Recognize the controlling condition
Knowing a customer includes understanding essential account facts and who is authorized to act. A relative, a long relationship or an urgent message does not automatically confer discretion. Compare the actual customer instruction with the action proposed. Knowing essential customer facts includes information needed to service the account and understand authority to act. Discretionary trading requires the applicable documented authority and firm acceptance, not an assumed permission. Essential account facts include identifying persons with authority to act for the customer. A limited customer instruction does not automatically grant discretion to select a different security.
Work a decision from its evidence
A firm opens an account but has not gathered the essential facts about the customer and authorized persons. The appropriate response is to obtain the essential customer and authority information required for account handling. The decisive reason is: Knowing essential customer facts includes information needed to service the account and understand authority to act. Compare the tempting alternative "Assume the customer's name alone establishes every relevant fact.". A name alone does not establish all essential facts relevant to account administration. Before choosing, identify the specific condition that makes this rule applicable. Do not transfer a number, exception, or permission to a different situation without checking its conditions.
Contrast a different mistake
A representative wants to choose securities for a customer without obtaining the required written authorization and firm acceptance. Here the appropriate response is: Obtain the required customer authorization and firm acceptance before discretionary trading. A different proposed response is "Assume a long customer relationship automatically grants discretion.". The length of a relationship does not itself establish discretionary authority. The difference between these cases is the source of the risk or obligation, not a change in the decision maker's preference. Explain the distinction before reading the answer to the linked example.
Apply and check the method
Before acting, identify the account holder, the authorized person, the scope of the instruction and any applicable written discretionary arrangement. A favorable outcome cannot retroactively create missing authority. Verify the permission before selecting or changing securities for someone else. For know your customer, ask whether the proposed response addresses this condition: Knowing essential customer facts includes information needed to service the account and understand authority to act. For discretionary authority, ask whether the proposed response addresses this condition: Discretionary trading requires the applicable documented authority and firm acceptance, not an assumed permission. For account instructions, ask whether the proposed response addresses this condition: Essential account facts include identifying persons with authority to act for the customer. For unauthorized discretion, ask whether the proposed response addresses this condition: A limited customer instruction does not automatically grant discretion to select a different security. Check the explanation against the cited reference, then answer the associated case items without using the option length or answer position as a clue.
A firm opens an account but has not gathered the essential facts about the customer and authorized persons. What is the most appropriate response?
- Identify the controlling condition: Know your customer.
- Knowing essential customer facts includes information needed to service the account and understand authority to act.
- Apply it: Obtain the essential customer and authority information required for account handling.
- Compare the alternative "Assume the customer's name alone establishes every relevant fact.": A name alone does not establish all essential facts relevant to account administration.
Compare the other answer choices
A name alone does not establish all essential facts relevant to account administration.
Authority must be properly established, not inferred from an unverified message.
A small initial transaction does not create a general exemption from the account obligation.
Try it, then explain it.
Complete a short set without looking at the example. After each answer, explain which evidence or rule supports your decision and why the alternatives do not fit.
Sources & authorship
Original Slope explanations and examples. References support the concepts; they are not the source of copied questions. Independent educator review is pending.
FINRA Rule 2090: Know Your CustomerFINRA Rule 3260: Discretionary Accounts