February 12, 2004
Mr. Alan Sorcher
Re: Financial Recordkeeping and Reporting of Currency and Foreign Transactions / Broker-Dealer Customer Identification Rule
Dear Mr. Sorcher:
I am writing in response to your letter of January 6, 2004, concerning the reliance provisions in the new broker-dealer customer identification rule ("CIP Rule").1 Specifically, you have asked whether the staff of the Division of Market Regulation would recommend to the Securities and Exchange Commission ("Commission") that enforcement action be taken if broker-dealers treat registered investment advisers ("advisers") as if they were subject to an anti-money laundering program rule under 31 U.S.C. 5318(h) ("AML Rule") for the purposes of paragraph (b)(6) of the CIP Rule.2
I understand the following facts are pertinent to your question. On April 29, 2003, the Commission issued the CIP Rule jointly with the Treasury3 under Section 326 of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act).4 The rule is codified in 31 CFR Part 103,5 which contains regulations under the Bank Secrecy Act ("BSA").6 Commission Rule 17a-87 requires broker-dealers to comply with applicable BSA regulations, including the CIP Rule.8
The CIP Rule requires brokers-dealers to implement customer identification programs that contain the following elements: (1) procedures for verifying the identities of customers, (2) procedures for maintaining records of the verification process, (3) procedures for comparing customers with 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.9
Paragraph (b)(6) of the CIP Rule permits broker-dealers to rely on certain other financial institutions to undertake the required elements with respect to shared customers.10 The rule permits such reliance if, among other things, the other financial institution is subject to an AML Rule and regulated by a Federal functional regulator. Paragraph (b)(6) also requires that the reliance be reasonable under the circumstances and that the relied-on financial institution enter into a contract requiring it to certify annually to the broker-dealer that it has implemented an anti-money laundering program, and that it will perform (or its agent will perform) specified requirements of the broker-dealer's customer identification program. The reliance provisions are designed to permit two financial institutions with mutual customers to reach agreements between themselves as to how they should allocate performance of the requirements of the rule and, thereby, rely on one another to avoid unnecessary duplication of efforts with respect to a given customer.
You state that the interrelationship between broker-dealers and advisers is the type of situation intended to be covered by the reliance provisions. In particular, you point out that advisers have the most direct relationship with the customers they introduce to broker-dealers and, therefore, are in the best position to perform some of the requirements of the CIP Rule. You point out that the advisers typically are authorized to direct securities transactions in a securities account opened in the name of the customer at a broker-dealer.11 You also note that some advisers, for competitive reasons, may be hesitant to give broker-dealers direct access to their customers. You report that some advisers have implemented AML programs and will agree to enter into reliance contracts. You argue that broker-dealers will incur unnecessary compliance costs if they are not permitted to rely on advisers.
Because these advisers are registered with the Commission, they meet the requirement that the relied-on financial institution be regulated by a Federal functional regulator. However, they are not currently subject to an AML Rule and, consequently, do not meet this condition of paragraph (b)(6) of the CIP Rule. On April 28, 2003, the Financial Crimes Enforcement Network (FinCEN), Department of the Treasury, proposed an AML Rule for registered investment advisers.12 Final rules have not been adopted. You have asked that broker-dealers be permitted to treat registered investment advisers as if they are subject to an AML Rule for the purposes of paragraph (b)(6) of the CIP Rule. If such relief is granted and Treasury ultimately decides not to issue an AML Rule for advisers, you ask that broker-dealers be permitted to continue relying on advisers under paragraph (b)(6) until thirty days after Treasury publicly announces such a decision.
Based on the foregoing, the Division staff will not recommend enforcement action to the Commission under Rule 17a-8 if a broker-dealer relies on an investment adviser, prior to such adviser becoming subject to an AML Rule, provided all the other requirements and conditions in paragraph (b)(6) of the CIP Rule are met, namely that: (1) such reliance is reasonable under the circumstances; (2) the investment adviser is regulated by a Federal functional regulator; and (3) the investment adviser enters into a contract requiring it to certify annually to the broker-dealer that it has implemented an anti-money laundering program, and that it will perform (or its agent will perform) specified requirements of the broker-dealer's customer identification program. This letter is withdrawn without further action on the earlier of: (1) the date upon which an AML Rule for advisers becomes effective, or (2) February 12, 2005.
This is a staff position with respect to enforcement only and does not purport to express any legal conclusions. It may be withdrawn or modified if the staff determines that such action is necessary to be consistent with the BSA and in the public interest.
Annette L. Nazareth