Know Your Customer (KYC)

The Customer Identification Program (CIP) tells the firm who the customer is. Know Your Customer goes further: it requires the firm to understand the essential facts about the customer and the people acting on their behalf. While CIP is a one-time identity check, KYC is an ongoing obligation.

FINRA Rule 2090: Know Your Customer

• Every member must use reasonable diligence, in regard to the opening and maintenance of every account, to know and retain the essential facts concerning every customer
• The rule also requires knowing the authority of each person acting on behalf of the customer
• The standard is reasonable diligence, not perfection

Exam Tip: Gotchas

• Rule 2090 applies to every customer, not just those who receive recommendations. Even an unsolicited-only account triggers KYC obligations.
• The standard is reasonable diligence, not absolute certainty. The exam may try to make you think firms need to verify every detail.

What Are "Essential Facts"?

Essential facts are those needed to:

• Effectively service the customer's account
• Act in accordance with any special handling instructions for the account
• Understand the authority of each person acting on behalf of the customer
• Comply with applicable laws, regulations, and rules

Think of it this way: Essential facts are whatever the firm needs to do its job properly. If a customer has granted power of attorney to someone, the firm needs to know that. If the customer has specific instructions like "never buy tobacco stocks," the firm needs to know that too.

Ongoing Obligation

• KYC is not a one-time event; it applies to both the opening and maintenance of accounts
• Firms must update customer information when they become aware of changes
• KYC provides the foundation for suitability (Rule 2111) and Reg BI obligations
• Changed circumstances (new job, retirement, inheritance) may require updated information

Exam Tip: Gotchas

• KYC is the foundation that makes suitability and Reg BI possible. Without knowing the customer, you cannot make suitable recommendations.
• "Opening and maintenance" is the key phrase. A firm that only gathers information at account opening and never updates it is violating Rule 2090.

KYC vs. CIP

Exam Tip: Gotchas

• KYC is about essential facts, not every possible detail about a customer's life. The exam may present answer choices that go far beyond what is needed.
• CIP and KYC are separate obligations. Completing CIP does not satisfy KYC, and vice versa.