Know Your Customer (KYC)
FINRA Rule 2090 establishes the "Know Your Customer" (KYC) requirement, which goes beyond basic identity verification to understand each customer's financial situation, investment needs, and authority to transact.
FINRA Rule 2090: Know Your Customer
"Every member shall use reasonable diligence, in regard to the opening and maintenance of every account, to know (and retain) the essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer."
Essential Facts Defined
"Essential facts" are those required to:
- Effectively service the customer's account
- Act in accordance with any special handling instructions
- Understand the authority of each person acting on behalf of the customer
- Comply with applicable laws, regulations, and rules
Customer Investment Profile
To fulfill KYC obligations, firms must gather information about:
| Factor | Why It Matters |
|---|---|
| Age | Time horizon, risk capacity, regulatory requirements |
| Annual Income | Ability to invest, risk capacity |
| Net Worth | Overall financial picture, risk capacity |
| Liquid Net Worth | Available investable assets |
| Tax Status | Tax-advantaged product suitability |
| Investment Objectives | Growth, income, capital preservation |
| Investment Experience | Understanding of risks and products |
| Time Horizon | How long until funds needed |
| Risk Tolerance | Comfort with market volatility |
| Liquidity Needs | Access to funds requirements |
Investment Objectives
Common investment objectives from conservative to aggressive:
| Objective | Description | Risk Level |
|---|---|---|
| Capital Preservation | Protect principal, minimal loss | Very Low |
| Income | Generate regular cash flow | Low |
| Growth & Income | Balance of appreciation and income | Moderate |
| Growth | Long-term capital appreciation | Moderate-High |
| Speculation | Aggressive growth, high risk | Very High |
Risk Tolerance Categories
| Category | Description |
|---|---|
| Conservative | Cannot tolerate significant loss, prefers stability |
| Moderate | Accepts some volatility for potential growth |
| Aggressive | Willing to accept significant volatility for higher returns |
KYC vs. Suitability
| KYC (Rule 2090) | Suitability (Rule 2111) |
|---|---|
| Know essential facts about customer | Make suitable recommendations |
| Required for ALL accounts | Required when making recommendations |
| Ongoing obligation | Triggered by each recommendation |
| Foundation for suitability | Built on KYC information |
Updating Customer Information
FINRA Requirement
Customer information must be updated at least every 36 months (3 years).
When to Update More Frequently
- Customer notifies firm of changes
- Life events (marriage, divorce, retirement, inheritance)
- Change in investment objectives
- Change in financial situation
- Account activity suggests changed circumstances
Authority to Act on Accounts
Persons Acting for Customers
KYC includes understanding who has authority to act:
| Person | Authority Level |
|---|---|
| Account Owner | Full authority |
| Power of Attorney | As specified in POA document |
| Trustee | As specified in trust document |
| Custodian | On behalf of minor beneficiary |
| Guardian | Court-appointed for incapacitated person |
| Executor/Administrator | For estate accounts |
Third-Party Trading Authorization
When someone other than the account owner can trade:
- Must be in writing
- Must specify scope of authority
- Firm must verify authority
- Subject to supervision
Special KYC Situations
Senior Investors
Heightened attention for elderly customers:
- Cognitive decline concerns
- Financial exploitation risks
- Trusted contact person (Rule 4512)
- May place temporary holds on disbursements
Institutional Customers
Different KYC requirements:
- May have more investment experience
- Rule 2111 allows firms to assume institutional investors can independently evaluate risks
Trusted Contact Person (Rule 4512)
Firms must make reasonable efforts to obtain:
- Name and contact information of a trusted contact person
- Authorization to contact this person about:
- Account activity concerns
- Possible financial exploitation
- Customer health status
- Identity of legal guardian/POA
Note: The trusted contact is NOT an authorized trader - they're a resource if concerns arise.
KYC Documentation
Firms should document:
- Customer information collected
- When information was gathered/updated
- Source of information
- How information was verified
- Any discrepancies and resolution
Key Exam Points
- Rule 2090 - Know essential facts about every customer
- Essential facts - Required to service account, understand authority, comply with laws
- Investment profile - Age, income, net worth, objectives, experience, time horizon, risk tolerance
- Update requirement - At least every 36 months
- Authority - Understand who can act on behalf of customer
- Trusted contact - Rule 4512 requires effort to obtain
- Foundation for suitability - KYC information used to make suitable recommendations
According to FINRA Rule 2090, how often must customer information be updated at a minimum?
Which of the following is NOT typically part of a customer's investment profile under KYC requirements?
Under FINRA Rule 4512, what is the purpose of obtaining a trusted contact person?
4.6 Account Documentation and Disclosures
Continue learning