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Industry Spotlight > Broker Dealers

Treasury Proposes Broker-Dealer Patriot Rule

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NU Online News Service, July 18, 3:25 p.m. — Washington

Broker-dealers should evaluate at least seven “risk factors” when determining how to set up the customer identification program mandated by the USA Patriot Act, according to a proposed rule released by the Treasury Department.

The proposed rule is supposed to give broker-dealers guidance on what constitutes “reasonable procedures” under the USA Patriot Act.

The USA Patriot Act, which was enacted in the aftermath of the Sept. 11, 2001, terrorist attacks, requires financial institutions to implement “reasonable procedures” to identify customers and determine whether the customers might appear on lists of known or suspected terrorists.

Treasury also released proposed rules for the banking and mutual fund industries, and it will soon release a proposed rule for the insurance industry.

The American Council of Life Insurers, Washington, says the broker-dealer rule alone would have a significant effect on the distributors of variable insurance and annuity products.

“For example, they will be involved in detailed verifications of their customers’ identities, ensuring customers have government issued identification,” says Carl Wilkerson, the ACLI’s chief counsel for securities.

“In effect, variable product distributors will have to ensure their customers are the people they say they are,” he says.

Wilkerson says the ACLI is now reviewing the proposed rule on broker-dealers.

Specifically, the proposed rule says that, when broker-dealers are setting up a customer identification program, they should consider several risk factors. The proposal notes, however, that the listing of risk factors is for guidance only and is not meant to be an exhaustive list.

The first factor, the proposal says, is the broker-dealer’s size.

A large firm that opens a substantial number of accounts on a given day will have different risks than one that only opens one or two a month, the proposal says.

The same is true with respect to the number of branches, the proposal adds.

The second risk factor is location. The proposal says firms should assess whether they are located in areas where money-laundering activities are known to exist or where risks of money laundering are high.

The third factor is the method by which the account is opened.

The proposal says accounts opened exclusively on-line present different, and perhaps greater, risks than those opened in person.

The fourth and fifth factors are the types of accounts and transactions offered by the broker-dealer.

The proposal says broker-dealers should assess whether there are different risks associated with the various types of accounts they provide.

In addition, the proposal says, broker-dealers should examine the transactions they execute, such as short sales, over-the-counter derivatives deals or block trades.

The sixth factor is customer base. Broker-dealers should assess the risks associated with different types of customers, such as those situated in countries identified as locations of “primary money-laundering concern.”

The seventh factor is whether the broker-dealer can rely on another broker-dealer, with which it shares an account relationship, to undertake any of the steps required under the proposal.

As for the required information, the proposal notes that the USA Patriot Act requires name, date of birth, address and some type of documentation number, such as a Social Security number, for each customer.

Beyond that, the proposal says broker-dealers, in analyzing the risk factors, should determine whether other identifying information is necessary to form a reasonable belief as to the true identity of each customer.

The proposal also outlines verification procedures and recordkeeping requirements.

Treasury is seeking written comments on the proposed rule, which must be submitted no later than 45 days after the proposal is published in the Federal Register.

Links to more information about the proposed broker-dealer rule and other proposed USA Patriot Act rules are available on the Treasury Web site, at


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