Know Your Customer

Osric completes a new account record for a retail customer who is buying mutual fund shares in a cash account and forwards it to operations. Under FINRA Rule 4512, before or promptly after the account is opened the record must also carry:

1. A.the identity of the associated person responsible for the account and the signature of the principal accepting it.Correct. Rule 4512 requires both the responsible representative and the accepting principal signature.
2. B.a signed acknowledgement that the customer received the fund statement of additional information.The statement of additional information is furnished on request; no acknowledgement is part of the account record rule.
3. C.the customer signature on the new account form.No customer signature is required to open an ordinary cash account.
4. D.written approval from FINRA of the customer investment objective.FINRA does not approve individual customer accounts or objectives.

Why: Rule 4512 requires the account record to identify the associated person responsible for the account and to bear the signature of the partner, officer or manager who accepted the account for the member. That principal signature is what evidences the firm acceptance of the customer, and it must be obtained by the time the account is opened or promptly thereafter. The record is preserved for six years after the account is closed.

Drayton Securities is opening an account for a closely held corporation whose orders will be entered by its treasurer. Under FINRA's Know Your Customer rule, the firm must use reasonable diligence to learn and retain the ESSENTIAL FACTS about the account. Those essential facts are the ones needed to:

1. A.Effectively service the account, act on special handling instructions, understand the authority of each person acting for the customer, and comply with applicable laws and rulesCorrect. These are the four essential-facts categories under the Know Your Customer rule.
2. B.Establish the customer's investment profile so that recommendations can be madeThat is the suitability obligation, which is a separate rule triggered by a recommendation.
3. C.Verify the customer's identity for the customer identification program, and nothing moreIdentity verification is an anti-money laundering requirement; Know Your Customer reaches further.
4. D.Obtain the customer's most recent federal income tax returnNo rule requires collecting tax returns to open an account.

Why: The Know Your Customer rule is about servicing and supervising the account rather than about recommending securities. The essential facts are those required to effectively service the account, to act in accordance with any special handling instructions, to understand the authority of each person acting on the customer's behalf, and to comply with applicable laws, regulations and rules. Knowing that the treasurer, and not some other officer, is authorized to trade is a textbook example. Suitability analysis is a separate obligation that attaches when a recommendation is made.

The Larkhill Community Choir, an unincorporated nonprofit association, wants to invest its reserve funds in a bond fund. Beyond the ordinary new account information, the firm should obtain:

1. A.the personal financial statements of each member of the choir.Members are not the customer and their personal finances are not relevant to opening the entity account.
2. B.a signed statement that the choir will not redeem the shares for at least one year.No holding period commitment is required, and requesting one would be an odd condition to impose.
3. C.a certificate of incorporation from the state where the choir performs.An unincorporated association has no certificate of incorporation to produce.
4. D.the organisation by-laws or constitution and a resolution of its governing body naming those authorised to act.Correct. Capacity plus authority, evidenced by the documents an unincorporated association actually has.

Why: An unincorporated association has no charter, so the firm looks to the documents that actually exist: the organisation constitution or by-laws showing that it may invest its funds, and a resolution of its governing body naming the individuals authorised to open the account and give instructions. That combination establishes both the entity capacity to invest and the identity of the persons whose orders the firm may accept. The entity also needs its own taxpayer identification number for identification and reporting.

A corporate treasurer telephones Kestrelmoor Securities to open an account for the company and to place the first fund order. Beyond verifying the company identity for anti-money-laundering purposes, FINRA Rule 2090 requires the firm to use reasonable diligence to know:

1. A.the company projected earnings for the coming three fiscal years.Forecast earnings are not an essential fact for opening and maintaining the account.
2. B.the identity of every shareholder of the company, regardless of ownership percentage.Beneficial ownership identification under the customer due diligence rule reaches significant owners and a control person, not every shareholder.
3. C.the essential facts about the customer and the authority of each person acting on the customer behalf.Correct. Rule 2090 covers both the customer and the authority of those acting for it.
4. D.only the facts needed to determine whether a particular recommendation is suitable.That is the suitability analysis. Rule 2090 applies regardless of any recommendation.

Why: Rule 2090 obliges a member to use reasonable diligence, in regard to the opening and maintenance of every account, to know the essential facts concerning every customer and concerning the authority of each person acting on the customer behalf. In an entity account that second half does real work: the firm must establish that this particular officer is authorised to bind the company and to give orders, ordinarily through a corporate resolution. Know your customer is about identity and authority; suitability, by contrast, attaches to recommendations.