Series 6 Lesson 3 Know Your Customer

In Series 6 Lesson 3 we talk about your know your customer rule an essential tenent of investment management!

Sales Blotter

This is a daily record that shows all the movements of cash and securities that a broker-dealer is responsible for during the business day.

“Ledger” is another word for “record”. You are expected to keep ledgers of just about everything you do:

Assets vs. liability’s

Income vs. Expenses

Movements of all cash and securities within each customer account.

Types of Account Ownership:

• Individual account: Owned by one person
• TOD (Transfer on Death) Account: Passes directly to a beneficiary on the death of the account holder without having to go to a probate court. (A TOD agreement has to be signed with a broker-dealer). A second “contingent beneficiary” may be named.
• Trading authorization: Someone else has power of attorney over your account.
• Joint Account: Two or more people own. If you have the right of survivorship, the assets pass to the survivor if one person dies.
• Joint Tenants in Common: If one person dies, that person’s assets go to the person’s estate, not to the other tenant or tenants.
• Custodial Accounts: An adult opening an account on behalf of a minor. The adult is the nominal owner and the minor is the beneficial owner. The account can be set up as an UGMA or UTMA (Uniform Gifts to Minors/Uniform Transfers to Minors Act) so that the money can be gifted to the minor when he or she comes of age. There can only be one custodian per account of this type. Gifts cannot be taken back once given.
• Trust Account: An account for the benefit of another with stipulations on it, such as how much can be withdrawn in a year, what types of investments can be made with the account, etc. The grantor is the person who creates the trust and sets down the rules that are set down in a document, called the trust agreement.
• Estate Accounts: An account created after a person passes away, which requires a great deal of supporting documentation, such as a tax ID, a death certificate, and court documents. This estate holds the deceased person’s assets until they can be dispersed.
• Discretionary Accounts: An account where the broker-dealer is allowed to buy and sell at his or her discretion, while still collecting a commission. The customer would have to sign a discretionary authorization form.
• Guardian Accounts: This is created for a minor when his guardians become mentally incompetent or die. A person has to act as that person’s guardian until they come of age or recover.
• Business Accounts: An investment account opened by a corporation or partnership. You will have to look at the founding documents of the corporation or partnership to see who has authority to conduct business in their behalf.

Anti-Money Laundering (AML)

Every broker-dealer is required to enact AML measures under the Bank Secrecy Act. This act requires all financial institution to keep detailed records, which are subject to being audited. They are required to report any suspicious activity to the treasury department, and these are filed away as Suspicious Activity Reports. (SAR-SF).  The USA Patriot Act makes it a legal requirement for all broker-dealers to monitor activity that could be related to money laundering. You have to look at individual transactions, but also at patterns of transactions for suspicious activity.

More specific records have to be kept for transfers over $3000 and cash transactions over $10,000. This is a way to combat money laundering, which funds criminal organizations and terrorists groups. This means that these organizations are trying to make money that has been obtained from illegal sources look like it has been obtained from legitimate sources.

Three layers of laundering:

Placement: Money is moved into the system.

Layering: A confusing set of transactions is made to hide the money trail

Integration: Funds are invested in legitimate investments

There are four criteria that can be used when considering a SAR-SF.

• The transaction has funds from an illegal activity or is trying to disguise funds.
• The transaction is trying to avoid the requirements of the Bank Secrecy Act.
• The transaction does not seem to serve any business or lawful purpose
• The transaction uses a broker-dealer to engage in a criminal activity.

After filling a report, you should also contact the appropriate law enforcement agency if applicable.

Remember in addition to passing the Series 6 Exam you also need to pass the SIE Exam Here is the link for more information for the SIE Exam