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Rule 405. Diligence as to Accounts

This rule is no longer applicable. Incorporated NYSE Rule 405 has been superseded by FINRA Rule 2111. Please consult the appropriate FINRA Rule.

Every member organization is required through a principal executive or a person or persons designated under the provisions of Rule 342(b)(1) [¶2342] to

(1) Use due diligence to learn the essential facts relative to every customer, every order, every cash or margin account accepted or carried by such organization and every person holding power of attorney over any account accepted or carried by such organization.
(2) Supervision of Accounts

Supervise diligently all accounts handled by registered representatives of the organization.
(3) Approval of Accounts

Specifically approve the opening of an account prior to or promptly after the completion of any transaction for the account of or with a customer, provided, however, that in the case of branch offices, the opening of an account for a customer may be approved by the manager of such branch office but the action of such branch office manager shall within a reasonable time be approved by a principal executive or a person or persons designated under the provisions of Rule 342(b)(1) [¶2342]. The member, principal executive or other designated person approving the opening of the account shall, prior to giving his approval, be personally informed as to the essential facts relative to the customer and to the nature of the proposed account and shall indicate his approval in writing on a document which is a part of the permanent records of his office or organization.
(4) Common Sales Accounts

To facilitate the isolated liquidation of securities valued at $1,000 or less registered in the name of an individual who does not have an account, and which are not part of any distribution, a member organization may sell the securities through a common sales account set up for the specific purpose of handling such sales without sending a periodic statement to the customer as required by Rule 409, provided:
a) The customer is identified as the individual in whose name the securities are registered,
b) The securities are received by the member, at or prior to the time of the entry of the order, in the exact amount to be sold in good delivery form,
c) A confirmation is sent to each customer,
d) All proceeds of such sales are paid out on or immediately following settlement date, and
e) The record made in the common sales account includes as to each transaction: customer's name and address, name and amount of securities to be sold, date received, date sold, amount per share, total amount credited to the account, total amount of check issued to the customer and the date of disbursement.
December 22, 1969.
March 26, 1970.
Amended by SR-FINRA-2008-036 eff. Nov. 11, 2008.
Amended by SR-FINRA-2010-005 eff. June 14, 2010.

Selected Notice: 08-64.

• • • Supplementary Material: --------------

.10 Application of Rule 405(1) and (3) [¶2405]

In the case of a margin account carried by a member organization for a non-member corporation, definite knowledge should be had to the effect that the nonmember corporation has the right under its charter and by-laws to engage in margin transactions for its own account and that the persons from whom orders and instructions are accepted have been duly authorized by the corporation to act on its behalf. It is advisable in each such case for the carrying organization to have in its possession a copy of the corporate Charter, By-laws and authorizations. Where it is not possible to obtain such documents, a member or principal executive in the member organization carrying the account should prepare and sign a memorandum for its files indicating the basis upon which he believes that the corporation may properly engage in margin transactions and that the persons acting for the corporation have been duly authorized to do so.

In the case of a cash account carried for a non-member corporation, the carrying member organization should assure itself through a general partner or an officer who is a holder of voting stock that persons entering orders and issuing instructions with respect to the account do so upon the proper authority.

When an agency account is carried by a member organization its files should contain the name of the principal for whom the agent is acting and written evidence of the agent's authority.

When Estate and Trustee accounts are involved a member organization should obtain counsel's advice as to the documents which should be obtained.

Information as to the country of which a customer is a citizen is deemed to be an essential fact.
.20 See Rule 382 for information concerning the permitted allocation of responsibilities under (1) and (3) of this Rule between introducing and carrying organizations.
.30 See Rule 414 (Index and Currency Warrants) for account approval and suitability requirements relating to currency warrants, currency index warrants and stock index warrants.
December 19, 1968;
March 26, 1970;
February 19, 1982;
June 26, 1990;
August 29, 1995.
Amended by SR-FINRA-2008-036 eff. Nov. 11, 2008.

Selected Notice: 08-64.

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