Compliance Risk Concepts
Client Login
compliance risk logo-2024

Monthly Regulatory Summary (January 2024)

Monthly Regulatory Summary (January 2024)

CRC-Exploring-Thinning-Admin
No Comments
February 29, 2024

As the regulatory landscape is constantly evolving, Compliance Risk Concepts (“CRC”) is issuing its monthly review and summary of various FINRA, SEC, NFA, and FinCEN publications to assist our clients in keeping abreast of notable regulatory developments and deadlines in an effort to strengthen their compliance and regulatory initiatives.

FINRA

Regulatory Notices

Per Regulatory Notice 24-01, FINRA’s Renewal Program supports the collection and disbursement of fees related to the renewal of broker-dealer (BD) and investment adviser (IA) registrations, exempt reporting and notice filings with participating self-regulatory organizations (SRO) and jurisdictions. During this program, FINRA announces renewal fees BD and IA firms owe via Preliminary Statements issued in November. FINRA publishes Final Statements in January to confirm or reconcile the actual renewal fees BD and IA firms owe after Jan. 1, 2024.

FINRA is issuing this Notice to help firms review, reconcile and respond to their Final Statements in E-Bill as well as view the reports that are currently available in the Central Registration Depository (CRD) and Investment Adviser Registration Depository (IARD) systems for the annual registration renewal process.

The deadline to remit payment for any additional amounts owed and to report any discrepancies to FINRA is Jan. 26, 2024. It is critical that firms ensure they pay in full or report discrepancies by this deadline. More information about reporting discrepancies, as well as key dates, is provided below.

Firms should also refer to the following web pages for additional information and resources:

Questions concerning this Notice should be directed to the FINRA Support Center at (301) 869-6699.

Per Regulatory Notice 24-02, FINRA is issuing this Notice to announce the effective dates of two new supplementary materials under FINRA Rule 3110 (Supervision) as follows:

  • Rule 3110.19 (Residential Supervisory Location) becomes effective on June 1, 2024; and
  • Rule 3110.18 (Remote Inspections Pilot Program) becomes effective on July 1, 2024.

FINRA expects to publish additional guidance outlining in greater detail operational processes for compliance with the data and information requirements of Rules 3110.18 and 3110.19.

The rule text for Rules 3110.18 and 3110.19 is available in Attachment A. In addition, FINRA is announcing May 31, 2024, as the end date of the regulatory relief set forth in Regulatory Notice 20-08 (March 2020) (Notice 20-08 Relief) with respect to the obligation of firms to maintain current information for employment addresses and branch offices on specified uniform registration forms. In light of these changes, firms are encouraged to consult with FINRA’s Membership Application Program (MAP) Group as they consider the materiality of any potential increase in the number of offices or locations.

SEC

Final Rules

Per Release No. 33-11265, the SEC is adopting rules intended to enhance investor protections in initial public offerings by special purpose acquisition companies (commonly known as SPACs) and in subsequent business combination transactions between SPACs and private operating companies (commonly known as de-SPAC transactions). Specifically, the SEC is adopting disclosure requirements with respect to, among other things, compensation paid to sponsors, conflicts of interest, dilution, and the determination, if any, of the board of directors (or similar governing body) of a SPAC regarding whether a de-SPAC transaction is advisable and in the best interests of the SPAC and its shareholders. The SEC is adopting rules that require a minimum dissemination period for the distribution of security holder communication materials in connection with de-SPAC transactions. The SEC is adopting rules that require the re-determination of smaller reporting company (“SRC”) status in connection with de-SPAC transactions. The SEC is also adopting rules that address the scope of the safe harbor for forward-looking statements under the Private Securities Litigation Reform Act of 1995. Further, the SEC is adopting a rule that would deem any business combination transaction involving a reporting shell company, including a SPAC, to be a sale of securities to the reporting shell company’s shareholders and are adopting amendments to a number of financial statement requirements applicable to transactions involving shell companies. In addition, the SEC is providing guidance on the status of potential underwriters in de-SPAC transactions and adopting updates to the SEC’s guidance regarding the use of projections in SEC filings as well as requiring additional disclosure regarding projections when used in connection with business combination transactions involving SPACs. Finally, the SEC is providing guidance for SPACs to consider when analyzing their status under the Investment Company Act of 1940.

Proposed Rules

There were no proposed rules in January.

Interim Final Rules

There were no interim final rules in January.

Interpretive Releases

There were no interpretive releases in January.

Policy Statements

There were no policy statements in January.

NFA

Notices to Members

Notice I-24-01

January 4, 2024

Notice of Annual Meeting of NFA Members and Board and Nominating Committee election

Notice of Annual Meeting

NFA will hold its Annual Meeting of Members on Tuesday, February 6, 2024, at 12:00 p.m. CT, via videoconferencing. The agenda of the meeting is:

  1. Opening remarks.
  2. Members' questions regarding NFA-related topics.
  3. Any other business that may properly come before the Annual Meeting (or any adjournment or postponement thereof).

To register for the Annual Meeting of Members, please email your name, NFA ID and contact email to MemberMeeting2024@nfa.futures.org. Registration is due by Wednesday, January 31, 2024. NFA will then provide you with an invitation to the Annual Meeting.

Board and Nominating Committee Election

On October 23, 2023, NFA notified all Members of the candidates that the 2023 Nominating Committee nominated for election to NFA's Board of Directors and 2024 Nominating Committee and advised Members of the procedures by which additional candidates could petition to be nominated for election. No Members have petitioned for nomination of a candidate for election to the Board of Directors or Nominating Committee. Accordingly, NFA's Board of Directors, pursuant to Article VII, Section (3)(a) and NFA Bylaw 709 (effective February 15, 2024), will elect the nominees to the Board and Nominating Committee in February 2024.

Notice I-24-02

January 25, 2024

Member obligations under NFA Bylaw 1101 and Compliance Rule 2-36(d) with respect to CPOs/CTAs exempt from registration

The CFTC requires any person that claims an exemption from CPO registration under CFTC Regulation 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), 4.13(a)(5), an exclusion from CPO registration under CFTC Regulation 4.5 or an exemption from CTA registration under 4.14(a)(8) (collectively, exemption) to annually affirm the applicable notice of exemption within 60 days of the calendar year end. Persons that fail to file the affirmation notice by February 29, 2024, will be deemed to have requested a withdrawal of the exemption and, therefore, may be required to be registered and NFA Members.

Since exempt CPOs/CTAs have until February 29, 2024, to complete the affirmation process, NFA recognizes that it may be difficult for a Member to conclusively determine prior to that date whether a previously exempt CPO/CTA continues to be eligible for a current exemption.

Therefore, Members who take reasonable steps to determine the registration and membership status of these previously exempt persons will not be in violation of NFA Bylaw 1101 or Compliance Rule 2-36(d) if, between January 1 and March 31, 2024, they transact customer business with a previously exempt person that fails to become registered and an NFA Member, file a notice affirming its exemption from CPO/CTA registration, or provide a written representation as to why the person is not required to register or file the notice affirming the exemption.

How to identify whether an exempt CPO/CTA has affirmed its exemption

Members should compare their list of exempt CPO/CTAs with which the Member transacts customer business to the information NFA makes available to assist Members in determining whether an exempt CPO/CTA has affirmed its exemption(s). Members can review exemption information in two ways. Members can view individual persons or entities by navigating to NFA's BASIC System, opening the person or entity's record, and, if applicable, clicking 'View All' in the Firm Exemptions box and/or the Pools & Pool Exemptions box. The Firm Exemptions page and/or the Pools & Pool Exemptions page will reflect an affirmation date if an exempt person or entity has properly filed a notice affirming an exemption, if applicable. Any exemption that was not affirmed in the previous year will no longer appear in BASIC as of March 1, 2024.

Alternatively, Members can access a spreadsheet that includes a list of all persons or entities that have exemptions on file with NFA that must be affirmed on an annual basis. This spreadsheet, which is updated nightly, can be found in the Member's Annual Questionnaire which can be accessed by logging into the system. The spreadsheet includes all persons or entities with an exemption(s) that requires an annual affirmation, as well as the most recent affirmation date, if applicable, and the affirmation due date. If the affirmation due date is February 29, 2024, the exemption has not yet been affirmed. Once the exemption has been affirmed, the affirmation due date will change to March 1, 2025. Any exemptions not affirmed after February 29, 2024, will be withdrawn.

Expectations for Members transacting customer business with an exempt CPO/CTA that has not affirmed its exemption

NFA expects any Member transacting customer business with a person that previously claimed an exemption from CPO/CTA registration under the regulations listed above, and that has not filed a notice in NFA's Exemption System affirming the exemption, not filed a notice of exemption for another available exemption, or not properly registered and become an NFA Member by December 31, 2023, to promptly contact the person to determine whether the person intends to file a notice affirming the exemption.

If the Member learns that the person does not intend to file a notice affirming the exemption, or the person does not file a notice affirming the exemption by February 29, 2024, then the Member must promptly obtain a written representation as to why the person is not required to register or file a notice of exemption and evaluate whether the representation appears adequate. If the Member determines that this written representation is inadequate and the person is required to be registered, then the Member must put a plan in place (e.g., liquidation-only trades) to cease transacting customer business with the person or risk violating NFA Bylaw 1101 or Compliance Rule 2-36(d). Any Member that acts in accordance with the information provided in this Notice will not be charged with violating NFA Bylaw 1101 or Compliance Rule 2-36(d). Members should be aware, however, that this Notice does not relieve their regulatory obligations pursuant to the Commodity Exchange Act and the CFTC's Regulations.

NFA News Releases

There were no NFA News Releases in January.

FinCEN

FinCEN News Releases

U.S. Beneficial Ownership Information Registry Now Accepting Reports

January 01, 2024

Existing Companies Have One Year to File; New Companies Must File Within 90 Days of Creation or Registration

WASHINGTON -- Today, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) began accepting beneficial ownership information reports. The bipartisan Corporate Transparency Act, enacted in 2021 to curb illicit finance, requires many companies doing business in the United States to report information about the individuals who ultimately own or control them.

Filing is simple, secure, and free of charge. Companies that are required to comply (“reporting companies”) must file their initial reports by the following deadlines:

  • Existing companies: Reporting companies created or registered to do business in the United States before January 1, 2024 must file by January 1, 2025.
  • Newly created or registered companies: Reporting companies created or registered to do business in the United States in 2024 have 90 calendar days to file after receiving actual or public notice that their company’s creation or registration is effective.

Beneficial ownership information reporting is not an annual requirement. A report only needs to be submitted once, unless the filer needs to update or correct information. Generally, reporting companies must provide four pieces of information about each beneficial owner:

  • name;
  • date of birth;
  • address; and
  • the identifying number and issuer from either a non-expired U.S. driver’s license, a non-expired U.S. passport, or a non-expired identification document issued by a State (including a U.S. territory or possession), local government, or Indian tribe. If none of those documents exist, a non-expired foreign passport can be used. An image of the document must also be submitted.

The company must also submit certain information about itself, such as its name(s) and address. In addition, reporting companies created on or after January 1, 2024, are required to submit information about the individuals who formed the company (“company applicants”).

FinCEN is committed to providing America’s small businesses with the resources and information they need to make filing as quick and easy as possible. FinCEN’s Small Entity Compliance Guide walks small businesses through the requirements in plain language. Filers can also view informational videos and webinars, find answers to frequently asked questions, connect to the contact center, and learn more about how to report at www.fincen.gov/boi.

FinCEN Issues Analysis of Identity-Related Suspicious Activity

January 09, 2024

Report examines suspicious activity tied to the exploitation of identity processes during account creation, account access, and transaction processing

WASHINGTON—Today, the Financial Crimes Enforcement Network (FinCEN) issued a Financial Trend Analysis (FTA) on information linked to identity-related suspicious activity in Bank Secrecy Act (BSA) reports filed in calendar year 2021. FinCEN’s analysis found that approximately 1.6 million reports (42% of the reports filed that year) related to identity—indicating $212 billion in suspicious activity.

“This report reveals the existence of significant identity-related exploitations through a large variety of schemes,” said FinCEN Director Andrea Gacki. “Robust customer identity processes are foundational to the security of the U.S. financial system, and critical to the effectiveness of financial institutions’ programs to combat money laundering and counter the financing of terrorism. Financial institutions are encouraged to work across their internal departments to address these schemes.”

The report, which is part of what FinCEN has previously referred to as its Identity Project, explores how bad actors exploit identity-related processes involved in processing transactions as well as opening and accessing accounts. FinCEN identified over 14 typologies commonly indicated in identity-related BSA reports. The most frequently reported were fraud, false records, identity theft, third-party money laundering, and circumvention of verification standards. These top five typologies accounted for 88% of identity-related BSA reports and 74% of the total identity-related suspicious activity amount reported during calendar year 2021.

Trends found in the BSA reporting include:

  • Although identity-related suspicious activity impacted all types of financial institutions, depository institutions filed the most identity-related BSA reports, around 54% of all identity-related filings.
  • While most financial institutions in the identity-related BSA dataset reported impersonation as their top identity exploitation, money services businesses most often reported circumvention of verification.
  • The report found that compromised credentials have a disproportionate financial impact as compared to other types of identity exploitation.

FinCEN’s FTAs highlight the value of information filed by financial institutions in accordance with the BSA. Additional reports on a variety of topics are located on FinCEN’s website.

FinCEN is committed to using its authorities to assist financial institutions with detecting, reporting, and preventing criminals from circumventing these processes to victimize customers. In line with the 2022 National Strategy for Combating Terrorist and Other Illicit Financing, Treasury and FinCEN recognizes that innovations in digital identity can strengthen anti-money laundering and countering the financing of terrorism compliance and help banks and other financial institutions more effectively and efficiently identify and report illicit financial activity.

To advance responsible innovation, FinCEN has engaged with the private and public sectors to assess opportunities and to explore the risks and challenges emerging technologies present to financial institutions—including through the Bank Secrecy Act Advisory Group, FinCEN Exchanges, and Innovation Hours. The bureau has partnered with the Federal Deposit Insurance Corporation in a digital identity-focused Tech Sprint, and with other regulators and law enforcement to support the U.S.-UK Privacy Enhancing Technologies Prize Challenges. FinCEN has also served as the Department of the Treasury’s point for the Federal Identity Forum and Expo or FedID conference, the U.S. government’s annual public-private identity conference. These efforts served as a forum for stakeholders to both embrace responsible innovation and leverage innovation to mitigate risks, as well as identify threats and opportunities to protect the American people and the financial sector from illicit finance.

FinCEN Finds Iraq-based Al-Huda Bank to be of Primary Money Laundering Concern and Proposes a Rule to Combat Terrorist Financing

January 29, 2024

WASHINGTON — Today, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a finding and notice of proposed rulemaking (NPRM) that identifies Al-Huda Bank, an Iraqi bank that serves as a conduit for terrorist financing, as a foreign financial institution of primary money laundering concern. Along with its finding, FinCEN proposed imposing a special measure that would sever the bank from the U.S. financial system by prohibiting domestic financial institutions and agencies from opening or maintaining a correspondent account for or on behalf of Al-Huda Bank.

Bad actors like Al-Huda Bank and its foreign sponsors fuel violence that threatens the lives of U.S. and Iraqi citizens alike while diverting funds that could otherwise support legitimate business and the economic aspirations of the Iraqi people. Treasury remains committed to its longstanding shared work with the Government of Iraq to strengthen the Iraqi economy and protect both the U.S. and Iraqi financial systems from abuse.

“Iraq has made significant progress in rooting out illicit activity from its financial system, but unscrupulous actors continue to seek to take advantage of the Iraqi economy to raise and move money for illicit activity,” said Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson. “By identifying Al-Huda Bank as a key money laundering channel for destabilizing terrorist activity by Iran, proposing a special measure that will sever its correspondent banking access, and imposing sanctions on their CEO, we can protect the Iraqi financial system and its legitimate businesses, as well as the international financial system, from abuse by Iran and other illicit actors.”

“Evidence available to FinCEN has demonstrated that Al-Huda Bank served as a significant conduit for the financing of foreign terrorist organizations (FTOs),” said FinCEN Director Andrea Gacki. “We will continue to leverage the full range of our authorities to target terrorist financing while simultaneously supporting the legitimate use of the international financial system.”

As described in the finding, for years, Al-Huda Bank has exploited its access to U.S. dollars to support designated FTOs, including Iran’s Islamic Revolutionary Guard Corps (IRGC) and IRGC-Quds Force (IRGC-QF), as well as Iran-aligned Iraqi militias Kata’ib Hizballah (KH) and Asa’ib Ahl al-Haq (AAH). Moreover, the chairman of Al-Huda Bank is complicit in Al-Huda Bank’s illicit financial activities including money laundering through front companies that conceal the true nature of and parties involved in illicit transactions, ultimately enabling the financing of terrorism.

Since its establishment, Al-Huda Bank has been controlled and operated by the IRGC and the IRGC-QF. After establishing the bank, the Al-Huda Bank chairman began money laundering operations on behalf of the IRGC-QF and KH. Additionally, Al-Huda Bank affords access to the U.S. financial system to actors known to use fraudulent documentation, fake deposits, identity documents of the deceased, fake companies, and counterfeit Iraq dinar, providing opportunities to obscure the identities of the transaction counterparties to correspondent banking relationship providers.

To protect U.S. banks from Al-Huda Bank’s illicit activity, FinCEN is taking this action pursuant to Section 311 of the USA PATRIOT Act (section 311). Section 311 actions alert the U.S. financial sector to foreign institutions, such as Al-Huda Bank, that are of primary money laundering concern and through the public rulemaking process, if necessary, prevent direct and indirect access to the U.S. financial system. FinCEN has proposed a rule that would impose special measure five, which would prohibit domestic financial institutions and agencies from opening or maintaining a correspondent account for or on behalf of Al-Huda Bank.

This finding and NPRM are issued today alongside complementary Treasury actions to disrupt funding for Iran-aligned terrorist groups. Treasury’s Office of Foreign Assets Control (OFAC) designated Hamad al-Moussawi, the owner and chairman of Al-Huda Bank, for having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, the IRGC-QF. Previously, on November 17, 2023, OFAC designated six key individuals affiliated with KH following the group’s attacks against United States personnel and partners in Iraq and Syria. On January 22, 2024, OFAC designated three additional key individuals affiliated with KH, a business used by KH to generate revenue and launder money, as well as an Iraqi airline that the IRGC-QF and its proxies in Iraq used to transport fighters, weapons, and money to Syria and Lebanon. Additionally, since the brutal attacks against Israel in October, OFAC has imposed five rounds of sanctions targeting Hamas-linked operatives and financial facilitators.

SECTION 311 SPECIAL MEASURES

Section 311 grants the Secretary of the Treasury authority, upon finding that reasonable grounds exist for concluding that one or more financial institutions operating outside of the United States is of primary money laundering concern, to require domestic financial institutions and domestic financial agencies to take certain “special measures.” The five special measures set out in section 311 are safeguards that may be employed to defend the United States financial system from money laundering and terrorist financing risks. The Secretary may impose one or more of these special measures in order to protect the U.S. financial system from such threats. Through special measure one, the Secretary may require domestic financial institutions and domestic financial agencies to maintain records, file reports, or both, concerning the aggregate amount of transactions or individual transactions. Through special measures two through four, the Secretary may impose additional recordkeeping, information collection, and reporting requirements on covered domestic financial institutions and domestic financial agencies. Through special measure five, the Secretary may prohibit, or impose conditions on, the opening or maintaining in the United States of correspondent or payable-through accounts for or on behalf of a foreign banking institution, if such correspondent account or payable-through account involves the foreign financial institution found to be of primary money laundering concern. The authority of the Secretary to administer the Bank Secrecy Act, including, but not limited to, section 311, codified at 31 U.S.C. § 5318A, has been delegated to the Director of FinCEN.

The NPRM as submitted to the Federal Register is currently available here. Written comments on the NPRM may be submitted within 30 days of publication of the NPRM in the Federal Register.

FinCEN Assesses $100,000 Civil Money Penalty against Gyanendra Kumar Asre for Violations of the Bank Secrecy Act

January 31, 2024

WASHINGTON—Today, the United States Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) assessed a $100,000 civil money penalty on Gyanendra Kumar Asre (Asre) for willful violations of the Bank Secrecy Act (BSA) and its implementing regulations. FinCEN’s action also imposes a five-year ban on Asre’s participation in the conduct of the affairs of any financial institution subject to the BSA.

“Asre allowed millions of dollars in high-risk transactions to be processed without required anti-money laundering controls or reporting to FinCEN,” said FinCEN Director Andrea Gacki. “Today’s action serves as a reminder that FinCEN will not hesitate to take action against individuals when their conduct jeopardizes the integrity of our financial system.”

Asre admitted to willfully violating the BSA. Asre failed to register his money services business (MSB) with FinCEN and, in his capacity as the BSA Compliance Officer of a credit union, failed to maintain an effective AML program and failed to detect and report suspicious transactions. During Asre’s tenure as BSA Compliance Officer, the credit union’s risk profile drastically increased, including by providing services to Asre’s unregistered MSB. Despite these elevated risks, Asre failed to implement adequate AML controls. As a result, hundreds of millions of dollars in high-risk and suspicious funds—including substantial bulk cash deposits—moved through the credit union without proper monitoring or reporting to FinCEN.

FinCEN appreciates the close collaboration with its partners at the National Credit Union Administration (NCUA) on this matter and thanks the Department of Justice Money Laundering and Asset Recovery Section (MLARS) for its work on the parallel criminal matter. Today, Asre entered into a guilty plea with MLARS for criminally violating the BSA.

Hot Issue

FINRA has finally announced an end date to the pandemic reporting relief under Notice 20-08. Starting on June 1, 2024, firms must resume their continuing obligation to:

  • Maintain updated Form U4 information regarding the office of employment address for registered persons who relocated due to COVID-19; and
  • Submit or update branch office applications on Form BR for any office locations or space-sharing arrangements established as a result of COVID-19 that have not otherwise been registered or updated with FINRA through Form BR.

Now that a timeline has been established, CRC recommends that firms not wait until June to evaluate the potential increase in registered or unregistered offices because of the need to consider whether changes may trigger a “material change in business operations” under Rule 1017 and related guidance.

Our Perspective

The best approach to regulatory compliance is a proactive one. Staying ahead of the curve by taking note of statements and guidance released by regulators and using them as a barometer to assess the current regulatory climate can help ensure that a firm is prepared for a regulatory exam. Rather than scrambling to rectify issues or meet deadlines, a thorough, active compliance program that considers and incorporates regulatory developments is in a better position to satisfy regulators and preserve operations so they can best serve their clients.

For more information, please contact:

Mitch Avnet

p. (646) 346-2468  

mavnet@compliance-risk.com

David Amster

p. (917) 568-6470

damster@compliance-risk.com

Sources:

  • FINRA Notices
  • SEC Regulatory Actions
  • SEC Press Releases
  • NFA Notices
  • FinCEN News Releases

What: The proposed rule would require some investment advisers to apply certain anti-money-laundering and countering the financing of terrorism (AML/CFT) requirements pursuant to the Bank Secrecy Act (BSA).

Who: SEC-registered investment advisers and investment advisers that report to the SEC as exempt reporting advisers (ERAs) would be included in the definition of “financial institution” under the BSA.

When: Proposed rule announced on February 13, 2024 (Federal Register publish date expected February 15, 2024). The comment period for the proposed rule is open until April 15, 2024.

Why: A risk assessment conducted by the Department of the Treasury identified that criminal actors have used investment advisers as a point of entry to invest in U.S. securities, real estate, and other assets and found that the lack of comprehensive AML/CFT requirements across the investment adviser sector contributed to its vulnerability to illicit finance activity.

How: The proposed rule would require SEC-registered investment advisers and ERAs to:

  • implement an AML/CFT program;
  • file certain reports, such as Suspicious Activity Reports (SARs), with FinCEN;
  • keep records such as those relating to the transmittal of funds (i.e., comply with the Recordkeeping and Travel Rule); and
  • fulfill other obligations applicable to financial institutions subject to the BSA and FinCEN’s implementing regulations.

The proposed rule would also apply information-sharing provisions between and among FinCEN, law enforcement government agencies, and certain financial institutions, along with Section 311 special measures.

The proposed rule does not include a customer identification program (CIP) requirement or a requirement to collect beneficial ownership information (BOI) for legal entities. However, FinCEN plans to address these separately in future rulemaking. The proposed rule would also not require the covered investment advisers to apply AML/CFT and SAR reporting requirements to mutual funds they advise.

Why it matters: Although some investment advisers have adopted voluntary AML/CFT measures, this proposal represents a significant set of potential new mandatory obligations for covered investment advisers. With plans for subsequent rulemaking regarding CIP and BOI requirements, this proposal appears to be simply an opening salvo in what is an extended regulatory push for more consistency between broker-dealers and investment advisers as access points to the US financial system.

CRC keeps its thumb on the pulse of the evolving regulatory landscape. Keep an eye out for additional information, including updated guidance, risk alerts, and CRC’s thoughts on how to ensure successful compliance with evolving regulatory expectations within your firm’s existing regulatory compliance program.

Contact Mitch Avnet for further details: (646)346-2468 | mavnet@compliance-risk.com

What: FINRA has proposed to amend Rule 3240 to strengthen the general prohibition against borrowing and lending arrangements between registered persons and customers.

Who: FINRA member broker-dealers.

When: The proposal to the SEC was initially filed on January 2, 2024. If the SEC approves the change, FINRA will announce the effective date in a Regulatory Notice.

Why: FINRA cited anecdotal evidence from member firms, law clinics, and previous enforcement cases as well as its experience in examining and enforcing for compliance with Rule 3240 that it believed suggests that there is some ambiguity about the scope of Rule 3240 and certain risks to investors due to conflicts of interest and the superior information that registered persons have about potential risks and returns.

How: Among various changes, the proposal adds several new limitations: 1) clarifying that the prohibition applies to arrangements that precede a new broker-customer relationship, 2) extending the rule to arrangements entered into within six months following the end of broker-customer relationship, and 3) to arrangements with parties related (family and businesses) to the registered person and customer. The proposal also narrows existing exceptions based on certain personal and business relationships.

Why it matters: Firms should monitor further developments with this proposal. If the SEC ultimately approves the requested rule change, written supervisory procedures and controls related to this topic will need to be reviewed and may require modifications for compliance with the final requirements. In addition, assuming the final rule change tracks with the proposal, there may be potential operational and training considerations (e.g., account opening and pre-existing arrangements, account terminations and subsequent arrangements, and related-party arrangements).

CRC keeps its thumb on the pulse of the evolving regulatory landscape. Keep an eye out for additional information, including updated guidance, risk alerts, and CRC’s thoughts on how to ensure successful compliance with evolving regulatory expectations within your firm’s existing regulatory compliance program.

Contact Mitch Avnet for further details: (646)346-2468 | mavnet@compliance-risk.com

Today FINRA issued its latest iterative report on its examination and risk monitoring program. This article focuses on the new topics and material introduced this year, specifically selected examination findings. It also covers topics that FINRA noted in the report as “Emerging Risks,” which represent potentially concerning practices that may pose new or additional risk. Lastly, several targeted exam or sweep updates are referenced from the report.

New Topics for 2024 – Selected Examination, Surveillance, Investigation, or Enforcement Findings

  1. Crypto Asset Developments
    1. Failing to appropriately and accurately address relevant risks and include appropriate disclosures in communications with the public.
    1. Disseminating promotional materials that contain material misstatements or omissions in connection with securities offerings.
    1. Failing to conduct appropriate due diligence on crypto asset private placements recommended to customers.
    1. Failing to establish and implement AML programs reasonably designed to detect and cause the reporting of:
      1. suspicious crypto asset transactions occurring by, at or through the broker-dealer; and
      1. suspicious trading involving issuers with a purported involvement in crypto asset-related activities.
    1. Related new crypto asset communications findings:
      1. Failing to clearly differentiate in communications, including those on mobile apps, between crypto assets offered through an affiliate of the member or another third party, and products and services offered directly by the member itself.
      1. Making false statements or implications that crypto assets functioned like cash or cash-equivalent instruments, or making other false or misleading statements or claims regarding crypto assets.
      1. Comparing crypto assets to other assets (e.g., stock investments or cash) without providing a sound basis to compare the varying features and risks of these investments.
      1. Providing misleading explanations of how crypto assets work and their core features and risks.
      1. Failing to provide a sound basis to evaluate crypto assets by omitting explanations of how crypto assets are issued, held, transferred or sold.
      1. Misrepresenting the extent to which the federal securities laws or FINRA rules apply to crypto assets.
      1. Making misleading statements about the extent to which certain crypto assets are protected by SIPC under the SIPA.
  • OTC Quotations in Fixed Income Securities
    • Not maintaining controls and procedures reasonably designed to monitor quoting activity in fixed income securities; and not reviewing the firm’s activity to determine applicability of the Exchange Act Rule 15c2-1.
    • Stating that the firm only quotes in exempt securities without conducting an analysis.
    • Not implementing procedures and controls—including a process for complying with the Exchange Act Rule 15c2-1—to ensure that the firm does not quote a covered security prior to confirming the availability of public financial information (unless an exception under Exchange Act Rule 15c2-1 is available).
  • Advertised Volume
  • Overstating, or inflating, the firm’s trading volume due to technological or procedural failures or errors.
  • Failing to establish and maintain supervisory systems that are reasonably designed to achieve compliance with Rule 5210, including with respect to trading information disseminated by third-party service providers.
  • Market Access Rule
    • Not establishing pre-trade order limits, pre-set capital thresholds and duplicative and erroneous order controls for accessing ATSs, including those that transact fixed income transactions.
      • Setting pre-trade order limits at unreasonable thresholds based on a firm’s business model.
      • Not demonstrating, and failing to maintain, documentation demonstrating the reasonability of assigned capital, credit and erroneous order pre-trade financial controls.
      • Not establishing adequate policies and procedures to govern intra-day changes to firms’ credit and capital thresholds, including requiring or obtaining approval prior to adjusting credit or capital thresholds, documenting justifications for any adjustments and ensuring thresholds for temporary adjustments revert back to their pre-adjusted values.
    • Failing to consider a firm’s business model when setting pre-trade order limits or other regulatory requirements (e.g., Limit Up-Limit Down (LULD) thresholds and exchanges’ Limit Order Price Protection thresholds), as well as historical and available liquidity, and the time required for liquidity replenishment, when determining erroneous price and size control thresholds.
    • Excluding certain orders from a firm’s pre-trade erroneous controls based on order types (e.g., excluding limit on close orders from a firm’s price controls).
    • For firms with market access, or those that provide it, unreasonable capital thresholds for trading desks and unreasonable aggregate daily limits or credit limits for institutional customers and counterparties.
    • Relying on third-party vendors’ tools, including those of an ATS or exchange, to apply their financial controls without performing adequate due diligence, not understanding how vendors’ controls operate, or both; and not maintaining direct and exclusive control over controls by allowing the ATS to unilaterally set financial thresholds for firms’ fixed income orders without the involvement of the firm, instead of establishing their own thresholds.
    • Failure to document the firm’s review, conducted at least annually, of the effectiveness of its risk management controls and supervisory procedures (e.g., no inventory of the specific systems, controls, thresholds or functionality that were reviewed), including the reasonableness of the firm’s market access controls applicable to each business/product line in which the firm provides market access.

Emerging Risks That May Receive Increased Scrutiny by FINRA

  1. Artificial Intelligence (AI)

FINRA noted that the development of AI tools has been marked by concerns about accuracy, privacy, bias and intellectual property, among others. FINRA encouraged member firms to be mindful of how these new technologies, including generative AI tools, may implicate their regulatory obligations.

  • Before deploying AI technologies member firms may consider paying particular attention to the following areas:
    • Anti-Money Laundering
    • Books and Records
    • Business Continuity
    • Communications With the Public
    • Customer Information Protection
    • Cybersecurity
    • Model Risk Management (including testing, data integrity and governance, and explainability)
    • Research
    • SEC Regulation Best Interest
    • Supervision
    • Vendor Management
  • New Account Fraud

FINRA has observed an increase in suspicious and fraudulent activity related to new account fraud (NAF), which occurs when a bad actor uses stolen or synthetic identification14 information to fraudulently open an account.

  • NAF may be a precursor to other fraud schemes. Examples observed in FINRA examinations and investigations include, but are not limited to:
    • fraudulent requests to the ACATS to steal securities and other assets from an investor;
    • fraudulent ACH transfers and wire transfers, including instances in which accounts opened through NAF were used as conduits to steal money from customers at other financial institutions; and
    • deposit or movement of fraudulently obtained funds from government benefit programs (e.g., fraudulently obtained COVID-relief funds).
  • FINRA encourages firms, especially those that offer fully online account opening services and rely on automated account opening or customer verification services, to:
    • evaluate their review of red flags of NAF during the account opening process;
    • evaluate their monitoring of ongoing customer account activity for NAF and other known fraud schemes; and
    • enhance these processes, as needed, to ensure compliance with Regulation S-ID and other applicable rules.

FINRA Targeted Exam (Sweep) Mentions & Updates

  1. FINRA Provides Update on Sweep: Special Purpose Acquisition Companies (SPACs)
  2. FINRA’s review focuses on a cross-section of firms that participated in SPAC offerings and included, among other things, reasonable investigation, best interest, disclosure of outside activities or potential conflicts, net capital and supervision.
  3. The update highlights several initial themes from our reviews of firms’ offering of, and services provided to, SPACs and their affiliates (e.g., sponsors, principal stockholders, board members and related parties), and includes questions for firms to consider as they evaluate whether their supervisory systems are reasonably designed to address risks of their SPAC-related activities, including:
    1. reasonable investigation of the issuers and the securities they recommend, including SPACs;
    1. underwriting compensation and disclosures;
    1. identifying, addressing and disclosing potential or actual conflicts of interest when underwriting or
    1. recommending transactions in SPACs; and
    1. firms’ supervisory systems, procedures, processes and controls for underwriting and recommending transactions in SPACs.

In September 2021, FINRA launched a sweep to review firms’ practices related to their acquisition of customers through social media channels, as well as firms' sharing of customers’ usage information with affiliates and non-affiliated third parties. The first part of the review focuses on firms’ use of social media influencers and referral programs to promote their products and services and recruit new customers. The second part of the review addresses firms’ privacy notices (and options to opt-out) regarding the collection and sharing of their usage information.

In August 2021, FINRA launched a sweep to review firms’ practices and controls related to the opening of options accounts and related areas, including account supervision, communications and diligence. FINRA’s review focuses on a cross-section of retail and diversified firms that offer options trading to their customers.

  • Sweep Letter: Crypto Asset Communications
  • Crypto asset-related retail communications reviewed by FINRA’s Advertising Regulation Department have had a non-compliance rate that is significantly higher than that of other products.
  • As a result, in November 2022, FINRA launched a targeted exam to review practices of certain member firms that actively communicate with retail customers concerning crypto assets and crypto asset-related services.
  • FINRA is working to complete this review and publish an update on findings and effective practices.

What: The SEC recently adopted new Rule 13f-2 and related Form SHO and an amendment to the national market system plan governing the consolidated audit trail (CAT) to provide greater transparency of short sale-related data.

Who: Institutional investment managers (“Managers”). Managers are any person, other than a natural person, investing in or buying and selling securities for its own account, and any person exercising investment discretion with respect to the account of any other person - typically includes brokers and dealers, investment advisers, banks, insurance companies, pension funds and corporations.

When: Rule and plan amendment adopted on October 13, 2023, and they become effective on January 2, 2024. The compliance date for Rule 13f-2 and Form SHO will be 12 months after the effective date of the adopting release – with public aggregated reporting to follow 3 months later. The compliance date for the amendment to the CAT NMS Plan will be 18 months after the effective date of the adopting release.

Why: The SEC is adopting Rule 13f-2 and Form SHO to help enhance transparency regarding short selling in equity securities—including both exchange-listed and over-the-counter securities, and ETFs. The SEC believes that, through the publication of short sale-related data to investors and other market participants, the information reported by Managers will provide important additional context to market participants regarding short sale activity in these equity securities by Managers.

How: Under Rule 13f-2, institutional investment managers that meet or exceed certain prescribed reporting thresholds will report on Form SHO certain short position and short activity data for equity securities. The SEC will thereafter aggregate and publish certain data collected from Form SHO.

Why it matters: The SEC estimates that approximately 1,000 Managers per month will trigger a reporting threshold for at least one security and therefore be required to file the new Form SHO.  The SEC concluded that it would take about 20 hours per Form SHO filing.

CRC keeps its thumb on the pulse of the evolving regulatory landscape. Keep an eye out for additional information, including updated guidance, risk alerts, and CRC’s thoughts on how to ensure successful compliance with evolving regulatory expectations within your firm’s existing regulatory compliance program.

Contact Mitch Avnet for further details: (646)346-2468 | mavnet@compliance-risk.com

On September 20, 2023, the SEC adopted amendments to the Investment Company Act “Names Rule,” as well as related disclosure and reporting requirements.

Principal Elements

Expands Scope

  • The rule’s 80% investment policy requirement will be expanded beyond its current scope, to apply to any fund name with terms suggesting that the fund focuses on investments that have, or investments whose issuers have, particular characteristics.
  • This coverage will include, for example, fund names with terms such as “growth” or “value,” or terms indicating that the fund’s investment decisions incorporate one or more ESG factors.

Temporary Departures from the 80% Investment Requirement

  • The amendments retain the names rule’s current requirements for a fund to invest in accordance with its 80% investment policy “under normal circumstances” (the “80% investment requirement”), and for the 80% investment requirement to apply at the time a fund invests its assets.
  • The amendments add a new provision that requires a fund to review its portfolio assets’ inclusion in its “80% basket” at least quarterly.
  • The amendments include specific time frames—generally 90 days—for getting back into compliance if a fund departs from the 80% requirement as a result of drift or in other-than-normal circumstances.

Derivatives

  • The amendments generally require funds to use a derivatives instrument’s notional amount to determine the fund’s compliance with its 80% investment policy, with certain adjustments.
  • The amendments include a limited modification to this approach that would exclude certain currency hedges from the names rule compliance calculation.

Unlisted Registered Closed-End Funds and BDCs

  • The amendments generally prohibit an unlisted registered closed-end fund or BDC that is required to adopt an 80% investment policy from changing that policy without a shareholder vote.
  • The amendments permit these funds to change their 80% investment policies without such a vote if:
    • the fund conducts a tender or repurchase offer with at least 60 days’ prior notice of the policy change,
    • that offer is not oversubscribed, and
    • the fund purchases shares at their net asset value.

Enhanced Prospectus Disclosure

  • The amendments to funds’ prospectus disclosure requirements that will require a fund to define the terms used in its name, including the criteria the fund uses to select the investments that the term describes.

Plain English Requirements for Terms Used in Fund Names

  • The amendments to the names rule effectively require that any terms used in the fund’s name that suggest either an investment focus, or that the fund’s distributions are tax-exempt, must be consistent with those terms’ plain English meaning or established industry use.

Form N-PORT Reporting Requirements

  • The amendments to Form N-PORT for funds will require funds to report the value of the fund’s 80% basket, and whether an investment is included in the fund’s 80% basket.
  • The amendments also include a new reporting item to include the definition(s) of terms used in the fund’s name. Funds will have to report this information for the third month of every quarter, instead of for each month as proposed.

Recordkeeping

  • The final rules include recordkeeping provisions related to a fund’s compliance with the rule’s requirements.

Compliance Date

Tiered Compliance Period

  • The compliance date for the final amendments is December 10, 2025 for larger entities, and June 10, 2026 for smaller entities.
    • Larger entities are funds that, together with other investment companies in the same “group of related investment companies” (as such term is defined in rule 0-10 under the Investment Company Act [17 CFR 270.0-10]) have net assets of $1 billion or more as of the end of the most recent fiscal year
    • Smaller entities are funds that together with other investment companies in the same “group of related investment companies” have net assets of less than $1 billion as of the end of the most recent fiscal year

Compliance Cost Estimates

The SEC project direct compliance costs broadly attributable to the following activities:

  • reviewing the final rule’s requirements;
  • determining whether to change a fund’s name or comply with the new requirements, as applicable;
  • developing new (or modifying existing) practices, reporting, and recordkeeping requirements to align with the requirements of the final rule;
  • integrating and implementing those practices, reporting, and recordkeeping requirements to the rest of the funds’ activities; and
  • preparing new training materials and administering training sessions for staff in affected areas.

The SEC estimated that the initial costs to establish and implement practices designed to meet the requirements of the final amendments as described in the adopting release will range from $50,000 to $500,000 per fund, depending on the particular facts and circumstances of the fund. The SEC believes the costs would be closer to the lower end of the range for funds whose current practices are more similar to the requirements of the final rule and for a fund that only incurs costs associated with analyzing the requirements of the rule.

The SEC also concluded that some funds may change their name rather than comply with the amended rule, which it estimated would result in a total direct burden of $75,000 to $250,000 as a one-time cost, including analyzing the rule and deciding to change their name.

CRC keeps its thumb on the pulse of the evolving regulatory landscape. Keep an eye out for additional information, including updated guidance, risk alerts, and CRC’s thoughts on how to ensure successful compliance with evolving regulatory expectations within your firm’s existing regulatory compliance program.

Contact Mitch Avnet for further details: (646)346-2468 | mavnet@compliance-risk.com

December 13, 2023

What: The SEC’s Division of Examinations has initiated a sweep of investment advisers on how AI-based tools are being deployed by the firms across the industry.

Who: Investment advisers in receipt of examination notifications should expect requests related to AI practices, governance, and oversight.

When: Several investment advisers have reported AI-focused request lists in conjunction with recent examinations. CRC expects this trend to continue into 2024.

Why: In light of the SEC’s recent focus on AI-driven investment management services, as well as the proposed rule related to conflicts associated with such activity, a sweep initiative is a commonly-practiced next step for the regulator, and serves primarily as a data collection exercise. In light of findings, advisers should expect modifications to proposed rulemaking, risk alerts, and guidance in this area.

How: Advisers can prepare for AI-focused examinations and request list items by conducting a brief mock-audit of its AI-related policies, procedures, and practices. Firms should be prepared to produce the documents relating to AI use in the event of an SEC request, including (but not limited to):

  • Itemization of areas and instances where AI-based tools are deployed across the firm, particularly with respect to investment recommendations;
  • Data security measures relative to AI use;
  • Policies and procedures related to the use of AI within the firm, particularly with respect to investment recommendations;
  • An itemization of inputs that drive AI-based recommendations and other activity, including how such information is collected and updated;
  • Advertising materials and disclosures, including Form ADV, that reference the use of AI, particularly with respect to investment recommendations;
  • Information related to the development, testing, and ongoing management and oversight of AI tools; and
  • Plans in place to identify, resolve, and disclose AI system failures, AI-driven errors, and other issues related to AI use.

CRC keeps its thumb on the pulse of the evolving regulatory landscape. Keep an eye out for additional information about the SEC’s AI-driven conflicts proposed rule and new sweep exam initiative, including updated proposals, rule finalization details, and CRC’s thoughts on how to ensure successful integration of new or updated rules within your firm’s existing regulatory compliance program.

Contact Mitch Avnet for further details: (646)346-2468 | mavnet@compliance-risk.com

As the regulatory landscape is constantly evolving, Compliance Risk Concepts (“CRC”) is issuing its monthly review and summary of FINRA, SEC, and NFA notices and bulletins to assist our clients in keeping abreast of notable regulatory developments and deadlines in an effort to strengthen their compliance and regulatory initiatives.

FINRA

Regulatory Notices

Per Regulatory Notice 23-19, FINRA has adopted a short-form membership application process for certain firms that must become FINRA members due to the recent amendments to Rule 15b9-1 of the Securities Exchange Act of 1934. Firms that are eligible for the short-form membership application process also must have been a member of a national securities exchange with which FINRA has had a regulatory services agreement for the 12-month period prior to August 23, 2023. FINRA has further adopted a partial waiver of the new membership application fee for those firms that apply for FINRA membership through the short-form membership application process. These rule changes became effective on October 30, 2023.

The text of the rule changes is set forth in Attachment A. The short-form application is set forth in Attachment B.

SEC

Final Rules

Per Release No. 34-98845, the SEC is adopting a set of rules and forms under the Securities Exchange Act of 1934 (“SEA”) that would create a regime for the registration and regulation of security-based swap execution facilities (“SBSEFs”) and address other issues relating to security-based swap (“SBS”) execution generally. One of the rules being adopted implements an element of the Dodd-Frank Act that is intended to mitigate conflicts of interest at SBSEFs and national securities exchanges that trade SBS (“SBS exchanges”). Other rules being adopted address the cross-border application of the SEA’s trading venue registration requirements and the trade execution requirement for SBS. In addition, the SEC is amending an existing rule to exempt, from the SEA definition of “exchange,” certain registered clearing agencies, as well as registered SBSEFs that provide a market place only for SBS. The SEC is also adopting a new rule that, while affirming that an SBSEF would be a broker under the SEA, exempts a registered SBSEF from certain broker requirements. Further, the SEC is adopting certain new rules and amendments to its Rules of Practice to allow persons who are aggrieved by certain actions by an SBSEF to apply for review by the SEC. Finally, the SEC is delegating new authority to the Director of the Division of Trading and Markets and to the General Counsel to take actions necessary to carry out the rules being adopted.

The SEC is adopting the following compliance schedule for Regulation SE. The SBSEF rules shall become effective 60 days after the date of publication in the Federal Register (“Effective Date”). Once Regulation SE has become effective, any entity that meets the definition of SBSEF may file an application to register with the SEC on Form SBSEF at any time after the Effective Date. As discussed above, the Temporary SBSEF Exemptions will expire 180 days after the Effective Date for any entity that has not filed an application to register with the SEC on Form SBSEF.

For an entity that has submitted an application on Form SBSEF by 180 days after the Effective Date, the exemptive relief relating to SBSEF registration would expire 240 days after the Effective Date, except with respect to an entity whose application on Form SBSEF is complete (having responded to requests by the SEC’s staff for revisions or amendments) within 240 days of the Effective Date. An entity that has submitted an application within 180 days of the Effective Date and whose application is complete within 240 days of the Effective Date will continue to benefit from the exemption from registration until 30 days after the SEC acts to approve or disapprove the application on Form SBSEF.

Per Release No. 34-98959, the SEC is adopting rules under the Securities Exchange Act of 1934 (“Exchange Act”) to improve the governance of clearing agencies registered with the SEC (“registered clearing agencies”) by reducing the likelihood that conflicts of interest may influence the board of directors or equivalent governing body (“board”) of a registered clearing agency. The rules identify certain responsibilities of the board, increase transparency into board governance, and, more generally, improve the alignment of incentives among owners and participants of a registered clearing agency. In support of these objectives, the rules establish new requirements for board and committee composition, independent directors, management of conflicts of interest, and board oversight.

The SEC is adopting a compliance date of 12 months after publication in the Federal Register for Rule 17Ad-25, except that the compliance date for Rules 17Ad-25(b)(1), (c)(2), and (e) is 24 months after publication in the Federal Register.

Per Release No. 33-11254, the SEC is adopting a rule to implement Section 621 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) prohibiting an underwriter, placement agent, initial purchaser, or sponsor of an asset-backed security (including a synthetic asset-backed security), or certain affiliates or subsidiaries of any such entity, from engaging in any transaction that would involve or result in certain material conflicts of interest.

The final rule is effective 60 days after publication in the Federal Register. Under the compliance date that the SEC is adopting in this release, any securitization participant must comply with the prohibition and the requirements of the exceptions to the final rule, as applicable, with respect to any ABS the first closing of the sale of which occurs 18 months after publication in the Federal Register.

Proposed Rules

There were no proposed rules in November.

Interim Final Rules

There were no interim final rules in November.

Interpretive Releases

There were no interpretive releases in November.

Policy Statements

There were no policy statements in November.

NFA

Notices to Members

Notice I-23-20

November 20, 2023

Request for Public Representative Nominations for NFA's Board of Directors

Please Route To:
Compliance/Legal/Membership
Sr. Management

NFA's Board of Directors (Board) amended NFA's Articles of Incorporation (Articles) to reduce the size of NFA's Board from 29 to 21 Directors. The Board's new composition becomes effective at the Board's Annual Meeting on February 15, 2024, at which time the terms of all current Public Representatives - Ana Beskin, Michael C. Dawley, Ronald H. Filler, Arthur W. Hahn, Douglas E. Harris, Mary M. McDonnell, Michael H. Moskow, Ronald S. Oppenheimer, Todd E. Petzel, and Michael R. Schaefer - will expire. NFA is seeking nominations to fill seven Public Representative vacancies. The incumbent Public Representatives are eligible for nomination.*

NFA's Articles permit NFA Members and non-Members to nominate Public Representatives. At its February 15, 2024 Annual Meeting, the Board will elect, by majority vote, from among the nominees seven Public Representatives to serve on the Board.

Over the years, NFA's Board has consistently included Public Representatives with outstanding credentials, and their contributions to NFA have been enormous. Public Representatives bring the perspective of non-Members to the Board. Public Representative candidates must be knowledgeable of the markets and the Members regulated by NFA and have no material relationship with NFA that would impact their ability to provide an impartial, objective analysis of the issues that come before the Board. NFA Bylaw 517 sets forth the qualifications for Public Representatives as follows:

To qualify as a Public Representative of NFA, an individual must first be found by the Board, on the record, to have no material relationship with NFA that might reasonably affect the independent judgment of the public representative. Any of the following relationships during the previous three years shall be considered a material relationship with NFA:

(a) The Director or Member of the Director's immediate family (i.e., spouse, parents, children and siblings) is an NFA Officer or employee;

(b) The Director is an NFA Member, Associate Member or a principal of an NFA Member or has an immediate family Member (i.e., spouse, parents, children and siblings) who is an NFA Member, Associate Member or principal of an NFA Member;

(c) The Director, or a firm with which the Director is an officer, director or partner receives more than $100,000 in combined annual payments from NFA, or the Director, or a firm with which the Director is an officer, director or partner receives more than $100,000 annually from an NFA Member or Associate Member for legal, accounting or consulting services related to the NFA Member's or Associate Member's CFTC-registered activities. Compensation for services as a Director of NFA does not count towards the annual $100,000 payment limit, nor does deferred compensation for services prior to becoming a Director so long as compensation is in no way contingent, conditioned or revocable.

Public representation on NFA's Board of Directors is an important matter. We ask that you give serious consideration to submitting a nomination to fill these vacancies. The deadline for submitting Public Representative nominations is Tuesday, January 9, 2024.

Nominations may be submitted by mail or email by January 9, 2024 to:

By Mail:
Carol A. Wooding
General Counsel and Secretary
NFA
320 South Canal, Suite 2400
Chicago, Illinois 60606

By Email:
election2024@nfa.futures.org

Notice I-23-21

November 21, 2023

FCM and IB Members—FinCEN adopts terrorism crowdfunding report and updates its list of FATF-identified jurisdictions with AML/CFT deficiencies

On November 3, 2023, the Financial Crimes Enforcement Network (FinCEN) issued a news release informing U.S. financial institutions of the Financial Action Task Force's (FATF) recent public statement. The statement announces the FATF's adoption of a report regarding terrorist groups' use of crowdfunding techniques to raise money for attacks. Additionally, the FATF reiterates that all jurisdictions should be vigilant of current and emerging risks from the circumvention of measures taken against the Russian Federation to protect the international financial system.

The release also announced that the FATF reissued its list of jurisdictions with strategic AML/CFT deficiencies. NFA Member futures commission merchants (FCM) and introducing brokers (IB) should review this release to ensure that their AML programs have the most current information on FATF-identified jurisdictions with AML/CFT deficiencies and revise their AML programs accordingly. A copy of the news release is available on FinCEN's website.

News Releases

November 15, 2023

NFA orders London, United Kingdom introducing broker Braemar Securities LTD to pay a $140,000 fine

November 15, Chicago—NFA has ordered Braemar Securities LTD (Braemar Securities) to pay a $140,000 fine. Braemar Securities is an introducing broker (IB) Member of NFA located in London, United Kingdom.

The Decision, issued by an NFA Hearing Panel (Panel), is based on a Complaint issued by NFA's Business Conduct Committee and a settlement offer submitted by Braemar Securities, in which the firm neither admitted nor denied the allegations in the Complaint. The Complaint charged Braemar Securities with failing to comply with its communication recordkeeping obligations, in violation of NFA Compliance Rule 2-10, and disclosing customers' confidential non-public information, in violation of NFA Compliance Rule 2-26. The Complaint further charged Braemar Securities with a failure to supervise, in violation of NFA Compliance Rule 2-9.

In its Decision, the Panel found that Braemar Securities violated NFA Compliance Rules 2-10, 2-26 and 2-9.

The complete text of the Complaint and Decision can be viewed on NFA's website.

Hot Issue

The SEC is continuing its enforcement activity against cypto asset securities trading platforms. In its latest publicized move, the SEC charged Payward Inc. and Payward Ventures Inc., together known as Kraken, with operating Kraken’s crypto trading platform as an unregistered securities exchange, broker, dealer, and clearing agency. The SEC alleged that Kraken:

  • Provides a marketplace that brings together the orders for securities of multiple buyers and sellers using established, non-discretionary methods under which such orders interact, and thus operates as an exchange;
  • Engages in the business of effecting securities transactions for the accounts of Kraken customers, and thus operates as a broker;
  • Engages in the business of buying and selling securities for its own account without an applicable exception, and thus operates as a dealer; and
  • Serves as an intermediary in settling transactions in crypto asset securities by Kraken customers, and acts as a securities depository, and thus operates as a clearing agency.

The November action follows charges against Coinbase in June and Bittrex in April.

Our Perspective

Regulators continue to demonstrate their commitment to protecting investors by aggressively pursuing bad actors and reviewing and updating regulations to guard investors against constantly evolving threats.

The best approach to regulatory compliance is a proactive one. Staying ahead of the curve by taking note of statements and guidance released by regulators and using them as a barometer to assess the current regulatory climate can help ensure that a firm is prepared for a regulatory exam. Rather than scrambling to rectify issues or meet deadlines, a thorough, active compliance program that considers and incorporates regulatory developments is in a better position to satisfy regulators and preserve operations so they can best serve their clients.

For more information, please contact:

Mitch Avnet

p. (646) 346-2468  

mavnet@compliance-risk.com

David Amster

p. (917) 568-6470

damster@compliance-risk.com

Sources:

  • FINRA Notices
  • SEC Regulatory Actions
  • SEC Press Releases
  • NFA Notices
  • NFA New Releases

Sample One Post

To All our Amazing Clients:

No matter how you measure it, we want to express our profound gratitude as we mark our 10th Anniversary. Without your support throughout this transformative journey, Compliance Risk Concepts would not be what it is today.

CRC began as a one-person operation with a unique approach to compliance professional services: understanding each client’s needs and model, and then tailoring our solutions to suit them. We grew by underpinning our clients’ commercial success with a balanced, measured understanding of regulation and compliance. Today, we stand as a team of  50+ of the industry’s best and brightest, humbled by our growth and collective accomplishments. Through it all, we’ve strived to be a true partner – functioning as a seamless extension of your team.

Our proudest milestones include not only thriving in a remote environment during the pandemic, but also balancing our serious commitment to compliance with teamwork and fun. This balance is key to our culture and vision, making it possible for our team to achieve results we only dreamed were possible.

As we look into the future of a constantly evolving regulatory landscape, areas like digital currencies, alternative investments, best interest standards, cyber-threats, and off-channel communications all pose new and significant challenges. Rest assured, we will continue providing the insightful guidance and support you need to confidently navigate these emerging trends – and stay ahead of the pack.

To mark our first 10 years, we’ve refreshed our logo and educational materials. On behalf of everyone at CRC, thank you for entrusting us with your compliance programs and regulatory wellness. It’s an honor to partner with you, and we look forward to contributing to your success story in the decade to come.

With sincere thanks,

Mitch Avnet
Founder and Managing Partner

NEW YORK--(BUSINESS WIRE)--Compliance Risk Concepts (“CRC”), through its parent company, Re-Sourcing Group, has received a significant investment from MidOcean Partners to advance its position as a valued compliance partner to the financial services industry. This investment will support the continued growth of CRC’s unique brand of business-focused compliance and risk management advisory services.

The compliance and risk management industry has evolved in recent years, amid new regulations, rule modifications and heightened government oversight. These changes come amid consolidation in the outsourced compliance space, resulting in fewer options for clients seeking expertise coupled with exceptional service.

CRC has thrived as a provider of senior-level compliance advisory services for financial organizations. The firm delivers expert-driven advice and strategy for its clients, which include broker-dealers, investment advisers, fintech and digital asset firms, banks and credit unions, in helping them navigate the ever-changing regulatory landscape. Recognizing CRC’s strong position in the market, MidOcean Partners, a premier middle-market private equity firm focused on the business services and consumer sectors, anticipates CRC’s continued success in delivering compliance solutions to a diverse clientele.

“Market demand for outsourced solutions in the compliance advisory arena has grown significantly in recent years,” said Mitch Avnet, founder of CRC. “At the same time, consolidation has left clients with fewer premier options. CRC has over 50 senior compliance professionals on our team, and we can deliver the guidance, insight and day-to-day execution support that firms in the financial services market are seeking. We are known for our ‘in-the-seat’ approach to compliance and risk management support, and we plan to leverage this growth investment to extend our reach within the industry.”

The confluence of talent shortages and increasingly complex requirements for managing businesses on the legal and compliance front has led to a continued surge in demand for outsourced solutions. For example, in the investment adviser sector, an estimated 59%1 of firms outsourced some or all of their compliance and legal work. Avnet and his partners at MidOcean see this as an opportunity for further growth.

Avnet added: “We are business people that know compliance and we are fully invested in helping our clients achieve great commercial outcomes while remaining regulatorily compliant. Our partnership with MidOcean is integral to our overall business thesis and we look forward to leveraging the impact of MidOcean’s investment to extend our reach within the industry.”

“There is incredible upside for a firm of CRC’s caliber to fill the void that firms have in meeting their compliance needs and having the support they want to help them make sound business decisions. We feel that the consolidation happening that has absorbed some boutique players has spurred the opportunity for CRC even more, and we’re eager to see how our investment can be a catalyst for Mitch and his team,” shared Elias Dokas, Managing Director at MidOcean Partners.

1 Source: https://www.assetmark.com/blog/advisors-front-middle-back-office-outsourcing

About Re-Sourcing Group

Re-Sourcing is a leading professional services firm, offering staffing, consulting and direct hire services that specialize in finance & accounting, legal & compliance and information technology. Re-Sourcing serves clients through its distinguished portfolio of premium brands, including Compliance Risk Concepts, Conexus, JW Michaels, ExecuSource, Perennial Resources, Partnership Employment and Technology Navigators. Founded in 2003, Re-Sourcing and its brands are strategically located in 20 offices across 10 markets nationwide. Re-Sourcing’s differentiated operating partner model enables a strong focus on building direct relationships with clients to bolster retention and deepen understanding of client needs.

For more information, visit https://www.myresourcing.com/.

About MidOcean Partners

MidOcean Partners is a premier New York-based alternative asset manager specializing in middle-market private equity and alternative credit investments. Since its inception in 2003, MidOcean Private Equity has targeted investments in high-quality middle-market companies in the consumer and business services sectors. MidOcean Credit was launched in 2009 and manages a series of alternative credit strategies, collateralized loan obligations (CLOs) and customized separately managed accounts.

For more information, visit https://www.midoceanpartners.com/.

As the regulatory landscape is constantly evolving, Compliance Risk Concepts (“CRC”) is issuing its monthly review and summary of FINRA, SEC, and NFA notices and bulletins to assist our clients in keeping abreast of notable regulatory developments and deadlines in an effort to strengthen their compliance and regulatory initiatives.

FINRA

Regulatory Notices

Per Regulatory Notice 23-20, FINRA discusses the guidance and other resources available to assist members with their compliance efforts in connection with the SEC’s Regulation Best Interest (Reg BI). In particular, FINRA highlights the SEC’s series of Staff Bulletins (Bulletins) reiterating standards of conduct for broker-dealers (BDs or members) and investment advisers (IAs): SEC Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors; SEC Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Conflicts of Interest; and SEC Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Care Obligations. FINRA encourages members to review these Bulletins closely, along with the Reg BI Adopting Release and the other guidance and resources identified in this Notice, as part of their ongoing efforts to meet their best interest obligations.

This Notice does not create new legal or regulatory requirements or new interpretations of existing requirements, nor does it relieve firms of any existing obligations under federal securities laws and regulations.

Per Regulatory Notice 23-21, FINRA has observed instances of non-compliance with SEA Rule 15c3-1, SEA Rule 17a-3 and SEA Rule 17a-5 resulting from misapplication of the Financial Accounting Standards Board’s Accounting Standard Codification 606, Revenue from Contracts with Customers (“ASC 606”). This Notice provides guidance regarding potential compliance issues with respect to these rules that may result from the misapplication of ASC 606.

SEC

Final Rules

Per Release No. 34-99149, the SEC is adopting rules under the Securities Exchange Act of 1934 to amend the standards applicable to covered clearing agencies for U.S. Treasury securities to require that such covered clearing agencies have written policies and procedures reasonably designed to require that every direct participant of the covered clearing agency submit for clearance and settlement all eligible secondary market transactions in U.S. Treasury securities to which it is a counterparty. In addition, the SEC is adopting additional amendments to the Covered Clearing Agency Standards with respect to risk management. These requirements are designed to protect investors, reduce risk, and increase operational efficiency. Finally, the SEC is amending the broker-dealer customer protection rule to permit margin required and on deposit with covered clearing agencies for U.S. Treasury securities to be included as a debit in the reserve formulas for accounts of customers and proprietary accounts of broker-dealers (“PAB”), subject to certain conditions.

Per Release No. 34-99193, the SEC is adopting amendments to Volume II of the Electronic Data Gathering, Analysis, and Retrieval system Filer Manual (“EDGAR Filer Manual” or “Filer Manual”) and related rules and forms. EDGAR Release 23.4 will be deployed in the EDGAR system on December 18, 2023.

Proposed Rules

There were no proposed rules in December.

Interim Final Rules

There were no interim final rules in December.

Interpretive Releases

There were no interpretive releases in December.

Policy Statements

There were no policy statements in December.

NFA

Notices to Members

Notice I-23-22

December 4, 2023

Guidance on the annual affirmation requirement for entities currently operating under an exemption from CPO or CTA registration

The CFTC requires any person that claims an exemption from CPO registration under CFTC Regulation 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), 4.13(a)(5), an exclusion from CPO registration under CFTC Regulation 4.5 or an exemption from CTA registration under 4.14(a)(8) (collectively, exemption) to annually affirm the applicable notice of exemption within 60 days of the calendar year end, which is February 29, 2024, for this affirmation cycle.

Persons re-affirming an exemption under 4.13(a)(1), 4.13(a)(2), 4.13(a)(3) and 4.13(a)(5) will be required to attest that neither the person nor its principals has in its background any statutory disqualifications listed under Section 8a(2) of the Commodity Exchange Act.

Failure to affirm an active exemption from CPO or CTA registration will result in the exemption being withdrawn on March 1, 2024. For registered CPOs or CTAs, withdrawal of the exemption will result in the entity being subject to Part 4 Requirements regardless of whether the entity otherwise remains eligible for the exemption. For non-registrants, the withdrawal of the exemption may subject the person or entity to enforcement action by the CFTC, if either continues to operate without registration or exemption.

See the Notice for details on how to complete the affirmation process.

Notice I-23-23

December 5, 2023

CPO Members—Effective date of FinCEN's beneficial ownership reporting rule

The Financial Crimes Enforcement Network (FinCEN) has issued a final rule establishing beneficial ownership information (BOI) reporting requirements for existing and newly formed corporations, limited liability companies and similar entities (collectively referred to as a "reporting company"). As of January 1, 2024, subject to certain exemptions, reporting companies will be required to file a report with FinCEN identifying their BOI. Generally, BOI refers to identifying information about the individuals who directly or indirectly own or a control a reporting company.

FinCEN's final rule implements the Corporate Transparency Act's (Act) beneficial ownership reporting provisions. Under the Act, CFTC-registered entities are exempt from the reporting requirement. However, a pooled investment vehicle (PIV), such as a commodity pool, will be required to comply with FinCEN's reporting rule unless it qualifies for another exemption under the Act. Importantly, the Act exempts from the BOI reporting requirement any PIV operated or advised by an SEC-registered broker dealer (BD) or investment advisor (IA). As a result, a commodity pool operated or advised by an SEC-registered BD or IA is exempt from the reporting requirement.

However, NFA Member commodity pool operators (CPO) which operate a commodity pool that does not qualify for an exemption under the Act will be required to report BOI to FinCEN for any commodity pools they operate in accordance with the following deadlines.

For a commodity pool created or registered to do business before January 1, 2024, a CPO must file a BOI report with FinCEN by January 1, 2025.

For a commodity pool created or registered on or after January 1, 2024, a CPO must file a BOI report with FinCEN within 90 days from the time the CPO receives actual notice that the commodity pool's creation or registration is effective. In addition, for any commodity pool created or registered on or after January 1, 2024, a CPO will need to report the commodity pool's company applicants. A company applicant is the individual who directly files the document that creates or registers the company.

FinCEN will not accept any BOI reports prior to January 1, 2024, and FinCEN has emphasized that reporting companies should not submit any BOI reports prior to that date.

Notice I-23-24

December 14, 2023

FCM and RFED filing requirements for Christmas and New Year's Day—Reminder for upcoming holidays

This is a reminder that the following futures commission merchant (FCM) and retail foreign exchange dealer (RFED) regulatory filings will be impacted as follows by the Christmas and New Year's Day holidays:

Christmas Day—Monday, December 25, 2023

Daily segregated, 30.7 secured, cleared swaps customer collateral and daily forex statements prepared as of Friday, December 22, 2023, are required to be submitted by 12:00 noon on Tuesday, December 26, 2023; and

Daily segregated, 30.7 secured, cleared swaps customer collateral and daily forex statements are required to be prepared as of Monday, December 25, 2023, and are required to be submitted by 12:00 noon on Tuesday, December 26, 2023.

New Year's Day—Monday, January 1, 2024

Daily segregated, 30.7 secured, cleared swaps customer collateral and daily forex statements prepared as of Friday, December 29, 2023, are required to be submitted by 12:00 noon on Tuesday, January 2, 2024;

Daily segregated, 30.7 secured and cleared swaps customer collateral statements are not required to be prepared as of Monday, January 1, 2024; and

Daily forex statements are required to be prepared as of Monday, January 1, 2024, and are required to be submitted by 12:00 noon on Tuesday, January 2, 2024.

Any information filed by FCMs or RFEDs after its due date must be accompanied by a fee for each business day that it is late.

Holiday Filing Schedule

Visit NFA's website to view a complete schedule of daily filing requirements for upcoming holidays and an updated calendar of Segregated Investment Detail Report (SIDR) due dates. NFA recommends viewing the calendars and keeping this Notice as a reference for the upcoming 2024 holiday filing requirements.

For more information about filing financial reports, visit NFA's website.

Questions concerning the requirements should be directed to NFA's Information Center (800-621-3570 or 312-781-1410 or information@nfa.futures.org).

Notice I-23-25

December 14, 2023

SD holiday filing requirements

Visit NFA's website to view schedules of 2024 swap dealer (SD) holiday filings, risk data and margin monitoring filings and financial reporting due dates. We recommend viewing the schedules and keeping this Notice as a reference for the upcoming 2024 holiday filing requirements.

For more information about SD filing requirements visit NFA's website.

Questions concerning the requirements should be directed to NFA's Information Center (800-621-3570 or 312-781-1410 or information@nfa.futures.org).

NFA News Releases

There were no NFA News Releases in December.

FinCEN News Releases

December 07, 2023

WASHINGTON—During its ninth annual Law Enforcement Awards Program, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) recognized agencies that used Bank Secrecy Act (BSA) data to successfully pursue and prosecute criminal investigations.

“While these awards recognize our law enforcement partners who have effectively used BSA data in their investigations, it is important to emphasize that these investigations and prosecutions may not have been possible without financial institutions’ efforts to identify and report suspicious activity,” said FinCEN Director Andrea Gacki during the ceremony. “Safeguarding the financial system and promoting national security is a collective effort.”

Financial industry representatives and law enforcement officials participated in the ceremony. FinCEN will post summaries of all case nominations to its website in the coming weeks. Brief descriptions of the award-receiving cases follow:

Fraud: Internal Revenue Service–Criminal Investigation, Federal Bureau of Investigation, and Small Business Administration Office of Inspector General

Investigators used BSA filings to identify more than 150 loans totaling approximately $21 million in a massive pandemic relief fraud ring. The United States Attorney’s Office for the Central District of California and the Department of Justice’s Fraud Section prosecuted this case.

Drug Trafficking Organization Activity: Federal Bureau of Investigation

Forensic accountants used complex analytics to review BSA data and other financial records to identify suspicious transactions in U.S. bank wire entries and trace illicit proceeds across three continents. The United States Attorney’s Offices for the Southern District of New York and the Southern District of Florida prosecuted the cases, with assistance from the United States Attorney’s Office for the Southern District of Texas.

Transnational Criminal Organization Activity: Drug Enforcement Administration

Investigators made extensive use of FinCEN’s programs and resources to aid this investigation, resulting in the seizure of approximately 4.5 metric tons of cocaine hydrochloride in South America bound for the United States. While searching BSA filings on one of the primary subjects, investigators identified additional information that led to the discovery of a money laundering, poly-drug trafficking, and human smuggling empire. This case was jointly prosecuted by the U.S. Attorney’s Office for the Eastern District of Virginia and the Department of Justice’s Money Laundering and Asset Recovery Section.

Proliferation Financing: Department of Defense Office of Inspector General, Defense Criminal Investigative Service, and Homeland Security Investigations

Information received from BSA filings as well as FinCEN’s 314(a) program led to nine defendants being charged with, among other things, conspiracy to commit money laundering and conspiracy to commit mail and wire fraud. As a result of this investigation and prosecution, law enforcement recovered approximately $3 million worth of electronics and communications. This case was prosecuted by the United States Attorney’s Office for the District of Maryland.

Cybercrime: U.S. Secret Service and U.S. Postal Inspection Service

This investigation focused on individuals laundering the proceeds from a business email compromise scheme. BSA information was crucial in identifying accounts and co-conspirators, ultimately leading to successful convictions. The United States Attorney’s Office for the Eastern District of Virginia prosecuted this case.

Corruption: Internal Revenue Service–Criminal Investigation and Global Illicit Financial Team and Homeland Security Investigations

While investigating third-party money laundering, the Internal Revenue Service–Criminal Investigation and Global Illicit Financial Team identified a money remitter who was an investment advisor controlling several U.S. and foreign companies. BSA data revealed that Homeland Security Investigations had also initiated a separate investigation; the agencies were able to merge their efforts. The Department of Justice’s Fraud Section is prosecuting the criminal cases. The United States Attorney’s Office for the Southern District of Florida is handling the asset forfeiture case.

Human Trafficking/Human Smuggling: Department of Justice’s Civil Rights Division, Criminal Section

BSA reporting provided critical leads during this multi-year investigation. Several law enforcement agencies and non-profit entities worked together to bring justice to the 17 victims who cooperated with law enforcement and hundreds of other victims who were subjected to the defendants’ abuse. The United States Attorney’s Office, Middle District of Florida and the Department of Justice’s Civil Rights Division prosecuted the case.

December 11, 2023

REGISTRATION CLOSED

The U.S. Department of the Treasury’s Financial Crimes Enforcement Network will host a virtual information session on beneficial ownership information reporting requirements on Wednesday, December 13 at 2 p.m. Eastern Time.

Beginning January 1, 2024, a new law will require many companies doing business in the United States to report information to the U.S. government about who ultimately owns and controls them. This webinar will cover beneficial ownership information reporting requirements and how to comply with the law, followed by a Q&A session.

After registering, participants will receive a confirmation email containing information about joining the webinar.

Update: Due to high demand, registration for Wednesday’s beneficial ownership webinar has closed. Information will be forthcoming on additional webinars, which will take place in the coming weeks.

Update, 12/21/23: A recording of the webinar is available at https://www.youtube.com/watch?v=tJN6eB_Sm0U.

December 20, 2023

Please join U.S. Treasury Office of Terrorism and Financial Intelligence Under Secretary Brian Nelson and Financial Crimes Enforcement Network (FinCEN) Director Andrea Gacki for a briefing on the final rule that establishes parameters for access to and protection of beneficial ownership information. This briefing will cover key requirements for how authorized users will be able to access beneficial ownership information, mechanisms for protecting this sensitive data, and the differences between the proposed rule and the final rule. To attend the briefing, please visit https://www.youtube.com/@fincentreasury at 11 a.m. ET on Thursday, December 21.

December 21, 2023

WASHINGTON—Today, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) took another major step in support of U.S. Government efforts to crack down on illicit finance and enhance corporate transparency by issuing a final rule that establishes the framework for access to and protection of beneficial ownership information (BOI). Issued pursuant to the bipartisan Corporate Transparency Act (CTA), this final rule prescribes the circumstances under which BOI reported in compliance with FinCEN’s September 30, 2022 final BOI Reporting Rule may be disclosed to Federal agencies; state, local, tribal, and foreign governments; and financial institutions, and how it must be protected. FinCEN will also issue today two interagency statements to give banks and non-bank financial institutions guidance on the interplay between the final rule and FinCEN’s existing Customer Due Diligence Rule.

“This final rule is a significant step forward in our efforts to protect our financial system and curb illicit activities,” said FinCEN Director Andrea Gacki. “BOI can provide essential information to law enforcement, intelligence, and national security professionals as they work to protect the United States from bad actors who exploit anonymous shell companies to engage in money laundering, corruption, sanctions and tax evasion, drug trafficking, fraud, and a host of other criminal offenses with impunity, while legitimate businesses suffer from their misdeeds.”

The final rule is the second of three key rulemakings planned to implement the CTA. The first of these rulemakings, the BOI Reporting Rule, requires certain corporations, limited liability companies, and other similar entities created or registered to do business in the United States to report information about their beneficial owners to FinCEN. Those reporting requirements take effect on January 1, 2024, the same day that FinCEN will launch its beneficial ownership information technology system to securely collect, process, and store that information. FinCEN will undertake a third rulemaking to revise FinCEN’s Customer Due Diligence rule, as required by the CTA.

The final rule regarding access to BOI is effective on February 20, 2024. Starting in 2024, FinCEN will begin to provide access to BOI in phases to authorized government agencies and financial institutions that meet the requirements of the final rule.

Beneficial Ownership Information Access and Safeguards Final Rule Fact Sheet

Hot Issue

In early December, FINRA sanctioned four firms—M1 Finance LLC, Open to the Public Investing, Inc., SoFi Securities LLC, and SogoTrade, Inc.—a combined $2.6 million, including over $1 million in restitution to retail customers enrolled in fully paid securities lending programs and fines of $1.6 million for the firms’ related supervisory and advertising violations. All four firms offered retail customers self-directed trading through their respective mobile applications and websites. The firms failed to establish, maintain, and enforce written supervisory procedures reasonably designed to supervise their fully paid securities lending offerings. The firms also provided customers with disclosure documents that contained misrepresentations that customers would receive compensation for the lending of their securities, but the customers did not receive any compensation.

Our Perspective

Regulators continue to demonstrate their commitment to protecting investors by aggressively pursuing bad actors and reviewing and updating regulations to guard investors against constantly evolving threats.

The best approach to regulatory compliance is a proactive one. Staying ahead of the curve by taking note of statements and guidance released by regulators and using them as a barometer to assess the current regulatory climate can help ensure that a firm is prepared for a regulatory exam. Rather than scrambling to rectify issues or meet deadlines, a thorough, active compliance program that considers and incorporates regulatory developments is in a better position to satisfy regulators and preserve operations so they can best serve their clients.

For more information, please contact:

Mitch Avnet

p. (646) 346-2468  

mavnet@compliance-risk.com

David Amster

p. (917) 568-6470

damster@compliance-risk.com

Sources:

  • FINRA Notices
  • FINRA Press Release
  • SEC Regulatory Actions
  • SEC Press Releases
  • NFA Notices
  • FinCEN News Releases

RECENT POSTS

CRC NEWSLETTER

Stay updated with all latest updates,upcoming events & much more.

Subscribe NowSupport
Copyright Compliance Risk Concepts | All Rights Reserved © 2023 | Privacy Policy
magnifier