Summary about exbino27 comments
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Box 39 Vienna, VA Attention: S Ladies and Gentlemen: The SIA supports the proposed rule and believes it will play an important part in the industry's efforts in the prevention of money laundering and the financing of terrorism.
Our industry's resources can be utilized most effectively by concentrating on those individuals or accounts that are most likely to present increased risks of money laundering or terrorist financing. We have outlined below suggested modifications to the rule proposal that we believe will enhance the effectiveness of the customer identification procedures. SIA's Recommendations SIA's recommendations, which are aimed at providing clarification of the rule's requirements, enhancing the effectiveness of the identification procedures, and ensuring consistency with the CIP rules proposed for other financial institutions, include: In addition, we have suggested other areas that need to be clarified.
Lastly, we have identified in an Addendum to this letter certain provisions that should be made consistent with the customer identification rules issued by the other financial regulators. Reasonable Effective Date We strongly urge that the industry be allowed sufficient time after the date the final rule is issued to establish the required customer identification programs because the time and cost of implementing the required programs will be substantial.
Although some types of verification have been used by some firms on a limited basis, the new identification and verification procedures have never been required for the industry. Accordingly, firms will be required to make wholesale changes, including operational, systems and procedural changes. In particular, firms will have to develop a written customer identification program, make changes to their overall policy and procedures, change their account opening process and account opening forms estimates are that for some firms this could be 90 forms , and train appropriate personnel in home offices and all branches.
Moreover, firms will have to upgrade their software in their back office systems and effect other massive system changes to ensure that the relevant information is captured and retained.
For some firms, further time will be required because they rely on third party vendors for software development of back office systems that will need to be adjusted to the rule. Although firms have been assessing what changes will be required, compliance systems cannot be finalized until final terms of the rule are known. Once the final rule is issued, firms will need time to assess what changes will need to be put in place. Indeed, the time frame between the issuance of the final rule and the October 25, statutory date will not be anywhere near sufficient for these changes to be implemented.
We believe that the changes required are likely to take firms at least six months, and for larger firms even more time may be required. We therefore respectfully suggest that firms be permitted at least days, and preferably nine months, from the date the final rule is issued to implement the required CIPs.
A delay until the spring of would also be consistent with the effective date of recent amendments to the books and records requirements under SEC rules 17a-3 and 17a-4 of the Exchange Act of , which take effect on May 2, One approach could be to consider the October 25 date as the beginning of a voluntary compliance period.
The establishment of a voluntary compliance period would encourage those firms that are able to comply sooner to do so, but also recognize the significant changes required by the rule, especially for large firms, and the shortness of time to respond and analyze the final rule. Scope and Definitional Issues To enhance the effectiveness of the rule and ensure that broker-dealers' efforts are focused on the areas of highest concern, we recommend slight refinements to the definition of "customer," one of the operative terms of the rule.
We are concerned that a broad-based, unfocused definition of this key term will cause firms to cast a very wide net, and in doing so, focus resources on areas that are of lesser or little concern.
A customer is defined in the proposed rule as: Firms would thus have to verify all individuals who have such authority for any account on behalf of a corporation, institution or other entity.
The requirement to verify all individuals with authority to effect transactions is particularly overbroad when applied to accounts for publicly traded corporations, financial service companies, mutual funds, pension funds, retirement plans, municipalities and other governmental entities and other institutions, where it is commonplace for multiple parties to be authorized to "effect transactions" and where frequent changes of such parties are equally commonplace.
For the most part, firms do not have automated systems that can capture all of the individuals that have authority to "effect transactions" for an account. The proposed rule would require firms to conduct a manual review of every file for every account to determine every individual that has authority to effect transactions -- whether it be securities transactions or debit transactions, and irrespective of whether such persons have actually exercised such authority.
Moreover, for accounts of publicly traded companies and other company accounts, as noted above, typically there may be many individuals who have such authority, and these authorized parties change with significant frequency.
Verifying all of the individuals contemplated by the proposed rule could not be accomplished without significant business disruption.
We do not see the benefit of obtaining personal information, such as home address and date of birth from individuals who are acting in their professional capacity and who are often subject to rigorous background checks by their employers. Accordingly, we believe it should be sufficient for the broker-dealer to verify the identity of the entity, and to adopt a risk-based approach in determining whether it is necessary to verify the identity of individuals who the entity has authorized to act on its behalf, especially in the case of publicly traded corporations and other large institutions.
Under this approach, a firm would only have to verify individuals acting on behalf of that entity if the firm believed there was a heightened risk of money laundering based on its assessment of a number of factors, such as, the type of entity, whether it is foreign or domestic, its location i. In addition, we believe broker-dealers should be given reasonable discretion as to the minimum amount of personal information they need to obtain from the authorized individual for example, a business rather than home address may be sufficient and more appropriate in many instances.
This clarification is important because it is common for broker-dealers to establish individual accounts for plan participants, and for participants to have the authority to direct how the funds in their retirement and plan accounts are invested. Under a literal reading of the proposed definition of customer, this authority could require broker-dealers to verify each such participant's identity. For larger plans, this could cover potentially tens of thousands of individuals.
Moreover, the participants in such plans need not be subject to the identification procedures because the employer, many of which are publicly traded companies, through the employment and hiring process, has already obtained identification information.
Given the significant burden of verifying each participant, we believe it is reasonable for the broker-dealer to rely on the employer to have adequately reviewed its own employees. The broker-dealer should be able to rely on the due diligence that it has conducted with respect to the plan sponsor or employer. We therefore request that language be added to the preamble indicating that "it is the plan that is the customer of the broker-dealer, not the individual plan participants.
Additional Guidance for the Customer Identification Programs We recommend that Treasury and the Commission provide additional guidance for the customer identification programs in the following areas.
Intermediated and Omnibus Accounts While the rule provides that one of the risk factors to be considered as part of the customer identification program is the risk associated with different types of customers, the rule does not address the customer verification obligations that broker-dealers have for accounts with intermediaries.
The broker-dealer rule should provide that for various intermediated accounts, such as omnibus accounts, 9 the focus of the broker-dealer's customer identification program would be the intermediary itself and not the underlying participant or beneficiaries. Recognizing the ability of a broker-dealer to rely on intermediaries would be consistent with the approach taken in the proposed rules for other types of financial institutions.
For example, the preamble to the proposed rule for mutual funds states that mutual funds are not required to verify the identities of individuals whose transactions are conducted through omnibus accounts, such as those maintained by broker-dealers on behalf of their customers. In such cases, the omnibus accountholder - i. Referring to the legislative history of the PATRIOT Act, the preamble states that it is the plan that is the fund's customer, not the individual plan participants.
In most instances, given Treasury's risk-based approach to anti-money laundering programs for financial institutions generally, it is expected that the focus of each futures commission merchant's and introducing broker's CIP will be the intermediary itself , and not the underlying participants or beneficiaries.
We believe this same risk-based approach to intermediary relationships should be extended to broker-dealers. Just as in the mutual fund and futures business, it is commonplace for broker-dealers to maintain accounts for intermediaries that trade on behalf of third parties, such as other broker-dealers, banks, mutual funds, pension funds, and investment advisory firms.
These intermediaries are often large, well-regarded, publicly traded and highly regulated entities. Such an approach also takes into account the serious proprietary and privacy issues that arise in the context of intermediated relationships.
For example, an intermediary is often unwilling to disclose the identity of its clients to the broker-dealer whom the intermediary often regards as a competitor. Indeed, the very structure of the transaction highlights the fact that the intermediary does not want its customer to be viewed as a customer of the broker-dealer. Thus, if the intermediaries are properly reviewed, reliance on such intermediaries not only is appropriate, but essential to conducting business across borders.
While the breadth of relationships with intermediaries is extensive, the following are examples of routine transactions involving intermediaries that have undertaken prior identification and verification of their own customers: In this type of business, the securities are not held in the account at the broker-dealer but delivered out to a bank as custodian.
Thus, the broker-dealer holding the omnibus account is not really "carrying" the intermediary's account in the traditional sense, as it is not maintaining custody of cash or securities, nor providing margin financing to the account. It is only facilitating a brokerage transaction. Given this structure and the fact that DVP business generally presents very little risk of money laundering, we believe a severe burden and unnecessary business disruption would be imposed on this type of business, which encompasses a large volume of institutional securities trading activity, if a broker-dealer were to have to go beyond verifying the identity of the intermediary.
It is also critically important that a firm be allowed to treat an intermediary as its customer for section purposes even when it establishes administrative subaccounts to facilitate transactions with the intermediary.
In this regard, it is common practice for firms that do institutional business to open both an omnibus account for the institutional intermediary, as well as administrative subaccounts for the intermediary's clients. However, in some cases the subaccounts are identified by number, in others they may contain the client's name and the name of the client's custodial bank or broker-dealer.
In addition, most such subaccounts are set up through the use of automatic data feeds from third-party vendors. The practice of setting up administrative subaccounts is essential to the operation of institutional business in the securities industry, and virtually every institution avails itself of these automated third-party systems.
Because the type of information received is extremely limited, if these subaccounts were considered accounts for purposes of section , thus requiring firms to collect additional information about and verify the identity of the intermediary's client, institutional business would effectively be brought to a halt.
Firms simply could not obtain documentary numbers and verify the required information within the time frames necessary to handle their institutional transactions, and the costs of doing so would be enormous, particularly since the use of automated data feeds would almost certainly be eliminated by a verification requirement.
Accordingly, we urge the agencies to provide guidance in the final rule that the establishment of such institutional subaccounts does not trigger any obligation by the firm to verify the intermediary's underlying client. In short, under Treasury's risk-based approach, a broker-dealer should be permitted to treat the intermediary as its customer and should not have to "look through" the intermediary to identify or verify the clients on whose behalf the intermediary is acting, so long as appropriate due diligence has been conducted on the intermediary.
Accordingly, we suggest that the preamble include the following language, similar in concept to the language in the preamble to the proposed rule for FCMs and IBs: In most instances, given Treasury's risk-based approach to anti-money laundering programs for financial institutions generally, it is expected that the focus of each broker-dealer's CIP will be the intermediary itself, and not the underlying participants or beneficiaries. Specifically, a broker-dealer should be able to make an assessment of whether it can rely on the verification done by an affiliate, such as an affiliated bank, broker-dealer or investment advisor.
For instance, where a bank and broker-dealer are affiliated, and both subject to similar verification procedures, it makes little sense not to allow them to rely on verification performed by an affiliated entity. In these situations, if firms are not permitted to rely on affiliates, customers will have to provide the identical information multiple times. Most significantly, no legitimate anti-money laundering purpose is served by requiring affiliated entities to each perform the same verification on the same customer.
We also note that the proposed rule for FCMs recognizes the need to avoid duplication for firms that have both a broker-dealer and a futures commission merchant or introducing broker.
Shared Account or Client Relationships We appreciate that the proposed rule recognizes that broker-dealers that share an account relationship with the same customer should be able to allocate between themselves the responsibility for verifying the customer's identity.
This approach avoids unnecessary duplication of effort while at the same time provides adequate assurance that customer verification obligations will be met.
We respectfully request, however, that the proposed rule provide more specific guidance with respect to the following types of shared relationships, which we address in more detail below: We appreciate that, in the proposed rule relating to CIPs for broker-dealers, Treasury and the SEC recognized that the structural relationship between an introducing broker and a clearing broker raises unique issues. We respectfully request that, as discussed more fully below, the agencies clarify certain issues relating to introducing brokers and clearing firms in the final rule.
Our concerns are best understood in light of the history of the development of the structural relationship between introducing brokers and clearing brokers. We have therefore set forth in the attached Appendix a description of the background and basic structure of the introducing firm-clearing firm relationship. Sharing of Responsibilities for Verification of Identity Our threshold comment relates to language in the preamble to the proposed rule which indicates that broker-dealers will be able to share responsibilities under section when one or more brokers is involved with a customer's account.
For example, the correspondent may undertake to obtain the identifying information from customers. Nonetheless, both firms would still be responsible for ensuring that each requirement in the rule is met with respect to each customer. We note, however, that the example cited in the preamble to the proposed rule regarding the allocation of responsibilities, i. As the background discussion in the Appendix makes clear, the customer contact role lies primarily with the introducing broker.
As the initiator and manager of the customer relationship, the introducing broker is in the best position to obtain the documentary number and verify the information through the use of physical documents i. In contrast to these document-based "positive verification" efforts, the clearing firm is well-positioned to perform a non-documentary "negative verification" function, i. Accordingly, the example in the preamble to the proposed rule should be modified to reflect that "the correspondent may undertake to obtain identifying information from customers as required in paragraph c and undertake the positive verification procedures and the clearing firm may undertake the negative verification procedures.
Specifically, the relevant text of the rule defines "customer" as "[a]ny person who is granted authority to effect transactions with respect to an account with a broker-dealer. In that context, the clearing broker receives its instructions directly from the introducing broker and has no knowledge of the person or persons authorized to trade on behalf of the end customer. In fact, the decision whether to accept a trade i. These examples underscore the importance of the fact that the final rule should specifically leave it to the parties to allocate or apportion their responsibilities, including verification responsibilities, consistent with their contractual relationship as approved by their functional regulators.
The language in the preamble to the proposed rule with respect to the apparent responsibility placed on both firms for ensuring that " each requirement in the rule is met with respect to each customer " 18 raises concerns in this regard. We believe this language is at odds with the fundamental concept of permitting the allocation or apportionment of responsibilities between an introducing broker and its clearing firm.