Series-7 - Opens Accounts After Obtaining and Evaluating Customers' Financial Profile and Investment Objectives (9% of the exam) - Section 2.2

Apply customer identification, know-your-customer, and account-documentation requirements, including discretionary authorization and the obligation to identify and escalate suspicious activity.

Apply the customer identification program (CIP) and know-your-customer obligations of FINRA Rule 2090, gathering and updating essential facts before account opening. Recognise the documents that authorise third-party or discretionary trading - power of attorney, trust documents, corporate resolutions - the written discretionary authority required under FINRA Rule 3260, and the duty to identify and escalate suspicious activity under privacy and anti-money-laundering rules.

Customer identification programFINRA Rule 2090Know your customerDiscretionary authorityFINRA Rule 3260

Practice question for this objective

Free sampleOpens Accounts After Obtaining and Evaluating Customers' Financial Profile and Investment Objectivesmedium

How does FINRA Rule 2090, the know-your-customer rule, define the core obligation a firm owes when opening and maintaining an account?

AIt requires the firm to ensure that every recommendation made is suitable in light of the customer's financial situation and needs.
BIt requires the firm to verify the customer's identity against a government-issued photograph before the first trade is entered.
CIt requires the firm to use reasonable diligence to know the essential facts about every customer needed to effectively service the account. Correct
DIt requires the firm to update the customer's financial profile in writing at least once every 36 months.

FINRA Rule 2090 requires reasonable diligence to know the essential facts needed to service each customer's account. The know-your-customer rule focuses on the essential facts a firm needs to effectively service the account, act on any special handling instructions, understand the authority of each person acting for the customer, and comply with applicable laws, which is distinct from the suitability analysis applied to recommendations.

Why A is wrong: Ensuring recommendations are suitable is the province of the suitability rule, Rule 2111; Rule 2090 governs knowing the customer, not judging individual recommendations.

Why B is wrong: Photographic identity verification belongs to the Customer Identification Program, not to Rule 2090, which concerns the essential facts needed to service the relationship.

Why C is correct: Rule 2090 obliges a firm to use reasonable diligence, in opening and maintaining each account, to know the essential facts about the customer that let it service the account and follow instructions.

Why D is wrong: A 36-month refresh cycle applies to certain discretionary and institutional account records, not to the general standard Rule 2090 sets for knowing the customer.

See more Series-7 practice questions, answers explained.

Exam traps in Opens Accounts After Obtaining and Evaluating Customers' Financial Profile and Investment Objectives

Answers that look right on this material and are not. Each one is a distractor from a different question in the Series-7 bank for this domain.

Only the customer's spoken agreement given at the time each discretionary order is entered, with no separate document required.
Why it is wrong: It is tempting because verbal instructions can authorise time and price choices, but true discretion over the security, amount, or action requires prior written authorisation, not a spoken agreement at order entry.
Open the account now and collect the taxpayer identification number within thirty days, since the identifying number is a follow-up item rather than an opening requirement.
Why it is wrong: Plausible because firms do verify some information after opening, but the identification number is one of the four items that must be obtained before the account is opened, not afterwards.
A Financial and Operations Principal (FINOP), because opening any account that may be margined depends on the firm's net capital position.
Why it is wrong: It is tempting because options positions can require margin and the FINOP oversees net capital, but the FINOP supervises financial and operational recordkeeping, not the suitability approval of customer options accounts.

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