In the financial regulatory landscape, understanding and adhering to FINRA’s Rule 2090, commonly known as the KYC rule, is crucial for brokerage firms.
According to Alessa, this regulation mandates that member firms exercise reasonable diligence to discover and maintain essential facts about each customer. The primary goal is to comprehensively understand the customer’s financial situation, investment goals, and risk tolerance levels.
Rule 2090 outlines that each member must apply reasonable diligence in the opening and ongoing management of every account to know (and retain) crucial details concerning every customer and their authorized representatives.
As part of Rule 2090, firms are required to collect customer data at the inception of the client relationship and update this periodically to reflect any significant changes. The essential data collected helps firms effectively manage customer accounts, adhere to specific instructions, and comply with pertinent regulations including the Bank Secrecy Act and anti-money laundering rules mandated by Rule 3310.
Moving to FINRA Rule 2111, known as the “Suitability Rule”, it is imperative for broker-dealers and their representatives to have a justified belief that the recommended transactions or strategies are apt for the client. This includes considering the client’s age, financial situation, tax status, investment objectives, experience, time horizon, liquidity needs, and risk tolerance.
Rule 2111 sets forth three main obligations:
- Reasonable basis suitability: Ensuring due diligence is performed to substantiate that a recommendation is suitable for at least some investors.
- Customer-specific suitability: Each recommendation needs to be appropriate for the specific client’s investment profile.
- Quantitative suitability: For accounts under firm control, a belief must be held that a series of recommended transactions, while individually suitable, are not excessive when considered collectively.
Both Rule 2090 and Rule 2111 are intricately linked, aimed at protecting investors and ensuring actions taken by firms are in the best interests of their clients. Rule 2090’s requirements for knowing the customer lay the groundwork for making suitable recommendations as stipulated in Rule 2111.
To comply with Rule 2090, firms need to implement rigorous steps such as verifying customer information, using digital KYC, and employing continuous monitoring systems to update customer profiles regularly. These systems help firms adhere to all relevant laws, including FINRA regulations and SEC rules.
Despite the clear directives of these rules, violations occur, which can include inadequate collection of customer information, failure to update client profiles, making unsuitable recommendations, or engaging in excessive trading. Such violations can lead to severe penalties including regulatory fines, disciplinary actions, and damages to firm reputation, sometimes necessitating restitution to affected clients.
Copyright © 2024 RegTech Analyst
Copyright © 2018 RegTech Analyst
