Know Your Customer (KYC) refers to the regulatory and ethical obligation for broker-dealers, investment advisers, and other financial institutions to collect, verify, and maintain accurate information about their clients before opening accounts or making recommendations.
Regulatory basis: - FINRA Rule 4512: Requires broker-dealers to maintain records of essential facts about each customer — the "Know Your Customer" rule. - FINRA Rule 2090: Requires B/Ds to use "reasonable diligence" to know and retain essential facts about every customer. - USA PATRIOT Act / Bank Secrecy Act: Customer Identification Program (CIP) rules require identity verification. - FINRA Rule 2111 (Suitability): Suitability analysis requires knowing the customer's investment profile.
Information to collect: - Name, address, date of birth. - Social Security or taxpayer ID number. - Employment status and occupation. - Annual income and net worth. - Investment objectives. - Risk tolerance. - Time horizon. - Prior investment experience.
KYC throughout the relationship: - Account opening: Gather initial information. - Ongoing: Update customer information when circumstances change; re-verify annually or upon material change.
KYC for legal entities: For business accounts, must also identify beneficial owners (individuals owning ≥25% of the entity) and one controlling manager under FinCEN's Customer Due Diligence (CDD) rule.
> Exam tip: KYC is the foundation for both suitability (is this recommendation right for this customer?) and AML (is this customer who they say they are?). Know FINRA Rule 4512 (record-keeping) and Rule 2090 (diligence). Heavily tested on the SIE and Series 7.