More On Legal & Compliancefrom The Advisor's Professional Library
- Registration Requirements for Investment Advisor Representatives (IARs) When individuals launch an advisory firm, they must avoid marketing themselves or the firm as investment advisors before they are properly approved and registered. Otherwise, they are subject to severe penalties.
- Anti-Fraud Provisions of the Investment Advisers Act RIAs and IARs should view themselves as fiduciaries at all times, whether they meet the legal definition or not. Deviating from the fiduciary standard of full disclosure while courting clients may cause the advisor significant problems.
The Treasury Department’s Financial Crimes Enforcement Network (FinCEN), recently issued proposed rules under the Bank Secrecy Act to clarify and strengthen customer due diligence requirements — including anti-money laundering rules — for banks, brokers or dealers in securities, mutual funds, and futures commission merchants as well as introducing brokers in commodities.
FinCEN spokeswoman Candice Basso told ThinkAdvisor Wednesday that FinCEN continues to work with the Securities and Exchange Commission to draft a regulatory proposal on AML programs and suspicious activity reporting for investment advisors. Basso did not have a timeline for when such a proposal would be released.
FinCEN director James Freis had said in late 2011 that FinCEN would work with the SEC as well as state regulators as it “revisited” the topic of advisors having anti-money laundering plans. He said the advisor AML rules would build “on the changes to that industry pursuant to the Dodd-Frank Act, the SEC rules implementing Dodd-Frank and other changes.”
FinCEN’s proposed amendments to the Bank Secrecy Act for broker-dealers, banks and mutual funds would add a new requirement that these entities “know and verify the identities of the real people (also known as beneficial owners) who own, control, and profit from the companies they service.”
Comments on that proposal are due Oct. 3.
As David Cohen, undersecretary for terrorism and financial intelligence at Treasury, explained in an August commentary, the proposed rule takes “an important step” to close a loophole that still exists in financial security: “Banks and brokerages often do not know the identity of the people behind the businesses that open accounts.”
The proposed new regulation would require, when an account is opened, that banks and other financial institutions identify and verify the identity of the “real people behind the businesses who are their customers,” Cohen said. “While this may sound rather technical, it nonetheless is a critically important step forward in the fight against dirty money.”
Treasury says that the proposal will not only increase the ability of financial institutions, law enforcement and the intelligence community to identify the assets and accounts of terrorist organizations, money launderers, drug kingpins and other national security threats, but also facilitate reporting and investigations in support of tax compliance, and advance national commitments made to foreign counterparts in connection with the provisions of the Foreign Account Tax Compliance Act (FATCA).
Anti-money laundering infractions were among the top enforcement issues for the Financial Industry Regulatory Authority during the first half of 2014, in terms of the total fines reported, with FINRA reporting levying $11.3 million in AML fines and 17 AML cases.
Keith Fisher, a lawyer in Ballard Spahr’s Washington office, wrote in a recent legal alert that FinCEN’s proposal has been two years in the making, and that the proposal adds a new requirement for these financial institutions to know the real people who own, control and profit from companies (also known as “beneficial owners”) — and verify their identities.
- Each individual who owns 25% or more of the equity interests in the juridical entity that is the customer of the covered financial institution; and
- One individual who exercises significant managerial control over that customer
“If no individual owns 25% or more of the equity interests, the covered financial institution may identify a beneficial owner under the second prong only,” Fisher says. “The same individual (or more than one) may be identified under both prongs.”
Fisher writes that "another motivation" for FinCEN's recent regulatory proposal is the impending 2015-2016 evaluation of U.S. compliance with international AML and countering the financing of terrorism (CFT) standards established under the aegis of the Financial Action Task Force (FATF).
"Surprisingly, given the breadth and proliferation of AML/CFT regulation in this country, the prior (2006) FATF evaluation of the United States was only 'partially compliant' overall," Fisher writes, "with special criticism (and a 'non-compliant' category rating) for the lack of a beneficial ownership regime."
Related on ThinkAdvisor:
- FINRA’s 5 Biggest Fine Categories in First Half of 2014
- Treasury’s Crime Unit Drafting Anti-Money-Laundering Rule for Advisors