In a December 9, 2020, letter, the US Securities and Exchange Commission (“SEC”) extended its no-action relief to broker-dealers in securities (“broker-dealers”) that wish to rely on investment advisers to perform the broker-dealer’s obligations under US federal anti-money laundering (“AML”) customer identification program and beneficial owner identification regulations. First provided in 2004 regarding customer identification programs, this no-action relief has been renewed several times since then. The latest no-action relief was set to expire on December 12, 2020.
Broker-dealers, banks, mutual funds and futures commission merchants and introducing brokers (“covered companies”) must establish and maintain risk-based customer identification programs (“CIP”) that include procedures that will enable the covered company “to form a reasonable belief that it knows the true identity of each customer.” The CIP regulation requires that the covered company obtain certain identifying information from a customer when opening an account, and verify the identity of the customer through documentary or non-documentary procedures.
In addition, under the beneficial owner regulation, the same covered companies subject to the CIP regulation must identify the beneficial owners of certain of their legal entity customers (“covered customers”) and incorporate customer due diligence procedures into their required AML compliance programs. Subject to certain exemptions, information must be obtained from (i) each individual owning 25% or more of the equity interest of a legal entity customer and (ii) an executive officer or senior manager of the legal entity.
A prospective customer may be referred to a covered company by another affiliated or unaffiliated financial institution that already may have existing identifying information relating to the prospective customer. Under certain circumstances, both the CIP and beneficial owner regulations allow a covered company to rely on the performance by another financial institution (including an affiliate) of any of the covered company’s CIP or beneficial owner procedures with respect to any covered customer that either is opening an account or already has an established business relationship with the referring financial institution, provided that:
- The reliance is considered reasonable under the circumstances;
- The other financial institution is required to establish an AML compliance program and is regulated by a Federal functional regulator; and
- The other financial institution enters into a contract requiring it to certify annually to the covered company that it has implemented its AML compliance program, and that it will perform (or its agent will perform) specified requirements of the covered company’s CIP or beneficial owner procedures.
If the conditions for reliance cannot be met, a covered company still may obtain identifying information from a referring third party, but it must independently verify such information and cannot rely on any verification procedures that the referring party may have undertaken.
Investment advisers currently are not subject by regulation to any federal AML compliance requirements, including the CIP and beneficial owner requirements. An investment adviser may be subject to AML compliance requirements if its fits in another category of financial institution, such as broker-dealer, but the investment adviser function alone does not currently trigger any federal AML compliance requirements. A proposed rule was issued in 2003 that would subject registered investment advisers to AML compliance requirements, but was later withdrawn in 2008. A new proposed rule was issued by FinCEN in 2015 to require registered investment advisers to maintain AML compliance programs and report suspicious transactions, but remains pending.
In February 2004, while the 2003 proposed investment adviser AML compliance program regulation still was pending, the SEC’s Division of Trading and Markets (then known as the Division of Market Regulation) issued its first no-action letter stating that it would not recommend an enforcement action to the SEC Commissioners if for purposes of the CIP, a broker-dealer treated a registered investment adviser as if it were subject to an AML compliance program requirement, provided it complied with the conditions for reliance set forth in the CIP regulation.
The original no-action letter was to be considered withdrawn on the earlier of: (1) the date upon which an AML compliance program regulation for registered investment advisers became effective, or (2) February 12, 2005.
The no-action relief was extended several times and along the way, additional conditions were added to the no-action relief. In 2016, the no-action relief was extended to the requirements under the beneficial owner rule.
In the December 9, 2020 letter, the no-action relief, to allow a broker-dealer to treat a registered investment adviser as if it were subject to an AML compliance program regulation for purposes of both the CIP and the beneficial owner reliance requirements, was extended until the earlier of (1) the date upon which an AML compliance program regulation for investment advisers becomes effective, or (2) two years from the date of the letter (December 9, 2022), subject to the following conditions:
- The broker-dealer complies with the other requirements of the CIP and beneficial owner regulations
- The broker-dealer’s reliance on the investment adviser is reasonable under the circumstances, which will include conducting due diligence on the investment adviser both before the reliance begins and afterwards;
- The investment adviser is a U.S. investment adviser registered with the SEC under the Investment Advisers Act of 1940;
- The investment adviser enters into a contract with the broker-dealer in which the investment adviser agrees that:
- it has implemented its own AML compliance program consistent with the statutory requirements for such programs and will update the compliance program as necessary to implement changes in applicable laws and guidance,
- 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 the reliance requirements,
- 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 fulfill its responsibilities to report suspicious transactions and file a Suspicious Activity Report, as appropriate based on the broker-dealer’s judgment,
- it will certify annually to the broker-dealer that the representations in the reliance agreement remain accurate and that it is in compliance with such representations, and
- it will promptly provide its books and records relating to its performance of the CIP and/or beneficial ownership procedures to the SEC, to a self-regulatory organization (SRO) that has jurisdiction over the broker-dealer, or to authorized law enforcement agencies, either directly or through the broker-dealer, at the request of (i) the broker-dealer, (ii) the SEC, (iii) an SRO that has jurisdiction over the broker-dealer, or (iv) an authorized law enforcement agency.