Series 6 - Unit 10 - Know Your Customer

10.1 - Customer Identification and Know Your Customer

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USA PATRIOT Act

BDs must follow rules to fight money laundering/terrorism financing

Customer ID Program (CIP) :

 

Individuals must provide one of (4)

1. Driver's license

2. Passport

3. Military ID

4. State ID

Businesses must provide one of (4)

1. Certified articled of incorp

2. Gov-issued business license

3. Partnership agreement

4. Trust document

Minimum info required before opening an account (4)

1. Name

2. DOB

3. Address

4. SSN for individuals, TIN for businesses

For non US persons, one of (4) is required:

1. Taxpayer ID

2. Passport number/country

3. Alien ID card number

4. Any gov issued photo ID

If firm can't verify customer's identity, they must have a plan in place, which can be one of the (3):

1. Don't open account

2. Limit the account until verified, close it if verification fails

3. File a SAR if suspicions of something illegal

FINRA rule 2090

Know Your Customer - know their financial situation AND nonfinancial needs (age, job stability, risk tolerance, future plans)

If advisor doesn't have full information, what are they forced to do?

narrow range of recommendations

Which of the following is not required information for a customer identification program?

A)

Address

B)

Social Security number or tax ID

C)

A valid, government-issued photo ID

D)

Place of birth

D

A retail investor opens an account at your firm but only provides the minimum information and states she does not want to provide financial information or objectives. Which of the following statements best describes the responsibilities of the registered representative handling the account?

A)

The account cannot be opened without financial and nonfinancial information.

B)

The representative is limited to investment company recommendations only.

C)

Only unsolicited trades can be made in this account.

D)

Recommendations can be made because the customer decides whether or not to accept them.

C

10.2 - Customer Communications

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SEC Regulation S-P

"security and privacy", firms must protect a customer's nonpublic personal information (NPI) and provide disclosure before sharing it

(5) examples of NPI:

1. SSN

2. DL#

3. Account numbers

4. Security codes/passwords

5. Info from customer application

Firms must provide a privacy disclosure, which includes:

• Info that might be shared with a 3rd party

• Chance for customer to opt out and instructions on how to do so

When does the disclosure happen?

start of customer relationship, annually after

Opting out must be simple, and cannot include….

making customer write and mail a letter

Transfer and ship

securities are registered in customers name and shipped to them

Transfer and hold in safekeeping

registered in customer's name, BD holds them in safekeeping

Hold in street name

securities registered in BDs name and held by them too. BD is the nominal owner, customer is the beneficial owner

Deliver versus payment (DVP)

typically for institutional accounts, cash is only handed over the exact moment they hand over the securities

Mailing Instructions

where the customer wants statements and confirmations sent to. Can be sent to a POA if customer requests in writing

Disclosure of a firm's policies and procedures regarding customer privacy must be made no later than

A)

annually within 30 days of the firm’s fiscal year.

B)

annually within 30 days of the beginning of the calendar year.

C)

annually on the account anniversary.

D)

when the customer relationship is established.

D

Which of the following best describes the "hold in street name" delivery instruction?

A)

Securities are held in a trust account registered to the customer and forwarded to their attorney.

B)

Securities are held at a bank and delivered only when payment is received.

C)

Securities are registered in the broker-dealer’s name but belong to the customer.

D)

Securities are registered in the customer's name and sent directly to the customer.

C

10.3 - Third Party Authority

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Discretionary Trading Authorization

required to be signed by customer and BD for discretionary trading

What are some BD safeguards in place to protect against wrongdoing in discretionary trades?

principal must approve each trade, and there is supervision to check for signs of churning

3 A's of discretion:

1. Action

2. Amount

3. Asset

What is not considered discretion (2)?

1. Time

2. Price

FPOA

can make trades, deposit/withdraw, change address. Acts as account holder

LPOA

can only make trades, not deposit/withdraw

(3) ways a POA ends:

1. Death

2. Customer cancels it

3. Customer is incapacitated (unless it's a durable)

What type of POA is an advisor typically given?

LPOA

Which of the following statements is true about a guardianship account?

A)

An investment adviser must receive full power of attorney to place trades for a client.

B)

Fiduciary roles must be established before opening the account.

C)

Fiduciaries such as trustees or custodians receive trading authority only after account approval.

D)

Discretion must always be granted separately to fiduciaries through a POA.

B

10.4 - Registration Changes and Transfers

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What is required for the owner of an individual account to make a name change?

letter of authorization (LOA)

How can an individual account become a joint account?

if the Tax ID (SSN) stays the same, and the new owner signs account forms

What if it doesn't?

new account is opened, and previous owner sends an LOA to journal assets to new account

How can a new tenant be added to a joint account?

authorization from current tenants, then new tenant signs the new account form

How can a tenant be removed from a joint account?

they can't -- must open new account and journal transfe

Journal Transfer/Entry

move from one account to another within a firm

How can a business account authorize new persons?

new corporate resolution from the BOD

How to change the trustee, guardian, or custodian?

LOA from owner

After a carrying firm receives and validates a transfer initiation form, the transfer must be completed in how many days?

A)

Three business days

B)

One business day

C)

Five business days

D)

Three calendar days

A

Account Transfer Service (ACATS)

used to automate account transfers

Transfer Initiation firm (TIF)

sent through ACATS by new firm and received by carrying (old) firm

After receiving a TIF, carrying firm has 1 business day to…

validate securities listed on TIF or take exception

Within 3 business days, the carrying firm must…

complete the transfer