Identify Account Restriction Scenarios - Series 7

1. What action should be taken if a customer provides suspected fraudulent or altered identification documents?

   Refuse to open or restrict and escalate for fraud/AML review. Suspected fraudulent documents violate CIP and AML requirements, requiring refusal or restriction to avoid facilitating identity theft or money laundering.

2. What should a firm do if it cannot obtain required documentation to open an options account (for example, options agreement)?

   Do not approve options; restrict options trading until documents are received. OCC rules require an options agreement to ensure customers understand risks, prohibiting trading without it to maintain regulatory compliance.

3. What is the appropriate action if an account shows elder financial exploitation indicators and the customer is vulnerable?

   Restrict disbursements as permitted and escalate per firm policy. FINRA Rule 2165 permits temporary holds on disbursements for suspected elder exploitation to protect vulnerable customers from financial harm.

4. What should a firm do if a customer's check or ACH deposit is returned for insufficient funds repeatedly?

   Restrict deposits/trading and consider closing due to payment risk. Repeated insufficient funds indicate high payment risk, prompting restrictions to protect the firm from financial losses and ensure transaction integrity.

5. What is the required action if a customer is subject to a garnishment or levy affecting the account?

   Restrict as required and remit/freeze funds per the levy or garnishment. Garnishments and levies are legal mechanisms to collect debts, requiring firms to restrict accounts and remit funds to satisfy creditor claims.

6. What is the required action when a customer is using the account for potential market manipulation (for example, wash trades)?

   Restrict trading and escalate to compliance/surveillance; possible closure. SEC and FINRA rules prohibit market manipulation, mandating restrictions and escalation to protect market integrity and prevent unfair trading practices.

7. What is the appropriate action if a customer's activity violates firm policy or regulatory requirements and cannot be remediated?

   Close the account and document the reason per firm procedures. Firms may close accounts for unremediable violations to comply with regulations and internal policies, documenting reasons for audit and legal purposes.

8. What is the required action when a customer fails to provide a valid Taxpayer Identification Number (TIN)?

   Refuse to open or restrict the account until a valid TIN is provided. FINRA and IRS regulations require a valid TIN for tax reporting and to prevent identity fraud, necessitating refusal or restriction without it.

9. What should a firm do when CIP verification cannot be completed within a reasonable time after opening?

   Restrict trading and consider closing the account per CIP procedures. CIP rules require timely verification of identity; failure to do so poses compliance risks, prompting restrictions and potential closure to mitigate threats.

10. What is the required action when a customer refuses to provide required CIP identity information at account opening?

    Refuse to open the account (CIP information is mandatory). The USA PATRIOT Act's Customer Identification Program mandates verifying customer identity before opening accounts to combat money laundering and terrorism financing.

11. What should a firm do if it suspects insider trading by a customer in the account?

    Restrict activity and escalate to compliance; possible account closure. Insider trading violates securities laws, requiring firms to restrict activity and escalate to avoid complicity in illegal use of nonpublic information.

12. What action is required when a minor attempts to open an individual brokerage account without a custodian?

    Refuse; open only as a custodial account with an adult custodian. Minors lack legal capacity to contract, so individual accounts are prohibited without a custodian to ensure compliance with securities regulations.

13. What should a firm do when a customer's address cannot be validated and mail is repeatedly returned undeliverable?

    Restrict disbursements/trading until address is updated and verified. Undeliverable mail suggests potential abandonment or fraud, requiring restrictions to verify customer details and prevent unauthorized access.

14. What action is appropriate when a customer refuses to pay a margin call by the deadline?

    Restrict account and liquidate positions as permitted to meet the call. Regulation T allows liquidation of positions if margin calls are unmet to maintain required equity levels and mitigate credit exposure.

15. What is the appropriate action if a customer refuses to provide beneficial ownership information when required?

    Refuse to open or restrict/close the account until information is provided. FinCEN's beneficial ownership rule requires identifying controlling parties for legal entities to prevent anonymous shell companies from laundering money.

16. Which action is required if a customer appears on an OFAC sanctions list or is a blocked person?

    Block or reject transactions and freeze assets as required; notify OFAC. OFAC regulations mandate blocking assets and notifying authorities for sanctioned individuals to enforce U.S. foreign policy and national security goals.

17. What is the appropriate response when there are red flags of money laundering and the source of funds cannot be reasonably explained?

    Restrict activity and escalate to AML; consider closing the account. AML regulations require firms to investigate unexplained funds with red flags to prevent illicit activities, leading to restrictions and potential closure.

18. What action is appropriate when a customer engages in abusive, threatening, or harassing conduct toward firm personnel?

    Restrict service and consider closing the account per firm policy. Firms have discretion to restrict or close accounts for abusive behavior to maintain a safe work environment and uphold professional standards.

19. What is the required action if a customer attempts to open an account using a third party to conceal the true owner (nominee)?

    Refuse or restrict and escalate for AML/beneficial ownership review. AML rules prohibit concealing beneficial owners through nominees, mandating refusal or restriction to ensure transparency and prevent illicit activities.

20. What is the appropriate action when a customer's account has a pattern of unpaid trades or payment failures?

    Restrict trading and consider account closure for credit risk. Patterns of unpaid trades signal credit risk, necessitating restrictions to safeguard the firm's financial interests and comply with risk management policies.

21. What should a firm do if it detects account takeover indicators (for example, suspicious login and disbursement request)?

    Restrict disbursements/trading and verify identity before any transfers. Account takeover indicators suggest fraud, requiring restrictions and identity verification to secure assets and prevent unauthorized transactions.

22. What is the appropriate action if a customer is consistently engaging in free-riding in a cash account?

    Restrict the account (cash-up-front) and possibly close for repeated abuse. Free-riding violates Regulation T by trading without sufficient funds, requiring cash-up-front restrictions to enforce payment discipline.

23. What is the appropriate action if a customer refuses to update account information necessary for suitability or KYC?

    Restrict recommendations and possibly restrict trading until updated. FINRA suitability rules require current customer information for appropriate recommendations, leading to restrictions if updates are refused.

24. What is the appropriate response if a customer's account is under a legal order to freeze assets (for example, court order)?

    Restrict transactions per the order; freeze assets as directed. Firms must comply with court orders to freeze assets to uphold legal processes and prevent dissipation of funds subject to judicial proceedings.

25. What is the required response when a customer refuses to acknowledge or sign required margin disclosures/agreements?

    Do not open margin; restrict to cash-only until agreements are executed. Margin accounts require signed agreements and disclosures to inform customers of risks, restricting to cash-only without them for legal compliance.

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