Customer ID, KYC and suitability information

Every new account starts by proving who you are

A new customer wants to open an account at a brokerage firm. Before anything else, the firm has to know who this person really is. That step is called the customer identification program, or CIP. CIP is the firm's process for proving who a customer is.

Think about opening a bank account. The bank asks your name and looks at your driver's license. A brokerage firm does the same thing. For a person, CIP asks for four facts. They're name, date of birth, address and an ID number. For a U.S. person, that's a taxpayer ID, like a Social Security number.

Then the firm checks that the facts are true. It might look at a driver's license or a passport. Collecting them isn't enough on its own. The exam likes to mix in facts like annual income or risk tolerance. Those are on the account form too. But they don't prove who you are, so they aren't CIP.

CIP proves who a customer is, with four facts. Name, date of birth, address and ID number.

Know your customer starts on day one, for every account

Proving who a customer is comes first. But the firm also has to understand the person it's serving, and keep up with them. That duty is called know your customer, FINRA Rule 2090. FINRA is the group that writes the rules for brokerage firms. Know your customer means the firm uses reasonable care to learn the essential facts about each customer.

Say Maria opens an account. She tells the rep her son may call in orders for her. The firm needs to know if he's allowed to. That's an essential fact. Essential facts are the ones the firm needs to service the account and follow special instructions. They also tell it who has authority, and help it follow the rules.

The duty starts when the account opens. It covers every account, and it lasts as long as the account is open. A common mistake is thinking it waits until the rep recommends something. It starts on day one, recommendation or not. It isn't a yearly check, and it isn't only for margin or options accounts.

Know your customer means learning the essential facts about each customer. It covers every account, from day one.

A recommendation has to fit the investment profile

A rep wants to recommend an investment. First, the rep needs a picture of the customer's money and goals. That picture is the investment profile. The investment profile is the set of facts about a customer's money, goals and comfort with risk.

Think about a doctor. A doctor asks how you feel before writing a prescription. A rep asks first too. The profile covers age, other investments, finances, taxes, goals and experience. Time horizon is when you'll need the money. Liquidity needs is how fast you might need cash. Then there's risk tolerance.

For a retail customer, the rule is the SEC's Regulation Best Interest, or Reg BI. A retail customer is a person investing for personal, family or household purposes. Reg BI says the recommendation has to be in that customer's best interest. The rep weighs risks, rewards and costs against the profile.

For institutions, like banks and pension funds, FINRA's suitability rule, Rule 2111, applies instead. A common mistake is applying Reg BI to a bank or a pension fund. Reg BI protects retail customers, who are people.

The investment profile is the facts about a customer's money, goals and risk. Every recommendation has to fit it.

Worked example: sort four facts from a new-account form

1. Dev fills out a new-account form. Four facts stand out: date of birth, risk tolerance, taxpayer ID and time horizon. Which ones does CIP need?
2. Use one test on each fact. Does it prove who Dev is? If yes, it's CIP. If no, it's part of his investment profile.
3. Start with date of birth. It helps prove who Dev is, so it's CIP.
4. Risk tolerance is how much loss he can live with. It says nothing about who he is, so it goes in the profile.
5. His taxpayer ID is an identity number. It proves who he is, so it's CIP.
6. Time horizon is how long until he needs the money. That's for planning his investments, so it's profile.
7. CIP needs just four facts: name, date of birth, address and ID number. Anything about money, goals or risk is profile.

Common mistakes

identity facts vs profile facts

You mixed up an identity fact with a profile fact. CIP proves who a customer is with four facts: name, date of birth, address and ID number. Income, goals and risk tolerance belong to the investment profile. If a fact proves who they are, it's CIP.