Quick Answer
Account opening involves three separate duties. The firm maintains required account information, uses a written Customer Identification Program to verify identity, and applies Know Your Customer diligence. The program also covers failed verification and government-list checks. Identity records follow two five-year periods, while account information carries separate six-year periods.
How Do the Three Customer-Information Duties Differ?
The exam tests each duty by its purpose, trigger, and record requirements.
| Obligation | What question does it answer? | When does it apply? |
|---|---|---|
| Customer account information | What information must the firm maintain for the account? | Core information applies to each account. Additional information has a reasonable-efforts standard, a deadline, and exceptions. |
| Customer Identification Program (CIP) | Can the firm form a reasonable belief that it knows the customer’s true identity, and how does it respond when it cannot? | The procedures apply to account opening. Verification may occur within a reasonable time before or after opening. |
| Know Your Customer (KYC) | What essential facts concern the customer, and what authority does each acting person have? | The firm uses reasonable diligence when opening and maintaining every account. |
The Customer Identification Program must be written, risk-based, appropriate for the firm’s size and business, and part of its anti-money laundering program.
Exam Tip: Gotchas
- The three duties do not merge. Identity verification does not replace account-information requirements or KYC. KYC covers essential facts about the customer and the authority of each acting person.
What Customer Account Information Must the Firm Maintain?
These requirements are separate from the identity program. The firm must maintain the following account information.
| Account-information category | What must the firm maintain or obtain? | Timing or exception |
|---|---|---|
| Customer basics | The customer’s name and residence, and whether the customer is of legal age. | Applies to each account. |
| Account responsibility | The names of associated persons responsible for the account, if any. If more than one person is responsible, the record shows each person’s scope. | Does not apply to an institutional account. |
| Account acceptance | The signature of the partner, officer, or manager that denotes acceptance under the firm’s policies and procedures. | Applies to each account. |
| Entity authority | For a corporation, partnership, or other legal entity, the names of persons authorized to transact for the entity. | Applies to each entity account. |
| Additional customer details | The customer’s tax identification or Social Security number, occupation, employer name and address, and whether the customer is an associated person of another member firm. | The firm makes reasonable efforts to obtain applicable information |
Exam Tip: Gotchas
- Account acceptance and trading authority use different records. A partner, officer, or manager signs for account acceptance. An entity account separately identifies persons authorized to transact.
What Identifying Information Must the Firm Collect?
The firm generally collects these items before opening the account:
| Required item | What must the record show? |
|---|---|
| Name | The customer’s name. |
| Date of birth | The date of birth for an individual. |
| Address | An individual’s residential or business street address. A person other than an individual provides a principal business location, local office, or other physical location. |
| Identification number | A U.S. person provides a taxpayer identification number. A non-U.S. person may provide specified government-issued identification, such as a passport number and country of issuance. |
How Can the Firm Verify Identity?
The firm verifies identity within a reasonable time before or after account opening. Collection and verification therefore have different timing.
| Method | What can the firm use? |
|---|---|
| Documentary | An individual’s unexpired government-issued identification with a photograph or similar safeguard. An entity can provide documents showing its existence, such as formation documents, a business license, a partnership agreement, or a trust instrument. |
| Non-documentary | Customer contact, comparison with an independent source, reference checks with other financial institutions, or a financial statement. |
The firm chooses documents, non-documentary methods, or both under its risk-based procedures.
For an entity customer, the program must address obtaining information about individuals with authority or control based on the firm’s risk assessment. This method applies only when documentary and non-documentary methods cannot verify the entity customer’s true identity.
Exam Tip: Gotchas
- Additional entity verification has an only-when condition. The firm uses authority-or-control information only when documentary and non-documentary methods cannot verify the entity customer’s true identity.
What Other Procedures Must the Identity Program Include?
The program must include procedures for two additional situations:
- Failed verification: The firm needs procedures for when it cannot form a reasonable belief that it knows the customer’s true identity.
- Government lists: The firm needs procedures to determine whether a customer appears on a designated federal list of known or suspected terrorists or terrorist organizations.
How Long Must Identity and Account Records Remain?
Identity records and customer account information use different retention clocks.
| Record framework | Record category | What must the firm record? | Retention period |
|---|---|---|---|
| Identity program | Identifying information | All identifying information collected from the customer. | Five years after the account is closed. |
| Identity program | Documentary verification | The document type, identification number, place of issuance, and any issuance and expiration dates. | Five years after the record is made. |
| Identity program | Other verification | The methods and results of non-documentary measures or entity verification used only when documentary and non-documentary methods cannot verify true identity. | Five years after the record is made. |
| Identity program | Substantive discrepancies | How each substantive discrepancy found during verification was resolved. | Five years after the record is made. |
| Customer account information | Information that is later updated | The prior account information that became outdated. | Six years after the update date. |
| Customer account information | Last update, or original information if no update occurred | The final current account-information record. | Six years after the account is closed. |
For customer account information, maintain refers to information that is current or in use. Preserve refers to information that is no longer current or in use.
Exam Tip: Gotchas
- The five-year and six-year clocks cover different records. Identity information uses two five-year periods. Updated account information remains six years after each update, while the last or original account information remains six years after account closure.
- Maintain and preserve are not synonyms here. Maintain refers to current or in-use account information. Preserve refers to information that is no longer current or in use.
What Notice Must the Customer Receive?
Before opening the account, the firm must give adequate notice that it requests information to verify identity. The notice must generally describe the identification requirements and use a method reasonably designed to let the customer view or otherwise receive it.
What Facts Does Know Your Customer Require?
The firm uses reasonable diligence when opening and maintaining every account. It must know and retain essential facts about every customer and the authority of each person acting for that customer.
Facts are essential when the firm needs them to:
- service the account effectively;
- follow special handling instructions;
- understand each acting person’s authority; or
- comply with applicable requirements.
The obligation concerns essential facts about the customer and the authority of each person acting for the customer.
Exam Tip: Gotchas
- Know Your Customer separates customer facts from acting-person authority. The firm knows and retains essential facts concerning the customer and concerning each acting person’s authority.
What Should You Check on Exam Day?
- Collect the required identifying information before opening. Verify identity within a reasonable time before or after opening.
- Use authority-or-control information for an entity only when documentary and non-documentary methods cannot verify the entity customer’s true identity.
- Include procedures for failed verification and government-list checks.
- Keep identity records under their two separate five-year periods. Preserve updated and final account information under their separate six-year periods.