Refusing, Restricting, or Closing Accounts

Not every customer relationship works out. Firms have both the right and, in some cases, the obligation to refuse, restrict, or close accounts. This section covers when and how that happens.

When Must a Firm Refuse or Restrict an Account?

A firm is not obligated to accept every potential customer. However, firms must refuse or restrict account activity when:

• The customer refuses to provide required identification or account information (Customer Identification Program/CIP failure)
• Suspicious activity is detected that may indicate money laundering, terrorist financing, or other illicit conduct (Bank Secrecy Act/AML obligations under the AML compliance program rule)
• The customer or beneficial owner appears on the OFAC Specially Designated Nationals (SDN) list; the firm must block the account and report to OFAC
• The account activity is unsuitable and the customer refuses to acknowledge the risks after disclosure

Exam Tip: Gotchas

• A firm can refuse to open an account for a customer who will not provide required CIP information; this is a regulatory requirement, not discrimination. However, a firm cannot refuse to open an account based on protected characteristics (race, gender, religion, national origin, etc.).
• OFAC SDN list matches require the account to be blocked AND reported, not just one or the other. Both actions are mandatory.

What Happens When Suspicious Activity Is Identified?

When suspicious activity is identified:

• The firm must file a Suspicious Activity Report (SAR) with FinCEN
• SAR filing is required when a transaction involves funds or assets of at least $5,000 and the firm knows, suspects, or has reason to suspect it involves illegal activity
• The firm must not inform the customer that a SAR has been filed; "tipping off" is prohibited
• Depending on the severity, the firm may freeze or close the account

Note: SAR confidentiality is absolute. No director, officer, employee, or agent of the firm may disclose a SAR or its existence to the person involved in the reported transaction.

Exam Tip: Gotchas

• Tipping off a customer about a SAR filing is prohibited; even if the customer asks directly, no one at the firm may confirm or deny a SAR exists.

What Can Trigger a Restriction Without Closing the Account?

A firm may restrict activity for several reasons:

What Are the Pattern-Day-Trading Details?

• A pattern day trader executes 4 or more day trades in 5 business days in a margin account (when day trades represent more than 6% of total trading activity)
• Must maintain at least $25,000 in equity at all times
• Falling below this threshold restricts the account to closing transactions only
• Funds deposited to meet the minimum must remain in the account for at least 2 business days

What Are the Free-Riding Details?

• Free-riding occurs when a customer buys securities in a cash account and sells them before paying for the purchase
• Regulation T requires a 90-day freeze on the account
• During the freeze, the customer may still trade but must fully pay for any purchase on the trade date (no credit)

Exam Tip: Gotchas

• Free-riding results in a 90-day freeze, not account closure. The customer can still trade during the freeze but must prepay.
• Pattern day traders need $25,000 in equity at ALL times, not just when placing trades. Falling below this threshold at any point triggers a restriction.
• Regulatory update: FINRA eliminated the pattern-day-trader designation, the $25,000 minimum equity, and the end-of-day day-trading buying-power test, replacing them with a real-time intraday margin standard. The pattern-day-trader framework described above is the version still reflected on the current exam outline, so it remains testable during the transition.

When Can a Firm Close an Account, and What Does It Owe the Customer?

A firm may close an account for legitimate business reasons, including:

• Repeated suspicious or potentially fraudulent activity
• Regulatory or legal requirements (OFAC sanctions, court orders)
• Customer's pattern of unsuitable activity despite warnings
• Business decision to exit a product line or customer segment

What Are the Requirements When Closing an Account?

• The firm must provide the customer with reasonable notice
• The firm must facilitate the orderly transfer of assets via ACATS (Automated Customer Account Transfer Service) under FINRA account-transfer requirements
• The carrying firm must validate or take exception to a transfer instruction within one business day of receiving it
• The transfer must be completed within three business days following validation

Exam Tip: Gotchas

The carrying firm may only take exception to a transfer for specific listed reasons (missing documentation, invalid account number, SSN/tax-ID mismatch, missing authorization, and similar defects). It may not take exception simply because it disagrees with a securities-position or money-balance figure, and "customer retention" is never a valid reason to delay a transfer.

What Should You Check on Exam Day?

• Can you separate the four situations that require a firm to refuse or restrict an account (CIP failure, suspicious activity, OFAC match, unacknowledged unsuitability) from the situations that only permit restriction (margin deficiency, missing documents, free-riding)?
• Do you know a SAR must be filed with FinCEN and that "tipping off" the customer is prohibited?
• Can you distinguish the free-riding 90-day freeze (customer can still trade but must prepay) from a pattern-day-trader restriction to closing transactions only?
• Do you know the ACATS timeline: validate or take exception within one business day, complete the transfer within three business days after validation?