Broker-Dealers: Why They Ask for Personal Information
Jan. 28, 2014
Brokers generally request personal information from their customers, including financial and tax identification information, to comply with U.S. government laws and rules, as well as rules imposed by self-regulatory organizations (SROs). Brokers request personal information from new customers as well as from customers who have had long-standing relationships with their firms.
Here are some of the reasons why brokers need to gather this information:
Under SRO rules, when a broker recommends that a customer buy or sell a particular security, the broker must have a reasonable basis for believing that the recommendation is suitable for that customer. In making this assessment, the broker must consider the customer’s risk tolerance, other security holdings, financial situation (income and net worth), financial needs, and investment objectives.
Information on FINRA’s suitability rule, along with links to other materials concerning suitability, may be found in the FINRA Manual.
SEC Rule 17a-3(17) requires that brokerage firms create a record for each account with an individual customer that includes the following information:
- Customer name
- Tax identification number (e.g., Social Security number)
- Telephone number
- Date of birth
- Driver's license, passport information or information from other government-issued identification
- Employment status and occupation
- Whether the customer is employed by a brokerage firm
- Annual income
- Net Worth
- Account investment objectives
Brokers must make a good faith effort to obtain this information. However, if the customer neglects or refuses to provide the information, or is unable to provide it, then the rule excuses the broker from obtaining it.
The SEC’s rule also requires a brokerage firm to periodically send this information (excluding the customer’s tax identification number and date of birth) to its customers to verify whether the information is accurate. Brokerage firms have some flexibility as to how they send this to the customer and may incorporate it into a customer’s account statement. Broker-dealers also are subject to SRO recordkeeping requirements, in part to ensure the firms have an up-to-date understanding of their customers’ financial situation and investment objectives.
ANTI-MONEY LAUNDERING/ANTI-TERRORIST FINANCING REQUIREMENTS
In addition, brokers must comply with a customer identification rule the SEC issued jointly with the Department of the Treasury to implement a provision of the USA Patriot Act of 2001. This rule requires brokers to put procedures in place to verify the identity of any person seeking to open an account to maintain records of the information used to verify the person's identity; and to determine whether the person appears on any lists of known or suspected terrorists or terrorist organizations provided to broker-dealers by any government agency. Under this rule, brokers are required to collect certain identifying information from customers opening new accounts including, at least, the following information:
- Customer name
- Identification number (or SSN for U.S. citizens)
- Date of birth
This requirement sets the minimum information brokers must obtain. Brokers may require that customers provide them with more information for purposes of this rule.