A familiar customer's name appears on an email requesting a transfer. Before moving money, establish who sent it and use the required legal documents to check whether that person may act.
You need enough information to service an account, recognize unusual activity, and establish who can give instructions. Know your customer (KYC) is this continuing responsibility. The Financial Industry Regulatory Authority (FINRA) requires reasonable diligence in obtaining and retaining essential facts under Rule 2090. Those facts support account servicing, special handling instructions, trading authority, and compliance.
Obtain identifying information, legal-age status, occupation, employer, financial resources, investment objectives, and relevant account documentation. Record who accepts the account for the firm. Updating customer information when you learn of retirement, changed finances, or replacement trustees prevents decisions based on obsolete facts.
KYC supplies facts used for suitability, meaning whether a recommendation fits the customer. Regulation Best Interest requires retail recommendations to serve the customer's best interest, with duties addressing conflicts of interest between you and the customer. Neither recommendation standard replaces identifying the customer or confirming trading authority.
Common mistakes
- Treating 36 months as permission to ignore changed finances. Update customer information when relevant changes become known.
- Treating “choose any fund” as time-and-price discretion. Choosing the security requires written discretionary authority.
- Applying the ownership test only above 25%. Exactly 25% qualifies; the corporate-insider ownership threshold is more than 10%.
Bottom line
- FINRA Rule 2090 requires ongoing knowledge of essential customer facts and each person's authority to act for the customer.
- CIP generally requires identifying information before opening and verification within a reasonable time.
- Covered entity screening identifies owners of 25% or more plus one control person.
- FINRA Rule 3260 requires prior written customer authority and written firm acceptance for discretion.
Exam shortcut
When a stem asks what happens first, identify the missing permission or information before choosing a trade or transfer. For discretion questions, underline who chose the security and amount. “Use your judgment” about either points toward formal discretionary documents. For privacy questions, identify the recipient and purpose before applying opt-out rules. Processing a trade differs from selling a customer list. Match every deadline to its trigger and recipient.
The full lesson (about 3,066 words, 22 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- B4
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