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FinCEN Proposed Rules, issued April 29, would: n
Require Investment Advisers and Commodity
Trading Advisors (“CTAs”) to adopt antimoney laundering programs (“AML Program”) similar to those required for broker-dealers and mutual funds (comments due within 60 days of publication in Federal Register)(details under
“AML Program Requirements,” below); n
Subject Futures Commission Merchants
(“FCMs”) and Futures Introducing Brokers
(“IBs”) to suspicious activity report filing requirements, tracking the reporting obligations of broker-dealers, and to general recordkeeping and record retention rules under the Bank
Secrecy Act (“BSA”) (comments due within 60 days of publication in Federal Register)(details under “SAR and BSA Recordkeeping
Requirements” below).
Final Customer Identification Program (“CIP”) Rules, issued April 30, will: n
Require banks and trust companies, savings associations, credit unions, securities brokers and dealers, mutual funds, FCMs, and IBs to be in full compliance, by October 1, 2003, with their obligations to establish procedures to verify the identity of new accountholders.
(Details to be provided under separate cover.)
AML PROGRAM REQUIREMENTS
Who is Covered . The proposed rules apply to: n n
Investment Advisers — persons whose principal office and place of business is located in the United States that:
Are registered or required to be registered with the Securities and Exchange Commission
(“SEC”) under Section 203(a) of the Investment n
Advisers Act of 1940 (“Advisers Act”) and report or are required to report in Part 1A of
SEC Form ADV that they have assets under management; or
Are exempt from registration with the SEC pursuant to 203(b)(3) of the Advisers Act and that would be required, if they were registered with the SEC, to report in Part 1A of SEC Form
ADV that they have $30 million or more of assets under management, unless such persons are otherwise required to have an antimoney laundering program under the BSA.
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CTAs — persons registered or required to be registered as a commodity trading advisor with the Commodity Futures Trading Commission
(“CFTC”) under the Commodity Exchange Act
(“CEA”) and that directs client commodity futures or options accounts. “Directs” refers to agreements whereby a person is authorized to cause transactions to be effected for a client’s commodity futures or options account without the client’s specific authorization.
Deadline . Investment advisers and CTAs would need to fully implement their AML Programs within
90 days after the final rule is adopted. Comments on the proposed rules must be submitted within 60 days after publication in the Federal Register. Thus, the very earliest date for compliance, assuming final rules are adopted without delay shortly after the comment period ends, would be fourth quarter of this year.
AML Program Requirements . Investment advisers and CTAs would, under the proposed rules, be required to implement a written AML Program, much like those for mutual funds and other types of financial institutions, which at a minimum must: n
Establish and implement polices, procedures, and internal controls reasonably designed to
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A NTIM ONEY L AUNDERING n n n prevent the investment adviser or CTA from being used for money laundering or the financing of terrorist activities and to achieve and monitor compliance with applicable provisions of the BSA;
Provide for independent testing for compliance;
Designate a person or persons responsible for implementing and monitoring the program; and
Provide for ongoing training.
Each program must be approved in writing by the entity’s board of directors or trustees, or if it does not have one, by its sole proprietor, general partner, or other persons who have similar functions.
FinCEN indicated that the person responsible for overall supervision of the program should be an officer of the firm.
The proposed rules contemplate delegation of examination authority over investment advisers to the SEC and, over CTAs, to the CFTC.
AML Risk Assessment . CIP regulations do not currently anticipate covering activities of investment advisers and CTAs, although they likely will in the future. FinCEN addressed certain customer identification issues in the proposal, in the context of a firm assessing its risk of susceptibility to money-laundering activity.
FinCEN indicated that each AML Program must be tailored to address the risks presented by the nature of the investment adviser or CTA’s services and clients. FinCEN suggested that, in light of each firm’s risk assessment, large firms will likely adopt detailed procedures addressing the responsibilities of the individuals and departments involved in carrying out each aspect of the program and smaller firms are more likely to adopt procedures consistent with their simpler, centralized organizational structure.
According to the FinCEN, investment advisers and
CTAs may exclude from consideration clients for whom the investment adviser or CTA does not manage assets, such as newsletter recipients, which pose minimal money laundering risk.
Pooled Investment Vehicles . On the basis of
FinCEN’s risk assessment model, investment advisers and CTAs may exclude from consideration pooled investment vehicles that are themselves subject to BSA AML Program requirements. For pooled investment vehicles not subject to BSA AML
Program requirements, an investment adviser would need to look through to the investors in the vehicles, utilizing the same money laundering risk criteria as the adviser uses with other, non-pooled clients, only to the extent that the vehicle was created or is administered by the investment adviser.
Otherwise, an investment adviser or CTA must conduct an assessment of the money laundering risk posed by the particular vehicle (e.g., a 401(k) plan poses little risk for money laundering, whereas an offshore vehicle not itself subject to AML Program requirements may present a more significant risk).
In this connection, the firm may take into consideration any impact on risk presented by the third party that created or administers the vehicle
(e.g., the third party administrator is an entity required to have a BSA AML Program). As the potential vulnerability to money laundering increases, the procedures would need to address the increased risks, which may include looking through the vehicle and obtaining and reviewing information about the identity and transactions of its investors.
Dual Registrants . Investment advisers and CTAs that function as more than one type of financial institution (e.g., also registered as a broker-dealer) need not have multiple anti-money laundering programs, so long as the program is appropriately designed to address the different risks posed by the different aspects of the entity’s business and satisfies each of the anti-money laundering program requirements to which it is subject.
Third-Party Service Providers . Investment advisers and CTAs may contractually delegate elements of their AML Programs to third party service providers, but remain fully responsible for the effectiveness of the program. They must also ensure that federal examiners will be able to obtain information and records relating to the program and granted access to inspect the third parties with regard to the program.
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Notice Requirement for Unregistered Investment
Advisers . Unregistered investment advisers subject to these rules must file a notice with FinCEN within
90 days after becoming subject to the AML Program requirement and annually thereafter within 90 days after the adviser’s fiscal year end. The form for the notice will be available on FinCEN’s website.
Future Regulatory Action . FinCEN is currently considering whether investment advisers and/or
CTAs should be required to file suspicious activity reports and maintain account holder identification and verification procedures. FinCEN encourages both investment advisers and CTAs to file suspicious activity reports on a voluntary basis.
SAR AND BSA RECORDKEEPING
REQUIREMENTS
Who is Covered . The proposed rules apply to: n n
FCMs — persons registered or required to be registered as an FCM with the CFTC under the
CEA, except broker-dealers that have notice registered with the CFTC as FCMs for the sole purpose of effecting securities futures products transactions; and
IBs — persons registered or required to be registered as an introducing broker with the
CFTC under the CEA, except broker-dealers that have notice registered with the CFTC as
IBs for the sole purpose of effecting securities futures products transactions.
What is Required . The proposed rules require FCMs and IBs to file suspicious activity reports (“SARs”) as well as comply with the general recordkeeping and record retention rules under the BSA.
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Suspicious Activity Reporting . The suspicious activity reporting requirements, including rules on what must be reported, how to report, when to report, retention of records, confidentiality of reports, and limitations on liability for filing a report, generally track those for broker-dealers and the proposed rules for mutual funds.
FCMs and IBs will be required to file SARs with FinCEN via Form SAR-SF. An FCM or IB is not required to file a SAR for violations by the FCM or IB or any of its officers, directors, employees, or associated persons that would otherwise be reported under the CEA, the regulations of the CFTC or the rules of any registered futures association, as long as such violation is reported to the CFTC or a registered futures association, as required by their rules.
FCMs and IBs will be required to files SARs with respect to transactions that occur 180 days after the final rule is published in the
Federal Register. Filing a report of a suspicious transaction does not relieve an FCM or IB from the responsibility of complying with any other reporting obligation imposed by the CFTC or any registered futures association.
The proposed rules include provisions under which the CFTC is granted examination authority with respect to FCMs and IBs for
BSA compliance.
n
BSA Recordkeeping Requirements. The proposed rule makes a number of BSA recordkeeping regulations applicable to FCMs and IBs that had not applied in the past. These include reporting currency transactions via
Form 4789, instead of the current IRS/FinCEN
Form 8300—which change affects the types of cash transactions that must now be reported – and complying with the funds transfer rules that currently apply to broker-dealers and other non-bank financial institutions.
Please contact Diane E. Ambler (202.778.9886, dambler@kl.com) or András Teleki (202.778.9477, ateleki@kl.com) if you have any questions or would like further information.
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Kirkpatrick & Lockhart LLP offers diverse experience in issues relating to money laundering. We can help banking and diversified financial services clients assess their risk, establish and review compliance practices, investigate potential weaknesses, perform internal investigations, and respond to regulatory inquiries and enforcement actions while being sensitive to the privacy of each client and their customers through an effective attorney-client privilege relationship.
In addition, we have established a website dedicated to issues relating to anti-money laundering regulatory and legislative developments. The website is located at www.kl.com/aml/amlwrc. In addition to outlining
K&L’s enterprise-wide approach to assisting clients with money laundering compliance issues, the website contains a resource center with over 100 carefully selected links to various informational resources on money laundering. The resource center also includes a library of prior K&L publications on money laundering.
We invite you to contact one of the members of our cross-disciplinary anti-money laundering practice team for additional assistance. You may also send general inquiries to antimoney@kl.com.
BOSTON SAN FRANCISCO
Michael S. Caccese
D. Lloyd Macdonald
617.261.3133
617.261.3117
mcaccese@kl.com
lmacdonald@kl.com
Stanley V. Ragalevsky 617.261.9203
sragalevsky@kl.com
Eilleen M. Clavere
Jonathan D. Jaffe
David Mishel
HARRISBURG WASHINGTON, DC
Raymond P. Pepe
LOS ANGELES
William J. Bernfeld
David P. Schack
William P. Wade
NEWARK
Anthony P. La Rocco
NEW YORK
Beth R. Kramer
Richard D. Marshall
Loren Schechter
717.231.5988
rpepe@kl.com
310.552.5014
wbernfeld@kl.com
310.552.5061
dschack@kl.com
310.552.5071
wwade@kl.com
973.848.4014
alarocco@kl.com
212.536.4024
bkramer@kl.com
212.536.3941
rmarshall@kl.com
212.536.4008
lschechter@kl.com
415.249.1047
eclavere@kl.com
415.249.1023
jjaffe@kl.com
415.249.1015
dmishel@kl.com
Diane E. Ambler
Benjamin J. Haskin
Ronald A. Holinsky
Kathy Kresch Ingber
Henry L. Judy
Ivan B. Knauer
Rebecca H. Laird
Charles R. Mills
202.778.9886
202.778.9369
202.778.9425
202.778.9015
202.778.9032
202.778.9468
202.778.9038
202.778.9096
dambler@kl.com
bhaskin@kl.com
rholinsky@kl.com
kingber@kl.com
hjudy@kl.com
iknauer@kl.com
rlaird@kl.com
cmills@kl.com
Michael J. Missal
Jeffrey B. Ritter
202.778.9302
mmissal@kl.com
202.778.9396
jritter@kl.com
Francine J. Rosenberger 202.778.9187
francine.rosenberger@kl.com
Robert H. Rosenblum 202.778.9464
rrosenblum@kl.com
Ira L. Tannenbaum 202.778.9350
itannenbaum@kl.com
Andr á s P. Teleki 202.778.9477
ateleki@kl.com
Richard L. Thornburgh 202.778.9080
rthornburgh@kl.com
Robert A. Wittie 202.778.9066
rwittie@kl.com
PITTSBURGH
Heather Hackett
Mark A. Rush
412.355.6419
hhackett@kl.com
412.355.8333
mrush@kl.com
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This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.
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