Why Do Brokers Ask for Personal Information?

When investors contact brokers, they are often surprised by the number of requests for personal information. The broker is just complying with the law and rules set forth by the Securities Exchange Commission (SEC).

Indeed, certain required information must be obtained before a broker can make any trades on behalf of a client. These include your social security number or tax ID, your contact information, and whether or not you are an insider at any publicly-traded corporation.

SSN Requirements for Trading Stocks

Broker-dealers in the U.S. are required to record a Tax Identification Number (TIN) for their clients, and this number is usually a Social Security Number (SSN). However, there are several other ways for non-U.S. citizens to supply a TIN. In many cases, a valid passport number, an alien registration card number, and other government-issued ID numbers (such as a driver’s license number) can be used.

Personal Information

Brokers don’t ask investors for their personal information to make conversation. There’s a perfectly good reason behind it—they have to ask. The type of information required of a broker is spelled out in Rule 17a-3(a)(17) of the Securities Exchange Act of 1934. The Rule specifically requires the customer’s name, SSN/TIN, mailing address, telephone number, date of birth, employment status (including occupation and whether the customer is an associated person of an exchange, a broker, or a dealer), annual income, net worth (excluding the value of a primary residence), and investment objectives.

Tax compliance is one reason that brokers need personal information. Investors need to report capital gains, losses, and dividends to the IRS. It follows that brokers must have this data in order to send the required forms each year.

The SEC lists three other reasons why brokers are required to ask for personal information. They are suitability, record-keeping requirements, and anti-terrorist / anti-money laundering (AML) laws.

Suitability

Suitability refers to how an investor’s financial situation matches the advice and recommendations that are given by a broker. A broker must attempt to understand an investor’s circumstances and preferences. The broker should then provide recommendations that are suitable for that person and their investment objectives. A broker who does not do that violates rules laid out by the National Association of Securities Dealers.

Relevant information includes an individual’s risk tolerance, financial goals, the amount of debt an investor owes, the number of years to retirement, and net worth. A good broker will tailor advice to particular situations. If a broker advises you to take any action in direct contradiction of your financial goals and circumstances, you might even have grounds for legal action.

Record Keeping

Rules set out by the SEC require brokers to maintain a current record of personal information. Note that if a client refuses to provide this data, the broker is excused from following the rule. However, the broker must be able to prove that an effort was made to obtain and document the information.

Keep in mind that some personal information may change over time. It is the investor’s responsibility to volunteer such new information to update the record. Still, a broker may ask for updates on an annual basis. Address changes may be of particular importance because the investor will receive a prospectus and other information for each investment.

Terrorism and Money Laundering

Finally, the broker must provide client information to meet anti-money-laundering and anti-terrorist financing requirements. The minimum requirements for this section include:

• Name
• Address (home or business address, not a P.O. Box)
• Tax Identification Number (TIN), such as a Social Security Number (SSN)
• Date of birth (for a person)

This information allows the broker to verify the client’s identity. The client’s personal data is cross-checked against lists of known or suspected terrorists.

These requirements can create issues for misidentified individuals and victims of identity theft. An identity check in such a case may reveal that an identity has been stolen and is being abused for money laundering purposes. Before visiting a broker, it is a good idea to review credit reports for signs of unusual activity. One of the best credit monitoring services would likely be useful in this endeavor. There are also services that monitor Social Security Numbers to spot potential theft.

Additional Information

The Financial Industry Regulatory Authority (FINRA) has a list of other personal information a broker may ask when opening an account. While not required, it suggests that investors pass these details on so the firm can better serve their trading and investment needs:

• Contact person: They may ask for the name, address, and telephone number of a trusted contact person. FINRA states that this is not a requirement. This information is only needed if the broker is authorized to disclose information in the event of financial exploitation.
• Type of account: The broker may ask investors if they want to open cash accounts or margin accounts. In a cash account, investors are required to pay for their trades with cash deposits. Margin accounts are needed for using most types of leverage and trading derivatives.
• Uninvested cash: Investors may also be asked how they intend to deal with cash on hand in their accounts. That includes any money they deposit at regular intervals, dividends, or interest on investments. Automatic reinvestment plans usually boost returns in the long run.

Online Brokerages and Trading Platforms

Some brokerages have traditional offices, which means that investors are able to supply confidential information in person. Transferring data in person can reduce the risk of identity theft.

When trading online, investors are often required to give up personal information through the trading platform or app.

However, due diligence remains crucial online. Just as with any traditional broker, investors need to know who is getting their information. Read up on the brokerage’s background and check out reviews to see if it is legitimate. Beware of fake apps and online platforms designed to harvest personal information. Legitimate apps will usually have a large number of users and reviews.