Screening: Citizenship, Insiders, and Industry Employees

Customer identification program (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?

What Must a Firm Collect from 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

What Identification Do Non-Resident Aliens (NRAs) Provide?

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

When Must a Firm Apply 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 anti-money laundering (AML) controls)
• Jurisdictions subject to FinCEN special measures under the USA PATRIOT Act special-measures provision

What U.S. Withholding Applies to 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)

What Does OFAC Sanctions Screening Require?

• 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 Does the Firm Flag 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.

What Must the Associated Person Do?

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

What Must the Executing Member Do?

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

What Happens to 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

Which Accounts Does the Outside-Account Rule Reach?

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.

The rule presumes the associated person has a beneficial interest in, and established, an account held by:

• The associated person's spouse
• A child of the associated person or the spouse who lives in the same household or is financially dependent on the associated person
• Another related individual whose account the associated person controls
• Another individual whose account the associated person controls and to whose financial support the associated person materially contributes

For a spouse's or qualifying child's account only, the associated person may rebut the presumption by showing the employer member, to its reasonable satisfaction, both no economic benefit and no control. Showing only one of the two is not enough, and the last two categories above carry no rebuttal route at all.

Which Accounts Are Exempt from the Outside-Account Rule?

The rule's requirements do not apply at all to transactions in unit investment trusts, municipal fund securities, 529 plans, variable contracts, or redeemable securities of registered investment companies; to accounts limited to those transactions; or to monthly investment plan type accounts and Coverdell education savings accounts.

This exemption removes the whole rule for those accounts, not just the duplicate confirmations and statements. The prior written consent and the notification duty fall away too.

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. Rebutting the presumption takes both no economic benefit and no control.
• The packaged-product exemption switches off the entire rule, not just the duplicates. An account limited to mutual funds, variable contracts, or a 529 plan needs no prior written consent and no notification either. An answer choice that waives only the duplicates is naming the wrong scope.

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.

What Should You Check on Exam Day?

• Can you state that non-resident aliens provide a passport number and country (or alien ID), not a Social Security Number, for identification?
• Do you know NRA accounts default to 30% withholding on U.S.-source income unless the customer files Form W-8BEN?
• Can you name the three groups that count as corporate insiders: directors, executive officers, and 10%-or-greater shareholders?
• Do you know a registered representative's job with an insider is to flag and route the account, not to determine resale conditions?
• Can you explain that under the outside-account rule, the associated person's consent and notification duties are automatic, but duplicate statements go out only on written request?