What is “Know Your Client?”
There is a standard called Know Your Client, also known as Know Your Customer, and it ensures that investment advisors are knowledgeable about their client’s information. And when we say information, we refer to detailed information where the advisors know how much investment knowledge the client has, how much risk he can tolerate, and the current status of his finances. KYC goes both ways. It protects the investor and the advisor at the same time. How? The investment advisor protects the investor by guiding him and sharing everything he knows about investments. Hence, the investor has an idea of which investment suits him. On the other hand, KYC protects advisors because they know what they can and cannot consider in a client’s portfolio. Most KYC compliance comes with requirements and policies like risk management, transaction monitoring, and customer acceptance.
FINRA, Suitability, and Know Your Client
KYC is an ethical requirement for people in the securities industries and engaging with customers who open and maintain accounts. In 2012, FINRA Rule 2090 and 2111 were made to make our previous statement possible. FINRA is short for Financial Industry Regulatory Authority. Rule 2090 is for Know Your Customer, and 2111 is for Suitability. They both protect broker-dealers and investors, and it makes brokers and firms deal with clients fairly.
Rule 2090 KYC tells us that broker-dealers should make efforts to clients who open and maintain accounts. They should learn and keep significant facts about every investor. Aside from that, they should know who can act on behalf of the said investor. This rule is essential, especially at the start of an investor-broker relationship, so the broker knows everything he needs to know about the investor before making any recommendations. The broker needs information to service the client and his account effectively.
Rule 2111, which we can find on FINRA Rules of Fair Practices, is almost always with the KYC rule. It is also involved in making recommendations. It says that the broker-dealer should have reasonable grounds every time he makes a suitable recommendation for the investor. This recommendation depends on the investor’s needs and current finances. The broker-dealer is responsible for thoroughly reviewing the investor’s profile, his facts, other securities, and more before proceeding with a purchase, sale, or security exchange.
A summary of today’s learnings
There is much more about KYC but what we mentioned today are some of the most important things. KYS are standards and requirements used by companies related to investments and financial services to ensure their customers’ identity. Aside from that, they also use this to know any risks that involve the customer relationship. Investors should get the customer’s information as much as possible, especially if it’s related to risk tolerance and current financial status. The US FinCEN or the Financial Crimes Enforcement Network is the entity that prescribed the rules that financial companies and institutions must follow regarding customer identity verification and the beneficial owners if they have. They verify situations surrounding the customer relationship. They also keep an eye on and report illegal activities.