know-your-customer rule

Rule 405

A New York Stock Exchange rule requiring investment advisers to only make or recommend investments for their clients' accounts that a "prudent person" would make. This means that investment advisers are not allowed to make investments they believe will lose money for the client. It does not require that the investment adviser always make correct decisions; it merely requires him/her to make decisions that will be generally accepted as sound for someone of average intelligence who seeks to do what is in the client's best interests as the client defines them. It is an example of a suitability rule. See also: Prudent-Person Rule.

know-your-customer rule

A requirement that brokers understand the financial needs and circumstances of a customer before providing investment advice.
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Regulated financial institutions have to play cop by enforcing tight know-your-customer rules.
As a substantial proportion of customer relationships are with nonresidents, adherence to know-your-customer rules is an area of focus for efforts to limit illicit money from foreign criminal activity.
know-your-customer rules require financial institutions to develop and maintain a written customer identification program and anti-money laundering policies and procedures.
A company in the business of providing fiduciary services as a trustee and subject to approved know-your-customer rules may obtain QI status.
The ratings also consider the regulatory and legal risks such as know-your-customer rules and the changing laws, tax statutes and regulations, which can lead to a high amount of surrenders (as experienced in 2009 for swisspartners Versicherung AG).
The tradition of secrecy in the precious metals and stones trade makes it difficult for law enforcement to detect and deter money laundering in this sector, even though dealers in precious metals and stones are required to implement know-your-customer rules.
The ratings also consider the intense competition to provide wealth management services to the finite target market for high net worth individuals as well as regulatory and legal risks such as know-your-customer rules and remaining compliant with changing laws, tax statutes and regulations.