Essential Facts About Customers and Customer Relationships

The obligation is not limited to a one-time intake form. It covers who is actually authorized to act on the account, not just facts about the account owner, and it has to be revisited whenever the relationship changes.

What Is the Know-Your-Customer Foundation?

• The know-your-customer rule requires members to use reasonable diligence to know and retain the essential facts about every customer
• "Essential facts" include financial information, personal circumstances, and any other information the customer discloses that is relevant to making suitable recommendations
• This obligation applies to the customer and the customer relationship (both matter)

What Are Essential Facts?

Essential facts are not limited to a fixed checklist. They include:

• Financial information: Income, net worth, assets, liabilities
• Personal circumstances: Age, employment, family situation, investment experience
• Relationship context: The nature of the account, who controls trading decisions, and what authority has been granted
• Customer disclosures: Any additional information the customer volunteers that is relevant to recommendations

The information gathered forms the basis of the customer's investment profile, which drives all suitability and best interest determinations going forward.

Exam Tip: Gotchas

• Essential facts are not limited to a preset list. The customer may disclose additional relevant information that must be considered.
• The obligation is ongoing, not one-time. Changes in a customer's facts require reassessment of suitability.

What Is the Customer Relationship Dimension?

The obligation extends beyond the individual to the relationship structure:

• A customer who trades only in their own account has a straightforward relationship profile
• A customer who holds trading authorization over a family member's account has a different relationship profile
• A fiduciary managing someone else's money (e.g., a trustee) introduces additional considerations about whose objectives and risk tolerance apply

Who Is Authorized to Act on the Customer's Behalf?

The know-your-customer obligation requires the firm to know the authority of each person who acts on the customer's behalf, not just facts about the account owner. Before acting on any instruction, the representative must be able to answer one question: is this person actually authorized to direct this account?

• A representative must not act on trading instructions or account-change requests from a third party (a spouse, an adult child, a family friend) who lacks documented authorization over the account
• Marriage or a family relationship does not, by itself, confer trading authority. A spouse cannot direct trades or change a profile simply because they are married to the account owner
• When a third party reports a material change (or attempts to act), the representative confirms it directly with the account owner and ensures any authority is properly documented before acting
• Documented authority can take the form of a written trading authorization, a power of attorney, or fiduciary appointment papers (e.g., trustee or guardian documents)

Exam Tip: Gotchas

• "Customer" and "customer relationship" are separate dimensions. If a customer trades in their own account and also holds power of attorney over a parent's account, those are two different relationship profiles requiring separate suitability analysis.
• Third-party instructions need documented authority. A helpful family member who is not authorized cannot direct the account. Confirm material changes with the owner and document any authority before acting.

What Should You Check on Exam Day?

• Essential facts cover the customer and the customer relationship, both financial data and personal circumstances, plus anything else the customer volunteers.
• The obligation is ongoing: a change in the customer's facts requires reassessing suitability, not a one-time intake.
• Marriage or a family tie alone does not confer trading authority. Confirm any third-party instruction against documented, written authorization before acting on it.