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News Releases
3/18/04 USA PATRIOT Act Monitor News Release: When Broker-Dealers
May Rely on Advisers
No-Action Letter Opens Door For Broker-Dealers to Rely on Investment Advisers
for Customer Identification Requirements
The SEC Division of Market Regulation has determined that
it will not take enforcement action against a broker-dealer that, in specific
circumstances, relies on an investment adviser to perform customer identification
procedures, even where the adviser is not subject to anti-money laundering requirements.
Although not a legal conclusion, a No-Action Letter released by the Division
on February 12, 2004 (http://www.sec.gov/divisions/marketreg/mr-noaction/sia021204.htm),
effectively allows broker-dealers to share Customer Identification Program (CIP)
responsibilities with investment advisers.
Under the customer identification regulations of the Bank Secrecy Act, a broker-dealer
may rely on the customer identification procedures of another financial institution
as to a customer of the broker-dealer that is opening an account with the other
financial institution if (1) the reliance is reasonable, (2) the other financial
institution is subject to a rule implementing 31 U.S.C. 5318(h) and regulated
by a federal functional regulator, and (3) the other financial institution enters
into a contract requiring it to certify annually to the broker-dealer that it
has implemented its anti-money laundering program, and that it or its agent
will perform requirements of the broker-dealer's CIP, as specified in the agreement.The
problem comes from the italicized requirement—investment
advisers are not yet subject to anti-money laundering requirements. The Division
staff determined that reliance on an investment adviser may nevertheless be
reasonable, citing a number of factors:
Unnecessary duplication is avoided.
• Investment advisers have the most direct relationship with the customers they introduce to broker-dealers and are in the best position to perform some of the requirements of the CIP rules.
• Investment advisers are typically authorized to direct securities transactions in a securities account opened in the name of the customer of the broker-dealer.
• Investment advisers are frequently hesitant to give broker-dealers direct access to their customers.
• Some investment advisers have implemented AML programs and are willing to enter into reliance contracts.
• Broker-dealers will incur unnecessary compliance costs if they are not permitted to rely on investment advisers.
This No-Action Letter will be discussed in detail in the next issue of the Monitor.
The USA PATRIOT Act Monitor and the news releases prepared by the Monitor staff are services of the Civic Research Institute, publisher of Money Laundering, Terrorism, and Financial Institutions, by Raymond Banoun and John Ensminger. Contact and subscription information may be obtained at http://www.civicresearchinstitute.com/moneylaundering or by calling the Civic Research Institute at 609-683-4450 (fax: 609-683-7291).