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April 18, 2014

SEC Extends No-Action Letter Permitting Broker-Dealers to Rely on Certain Investment Advisers to Conduct Customer Identification Program Obligations

The Securities and Exchange Commission has extended a no-action letter dated February 12, 2004 (the 2004 Letter) from the Securities Industry Financial Markets Association (SIFMA) that permits broker-dealers, subject to certain conditions, to rely on registered investment advisers to perform some or all of a broker-dealer’s customer identification program (CIP) obligations. The 2004 Letter allows broker-dealers, in certain circumstances, to treat investment advisers as if they are subject to an anti-money laundering (AML) program even though the Department of Treasury’s Financial Crimes Enforcement Network has yet to adopt an AML program rule for investment advisers. The 2004 No-Action Letter was to be withdrawn on the earlier of (i) the date on which an AML program rule for investment advisers became effective, or (ii) February 12, 2005. Since an AML program rule has yet to become effective, the 2004 Letter was extended, at SIFMA’s request, multiple times. In response to SIFMA’s most recent request to extend the 2004 Letter, the SEC has extended the 2004 Letter’s no-action relief to January 11, 2015.

The CIP obligations require a broker-dealer to adopt written procedures for verifying the identities of customers (CIP Procedures). Broker-dealers may rely on certain financial institutions with mutual customers of the broker-dealer to perform CIP Procedures if the institution is subject to an AML program rule and is federally regulated. Under the 2004 Letter, a broker-dealer may treat an investment adviser as if it is subject to an AML program rule if (i) the broker-dealer’s reliance on the investment adviser to conduct CIP Procedures is reasonable and proper due diligence is conducted, (ii) the investment adviser is an SEC-registered US investment adviser, and (iii) the investment adviser agrees in a written contract with the broker-dealer to (a) implement a proper AML program and update it as necessary, (b) perform the required CIP Procedures, (c) disclose promptly to the broker-dealer potentially suspicious or unusual activity, (d) certify annually that representations in such agreement remain accurate and (e) comply with requests for its books and records relating to its CIP Procedures from the broker-dealer, the SEC, the broker-dealer’s self-regulatory organization or any authorized law enforcement agency.

Click here to read the SEC’s February 2004 No-Action Letter.

©2014 Katten Muchin Rosenman LLP

About the Author

Janet M. Angstadt, Securities Attorney, Katten Muchin Law Firm
Partner

Janet Angstadt concentrates her practice in financial services. She counsels broker-dealers and market centers on a wide variety of legal and regulatory matters, including mergers and acquisitions involving broker-dealers; exchange, FINRA and SEC investigations; compliance issues related to registrations, sales practice, short sales, Regulation NMS, market making, and options and equities order handling; broker-dealer sponsored alternative trading systems such as dark pools and electronic communication networks; policies and procedures for trading systems development and testing; and...

312.902.5494

About the Author

Avi Badash, Katten Muchin Law firm, finance attorney
Associate

Avi Badash concentrates his practice in financial services matters.

Prior to joining the firm, Avi was an Associate Director at the Financial Industry Regulatory Authority (FINRA), where he was involved in securities arbitration matters among broker-dealers and between broker-dealers and their customers or registered representatives.

While in law school, Avi was a member of the Cardozo Securities Arbitration Clinic.

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