WASHINGTON (HedgeWorld.com) – The division of clearing and intermediary oversight of the Commodity Futures Trading Commission issued a no-action letter that will permit futures commission merchants and introducing brokers to rely on the customer identification procedures of certain commodity trading advisers with respect to shared customers.
The letter is in response to a request from Barbara B. Wierzynski, executive vice president and general counsel of the Futures Industry Association, Washington.
Ms Wierzynski wrote the CFTC on this point May 5, 2004. James L. Carley, director of the division of clearing, replied March 14, 2005.
The issue arose because on April 29, 2003, the CFTC, in conjunction with the Financial Crimes Enforcement Network of the Treasury Department, issued its customer identification procedures rule, requiring futures commission merchants and introducing brokers to establish procedures that contain the following elements: (1) procedures for verifying the identities of customers; (2) procedures for making and maintaining records of the verification process; (3) procedures for checking customer names against lists of known or suspected terrorists or terrorist organizations; and (4) procedures for providing customers with notice that information is being collected to verify their identities.
The customer identification rule allowed futures commission merchants and introducing brokers to rely on certain financial institutions to perform procedures within that list with respect to shared customers when three conditions are met: (1) it is reasonable under the circumstances; (2) the relied-upon financial institution is itself subject to an anti-money laundering procedures rule; and (3) the relied-upon institution enters into a contract requiring it to certify annually to the futures commission merchant or introducing broker that it has implemented an anti-money-laundering procedure.
Ms Wierzynski’s request observed that the staff of the Securities and Exchange Commission has granted relief that allows brokers and dealers to rely upon investment advisers that are registered with the SEC to perform elements of a broker or dealer’s customer identification. She also noted that although FinCEN has proposed anti-money-laundering rules for certain registered commodity trading and investment advisers, final rules have not yet been adopted, which arguably means that reliance upon such institutions at this time fails the second of the above three tests for permissible reliance.
Based on those considerations, Mr. Carley replied, in an abbreviation-laden statement, “and with the consent of FinCEN as this relates to a joint rulemaking, this Division will not recommend that the [CFTC] commence any enforcement action against FCMs or IBs for failure to comply … if an FCM or IB relies upon a CTA that either is registered with the [CFTC] as a CTA or is exempt from such registration … because it is registered as an IA with the SEC prior to the time that such CTA becomes subject to an AMLP rule.”
Mr. Carley also cautioned that this letter doesn’t impose any obligations upon commodity trading advisers, so a futures commission merchant or introducing broker hoping to benefit from such reliance will still have to ensure that the commodity trading adviser has affirmatively entered into an agreement with it, and even then will only apply with respect to those customer identification procedure elements specifically set out in that agreement negotiated between the adviser and the futures commission merchant or introducing broker.
Contact Bob Keane with questions or comments at: firstname.lastname@example.org.