Chapter 11: Individual Customer Accounts

Section 1: Customer Accounts for Individuals

Before opening a new account, a registered representative (RR) is required to gather and record a significant amount of information. This information serves three purposes: establishing the customer's identity, determining suitability for future recommendations, and fulfilling anti-money laundering requirements.

Topic 1: The New Account Form

Required Information

Reasonable Efforts for Non-Mutual Fund Accounts

If the account is for an individual who isn't simply purchasing unsolicited mutual funds, the broker must make reasonable efforts to obtain the following information before the settlement of the first transaction:

• Social Security number or tax identification number (this must be provided to verify identity)
• Occupation of customer and address of employer
• Whether the customer is employed by a bank or broker-dealer
• Whether the customer is an officer or director of a publicly held company
• Citizenship
• Whether it's a cash or margin account
• Third-party authorization (if any)

Suitability Information

Copy of the New Account Form

Timing matters. A copy of the new account form must be sent to the customer:

• Within 30 days of opening the account
• At least every 3 years thereafter, to verify and update the customer's information
• Within 30 days of any updates

Customer records must be maintained for at least 6 years after the information was last updated and for at least 6 years after the account is closed.

The Predispute Arbitration Agreement

Here's the key distinction: it is not mandatory that a customer sign an arbitration agreement. No FINRA or SEC rule requires it. However, virtually every firm requires one as a condition of opening the account. In practice, if you want to open the account, you're signing the agreement.

Most new account forms contain a predispute arbitration agreement, in which the customer agrees to resolve disputes with the firm or its associated persons through arbitration rather than litigation.

Predispute Arbitration Agreement Disclosures

Topic 2: Customer Identification and Verification

The USA PATRIOT Act

The USA PATRIOT Act requires member firms to independently verify a customer's identity using four pieces of information:

1. Name
2. Address
3. Date of birth
4. Social Security number or tax ID number

Verification can be done with a government-issued photo ID:

• A current driver's license
• A passport
• An alien registration card
• A green card
• Another government-issued identification

Verification must be completed within a reasonable amount of time after the account is opened.

Customer Identification Program (CIP)

Beyond verifying identity, firms must also check whether the customer appears on a known or suspected terrorist list. Specifically, they must screen against the Specially Designated Nationals and Blocked Persons (SDN) list, maintained by the Office of Foreign Asset Control (OFAC).

These rules exist to detect and deter money laundering and the funding of terrorist organizations. Records relating to identification verification must be kept for at least 5 years.

Know Your Customer (KYC)

The Know Your Customer (KYC) rule requires broker-dealers to use "reasonable diligence" in collecting and maintaining essential information on their customers. The rule requires firms to check:

• Customers' identities
• Investment histories
• Investment objectives
• Sources of funds

This information serves two purposes: ensuring customers aren't engaging in money laundering, and making suitable recommendations.

What if the customer doesn't provide everything? The account may still be opened if the firm collects certain essential facts necessary to:

• Effectively service a customer's account
• Carry out special handling instructions for the account
• Understand who has trading authority on the account
• Comply with securities laws, regulations, and rules

When information is missing, a supervisor must be informed. Inquiries should be made and documented as to why the missing information wasn't provided. The supervisor must ensure that no missing information constitutes an essential fact.

KYC Updates

The KYC rule requires firms to make regular contact with customers to check if investment objectives or essential facts have changed. While the SEC requires broker-dealers to update suitability information at least every 3 years, the KYC obligation may require more frequent updates depending on the circumstances.

Anti-Money Laundering (AML) Requirements

The Three Phases of Money Laundering

Think of it as: get the cash in (placement), move it around until nobody can follow the trail (layering), then pull it back out looking legitimate (integration).

Currency Transaction Reports (CTRs)

The BSA requires financial institutions to report currency transactions—deposits or withdrawals of cash—that exceed $10,000. When this threshold is crossed, the institution must file a Currency Transaction Report (CTR) with FinCEN (the Financial Crimes Enforcement Network) within 15 days.

Structuring

Structuring is the practice of making a series of smaller deposits or withdrawals to avoid triggering the $10,000 CTR threshold. It's illegal, and firms are trained to spot it.

If the $10,000 limit is exceeded AND the firm suspects illegal activity, both an SAR and a CTR must be filed.

Suspicious Activity Reports (SARs)

The BSA requires broker-dealers to file Suspicious Activity Reports (SARs) with FinCEN—part of the U.S. Department of the Treasury—which serves as the central collection point for these reports.

Key SAR facts:

• If potential money laundering or BSA violations are detected or suspected, for any dollar amount, a report must be filed within 30 days
• Beginning 1/1/2026, firms must notify FinCEN regarding the Beneficial Ownership Information (BOI) of each account held by the firm in street name

Monetary Instrument Log (MIL)

Broker-dealers must record cash purchases of negotiable instruments—personal checks, money orders, travelers' checks—between $3,000 and $10,000 in an internal log called a Monetary Instrument Log (MIL).

The Firm's AML Program

Numbered Accounts

Customers are permitted to open a numbered account, using a number or symbol instead of their name so they can remain anonymous when placing trades. But anonymity from other traders doesn't mean anonymity from the firm—the customer's identity must still appear on the new account form, and the owner must sign the form. This document is kept on file at the broker-dealer.

Customers may also open multiple individual accounts at a single broker-dealer, but they must sign a statement affirming that the accounts are not held for any other individual.

Topic 3: Regulation S-P (Privacy of Customer Information)

The Privacy Framework

Regulation S-P (Reg S-P) limits the ability of broker-dealers, investment companies, and investment advisers to disclose personally identifiable information (PII) about their customers to nonaffiliated third parties.

Privacy Notice Requirements

Firms must provide customers with a notice describing their privacy policies and procedures:

• When the account is opened, and annually thereafter
• The notice must describe the type of information collected, how it will be used, and the categories of entities with whom it will be shared

Consumers vs. Customers

Both consumers and customers must be given adequate notice and the opportunity to opt out of sharing personal information with third parties.

Written Safeguarding Plan

Reg S-P requires firms to maintain a written plan for safeguarding customer information. The plan must be designed to:

• Ensure the security and confidentiality of customer records and information
• Protect against anticipated threats or hazards to customer records
• Protect against unauthorized access to or use of customer records
• Properly dispose of personal information and protect against unauthorized access to disposed information

Firms must also conduct periodic reviews to detect potential problems in their databases.

Topic 4: Trading Authorizations and Discretionary Accounts

Account Ownership

An individual account has only one owner. A representative may not give account information to anyone else—including the account owner's spouse. The owner is the only person who can trade in the account unless trading authorization has been explicitly granted.

Three Types of Trading Authorization

The AAA Rule: When You Don't Have Discretion

In most cases, discretionary authority is NOT required to exercise discretion over time and price. This means the broker-dealer may wait for the best time or price at which to execute a customer order, as long as it is executed on the same day the customer places it.

Discretionary Accounts

Discretionary authority must be given in writing before the account can be opened. A discretionary account typically requires the customer to grant their representative a power of attorney (POA). In most cases, the POA grants limited trading authorization (to trade), not full authorization (to make withdrawals).

Churning in Discretionary Accounts

Churning is the entering of excessive, often unsuitable transactions to generate commissions for the representative. It's a major concern in discretionary accounts because the representative has the power to trade without asking permission each time.

To guard against churning:

• A principal must approve all discretionary accounts before they are opened
• A principal must promptly approve all discretionary orders in writing
• A principal must review all discretionary accounts at frequent intervals

Topic 5: Accounts for Employees of Other Firms and FINRA Employees

Accounts for Employees of Other Member Firms

This rule applies broadly:

• All employees of broker-dealers who open accounts at other member firms
• Employees who open accounts at non-member financial institutions such as banks, trust companies, and investment advisers

Related and Other Persons

The rule extends beyond just the employee. It also applies to accounts held by:

• The spouse of the associated person
• A child who lives in the same household or is financially dependent upon the associated person
• Any other related individual over whose account the associated person has control
• Any other individual the associated person controls and provides financial support to

All such accounts must be disclosed to the representative's employing broker-dealer.

Exception: The rule does not apply to accounts limited to investment company securities or municipal fund securities (such as 529 plans).

Restrictions on FINRA Employees

FINRA has specific rules for its own employees who want brokerage accounts:

• Cannot have a debt or equity interest in broker-dealers, or companies with broker-dealer subsidiaries that contribute 10% or more of the parent's revenue
• Cannot take options positions on these firms
• Cannot purchase stock in an IPO
• Must disclose to FINRA all brokerage accounts they own or control
• Must authorize their broker-dealer to send duplicate statements to FINRA

(You can appreciate the irony: the regulators regulate themselves more strictly than they regulate anyone else. At least on paper.)

Section 2: Suitability and Account Maintenance

One of the primary reasons for collecting all that new account information is to ensure that future recommendations will be suitable for a particular customer. All regulators—FINRA, the MSRB, and the SEC—have established suitability standards. And as with all regulations, the SEC has the final say. Regulation Best Interest (Reg BI) is the ultimate standard for client suitability.

Topic 1: FINRA and MSRB Suitability Requirements

Suitability Information Collection

FINRA requires firms to evaluate whether each recommendation is suitable for the customer. This means collecting information on:

• Customer's age
• Time horizon (length of investment time)
• Liquidity needs
• Risk tolerance
• Tax status
• Current and future financial needs
• Investment experience

A suitability questionnaire should be provided at account opening and kept in the customer's file. Firms must make reasonable efforts to collect and maintain this information. The questionnaire should be revisited and updated frequently—at least every 36 months.

Three Components of Suitability

A suitability analysis must be conducted before a representative can make any recommendations. However, a representative may accept unsolicited orders from a customer who has not provided suitability information.

Institutional Customers Exception

Broker-dealers are not subject to the same strict suitability rules for institutional customers. An institutional customer is:

• A bank, savings and loan association, or insurance company
• A registered investment company
• A registered investment adviser
• An individual with total assets of at least $50 million

If the firm believes an institutional customer can evaluate risk independently, and the customer has stated that it is acting independently, the broker-dealer has met its suitability requirements.

Municipal Securities Suitability (MSRB)

The MSRB suitability rule mirrors FINRA's and the SEC's, with a few additions:

• Firms must determine tax status by asking the customer for their tax bracket and state of residence
• If a customer refuses to disclose their financial status, no recommendations can be made (but unsolicited trades can still be accepted)
• If the representative believes an unsolicited trade is unsuitable, the customer must be informed. If the customer insists, the unsolicited order can then be entered

Suitability by Type of Investor

Topic 2: Regulation Best Interest (Reg BI)

Overview

The SEC's Regulation Best Interest (Reg BI) provides standards that exceed traditional suitability requirements. Reg BI requires broker-dealers and their associated persons to act in their retail customers' best interest. The firm cannot place its own financial interests ahead of its customers'. Firms must also identify, eliminate, or disclose and mitigate any conflicts of interest between the firm and its retail customers.

Retail Customer Definition

A customer is considered a retail customer under Reg BI if all of the following are true:

• The customer is a natural person (not a corporation) or a natural person's legal representative (such as a trustee or executor)
• The customer receives a recommendation from a broker-dealer about securities or an investment strategy involving securities
• The customer uses the recommendation primarily for personal investing (or that of their family or household)

What Counts as a "Recommendation" Under Reg BI?

Reg BI applies broadly to recommendations made across all account types—margin accounts, retirement accounts, and education savings accounts.

Recommendations covered include:

• What type of account to open (e.g., traditional IRA vs. Roth IRA)
• Rollovers or transfers from one account to another
• Any call to action—statements that suggest a specific course of action

What is NOT a recommendation:

• Simply discussing investment options
• Providing general information (such as annual contribution limits for retirement accounts)

The Four Obligations of Reg BI

1. The Disclosure Obligation

Before or at the time of making a recommendation, firms must provide full and fair written disclosure of the following material facts:

• That the firm is acting in a broker-dealer capacity
• Material fees and costs
• Type and scope of services provided
• Any material limitations on the securities or strategies that may be recommended
• All material facts relating to conflicts of interest associated with a recommendation (e.g., proprietary products, third-party payments, compensation arrangements)

2. The Care Obligation

The SEC defines three components of the care obligation that closely mirror FINRA's suitability framework:

• Reasonable-basis: The firm must understand the potential risks, rewards, and costs associated with a recommendation
• Customer-specific: The firm must consider risks, rewards, and costs in the context of the customer's investment profile. Recommendations must be in the customer's best interest and cannot prioritize the firm's interests. Reasonable alternatives should be considered
• Quantitative: The firm cannot recommend a series of transactions that are excessive—even if each transaction is individually sound. A representative may not recommend multiple transactions simply to earn higher fees

3. The Conflict-of-Interest Obligation

Broker-dealers must establish, maintain, and enforce procedures to address conflicts of interest:

• Identify and mitigate conflicts that might create incentives to put the firm's interests ahead of the customer's
• Identify and disclose material limitations on offerings (e.g., only offering proprietary funds) and prevent those limitations from disadvantaging customers
• Identify and eliminate sales contests, sales quotas, bonuses, and noncash compensation based on the sale of specific securities (e.g., a sales contest for mutual funds from a particular company)

4. The Compliance Obligation

Reg BI requires broker-dealers to establish, maintain, and enforce written policies and procedures designed to achieve compliance with Reg BI.

Keep in mind the key distinction: these standards apply to broker-dealers. Registered investment advisers are already held to a fiduciary standard that requires them to always act in their customers' best interest.

Form CRS (Customer Relationship Summary)

Broker-dealers and investment advisers must deliver a summary of their relationship with a customer via Form CRS, the Customer Relationship Summary.

Form CRS must contain information about:

• The relationship and services (broker-dealer or investment adviser)
• Fees and costs
• Conflicts of interest
• Standards of conduct
• Disciplinary history of the firm and its professionals
• How a customer can obtain additional information (e.g., via FINRA's BrokerCheck system)

Delivery timing for broker-dealers — Form CRS must be provided before or at the earliest of:

• A recommendation of an account type
• A securities transaction or investment strategy involving securities
• Placing an order for a retail investor
• The opening of a brokerage account for a retail investor

Additional Form CRS rules:

• Must be filed with FINRA through the FINRA Gateway
• Changes to Form CRS must be sent to existing customers within 60 days
• A current Form CRS must be provided to any customer upon request and posted prominently on the broker-dealer's website

Topic 3: Account Maintenance

Customer Order Verification

Trade Confirmations

Customers must be sent written confirmation of each transaction at or before settlement.

Errors in Confirmations

If a confirmation contains errors, the firm must send a corrected confirmation.

Errors in Execution

If a trade was incorrectly executed:

• The original trade is canceled and rebilled at the correct amount
• The customer receives two new confirmations: one canceling the erroneous trade, one documenting the correction
• The customer pays the actual execution price
• All trade cancellations or adjustments must be approved by a principal

Errors in Client Instructions

If the client gave incorrect instructions, the client is obligated to accept the trade. For example, if a customer wanted to buy 1,000 shares of ABA at market but told the firm to buy 1,000 shares of AAB at market, the customer must pay for the AAB shares. You said it, you own it.

Delivery Instructions

Most securities today are issued in book-entry form—an electronic record on the books of the broker-dealer or issuer. But some physical certificates still exist. When physical securities are involved, customers have four options:

Transfer and Ship — Securities are delivered to the customer's address of record.

Transfer and Hold — Securities are registered in the customer's name but held for safekeeping by the brokerage firm. The firm may charge a fee for this service.

Hold in Street Name — Securities are held in book-entry form and registered in the name of the brokerage firm. The broker-dealer is the owner of record; the investor is the beneficial owner, retaining all rights of ownership (dividends, voting rights) without being listed directly on the issuer's books.

Direct Registration — Securities are registered in the purchaser's own name without a physical certificate. The customer receives statements, dividends, annual reports, proxies, and other mailings directly from the issuer, bypassing the broker entirely.

Cash and Mailing Instructions

Customers must instruct their broker-dealer on how to handle income and sales proceeds:

• Interest payments and dividends may be delivered in cash or reinvested
• Sale proceeds may be delivered directly to the customer, placed in a money market account, or credited to the investor's cash balance until reinvested

Quarterly Statements

• Customers must receive quarterly statements showing all positions at their current market value
• No statement is required for a quarter with no balance or securities
• If the customer owns penny stocks, statements must be sent monthly
• Statements can be mailed or sent electronically at the customer's request
• Firms may charge for paper statements and confirmations, which is why many clients opt for electronic delivery
• A legend on account statements must direct customers to promptly report inaccuracies or discrepancies
• The phone number provided for reporting cannot be the representative's personal number

Holding Customer Mail

Customer mail must be sent to the address on the new account form or to a post office box designated by the customer. It cannot be directed to the registered representative's office.

Customers may request in writing that mail be sent to an investment adviser or any individual with power of attorney.

Accounts Are the Property of the Firm

If a registered representative leaves a broker-dealer for any reason, all accounts are considered the property of the firm. The broker-dealer will allocate the departing representative's accounts among existing representatives.

If a representative inherits an account from a retiring or departing representative, the account documents must be updated before making any transactions in the account.

Proxy Materials

When securities are held in street name, the firm—not the investor—is listed as the owner on the issuer's books. But the investor remains the beneficial owner, retaining all rights of ownership including dividends and voting rights.

A firm holding securities in street name must forward all issuer communications—annual reports, proxy statements, and other materials—to the beneficial owner or their investment adviser.

The SEC requires companies to send a proxy statement before every stockholders' meeting. Whenever an issuer delivers proxy materials to a firm and promises to reimburse out-of-pocket expenses, the member firm must promptly forward those materials to the beneficial owner.

Proxy statements provide information on upcoming votes, including:

• Election of individuals to the board of directors
• Election or ratification of the company's accountant
• Authorization of new securities issues
• Modification or exchange of securities
• Any other submitted shareholder resolutions

Topic 4: Senior Citizen Accounts

Senior Citizen Suitability

FINRA has stated that a customer's age and life stage are both important factors in determining suitability. As investors age, their investment time horizons, goals, risk tolerance, and tax status often change—and liquidity takes on added importance.

Typically Unsuitable Recommendations for Seniors

FINRA does not prohibit any particular recommendation to a senior citizen if it's genuinely suitable. However, certain types of recommendations raise red flags:

Senior Certifications

FINRA is concerned about representatives using bogus certifications to appear more credible when working with senior citizens.

Prohibited designations (these are not true professional designations):

• Certified Senior Adviser
• Certified Financial Gerontologist
• Senior Specialist
• Retirement Specialist

Permitted designations (independently conferred, requiring rigorous training):

• Certified Financial Planner (CFP)
• Certified Public Accountant (CPA)

Trusted Contact Person

FINRA requires members to make reasonable efforts to obtain the name and contact information of a trusted contact person when opening an account. The member must disclose in writing that the firm may contact the trusted contact person to:

• Disclose information about the client's account to address possible financial exploitation
• Confirm the specifics of the client's current contact information or health status
• Obtain the identity of any legal guardian, executor, trustee, or holder of a power of attorney

Diminished Mental Capacity

Firms must train employees to identify diminished mental capacity. FINRA requires an internal process that allows representatives to seek guidance from others on what steps to take.

Financial Exploitation of Specified Adults

FINRA allows firms to place temporary holds on disbursements from client accounts when fraud is suspected. The investors FINRA considers particularly susceptible to financial exploitation are:

• Individuals aged 65 or older
• Individuals aged 18 or older with a mental or physical impairment that makes them unable to protect their interests

FINRA refers to these individuals as specified adults.

The Hold Timeline

If a hold is placed, the member must:

• Document the reason for the hold
• Notify the trusted contact person, UNLESS the trusted contact is suspected of being involved in the exploitation (in which case, do NOT notify them)

Topic 5: Transferring and Closing Accounts

Internal Transfers

If a customer wants their account transferred to another broker at the same firm, the branch manager must approve the transfer. No new account form is required.

External Account Transfers (ACATS)

When a customer wants to transfer to a different firm, the process begins with a Transfer Initiation Form (TIF), provided by the firm that will receive the assets—the receiving firm.

Reasons a Carrying Firm May Reject a Transfer

The carrying firm isn't required to accept every transfer request. Common reasons for taking exception include:

• The account contains no transferable assets
• Transfer instructions are incorrect
• The transfer would violate the firm's credit policy
• The receiving firm cannot identify the customer as the record owner of the assets
• The Social Security or tax ID number or account title doesn't match
• Authorization for the transfer is missing or incomplete
• The customer has already taken possession of the assets (or they're in transit)

However, FINRA prohibits broker-dealers from interfering with a customer's account transfer simply because they don't want to lose the client.

Educational Brochure When Soliciting Account Transfers

FINRA Rule 2273 addresses situations where a representative moves to a new firm and solicits former customers to follow them.

If such a solicitation is made, an educational brochure must be provided:

• With any written solicitation, or
• Within 3 business days if the solicitation is oral

The brochure must be delivered within a 3-month window following the representative's association with the new firm. The rule also applies if a former customer seeks to transfer assets without being individually contacted—in that case, the customer must receive the brochure with the approved account transfer documentation.

Death of a Customer

The executor of the customer's estate will typically transfer assets to an estate account. No changes can be made until proper legal documents are provided:

• Letters testamentary (court-issued documents verifying the executor's identity)
• Inheritance tax waivers (required in some states)
• A certified copy of the death certificate
• An affidavit of domicile

Estate Accounts

Estate accounts are a type of trust whose purpose is to safeguard a deceased person's assets pending probate. A designated executor creates this temporary account to hold assets while settling the estate.

To open an estate account, the executor needs:

• A taxpayer ID number in the estate's name (obtained from the IRS)
• A copy of the deceased's death certificate
• A list of bank accounts held by the deceased
• Proof of the executor's legal status

The firm may also be asked to value the securities in the account—the market value of all securities should be determined as of the date of death.

How different account types handle death:

• In a joint tenants in common (JTIC or TIC) account, the executor legally transfers the deceased's proportional share of assets into the estate account
• In a joint tenants with right of survivorship (JTWROS) account, the assets transfer to the surviving owner(s) without going through probate
• Upon the death of a child, assets in a Uniform Gifts to Minors Act (UGMA) account are NOT transferred to the parents—they become part of the child's estate

Transfer on Death (TOD) Accounts

Most states allow account holders to name a beneficiary to inherit securities without going through probate court. Customers register the securities with the broker using a transfer on death (TOD) designation form, naming one or more individuals to receive the securities upon their death.

TOD beneficiaries typically need only:

• A certified copy of the death certificate
• Proof of identity

Key Terms Glossary

Every recommendation you'll ever make, every trade you'll ever execute, and every dispute you'll ever face traces back to how the account was opened. The new account form isn't just paperwork—it's the legal foundation that determines what's suitable, what's authorized, and who's responsible when things go wrong.

Chapter Summary