BROKERS BE AWARE OF YOUR CUSTOMER TRADES OR BE SANCTIONED

BROKERS BE AWARE OF YOUR CUSTOMER TRADES OR BE SANCTIONED

What?

The Legal Entity Beneficial Ownership Rule adopted by Treasury Department’s Financial Crimes Enforcement Network is part of an expanded anti-money laundering program. When opening an account for a legal entity the broker must understand the nature and purpose of the customer relationship. With this understanding the broker must monitor the account for suspicious activity reporting. FINRA and the SEC are charged with enforcing this rule along with the Treasury Department.

When

The rule becomes effective May 11, 2018. It applies to broker-dealers, mutual funds, banks, and other financial institutions that open new accounts on or after May 11, 2018 for “legal entities.”

How

The rule requires obtaining specified information. This can be done by completing the Appendix to the rule (copy attached). The firm may require the individual opening the account for the legal entity to complete the Appendix or use other means to obtain the information specified in it.

Who

A “legal entity” includes most forms of business organization- corporations, partnerships, limited liability companies, and trusts. The rule excludes SEC or CFTC registered or regulated entities, publicly held reporting companies, and financial institutions. Pooled investment vehicles are not subject to the Rule’s beneficial ownership disclosure requirements, even if they are not operated by an SEC or CFTC registered entity, if the firm has the information as to the chief investment officer or similar officer.

Duty and Updating

FinCEN stated that the rule is intended to clarify the four (4) obligations of an Anti-Money Laundering Program. These are: 1. Customer identification and verification; 2. Ownership identification and verification; 3. Understanding the nature and purpose of the customer relationship; and 4. Ongoing monitoring for reporting suspicious transactions, and, on a risk basis, maintaining and updating customer information. The rule imposes no affirmative duty to monitor and update this information. That duty arises only when the firm has information brought to its attention or otherwise becomes aware of information that there is a change in the customer legal entity’s information- e.g new shareholders or chief officers.

What now?

The firm needs to understand the reason for establishing the account. Then if it becomes aware of circumstances or trades that inconsistent with the reasons for establishing the account it may be compelled to file a Suspicious Activity report. This duty can be combined with the broker’s other obligations –e.g. know your customer, suitability and related anti-fraud rules. As part of its regular program of reviewing customer trades the firm could also review the trading for its conformity to the purposes for which the customer established the account.

Questions: Comments. If you have any questions or comments please feel free to contact me
(phone: 212 455 0476; e-mail: msimkin@securitiesregslawyer.com ).

Morris Simkin
April 2018