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Securities Compliance Sentinel Analysis of cutting-edge securities industry issues

Broker-Dealers Really Need To Know Their Clients Better

Posted in Broker-Dealer Regulation, Compliance and Supervision, FINRA Compliance, FINRA Enforcement, Registered Representatives, SEC Compliance, SEC Enforcement

Seemingly– according to FINRA– broker-dealers are failing in their due diligence efforts relating to knowing their clients, and, as required by FINRA Rule 2090.

Over the last year or so, the most FINRA rule has been FINRA’s know-your-customer rule or Rule 2090.  As many know, FINRA Rule 2090 was modeled after the old NYSE Rule 405(1), requiring broker-dealers to use reasonable diligence in opening and maintaining customer accounts.  Broker-dealers are required to “know the essential facts concerning every customer,” so that they may 

  • service the customers’ accounts;
  • make appropriate decisions regarding special handling for the account;
  • have appropriate authority from the customer; and
  • follow all applicable laws, regulations, and rules.

This Rule must be followed by the broker-dealer at the beginning, during and, if necessary, the end of every customer relationship regadless of the type of account.

FINRA has also developed suitablity rules for transactions found in FINRA Rule 2111.  These rules require the broker-dealer or registered representative to have a reasonable belief when recommending a transaction or investment strategy or associated person “have a reasonable basis to believe that a recommended transaction or investment strategy.  Initially, the security or securities must be suitable for the customer, and based upon the information obtained from the process outlined abobe.  FINRA believes that there will be many factors involved depending upon, among other things, complexity and risk and broker-dealer and registered representative familiarity and knowledge.  FINRA Rule 2111 also requires that the broker-dealer and registered representative know much about a customer’s investment profile, including, among other things, age; other investments; financial predicament and needs; tax status; investment objectives, experience, time horizon; liquidity requirements; tolerance for risk; as well as any other customer specific information disclosed to the broker-dealer and registered representative.  Finally, analysis of this information is critical to determine quantitative suitability if there is actual or assumed discretion over the customer’s account.

Essentially, broker-dealers and their registered representatives are now on notice that they must know their customers or risk violating FINRA’s rules.