Update on FACT Act

First, let me share my appreciation for FINRA's effort to explain the applicability of the FACT Act's Red Flag and other rules to member firms. The folks in OGC said they were working on it, and they did. Here's the link to Notice 08-69: http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p117448.pdf

Now, let me express my dismay at the extreme lack of distinct clarity on this topic--not necessarily from FINRA, but embedded in the Act's definitions. Your firm may be subject to the regulation, or not--just read and re-read the definitions of 'financial institution,' 'transaction account, 'creditor' and 'covered account.' It's a little like solving a Rubik's cube. If all like colors end up on the same side, then yes, your firm has to implement Red Flag Rules under the Fact Act. But good luck getting there.

In reading the definitions provided in FINRA's notice, my first reaction is, "If they wanted broker-dealers to be covered, why didn't they just say so?" For instance, the term“financial institution” is specifically defined as “a State or National bank, a State or Federal savings and loan association, a mutual savings bank, a State or Federal credit union, or any other person that, directly or indirectly, holds a transaction account . . . belonging to a consumer.” And a “transaction account” is specifically defined as “a deposit or account on which the depositor or account holder is permitted to make withdrawals by negotiable or transferable instrument, payment orders of withdrawal, telephone transfers, or other similar items for the purpose of making payments or transfers to third persons or others. Such term includes demand deposits, negotiable order of withdrawal accounts, savings deposits subject to automatic transfers, and share draft accounts.” See what I mean? If they wanted B-D's to be subject to the regs, why not just include "SEC registered broker-dealers" or "brokerage accounts" or some such other simple identifiers in the definitions? That would have made it real easy... but instead, these definitions overtly exclude the whole subject of brokerage accounts and broker-dealers. And then your favorite SRO puts the onus on firms to twist and retwist the cube in order to solve the puzzle by themselves. Frankly, for most of the 5100 registered B-D's, I think this is like trying to force a square cube through a round hole: I don't think these rules should apply.

Also, while I'm ranting, this whole thing is crazy!! B-D's already have CIP rules to follow. And remember that AML rules are not just about preventing money laundering. We all know that most AML-triggered investigations end up focusing on fraud, including mail fraud and credit/debit card fraud. So firms are already obligated to attempt to identify and report fraud....why do they have to now be subject to seemingly duplicative rules? And at what cost? ...read the Notice... do you really have time to create a "Written Identity Theft Prevention Program"? One that will confuse your already confused Reps about the account opening process? This reminds me of redundant local ordinances--instead of having one rule that requires safe and responsible behavior on sidewalks, they have in place six different rules, pertaining to different possible ways to conduct unsafe and irresponsible behavior on sidewalks: skateboarding, bicycling, rollerblading, dog walking, etc.... get my point? I guess I just feel sorry for firms whose business has nothing at all to do with credit cards, withdrawals, payment transfers, etc. To think that they will have to adopt lengthy and complicated procedures on top of what they already have in place (which are already hardly deemed necessary and applicable): what a waste of resources.

But who am I ranting at, here? The Federal Trade Commission? That's a big target for a little person like me. And I don't want to trash FINRA--they did something cool by addressing the subject. I guess I would like if FINRA would go a bit farther out on the limb by actually giving its opinion on how application way firms, M&A/PP shops, and introducing firms who do not actually extend margin to clients fit into this definitional puzzle. I know they state up front that they're not the rulemakers or interpreters on this subject, but c'mon, since they go on to say that NOT complying would be a violation of just and equitable principles of trade, can't they show a little more mercy?

Another topic within this one: check out Part C of the Notice. It's about policies you have to have in place re: use of consumer reports. If your firm requests a consumer report about a new or existing customer and receives a notice of address discrepancy from a CRA, you'll have to be able to form a reasonable belief that the consumer report actually relates to the customer in question. FINRA did a nice job of laying out these responsibilities. I'm assuming the effective date of these requirements is the same delayed date as for Red Flag Rules: May 1, 2009 (although I could be wrong.)

Lastly, FINRA mentions in the Notice that FTC has indicated a willingness to work with them to "resolve on a consistent and industry-wide basis, interpretive questions that arise under these rules as applied to broker-dealers. " I love that! My advice to you and all your B-D friends: call OGC at (202)728-8071 to ask about this. Perhaps that kind of dialogue will result in 'interpretive challenges' being met head on with concrete directives from FINRA. Then you can throw that darned Rubik's cube out the window. Puzzle solved.

Networking Rocks!

Big shout out to Christine at IMS. Prompt, thorough assistance on a compliance issue. Gracias, Amiga!

r-e-s-p-e-c-t

...that's what binds both you and me.

I made that rhyme for your auditory pleasure. Say it out loud, go ahead.

I want my clients to know that, not only do I like you, I respect you--that is, I think the work you are doing is hard and you should be praised for that. Many in the media are trashing investment bankers, brokers and bankers, alike, as if they alone are to blame for the market turmoil. We know that's not true. You, my clients, are creative individuals who choose to make a living by making other people money. That ain't no crime. And the more creativity, energy and motivation you have, most likely, the more money your clients will make. (That came out a bit like Yoda-speak.)

Oh, and what I really want to say is thank-you for likewise respecting me and my work. It's an honor to help you out and I benefit everyday from your appreciation for what I do.

Oh my gosh, this touchy feely stuff is hard to take, non? Okay, back to my Rule Conversion/WSP update work...

Just a few notes on AML

Hey there, busy over here. Year-end always comes too quickly. I wish you all well in the markets and in your securities business. Hang in there.

Kinda recently, FinCEN published their newest SAR Activity review… here is the link: FinCEN Publishes SAR Activity Review- By the Numbers – Issue 11

Here is their summary analysis regarding SAR filing increases in the first 6 months of 2008:

Suspicious Activity Reports characterizing the suspicious activity type as Credit/Debit Card Fraud increased 58%, compared to the corresponding six month period in 2007.

In 2008, Suspicious Activity Reports characterizing the suspicious activity type as Mail Fraud increased 49%, compared to reports filed during the same period in 2007.

The total suspicious activity reporting volume in the first six months of 2008 increased 18%, compared to the same period in 2007.

Suspicious Activity Reports characterizing the suspicious activity type as Money Laundering/Structuring increased 15%, compared to the corresponding six month period in 2007.

And, this came out last month… as you know, investment advisers are not currently required to have AML programs in place, although most these days are adopting programs to meet the expectations of investors and broker-dealers. The announcement (see below) informs us that the proposed rule to require IA’s (SEC-registered IA’s and unregistered IA’s with $30mm under management) to have AML programs has been dropped. They say that if IA’s in the future are to be subject to FinCEN AML program requirements, a new rule will have to be proposed and adopted.

What that means for you, maybe: if you as a BD had hoped your unregistered IA friends would have their own darned AML rules to follow, so that you could rely on them to do it for you when they introduce investors to you, well, forget it. The currently-effective SEC no-action letter (effective 1-12-08) allows you to rely on federally-regulated IA's to do that--not unregulated IA's. I have that letter in my files; if you want me to email it to you, just ask.

Here is FinCEN's announcement, pulling the proposed IA rule proposal:
From: http://www.fincen.gov/news_room/nr/html/20081030.html
October 30, 2008

FinCEN Withdraws Dated AML Rule Proposals for Unregistered Investment Companies, Commodity Trading Advisors, and Investment Advisers

VIENNA, Va. – As part of its overall effort to increase its efficiency and effectiveness in administering the Bank Secrecy Act (BSA), the Financial Crimes Enforcement Network (FinCEN) has withdrawn its proposed anti-money laundering (AML) program rules for unregistered investment companies, commodity trading advisors and investment advisers. The withdrawals of the proposed program rules have been submitted for publication in the Federal Register.

Given the passage of time since these rules were first proposed in 2002 and 2003, FinCEN has determined that it will not proceed with BSA requirements for these entities without publishing new proposals and allowing for industry comments. FinCEN will continue to consider whether and to what extent it should impose requirements under the BSA on these entities.
Since the proposed rules were first published, FinCEN has concluded rulemakings for banks, broker-dealers and futures commission merchants. The financial transactions of unregistered investment companies, investment advisers, and commodity trading advisors and their clients must be conducted through, and their assets carried by, other financial institutions that are subject to BSA requirements. Thus, as FinCEN continues to consider the extent to which BSA requirements should be imposed on these entities, their activity is not entirely outside the current BSA regulatory regime.

In an effort to make its rulemaking processes more transparent, FinCEN today also established a section of its website entitled "Pending Rules" where those rules that are still awaiting comments or finalization will be made easily available.