SEC Issues Extension of Relief Granted to Broker-Dealers Allowing Reliance on Investment Advisers to Perform Customer Identification and Verification
On July 11, 2006, the SEC issued a letter to the Securities Industry Association extending no-action relief allowing broker-dealers to fully rely on SEC registered investment advisers to perform some or all of their Customer Identification Program obligations.
The final rule under Section 326 of the USA PATRIOT Act that obligates broker-dealers to adopt a written Customer Identification Program (CIP Rule) requires broker-dealers to establish and implement policies and procedures to: (i) verify the identities of customers; (ii) maintain records related to the identification and verification of customers; (iii) determine whether customers appear on a designated list of terrorists or terrorist organizations; and (iv) provide customers with notification that information is being obtained in order to verify their identities. The CIP Rule also allows broker-dealers to fully rely on another financial institution to perform any of the elements of their Customer Identification Program for shared customers as long as the financial institution meets the following criteria: (i) reliance is reasonable under the circumstances, (ii) the other financial institution is subject to the Anti-Money Laundering (AML) Program requirements of Section 352 of the USA PATRIOT Act, and is regulated by a Federal Functional Regulator and (iii) the other financial institution enters into a contract requiring it to certify annually to the firm that it has implemented its AML Program and the delegated elements of the broker-dealers CIP Program.
Under the terms of the CIP Rule, broker-dealers would not be able fully rely on SEC registered investment advisers to perform some or all of their CIP Program elements because such investment advisers are not yet subject to a final rule under Section 352 of the USA PATRIOT Act. At the request of the Securities Industry Association, on February 12, 2004, the SEC issued a no action letter stating that until a final AML Program rule is adopted for SEC registered investment advisers, broker-dealers are able to rely on investment advisers to perform all or a portion of their CIP Program elements if (i) reliance is reasonable under the circumstances, (ii) the investment adviser is regulated by the SEC and (iii) the investment adviser enters into a contract requiring it to certify annually to the broker-dealer that it has implemented its AML Program and the delegated elements of the broker-dealers CIP Program. This letter was to be withdrawn automatically on the earlier of the date upon which the AML rule for advisers became effective, or February 12, 2005. The SEC extended its no-action relief for another 18 month period on February 10, 2005 and this most recent July 11, 2006 letter extends this no-action relief for a second 18 month period or until such time as advisers become subject to an AML Rule.
Securities Industry FYI is a service of the Broker-Dealer Practice of Morgan Lewis. If you have any questions concerning these important legal developments, please contact any member of Morgan Lewis’s Broker-Dealer Practice, including:
Washington, D.C.
Beth Kiesewetter
202.739.5127
bkiesewetter@morganlewis.com