Study guide
Function 2 of the Series 6 outline, opening accounts after obtaining and evaluating the customer's financial profile and investment objectives, accounts for 8 of the 50 scored questions. The theme is simple: learn who the customer is before recommending anything, document the account correctly, and follow the rules that protect privacy, detect money laundering, and shield vulnerable investors.
Know Your Customer and the Investment Profile
Two rules anchor account opening. FINRA Rule 2090, Know Your Customer, requires the firm to use reasonable diligence to learn the essential facts about every customer and about anyone authorized to act for the customer, whether or not any recommendation is ever made. FINRA Rule 4512 lists the account record basics: the customer's name and residence, whether the customer is of legal age, the representative responsible for the account, the signature of the principal accepting the account, and, for most accounts, occupation and employer, and whether the customer is associated with another broker-dealer. The recommendation side runs on the customer investment profile, the checklist you will see over and over on the exam: age, other investments, financial situation and needs, tax status, investment objectives, investment experience, time horizon, liquidity needs, and risk tolerance. Each element does distinct work. Time horizon asks when the money will be needed; liquidity needs ask how quickly it must convert to cash without loss; risk tolerance asks how much fluctuation the customer can accept financially and emotionally. Example: Rosa is 29 and saving a house down payment she plans to use in three years. Her long career runway does not make an aggressive stock fund suitable for this money, because the three-year horizon and her need for the full amount point toward preservation and liquidity. A customer may decline to provide some information; the firm may still open the account, but any recommendation must be reasonable in light of what is actually known.
Regulation Best Interest and Suitability Obligations
Since June 2020, SEC Regulation Best Interest, or Reg BI, has governed recommendations of securities transactions, investment strategies, and account types to retail customers. Reg BI requires that the broker-dealer and its representatives act in the retail customer's best interest at the time of the recommendation, without placing the firm's financial interest ahead of the customer's. It is built from four component obligations. The Disclosure Obligation requires full and fair written disclosure of material facts about the relationship, including fees, services, and conflicts, delivered largely through Form CRS, the customer relationship summary provided at or before the earliest of a recommendation, an order, or account opening. The Care Obligation requires reasonable diligence, care, and skill: understand the product, have a reasonable basis to believe it is in the particular customer's best interest given the investment profile, and avoid excessive trading. The Conflict of Interest Obligation requires the firm to identify and at minimum disclose conflicts, and to eliminate certain ones such as sales contests based on specific securities within a limited time. The Compliance Obligation requires written policies reasonably designed to achieve compliance with the whole rule. FINRA's suitability rule, Rule 2111, still exists and follows the same three-part logic tested for decades: reasonable-basis suitability (the product is suitable for at least some investors), customer-specific suitability (it fits this investor's profile), and quantitative suitability (the overall series of transactions is not excessive). Recommending a higher-cost share class or an unnecessary rollover when a cheaper equivalent serves the customer equally well is a classic best-interest violation.
Account Types and Registrations
Account registration determines who owns the assets, who may give instructions, and what documents the firm needs. An individual account has one owner, and only that owner or someone holding written trading authorization may direct it. Joint accounts come in two main forms: joint tenants with rights of survivorship, where a deceased owner's interest passes automatically to the survivor, common for spouses; and tenants in common, where each owner holds a stated percentage that passes to that owner's estate. Any joint owner may enter orders, but checks must be payable to all names in the registration. Custodial accounts under UGMA or UTMA hold an adult custodian's management of an irrevocable gift to a minor: one custodian and one minor per account, the minor's Social Security number on the account, earnings taxed to the minor, and no margin trading. The custodian must transfer control when the minor reaches the age set by state law, commonly 18 to 21, with UTMA allowing later ages in some states; UTMA also accepts more property types than UGMA. Trust accounts require the trustee to furnish the trust document or certification showing authority, and fiduciaries must act within it, following in most states a prudent-investor standard. Retirement accounts such as IRAs carry their own beneficiary designations, which pass assets outside the will. Two more documentation points recur on the exam: discretionary authority, where the representative chooses the asset, the amount, or the action, requires the customer's prior written authorization and principal acceptance; and new mutual fund shares may not be purchased on margin, though fully paid shares held more than 30 days may serve as collateral.
Anti-Money Laundering and the Customer Identification Program
The Bank Secrecy Act, expanded by the USA PATRIOT Act, requires every broker-dealer to maintain a written anti-money laundering program with a designated AML compliance officer, ongoing employee training, independent testing, and risk-based procedures. Its front door is the Customer Identification Program, or CIP. Before or shortly after opening an account, the firm must collect four items: name, date of birth for an individual, a residential or business street address, and an identification number, normally a Social Security or taxpayer identification number for U.S. persons. The firm must then verify identity within a reasonable time using documents such as a driver's license or passport, or non-documentary means such as database checks, must determine whether the customer appears on government lists such as the Office of Foreign Assets Control sanctions lists, and must give customers notice that identifying information is being requested. Know the three stages of money laundering: placement, moving illicit cash into the financial system; layering, running it through transactions to obscure its source; and integration, returning it as apparently legitimate funds. Red flags include a customer indifferent to cost or risk, wires to or from unrelated third parties or high-risk jurisdictions, deposits followed by immediate withdrawals, and structuring, meaning breaking cash movements into pieces below reporting thresholds. Firms file a Currency Transaction Report for cash transactions exceeding 10,000 dollars in a day, and a Suspicious Activity Report, generally within 30 days, for suspicious transactions of 5,000 dollars or more. SARs are confidential: telling the customer a report was filed is itself a violation.
Privacy, Seniors, and the Trusted Contact
Regulation S-P governs customer privacy. Firms must deliver a notice of their privacy policies when the relationship begins and annually thereafter, and before sharing a consumer's nonpublic personal information with nonaffiliated third parties for their own use, must give the person a reasonable opportunity to opt out. The regulation also requires written safeguards for customer records, and amendments adopted in 2024 require firms to investigate data breaches and notify affected individuals whose sensitive information was likely compromised, generally within 30 days. Protecting older investors is the other pillar. FINRA Rule 4512 requires firms to make reasonable efforts to obtain the name and contact information of a trusted contact person for each non-institutional account, someone the firm may contact about possible financial exploitation or to confirm the customer's health status or a guardian's identity; the trusted contact has no trading authority, and the customer may decline to name one without blocking the account. FINRA Rule 2165 permits, but does not require, a temporary hold on disbursements or securities transactions when the firm reasonably believes financial exploitation of a specified adult is occurring or being attempted. A specified adult is a person 65 or older, or 18 or older with a mental or physical impairment leaving them unable to protect their own interests. The initial hold may last up to 15 business days; if the firm's internal review supports its belief, it may be extended up to 10 additional business days, and up to 30 more business days when the matter has been reported to a state regulator or court, with notice to parties authorized on the account and to the trusted contact. Many states add their own reporting duties to adult protective services, so requirements vary from state to state. Example: if 78-year-old Walter suddenly requests a full liquidation wired to a stranger he met online, the firm may pause the disbursement, contact his trusted contact, and escalate internally.
Key terms
- Know Your Customer (Rule 2090)
- — The FINRA requirement to use reasonable diligence to know the essential facts about every customer and anyone acting on the customer's behalf.
- Customer investment profile
- — The suitability checklist: age, other investments, financial situation, tax status, objectives, experience, time horizon, liquidity needs, and risk tolerance.
- Regulation Best Interest
- — The SEC rule requiring broker-dealers to act in a retail customer's best interest when recommending securities, strategies, or account types, built on disclosure, care, conflict, and compliance obligations.
- Form CRS
- — The customer relationship summary describing services, fees, conflicts, and standards of conduct, delivered at or before the earliest recommendation, order, or account opening.
- Quantitative suitability
- — The obligation that a series of recommended transactions, viewed together, not be excessive for the customer; excessive trading for commissions is churning.
- Joint tenants with rights of survivorship (JTWROS)
- — A joint registration in which a deceased owner's interest passes automatically to the surviving owner rather than to the estate.
- Tenants in common
- — A joint registration in which each owner holds a stated share that passes to that owner's estate at death.
- UGMA/UTMA account
- — A custodial account holding an irrevocable gift to a minor, managed by one custodian, taxed to the minor, and transferred at the age set by state law.
- Customer Identification Program (CIP)
- — The AML requirement to collect name, date of birth, address, and taxpayer ID, verify identity within a reasonable time, and screen against government lists.
- Suspicious Activity Report (SAR)
- — A confidential FinCEN filing, generally within 30 days, for suspicious transactions of 5,000 dollars or more; disclosing it to the customer is prohibited.
- Regulation S-P
- — The SEC privacy rule requiring privacy notices, opt-out rights before sharing data with nonaffiliated third parties, safeguards, and breach notification to affected customers.
- Trusted contact person
- — A person the firm makes reasonable efforts to obtain for each account, who may be contacted about suspected exploitation but holds no authority over the account.
Exam tips
- The firm must make reasonable efforts to obtain a trusted contact, but the customer may refuse and the account can still be opened; the trusted contact never gains trading authority.
- Custodial account facts to know cold: one custodian, one minor, irrevocable gift, minor's Social Security number, no margin, and transfer at the state-law age of majority.
- Reg BI's four obligations are Disclosure, Care, Conflict of Interest, and Compliance; sales contests tied to specific securities within a limited period must be eliminated, not just disclosed.
- Keep the AML thresholds straight: CTR for cash over 10,000 dollars in a day, SAR for suspicious activity of 5,000 dollars or more, and never tip off the customer about a SAR.
- When a question gives a young investor with a short-term goal, the time horizon and liquidity need outrank age; a three-year down-payment fund does not belong in an aggressive equity fund.