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 applicant refuses to provide identifying information required before account opening, such as their name (Customer Identification Program/CIP failure); the firm must decline the application
• 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.

How Does Missing CIP Information Differ from Pending Verification?

The Customer Identification Program (CIP) generally requires the firm to collect the customer's name, date of birth for an individual, address, and identification number before opening an account. A refusal to provide required information, such as a name, prevents opening.

Identity verification may occur within a reasonable time before or after opening under the firm's risk-based procedures. Those procedures may use documents, non-documentary methods, or both. A government-issued photo ID is not universally required, and non-U.S. customers may provide permitted identification-number alternatives to a Social Security number. A CIP may also permit opening while a taxpayer identification number application is pending if the firm confirms the application was filed before opening and obtains the number within a reasonable period afterward.

These alternatives do not excuse refusing required information. A cash-only account or an arbitrary grace period cannot replace that information.

What Happens When Suspicious Activity Is Identified?

When suspicious activity is identified:

• The firm must file a Suspicious Activity Report (SAR) with FinCEN when a transaction involving or aggregating at least $5,000 is conducted or attempted through the firm and the firm knows, suspects, or has reason to suspect one of the four problems below
• The four problems: the transaction involves illegally derived funds, is designed to evade Bank Secrecy Act requirements (for example, by structuring), has no business or apparent lawful purpose or is unusual for that customer, with no reasonable explanation after the firm examines the facts, or uses the firm to facilitate a crime
• 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

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 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.

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?
• Do you know that the free-riding 90-day freeze still lets the customer trade, as long as each purchase is fully paid on the trade date?
• Do you know the ACATS timeline: validate or take exception within one business day, complete the transfer within three business days after validation?