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 (Rule 144 affiliates), 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 Section 311 of the USA PATRIOT Act

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 under SEC Rule 144?

Who Is an Affiliate

A corporate insider (affiliate) for SEC Rule 144 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

Insiders selling the company's stock must comply with SEC Rule 144 on resales of restricted or control securities. Key mechanics:

• Volume limits: Greater of 1% of shares outstanding or the average weekly trading volume over the preceding 4 weeks (per 90-day rolling period)
• Manner of sale: Unsolicited broker transactions or to a market maker
• Current public information: Issuer must be current on periodic SEC filings
• Form 144 filing: Required if the sale exceeds 5,000 shares or $50,000 within any 3-month period

Section 16 Reporting

Insiders are also subject to SEC Section 16 (Securities Exchange Act of 1934):

• Form 3: Initial statement of beneficial ownership at the time the person becomes an insider
• Form 4: Filed within 2 business days of any change in beneficial ownership
• Form 5: Annual catch-up for transactions not otherwise reported
• Short-swing profit rule: Any profit from a purchase and sale (or sale and purchase) within 6 months must be disgorged to the company

Exam Tip: Gotchas

• "Corporate insider" on the Series 6 is tested around Rule 144 affiliate resale mechanics and Section 16 reporting, not general ethics. Flag insiders at account opening so the firm can apply the Rule 144 process when they sell restricted or control stock.

What does FINRA Rule 3210 require for BD or SRO employees opening outside accounts?

Rule 3210 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"

Rule 3210 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

• Rule 3210 duplicate statements 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 Rule 3210 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.
• Rule 144 thresholds: 5,000 shares or $50,000 in 3 months triggers Form 144.
• Section 16 insiders disgorge any profits from matched purchases and sales within 6 months.
• Rule 3210 consent is automatic from the associated person. Duplicate confirmations are on request.