SEC expands CIP relief for brokers

Broker-dealers have secured a pre-Christmas compliance boost: more time during which they will be able to use investment advisers (IAs) to collect security-based information on clients. 

Specifically, the SEC has extended regulatory relief under which it will not recommend enforcement action be brought against a broker-dealer that treats an IA as if it were subject to an anti-money laundering (AML) program rule for the purposes of complying with the customer identification program (CIP) rule and/or the recently implemented beneficial ownership rule, provided certain conditions are met (see Conditions, below).

Among other things, the broker-dealer’s reliance on an IA for such work must be reasonable. In determining this reasonableness, the SEC writes that it understands broker-dealers wanting to rely on the no-action position will undertake appropriate due diligence on the IA that is commensurate with the broker-dealer’s assessment of the money laundering risk presented by the adviser and the IA’s customer base.

‘Such due diligence would be undertaken at the outset of the broker-dealer’s relationship with the investment adviser, and updated during the course of the relationship, as appropriate,’ writes Emily Westerberg Russell, senior special counsel with the SEC’s division of trading and markets, in a related filing.

The new relief extends the effectiveness of a 2015 no-action letter and applies that position to the beneficial ownership requirements until the earlier of the date when an AML program rule for IAs becomes effective or December 12, 2018.


PATRIOT ACT
The SEC has been granting similar relief since issuing a letter in 2004 in consultation with the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). The CIP rule, which was adopted under the 2001 USA Patriot Act, requires broker-dealers to adopt written programs that include risk-based procedures for verifying the identity of customers.

The rule allows broker-dealers to rely on certain financial institutions to perform CIP procedures with respect to shared customers where:

• It is reasonable under the circumstances
• The relied-on financial institution is subject to an AML program rule under the Bank Secrecy Act
• The relied-on financial institution enters into a contract requiring it to certify annually to the broker-dealer that it has implemented its AML program and that it, or its agent, will perform specified requirements of the broker-dealer’s CIP.

The provision was intended to allow firms with shared customers to agree how they will allocate the performance of CIP requirements and, thereby, ‘rely on one another to avoid unnecessary duplication of efforts with respect to a given customer,’ writes Aseel Rabie, Securities Industry and Financial Markets Association (Sifma) associate general counsel, in the industry group’s request for the latest relief.

Similarly, under FinCEN’s beneficial ownership rule completed earlier this year, each broker-dealer must have written procedures that are reasonably designed to identify and verify the identity of the beneficial owners of legal entity customers. The beneficial ownership rule also allows broker-dealers to rely on another firm to carry out their requirements with regard to any legal entity customer of the broker-dealer that has an account or a similar business relationship with the other firm – subject to the same conditions as under the CIP rule.

The original no-action relief was granted in 2004 and has been renewed every few years since because no AML program rule for IAs has been in effect. That continues to be the case, even though FinCEN proposed such a measure last year.

In the letter requesting a new extension, Rabie writes that broker-dealers continue to rely on the no-action relief and urges the SEC to continue to make it available. In addition, she successfully requests that the agency grant no-action relief with respect to the reliance provisions of the new beneficial ownership rule, which will become effective on May 11, 2018.

‘Sifma believes that the interaction between broker-dealers and [registered] IAs is precisely the type of relationship intended to be covered by the reliance provisions,’ Rabie writes. ‘[Registered] IAs often have the most direct relationship with the customers they introduce to broker-dealers, and are best able to obtain the necessary documentation and information from and about the customers.

‘Moreover, [registered] IAs are often reluctant to have a broker-dealer contact the customer because they view the broker-dealer as a competitor. [Registered] IAs are thus best positioned to perform some or all of the requirements of the CIP rule, and particularly to perform requirements under the new beneficial ownership rule, which pertains to information not about a customer but about the beneficial owners of that customer.’


CONDITIONS
The no-action relief is conditional upon other provisions of the CIP rule, the beneficial ownership requirements being met and:

• The broker-dealer’s reliance on the IA is reasonable under the circumstances
• The IA is American and registered with the SEC
• The IA enters into a contract with the broker-dealer in which the IA agrees that:

(i)  It has implemented its own AML program and will update the program as necessary to implement changes in applicable laws and guidance

(ii)  It or its agent will perform the specified requirements of the broker-dealer’s CIP and/or the broker-dealer’s beneficial ownership procedures in a manner consistent with Section 326 of the Patriot Act and beneficial ownership requirements

(iii)  It will promptly disclose to the broker-dealer potentially suspicious or unusual activity detected as part of the CIP and/or beneficial ownership procedures being performed on the broker-dealer’s behalf in order to enable the broker-dealer to file a suspicious activity report, where appropriate

(iv)  It will certify annually to the broker-dealer that the representations in the reliance agreement remain accurate

(v)  It will promptly provide its books and records relating to its performance of the CIP and/or beneficial ownership procedures to the commission or a self-regulatory organization that has jurisdiction over the broker-dealer or to law enforcement agencies when asked.