FINRA Rules for Opening Cash Accounts

• Required information
  • Name of customer
    • Numbered or coded account is acceptable
      • Like a high profile individual (code: 007)
  • Address
    • Cannot open with P.O. box only (military P.O. box is acceptable)
  • Whether of legal age
  • Registered representative(s) of record
  • Signature of supervising principal
• Copy of the above information must be provided to clients at least every 36 months
• Customers are NOT required to sign their new account forms 

Additional Information

• Prior to settlement of the initial transaction, a reasonable effort must be made to obtain the following customer information (this does not apply to institutional accounts):
  • Tax ID/ Social Security Number
  • Occupation as well as name and address of employer
  • Whether associated with another member firm
• If a client refuses to provide any requested information, the RR should document the refusal

Recordkeeping Requirements

• According to SEC Rule 17a-3 broker-dealers are required to maintain the following records:
  • Name and tax ID number
  • Address, telephone number and date of birth
  • Employment status and whether associated with another broker-dealer
  • Information to assist in determining suitability
    • Income
    • Net worth (excluding principal residence)
    • Risk tolerance
    • Objectives

Updating Client Information

• Failure to update client information on a timely basis may result in the execution of unsuitable transactions or regulatory issues
  • If a client moves to a new state, both the firm and the RR must be registered in that state in order to continue conducting business with the client
  • Changes in the financial background of a client (for better or worse) must be documented
    • A different pattern of transactions may indicate a change
  • Objectives are typically adjusted as customers age
• FINRA rules require firms to send a copy of updated changes to a customer within 30 days or at the time the next statement is mailed

Suitability

• The basics of suitability
  • Suitability is based on the client’s profile when an account is opened
    • Applies to recommended transactions and investment strategy
    • Suitability is not determined by gains and losses
    • RRs may not place their own interests ahead of the client’s, such as:
      • Recommending one product over another to generate a larger commission
• Institutional suitability
  • The extent of the obligations are based on:
    • Those servicing the account having a reasonable belief that the client is capable of evaluating investment risks
    • The institutional client affirmatively stating that it is exercising independent judgment 

FINRA’s Suitability Rules

• Under FINRA’s three main suitability obligations, a member firm and its registered representatives must have a reasonable basis to believe that:
• The Reasonable Basis Obligation
  • A recommendation is suitable for at least some investors
• The Customer-Specific Obligation
  • A recommendation is suitable for a particular customer based on the customer’s investment profile (this provision does not apply to institutional customers) 
• The Quantitative Obligation
  • A series of recommended transactions, even if suitable for a customer, are not excessive when the customer’s investment profile is taken into consideration

Match the information to the FINRA rule

• Required
  • Name and address
  • Signature of principal
  • Whether client is of legal age
• Reasonable effort
  • Social security number
  • Name and address of employer 

USA Patriot Act

• Customer Identification Program (CIP)
  • B/Ds must verify the identity of each customer within reasonable period of time from the account opening
  • Why?
    • Terrorism and or money-laundering concerns
• Three stages of money laundering
• Placement
  • Illegal cash is placed in the broker-dealer’s business
• Layering
  • A series of transactions are executed which are meant to avoid detection (e.g., structuring)
• Integration
  • Proceeds from the previous transactions are put back into the stream of commerce)

FinCEN’s Reports

• Under the Bank Secrecy Act (BSA), certain reports are sent to the Financial Crimes Enforcement Network (FinCEN), which is a bureau of the US Department of Treasury
• Bank Secrecy Act Transaction Report (BCTR)
  • Filed for all cash transactions executed by a single customer during one business day that exceed $10,000 (also filed for structured transactions)
  • Filed within 15 calendar days 
• Suspicious Activity Report (SAR)
  • Filed whenever a transaction (or group of transactions) equals or exceeds $5,000 and the firm is suspicious
  • Filed within 30 calendar days
  • Suspicious activity should also be reported to a principal 
• A violation would result in a 20-year prison term and the greater of a $500,000 fine per transaction or twice the amount of the funds involved

AML Compliance Program

• A member firm must establish an AML program to detect money laundering schemes and suspicious transactions
  • Program requirements include:
    • Appointing an AML compliance officer
      • AML officer must be identified to FINRA and be knowledgeable about the Bank Secrecy Act (BSA)
    • Creating written procedures, including training for personnel
    • An independent audit function to test the program’s effectiveness
    • However, there’s NO requirement to file reports with a regulator

Customer Identification Program

• Required Identifying Information
  • Name
  • Legal address (residence or business)
  • Date of birth
  • Identification number (which may be different for US persons compared to non-us persons)
• Identification Number for US Persons
  • Taxpayer ID or Social Security Number
• Identification Number for Non-US Persons
  • One or more of the following:
    • Taxpayer ID
    • Passport number
    • Alien ID Card Number (green card)
    • Any other government-issued document establishing residence and identity
• Office of Foreign Assets Control (OFAC)
  • An OFAC list is maintained to identify the names of terrorists and/or criminals
  • If a client’s name appears on the OFAC List, transactions are blocked and law enforcement is notified
  • Also known as the Specially Designated Nationals or SDN list

Protecting Client Information

• Privacy
  • Firms may not disclose client information unless:
    • Ordered by a court or government entity or
    • Client provides written permission
      • A person does not have the right to know the content of his spouse’s account 
  • Regulation SP
    • Created rules for protecting the privacy of clients’ confidential information
    • Clients provided with “privacy notice” at the opening of account and annually thereafter
    • Requires disclosure of information that’s shared and with whom its shared
    • Requires a reasonable “opt-out” provision 

Identity Theft Prevention

• Federal Trade Commission’s (FTC) Red Flag Rules
  • Financial institutions must create and implement policies and procedures to detect and address identity theft
  • Intent is to protect the client’s assets 
• Use of Stockholder Information for Solicitation
  • Firms are prohibited from using client information for solicitation purpose
  • Permitted if specifically directed to do so and it is for the benefit of the corporation

Customer Statements and the Holding of Mail

• Account statements
  • Sent by broker-dealers at least quarterly
  • For active accounts, sent monthly
• Holding customer mail
  • Firm must receive written customer instructions
  • Instructions must include the time period during which the mail will be held
    • If the requested time exceeds three consecutive months, customer instructions must include a valid reason
  • Whether the customer’s instructions still apply must be verified at reasonable intervals 

Trade Confirmations

• Sent on, or before, settlement of the transaction
• Confirmation Information

Definitions of Communications

• Correspondence
  • Written or electronic communication that a member firm distributes or makes available to 25 or fewer retail investors (prospective or existing) within any 30-calendar-day period
  • Subject to review and supervision
• Retail Communication
  • Written or electronic communication that a member firm distributes or makes available to more than 25 retail investors within any 30-calendar-day period
  • Often subject to pre approval and filing
• Institutional Communication
  • Written or electronic communication that a member firm distributes or makes available only to institutional investors (NOT to any retail investors)
  • Subject to review and supervision 

Fill in the blank

• Regulation SP Establishes rules to protect the privacy of client’s confidential information
• A privacy notice must be provided to clients when opening the account and annually thereafter
• The FTC’s Red Flags Rule requires financial institutions to create policies to detect identity theft
• Account statements are sent quarterly for inactive accounts, but monthly for active accounts
• Customer mail can be held for three months at the broker-dealer
• Trade confirmations Must be sent on, or before, settlement of a transaction
• Correspondence is communication that’s distributed to 25 or fewer retail investors within a 30-calendar-day period
• Retail communications are sent to more than 25 retail investors within a 30-calendar-period

Telephone consumer Protection Act (This is usually for cold calling)

• Telemarketing calls may be made on any day, but only from 8am to 9pm local time of the person being called (residential only)
• Exclusions
  • The time-of-day restrictions doesn’t apply if the person:
    • Has made any unsolicited inquiry of the firm
    • Has engaged in a transaction with the firm within 18 months 
• Information provided
  • The caller must provide:
    • Both his name and his employing firm’s name
    • The firm’s phone number or address
    • The purpose for the call
• Do-Not-Call List
  • If requested, a client must be placed on the firm’s “Do Not Call List” within 30 days and will remain there indefinitely
    • Before placing a call, a firm must review the FTC’s National Do-Not-Call Registry 
• Transmitting unsolicited advertisements to fax machines is prohibited 

Customer Protection Rule

• On a daily basis, broker-dealers are required to obtain and maintain physical possession or control of all fully paid and excess margin securities belonging to customers
• Control
  • Good control locations include an SEC-approved depository (domestic or foreign) such as the DTC or in-transit between the offices of a broker-dealer
• Excess Margin Securities
  • The value of margined securities that exceeds 140% of a customer’s debit balance 
• Customer
  • Any person or whom the B/Ds holds funds or security or any omnibus account that is maintained by a B/D on behalf of its customers
  • Excludes B/Ds, general partners, directors, principal officers, or subordinated lenders

Customer Free Credit Balances

• A free credit balance represents customer proceeds resulting from sales, dividends, or interest payments that have not been withdrawn or invested
  • A statement must be sent to customers at least quarterly
  • The statement must indicate the total amount due and that it’s payable on demand
  • If statement are sent more frequently than quarterly, a notice of free credit balance must be included

Fidelity Bond

• Broker-dealers must obtain a fidelity bond as insurance coverage against losses as a result of
  • Fraudulent trading, loss of securities, or forgery
  • NOT errors and omissions or B/D bankruptcy
• If the bond is substantially modified, terminated or canceled, FINRA must be notified immediately 

Business Continuity Plan (BCP)

• A written plan identifying procedures to be followed due to an emergency or significant business disruption must be made available to FINRA promptly on request

Retention of Books and Records

• Lifetime
  • Corporate and partnership documents
• Six Years
  • Blotters (records of original entry), ledgers, new account forms, account statements, powers of attorney, municipal complaints*
  • FINRA requires complaints to be maintained for four years
• Three Years
  • Order tickets, confirmations, Forms U4 and U5, employee records,all forms of communication, trial balances 
• All records must be maintained in an easily accessible place for the first two years