Broker-Dealers Prepare for ‘Ambiguous’ KYC Regulations

November 29, 2011 – In The News
Joshua Horn commented on the proposed regulations of the Financial Industry Regulatory Authority (Finra) that will broadly, and some say ambiguously, expand broker-dealers' know-your-customer duties.

The two regulations proposed will require securities brokers to collect more anti-money laundering (AML) data on their clients and gauge the "sustainability" of the investments they make on their behalf.

Under Finra Rule 2090, or the know-your-customer regulation, broker-dealers will have to learn and retain "essential facts" on every customer.

Horn, who has represented brokers facing Finra actions, said guidance issued by Finra in May has done little to clarify what constitutes "essential facts" for broker-dealers. The ambiguity will allow Finra to "argue the edges" during examinations, Horn said.

"It causes problems because if a broker-dealer has someone who has a trust account, what is it that they need to get from the client?" said Horn. "Do they need the trust paperwork, a certification form, their signature? What is it that the regulators are looking for?"

In addition to the know-your-customer regulation, Finra will also be enforcing the Finra Rule 2111, which will require broker-dealers to collect more data on their clients in an effort to determine the sustainability of investments. Firms will now have to take into account a customer's age, investment experience and liquidity needs when determining how to invest in securities.

"The guidance [for 2090] isn't explicitly clear, but it’s very fair to interpret 2090 in conjunction with 2111 in a way that requires broker-dealers to locate a real person behind the entities making the investments," said Horn.

The rules are "an expansion of duties, and it's going to be a real challenge" to glean more data on beneficial owners, he said.