Required customer information

Brokerage customers must provide specific information to open a new account. This requirement comes from the Patriot Act, which was signed into law after the 9/11 attacks in 2001 to help prevent terrorism and money laundering. The law requires financial firms to verify each customer’s identity, which helps prevent accounts from being opened under false identities.

To do this, firms must collect four pieces of critical information as part of their Customer Identification Program (CIP):

• Name
• Date of birth
• Physical address*
• SSN or TIN**

*While a customer may request mail to be sent to a P.O. box, a physical mailing address must be on file.

**If a customer is a non-resident alien, they must provide their foreign passport and U.S. tax identification number (TIN).

After collecting this information, the firm must verify the customer’s identity. Firms generally use one of two methods:

• Government-issued identification: The firm compares the information provided on the application to a currently valid government-issued ID (for example, a driver’s license, passport, and/or military ID). The ID must be valid and include a photo, which is why a birth certificate can’t be used.

• Credit bureau verification: The firm checks the customer’s information against a credit bureau database. You’ve probably heard of TransUnion, Experian, and Equifax, the three largest credit bureaus. If the customer’s information doesn’t match what the bureau has on file, the firm can’t do business with the customer until the issue is resolved. For example, if the customer accidentally provides the wrong address, they’ll need to correct it before the account can be approved.

The four critical pieces of information are required by the Patriot Act, but firms also collect other information during the account-opening process. One important item is the customer’s occupation. This can feel unnecessary on an application, but the firm needs it to determine whether the customer is:

• an affiliate (insider) of a publicly traded company, or
• employed in the financial industry.

If the customer is an affiliate (insider) of a publicly traded company, the brokerage firm must enforce Rule 144. Rule 144 limits how quickly affiliates can sell large amounts of “control” stock. Insiders are limited to selling the greater of the last four week’s trading average or 1% of the outstanding shares, four times a year.

If the customer works in the finance industry, they’re restricted from purchasing common stock initial public offerings (IPOs). As we learned in the primary market chapter, this rule helps prevent industry professionals from buying up IPO shares and leaving little or nothing for the public. By asking about occupation, the firm can apply this restriction when required.

In addition to the IPO rule, brokerage firms must supervise their employees’ accounts to help prevent misconduct. One of the most important areas of supervision is insider trading. Insider trading occurs when a trade is made because of material, non-public information.

Because employees may come into contact with inside information, firms must supervise the accounts of their registered representatives. Also, if a registered representative wants to open an account at another brokerage firm, they must:

• obtain written approval from their employer,
• notify their employer when the account is opened, and
• provide duplicate statements and trade confirmations if requested*.

By collecting occupation information, firms can identify customers who are subject to these rules and apply the required supervision.

*Duplicate statements and confirmations are only required if requested, but approval and notification from the employing firm are mandatory.