You might be surprised by the personal information questions a broker asks you before you can open a trading account. The detail of the information is based on the concept that your broker needs to “know your customer” which is mandated by the Securities and Exchange Commission (SEC).
Knowing your customer/client is a standard in the investment industry, and it requires that investment advisors know detailed information about their clients’ investment experience, risk tolerance, and finances.
Know Your Customer Rule
The account that you set up needs to be established in a way that protects the customer as well as the broker. The broker does not want to put the brokerage firm in a situation where you borrow capital to trade without any prior experience.
They also cannot afford for you to lose money and then claim that you had no prior knowledge of how the markets function.
Also, your broker needs to have your personal information to comply with
- Investment risks suitability
- Tax laws
- Anti-money laundering laws
- Anti-terrorist funding
- Record keeping
Besides your basic information, such as your full name, address and telephone number, and date of birth, your broker will ask you for your tax identification number. If you are opening an account as an individual, this number will be your social security number.
If you are opening the account as a business, this number will be your business tax identification number. If you are not a US citizen and do not have a tax identification number, your broker should be able to use a valid foreign passport along with a value government issued ID number.
Investment Risk Suitability
Whether you are opening a discount brokerage account or a full-service account, your broker needs to determine your level of experience. It would be inappropriate for a broker to allow you to open an account with all the bells and whistles if you do not have any investment experience.
It is your broker’s job to match your knowledge with advice and recommendation that are provided by that broker and the brokerage operation. They need to listen to your investment goals and match the account set up to meet your financial preferences.
You broker will follow regulations that are laid out by the National Association of Security Dealers and are enforced by the Securities and Exchange Commission.
Investment activities generate several different types of financial results including:
- Short-term capital gains/losses
- Long-term capital gains/losses
- Ordinary Income
Your broker needs to report each of these directly to the Internal Revenue Service. In addition, your broker might report to the IRS unrealized gains on derivative certain securities such as futures contracts.
Long term and short-term losses are categorized and taxed at different rates. You also need to report and ordinary dividends or special dividends you receive from a company, along with interest received on bonds or preferred instruments. Your broker needs to fill out and file the proper forms on your behalf each year.
Anti-Money Laundering and Anti-Terrorism
In the wake of 9/11, brokers around the globe increased the information required to meet anti-money-laundering and anti-terrorist financing requirements. The brokerage performs a background check to make sure you are not a risk.
By finding out your name, address, date of birth, and tax id number, they can perform an initial background check. This will verify your identity and will be cross-checked against lists of launderers and terrorists.
This check can also uncover any victims of identity theft especially if someone is attempting to open an account in your name by stealing your identity.
Your broker needs to keep accurate records which is required by the Securities and Exchange Commission. Included in your records is your personal information as well as your financial information. Some of the trading capabilities offered to you by your broker are based on your net wealth as well as your market knowledge.
Your broker needs to provide the SEC a record of an attempt to obtain this information. If any of your pertinent information changes, it is your responsibility to tell your broker and update your records. Your broker is also required to ask every year if any of the information has changed.
Your broker also has the right to ask you for some other personal information that is not required. This could include emergency contacts. You also might be asked about the type of account you wish to open.
This could include a cash account or a margin account which allows you to borrow capital. Margin accounts are needed to sell-short, use leverage or trade options. You also might be asked about how you want to invest your unvested cash.
This could be money that is coming from dividends or interest that is placed into your account.
Perform Your Due Diligence
Before opening an account and providing a broker with your personal information, you should perform your due diligence. If you are sending information online, make sure no complaints describing a hack at your brokers account that is unexplained.
Check out reviews as well as perform a specific background check on the individual broker you are corresponding with. Make sure that you research any app or online platform that appears to be illegitimate.
They might be fishing for your personal information.
The key takeaway is that your broker needs specific personal information to allow you to open an account. This personal and financial information is required and it’s the law.
Not only are their record-keeping laws that each broker needs to comply with, but some laws also relate to tax collection, anti-money-laundering, and anti-terrorism.
Additionally, your broker needs to know his/her customer. They need to understand your investment knowledge and experience to make sure they tailor their advice to your experience.
Also, your broker can only provide you with certain tools, through a margin account if you have the experience necessary to trade certain products. Lastly, you should perform your due diligence to make sure you are giving your personal information to a reputable broker.