Why do brokers ask for personal information before they make any trades?

A:

According to the Securities and Exchange Commission (SEC), there are three main reasons why a broker will ask for personal information: suitability, record-keeping requirements and anti-terrorist/anti-money laundering laws.

Suitability refers to how your financial situation matches the advice and recommendations that are given to you by your broker. The suitability requirement comes from the self-regulatory organizations (SRO) that regulate brokers. By understanding your personal financial situation, the broker must only provide you with recommendations that are suitable for your preferences and investment objectives. If the broker does not do that they will be violating rules laid out by the National Association of Securities Dealers (NASD).

Record-keeping requirements refers to just that, record keeping. Rules set out by the SEC require brokers to maintain an up-to-date account of your personal information. The most important information that the broker must have is the client name, Social Security Number (SSN), net worth and account investment objectives among others. If the client refuses to provide such information, the broker is excused from following the rule, however they must be able to prove that an effort must have been made to retrieve the information.

Finally the broker must provide client information to meet anti-money laundering and anti-terrorist requirements. These requirements ensure that by requesting adequate information the broker must be able to verify their client's identity. The client's personal information is cross-checked with any lists of known or suspected terrorists. These are recent requirements that have arisen out of the USA Patriot Act of 2001.

To learn more, see Brokers and Online Trading, Shopping For A Financial Advisor and Tips For Resolving Disputes With Your Financial Advisor.

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