Why Opening An Account Requires Verification

Opening a brokerage account involves questions that seem unrelated to buying securities. Each of them traces to an obligation the firm carries rather than to curiosity.

Identifying the customer

Firms are required to verify the identity of anyone opening an account, collecting name, address, date of birth and a government identification number.

The requirement stems from anti-money-laundering rules that make financial institutions responsible for knowing who they are dealing with.

Verification may be documentary or performed against databases, and a mismatch typically triggers a request for supporting documents rather than a refusal. Firms are also expected to monitor activity afterward, so the obligation does not end once the account is open.

Suitability and the profile questions

Questions about income, net worth, investment objectives and experience support obligations that apply when a firm makes recommendations.

The profile also determines which capabilities the account may be approved for, including margin and options, each of which has its own approval standards.

Answers are used by the firm to assess appropriateness, so understating experience can restrict access and overstating it removes a protection.

The employment and affiliation questions

Applicants are asked whether they work for a broker-dealer, which triggers requirements that the employing firm receive duplicate statements.

They are also asked whether they are a director, officer or large shareholder of a public company, because trading in that company's shares is subject to additional restrictions.

Political exposure questions relate to separate obligations concerning certain officials and their close associates, which require enhanced review rather than denial of the account. None of these questions restrict ordinary applicants, and answering them accurately avoids delays later.

The agreements being signed

The account application incorporates a customer agreement covering custody, margin terms, securities lending eligibility and the handling of orders.

Most such agreements include a provision requiring disputes to be resolved through arbitration rather than in court, which is a substantive term.

These documents are provided at opening and are the governing record of the relationship, whatever any subsequent conversation suggests.

Why the process has grown longer

Requirements have accumulated across identity verification, tax reporting and account protection, each added in response to a specific concern.

Firms also perform their own risk assessment, which can result in additional questions for certain account types or funding sources.

Applicable rules vary by account type and by jurisdiction and change over time, and the firm's compliance function is the source for what applies in a given case.