Screening: Citizenship, Insiders, and Industry Employees

CIP catches identity; it does not catch special status. Three categories of customer require additional screening at account opening: non-U.S. persons, corporate insiders (affiliates subject to restricted-and-control-stock resale limits), and employees of broker-dealers or self-regulatory organizations (SROs). Each category triggers its own paperwork and its own ongoing obligations.

How does a firm screen for domestic or foreign residency and citizenship?

U.S. Persons

• Must provide a Taxpayer Identification Number (TIN): Social Security Number (SSN) for individuals, Employer Identification Number (EIN) for entities
• TIN is used for CIP and for IRS tax-reporting on Form 1099

Non-Resident Aliens (NRAs) and Non-U.S. Persons

Acceptable identification in lieu of a TIN:

• Passport number and country of issuance
• Alien identification card number
• Any other government-issued photo ID that establishes nationality or residence

Enhanced Due Diligence

Firms apply enhanced due diligence for non-U.S. accounts, especially accounts connected to:

• Financial Action Task Force (FATF)-listed jurisdictions (countries flagged for weak AML controls)
• Jurisdictions subject to FinCEN special measures under the USA PATRIOT Act special-measures provision

U.S. Withholding on NRA Accounts

• NRA accounts are subject to U.S. withholding on certain types of U.S.-source income
• Default rate is generally 30% unless reduced by a tax treaty
• Customer claims treaty benefits by filing Form W-8BEN with the broker-dealer (BD)

OFAC Sanctions Screening

• The BD may not open an account for, or maintain an account for, a person on the Specially Designated Nationals (SDN) list administered by the Office of Foreign Assets Control (OFAC)
• OFAC screening is continuous, not just at account opening

Exam Tip: Gotchas

• An NRA who does not file Form W-8BEN is treated at the full 30% withholding rate on U.S.-source dividends and interest. The customer, not the BD, is responsible for claiming treaty benefits.

What screening applies to corporate insiders subject to the restricted-and-control-stock resale rule?

Who Is an Affiliate

A corporate insider (affiliate) for restricted-and-control-stock resale purposes is a person who directly or indirectly controls, is controlled by, or is under common control with the issuer. In practice:

• Directors
• Executive officers
• 10%-or-greater shareholders

Why the Firm Flags Insider Status at Account Opening

An affiliate's restricted or control stock cannot be freely resold like ordinary shares: its resale is subject to restrictions and to the firm's resale procedures. By flagging insider status at account opening, the firm can:

• Apply its restricted- and control-stock resale procedures when the customer sells those shares
• Route any such sale through compliance, rather than treating the shares as freely tradable

The registered representative's job is to recognize and flag the affiliate at opening and route restricted- or control-stock sales to the firm's procedures. The representative does not determine the resale conditions or handle any insider reporting personally.

Exam Tip: Gotchas

• "Corporate insider" on the Series 6 is tested as a customer-screening category: recognize an affiliate (director, executive officer, or 10%-or-greater shareholder) at account opening and flag the account so the firm applies its restricted- and control-stock resale procedures when the insider sells. It is not tested around resale math or insider-reporting mechanics.

What does the outside-account rule require for BD or SRO employees opening outside accounts?

The outside-account rule governs what happens when a person associated with one member firm wants to open a securities account at another member firm or financial institution.

The Associated Person's Obligations

Before opening the outside account, the associated person (the "employee") must:

• Obtain prior written consent of the employer member (the firm that employs them)
• Notify the executing member (the firm where the outside account is being opened) in writing of the association with the employer member

The Executing Member's Obligation

Upon written request from the employer member, the executing member must transmit:

• Duplicate copies of confirmations and statements, or the underlying transactional data, to the employer member

Accounts Opened Before Association

• If the account existed before the person became associated with the employer member, the associated person has 30 calendar days after the association begins to obtain the employer's written consent and to notify the executing firm

Scope of "Accounts"

The outside-account rule reaches any account in which the associated person has a beneficial interest or over which the associated person has discretion or authority. That includes:

• The associated person's own accounts
• A spouse's account if the associated person has beneficial interest or discretion
• A dependent's account (for example, a minor child's custodial account under the associated person's control)

Exempt Accounts

Accounts limited to mutual funds, variable contracts, 529 plans, and similar packaged products held directly with the investment company are generally excluded from the duplicate-confirmation and duplicate-statement requirement (there are no trades in transferable securities on those accounts that would need confirmation).

Exam Tip: Gotchas

• Duplicate statements under the outside-account rule are sent only when the employer member makes a written request. It is not automatic. But the associated person's obligation to notify the executing firm (and to get the employer's written consent) is automatic.
• A spouse's account counts under the outside-account rule if the associated person has a beneficial interest or discretion. Moving the account into the spouse's name alone does not get around the rule.

What are the most tested customer screening rules for special-status customers?

Exam Tip: Gotchas

• NRA accounts need a passport number + country (or alien ID / photo ID), not an SSN.
• NRA accounts default to 30% withholding unless Form W-8BEN is on file.
• Corporate insiders (directors, executive officers, 10%-or-greater shareholders) are flagged at account opening so the firm applies its restricted- and control-stock resale procedures when they sell. The rep flags and routes; it does not handle resale math.
• Outside-account consent is automatic from the associated person. Duplicate confirmations are on request.