Exam priorities for financial services firms in 2018

The Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) recently released their annual examination priorities for 2018.  Although the regulators independently develop their areas of focus, there are five overlapping priorities that securities firms may want to address in the near term.

The SEC’s priorities are organized around five thematic areas: (1) compliance and risks in critical market infrastructure; (2) matters of importance to retail investors, including seniors and those saving for retirement; (3) FINRA and the Municipal Securities Rulemaking Board (MSRB); (4) cybersecurity; and (5) anti-money laundering (AML) programs.

FINRA’s priorities fall into six main categories: (1) fraud, (2) high-risk and firms and brokers, (3) operational and financial risks, (4) sales practice risks, (5) market integrity, and (6) new rules.

Our detailed review reveals five priorities shared by the SEC and FINRA:

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FinCEN finalizes rule on customer due diligence for financial institutions; Obama Administration takes other AML-related actions

Bag of money

On May 5, 2016, the Obama Administration announced1 several executive branch actions intended to combat money laundering and enhance financial transparency, including the publication of a long-awaited final rule from the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) that will require financial institutions—including banks, broker-dealers, mutual funds, futures commission merchants, and introducing brokers—to identify and report the “beneficial ownership” of their customers for the first time.2

In conjunction with the FinCEN final rule—formally known as Customer Due Diligence (CDD) Requirements for Financial Institutions—the Internal Revenue Service (IRS) released a proposed rule3 that would require foreign-owned entities that are “disregarded entities” (i.e., entities with one owner that are not recognized for tax purposes as entities separate from their owners, including single-member limited liability companies (LLCs)) to obtain an employer identification number (EIN) from the IRS.  The IRS believes that this rule will strengthen its ability to prevent the use of these entities for tax avoidance purposes.

Finally, the Administration released two legislative proposals intended to strengthen anti-money laundering (AML) efforts:

  1. A proposal from the Treasury Department4 that would require legal entities to report information on beneficial ownership at the time of a company’s creation, which it believes would help law enforcement to prevent and investigate financial crimes
  2. A proposal from the Department of Justice (DOJ)5 that they believe would enhance law enforcement’s ability to prevent bad actors from concealing and laundering illegal proceeds

Taken together, these regulatory and legislative developments represent a significant attempt to strengthen the Bank Secrecy Act (BSA) and enhance other AML efforts.

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Proposed rulemaking would extend AML requirements to Registered Investment Advisers

Proposed rulemaking would extend AML requirements to Registered Investment Advisers
Posted by Bob Axelrod

On August 25, 2015, the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, published a notice of proposed rulemaking that would extend anti-money laundering (AML) requirements to investment advisers registered with the U.S. Securities and Exchange Commission (SEC).  According to FinCEN, “investment advisers have an important role to play in safeguarding the financial system against fraud, money laundering, terrorist financing, and other financial crime.” As such, FinCEN believes registered investment advisers (RIAs) should be subject to certain AML requirements because money launderers and terrorist financers may be exploiting them to access the U.S. financial system. The underlying concern is that broker-dealers and banks might not presently have enough information to assess suspicious activity or money laundering risk for transactions ordered by an adviser on behalf of an unidentified client.

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