FINANCIAL CRIMES ENFORCEMENT NETWORK
In an August 25, 2015, press release, the Financial Crimes Enforcement Network (“FinCEN”) announced proposed anti-money laundering (“AML”) regulations for investment advisers. FinCEN has published a Notice of Proposed Rulemaking regarding AML programs and suspicious activity report (“SAR”) requirements that would apply to certain investment advisers. The purpose of FinCEN’s proposed rule is to prescribe minimal standards for AML programs to be established by certain investment advisers and to require such investment advisers to report suspicious activity to FinCEN pursuant to the Bank Secrecy Act (“BSA”). The proposed rules would apply to Securities and Exchange Commission (“SEC”) registered investment advisers and investment advisers required to be registered with the SEC, which includes advisers to certain hedge funds, private equity funds and other private funds.
The action to be taken by FinCEN in the proposed rulemaking is to address the issue of money laundering and terrorist financing risks faced by investment advisers that are not required to maintain an AML program or file SARs. FinCEN’s concerns are that such investment advisers would be a potential target of money launderers and terrorist financers seeking to access the US financial system through a financial institution not subject to minimal AML standards/reporting requirements.
FinCEN is proposing to expand the current BSA definition of “financial institutions” to include investment advisers. Investment advisers would be subject to the rules/requirements of the BSA if they are incorporated into the definition of a “financial institution”. For example, a few of the BSA requirements generally applicable to FIs include; filing currency transaction reports (“CTRs”) and record keeping rules regarding the transmittal of funds.
As a part of the proposed rules, FinCEN would delegate the authority to examine investment advisers for compliance with the BSA requirements to the SEC. Lastly; the proposed rules do not currently include requirements for customer identification programs (“CIPs”). FinCEN and the SEC will evaluate CIPs and other BSA requirements at a later date.
SECURITIES AND EXCHANGE COMMISSION
The Dodd-Frank Act required the SEC and the Commodity Futures Trading Commission (“CFTC”) to jointly adopt a form that would require certain registered investment advisers to report information that the regulators deemed necessary and appropriate in the public interest and for investor protection or for the assessment of systematic risk by the SEC’s Financial Stability Oversight Counsel (“FSOC”). The “Form PF” was jointly adopted by the SEC and CFTC. The size of the investment adviser and the type of private funds it advises determines the amount and type of information to be reported on Form PF as well as the frequency for filing the report.
While Form PF was intended to be used by the FSOC, the SEC’s Office of Compliance and Inspections (“OCIE”) uses the form during the examination and examination preparation process. Further, the use of information gathered from Form PF by the OCIE includes, but is not limited to: risk scoping; comparing with data from other filings; identification of key relationships and counterparties; confirm strategy and liquidity profile versus marketing material; and to review the use of leverage. The Dodd-Frank Act also requires SEC’s Division of Investment Management (“DIO”) to report annually to Congress on how it has used the data to protect investment and the integrity of the markets.
The annual staff report relating to the use of data collected from private fund systematic risk reports was published on August 13, 2015. As published in the annual staff report, the SEC focused its efforts on using Form PF data during the course of the following activities: examinations and investigations of private fund advisers; in risk monitoring activities; to inform regulatory initiatives; and when working with other regulators or international organizations of mutual interest relating to private fund advisers. A more in-depth analysis of the use of Form PF data by the SEC is available online. Also, the SEC has made the full report available on its website.
NATIONAL FUTURES ASSOCIATION
NFA Financial Requirements Section 14 – Implementation of Phase 2
Effective the close of business on August 31, 2015, the implementation of Phase 2 of National Futures Association (“NFA”) Financial Requirements Section 14 will commence, beginning with reporting of the end-of-day balances on September 1. This was announced in NFA Notice I-15-20 regarding the use of technology to monitor forex dealer member’s (“FDMs”) forex customer liability requirements. NFA Financial Requirements Section 14 outlines the rules regarding assets covering liabilities to retail forex customers. Specifically, Section 14 requires FDMs that hold assets used to cover retail forex customer liabilities under CFTC Regulation 5.8 to instruct the depositories holding the funds to report the balances in these accounts on a daily basis to the NFA or a third party designate. The depository, as per Section 14, must also comply with the request to maintain their status as an acceptable depository for retail forex assets.
The implementation of Phase 1 of the NFA Financial Requirements Section 14 was detailed in NFA Notice I-14-25, which became effective October 15, 2014. Phase 1 made it mandatory for all bank depositories holding assets to cover the amount owed to forex customers to report end-of-day balances in those accounts to the NFA. The NFA partnered with the CME Group to collect the balance reports directly from the Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) network. To address the issue of FDMs without access to the SWIFT network, the NFA developed an internal reporting system to collect the balance reports from forex funds depositories.
As previously mentioned, to comply with the implementation of Phase 2, FDMs are to report end-of-day balances on September 1st. Further, to be considered an acceptable depository for holding assets used to cover the FDM’s liability to forex customers, the FDM must ensure that these depositories report the end-of-day balances in those accounts to the NFA, effective for the close of business on August 31st.
Tutorial Videos
In an effort to assist Members with ongoing regulatory compliance, the NFA provides a wide array of education and training materials, in a variety of format. Access to the education resources is available online. NFA staff conducts regular reviews of the training/educational material to ensure it remains up-to-date. In July, the NFA updated the tutorial videos for swap dealers and major swap participants as well as commodity trading advisors (“CTAs”)/commodity pool operators (“CPOs”). The tutorial video for swap dealers and major swap participants demonstrates the 4S submission process. The CTA/CPO tutorial video explains the electronic process for filing disclosure documents.
For further information about any of the topics covered, please feel free to contact the Ruddy Law Office, PLLC (www.ruddylaw.com) or 202-797-0762.
