A stockbroker once said he had nightmares about Rule 405 according to the NASD. This registered representative's, Series 7 teacher drilled it into his head. Rule 405 is all about "knowing your customer."

Due diligence must always be done, before a customer's brokerage account is approved. The NASD takes the client's risk very seriously. Not all brokerage accounts are opened, because of the risk, the customer is willing to take. For example if a 75 year old, client wants to trade the QQQ Futures, and only has $25,000 in total assets, the application for this account will hopefully be rejected. Based on this example, any investment strategy that involves any risk may be unsuitable for this client.

Suitability is the hallmark of "knowing your customer." Always take the time to have your clients do a risk tolerance assessment, as a precursor, before a brokerage account is opened. Update this file at least once a year, to make sure nothing has changed. Some so called "investors" are pure gamblers with their life savings. From a moral and liability standpoint, a brokerage firm should disassociate themselves from such clients. A broker should not pursue this type of business. Otherwise, your Errors & Omissions company will be canceling coverage, real soon.

It is necessary to know where your client's money comes from. A client that makes $35,000 a year, but has weekly deposits of $10,000, should alarm your brokerage firm. Since 9/11, brokerage firms and insurance companies are more conscious about the possibility of laundered money. The Patriot Act, created as a result of the incident, has made "knowing your customer" even more meaningful. You must be provided with required financial information, otherwise the client's account will be rejected.

As a broker or brokerage firm you have a duty to "know your customer." This is a mandate straight from the NASD. Since 9/11, it is more important than ever to make sure your client's money is clean. Doing risk tolerance assessments of potential clients is important, to protects you and the future, client's financial security.

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