomas—maintain a joint brokerage account designated as Tenants in Common (TIC), with David holding a 50% ownership interest, Sarah holding 25%, and Thomas holding 25%. David unexpectedly passes away. Prior to presenting legal estate documentation, Sarah and Thomas submit a written request to the broker-dealer to liquidate David's portion of the portfolio and distribute the proceeds equally into their respective personal accounts, claiming survivorship rights. Which of the following statements correctly describes the broker-dealer's legal and regulatory obligation in handling this request?

  1. The broker-dealer must reject the distribution request and freeze the account against further transactions until proper legal documentation is provided, ensuring David's 50% share passes to his estate.Answer
  2. B
    The broker-dealer must honor the request because surviving account owners in a joint account automatically acquire the deceased owner's equity percentage.
  3. C
    The broker-dealer must liquidate David's 50% interest and reallocate the cash proportionally between Sarah and Thomas based on their existing 25% ownership stakes.
  4. D
    The broker-dealer must allow Sarah and Thomas to continue trading the entire account without restriction, but must place a temporary administrative hold on cash withdrawals only.

Answer

The broker-dealer must reject the distribution request and freeze the account against further transactions until proper legal documentation is provided, ensuring David's 50% share passes to his estate.
In a Tenants in Common (TIC) account, each account holder owns a specified fractional percentage of the assets. When a TIC account owner dies, their designated portion passes directly to their estate, not to the surviving joint owners. Upon receiving notice of death, the broker-dealer must freeze the account, cancel open orders, and wait for official estate documents (such as a death certificate and letters testamentary) before allowing any asset movement.

Step-by-Step Solution

1
Identify the specific ownership structure of the joint account.
The account is registered as Tenants in Common (TIC), not Joint Tenants with Rights of Survivorship (JTWROS).
Account registration dictates how asset rights transfer upon the death of an account owner.
2
Apply legal transfer rules for Tenants in Common (TIC) upon an owner's death.
Under TIC rules, David's 50% ownership interest passes to his legal estate rather than automatically dividing among surviving account holders.
TIC accounts allow custom ownership percentages and do not convey rights of survivorship to co-tenants.
3
Determine the required regulatory procedure for the broker-dealer.
The firm must reject the survivorship claim, cancel open orders, freeze the account against new trades, and require official documentation (death certificate and letters testamentary) before distributing assets to the estate.
Broker-dealers are legally obligated to protect estate assets and prevent unauthorized transfers by surviving account holders.

Key Concept

Tenants in Common (TIC) Asset Transfer vs. Survivorship Rights
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Topics

Customer Account Types and Ownership Structures