This slide deck was prepared as a fictional compliance project. It contains helpful information from FINRA for broker/dealers on the importance of knowing your customer, anti-money laundering, and how the suitability rule should be applied.

1. KYC – KNOW YOUR
CUSTOMER and SUITABILITY
THE WHAT, WHO, WHEN, HOW, AND WHY
ITS ADHERENCE IS CRITICAL

2. KYC – WHAT IS IT
FINRA rule 2090 requires that all firms use “reasonable diligence” in regard to
opening and maintenance of every account, to know the “essential facts” concerning
every customer – KNOW YOUR CUSTOMER
What are “essential facts”
Fact are considered essential when they are required to:
(a) effectively service the customer’s account,
(b) act in accordance with any special handling instructions for the account,
(c) understand the authority of each person acting on behalf of the customer, and
(d) comply with applicable laws, regulations, and rules.

3. KYC – WHO DOES IT APPLY TO
Obligation applies to all clients
New customers and
Existing customers

4. KYC – WHEN DOES IT APPLY
Obligation arises at the beginning of the customer-broker
relationship.
This does not depend on whether the broker has made a
recommendation.
The rule does not specifically address orders, supervision or
account opening.

5. KYC – THE PROCESS
KYC is an on-going process for prudent practices
As a firms we have compliance systems to make sure brokers or associated
persons are always aware of who and what their clients are:
It is the broker’s duty to:
(a) Update customer information records at reasonable intervals
(b) Maintain proper records of their clients
(c) Monitor and check unusually large cash transactions, especially those that
are out of character with the client’s history
(d) Comply with applicable laws, regulations, and rules.

6. KYC – STAGES KYC WILL BE CARRIED OUT
KYC will be carried out at the following stages:
(a)Opening new account
(b)Opening subsequent accounts while KYC documents have not been submitted
(c)When there are changes to signatories, mandate holders, and beneficial owners
(d)When AML concerns are triggered

7. AML – ANTI-MONEY LAUNDERING
The Bank Secrecy Act, among other things, requires financial institutions, including broker-
dealers, to develop and implement AML compliance programs. FINRA Rule 3310 sets the
standards on which this firm created its AML compliance program:
What is Money Laundering?
Money laundering is the process by which large amounts of illegally obtained money (from
drug trafficking, terrorist activities and other serious crimes) is given the appearance of
having originated from a legitimate source

8. AML – UNDERSTANDING THE PROCESS
Placement: First deposits are placed into the financial system, usually the deposits are
broken up into smaller amounts in an attempt to avoid detection. Breaking up the deposit
like this, with the intention to avoid having to report it to the Department of the Treasury, is
called structuring. And it’s illegal.
Layering: The second step involves carrying out complex financial transactions to
camouflage the illegal source of the cash typically by the use of placement and extraction
over and over again, using varying amounts each time, to make tracing transactions as hard
as possible.
Integrations: Now that the money is part of the financial system, it is removed as “clean
money”.

9. AML – ANTI-MONEY LAUNDERING
Brokers must adhere to the AML requirements on every client and must be aware and report any
of the following activities to the compliance department
Federal regulations require an broker to file a Suspicious Activity Report (SAR) when
(a) A transaction (or attempted transaction) of more than $5,000 takes place and the broker
suspects that money laundering or other illegal activity is involved, the transaction is an
attempt to avoid Bank Secrecy Act (BSA) regulations, or the trans-action isn’t one this customer
would usually engage in
(b) A criminal violation occurs and an insider is suspected
(c) A criminal violation of $5,000 or more occurs and the broker can identify the suspect
(d) A criminal violation of $25,000 occurs, even if the broker can’t identify the suspect

10. AML - BEST PRACTICES BY BROKERS
Customer Identification Program (CIP): collection, verification and record keeping of customer
identification information and screening of customers against lists of known criminals.
Basic Customer Due Diligence (“CDD”) is information obtained for all customers to verify the
identity of a customer and asses the risks associated with that customer.
Enhanced Due Diligence (“EDD”) is additional information collected for higher-risk customers to
provide a deeper understanding of customer activity to mitigate associated risks.
Customer risk assessments can be used to determine which level of due diligence to apply (CDD
v. EDD).

11. SUITABILITY
FINRA Rule 2111 requires, in part, that a broker-dealer or associated
person:
“have a reasonable basis to believe that a recommended transaction or
investment strategy involving a security or securities is suitable for the
customer, based on the information obtained through the reasonable
diligence of the [firm] or associated person to ascertain the customer’s
investment profile.”

12. SUITABILITY – 3 MAIN OBLIGATIONS
Reasonable-basis Suitability - a broker must perform reasonable diligence
to understand the nature of the recommended security or investment
strategy involving a security or securities, as well as the potential risks and
rewards, and determine whether the recommendation is suitable for at
least some investors based on that understanding
Customer-specific Suitability - a broker must have a reasonable basis to
believe that a recommendation of a security or investment strategy
involving a security or securities is suitable for the particular customer
based on the customer’s investment profile); and
Quantitative Suitability - a broker who has control over a customer account
must have a reasonable basis to believe that a series of recommended
securities transactions are not excessive.

13. SUITABILITY – ONE RULE AT A TIME
Reasonable-basis Suitability - a broker must:
(a)Perform reasonable diligence to understand the potential risks and
rewards,
(b)Determine whether the recommendation is suitable for at least some
investors based on that understanding
Reasonable diligence vary depending on the risks associated with the
securities or investment strategies. The lack of such an understanding when
recommending a security or strategy violates the suitability rule.

14. SUITABILITY – ONE RULE AT A TIME
Customer-specific Suitability - a broker must:
(a)have a reasonable basis to believe that a recommendation of a security
or investment strategy involving a security or securities is suitable for
the particular customer based on the customer’s investment profile
Our compliance program mandates that customers must fill out an
investment profile (IP) at the initial application process and it must
be updated on a yearly basis or any time a material event in our
customer’s life requires it.

15. SUITABILITY – ONE RULE AT A TIME
Customer-specific Suitability – Investment Profiles
The IP must include the customer’s:
(a) Age and investment time horizon
(b) Financial situation and needs
(c) Other investments;
(d) Tax status
(e) Investment objectives including
(a) might include generating income
(b) funding retirement, buying a home
(c) preserving wealth or market speculation;
(f) Investment experience;
(g) Risk tolerance
(h) Marital status
(i) Any other relevant information that will help the broker make suitable decisions

16. SUITABILITY – ONE RULE AT A TIME
Quantitative Suitability - a broker who has control over a customer account
must have a reasonable basis to believe that a series of recommended
securities transactions are not excessive.
Brokers who have actual or de facto control over a customer account to must have a reasonable basis for
believing that a series of recommended transactions, even if suitable when viewed in isolation, are not
excessive and unsuitable for the customer when taken together in light of the customer's investment profile, as
delineated in Rule 2111(a).
Excessive Activity factors are often seen as turnover rate, the cost-equity ratio, and the use of in-and-out
trading in a customer's account may provide a basis for a finding that a member or associated person has
violated the quantitative suitability obligation.

17. SUITABILITY – CONSIDERATIONS
One of the most common claims made by a customer against a brokerage
firm and/or account executive is that a particular investment or investment
strategy is unsuitable for the client. While this concept is rudimentary,
many issues relating to the theory of suitability are not that easy to discern.
Broker’s must always consider their client’s needs, age in relation to
amount of risk that they can tolerate, employment and years they working
years the clien has, their liquidity needs, their ability to understand the
complexity of the broker’s investment recommendations, and any other
factors that will enable the client to better make a decision.

18. POP QUIZ
A 75 year old mother of 4 children and grandmother of 13 recently lost her
husband. She has a portfolio with the firm totaling $3.8M. Her husband was
a successful broker his entire life and was heavily invested in mortgage-
backed securities, asset-backed securities, collateralized mortgage
obligations even into his 70’s. Should her investments be reevaluated in
light of her new circumstances?
A couple marries soon after he receives a JD degree. She has her master’s
degree in social work. Both are working and are interested in opening an
investment account for their ‘future’. What information would you want to
know? What investment strategy would you recommend? How would their
investment strategy be different from that of the 75 year old grandmother?

19. THE END