As the regulatory landscape is constantly evolving, Compliance Risk Concepts (“CRC”) is issuing its monthly review and summary of various FINRA, SEC, NFA, and FinCEN publications to assist our clients in keeping abreast of notable regulatory developments and deadlines in an effort to strengthen their compliance and regulatory initiatives.
Regulatory Notices
Per Regulatory Notice 24-03, FINRA has amended its Codes of Arbitration Procedure (Codes) to make: (1) changes to the arbitrator list selection process in response to recommendations in the report of independent counsel Lowenstein Sandler LLP (Report) and (2) clarifying and technical changes to requirements in the Codes for holding prehearing conferences and hearing sessions, initiating and responding to claims, motion practice, claim and case dismissals, and providing a hearing record. The amendments are effective for arbitration cases filed on or after March 4, 2024.
Per Regulatory Notice 24-04, FINRA has adopted amendments to conform its rules to the SEC’s amendments to Rule 15c6-1 and adoption of Rule 15c6-2 under the Securities Exchange Act of 1934 to shorten the standard settlement cycle for most broker-dealer transactions from two business days after the trade date (T+2) to one business day after the trade date (T+1). The amendments revise provisions in the following FINRA rules:
The amendments to these rules will become operative on May 28, 2024, which is the compliance date the SEC announced for amended Rule 15c6-1 and new Rule 15c6-2, or such later date as the SEC may announce for compliance with such rules.
The amended rule text is available in the online FINRA Manual.
Per Regulatory Notice 24-05, FINRA is adopting new Rule 6151 (Disclosure of Order Routing Information for NMS Securities) to require members to submit to FINRA for centralized publication the order routing reports required under the Securities and Exchange Commission’s (SEC) Rule 606(a) (Rule 606(a) Reports). These amendments will take effect on June 30, 2024. Therefore, members will be required to submit their Q2 2024 Rule 606(a) Reports to FINRA no later than July 31, 2024.
The text of the new rule is available in the online FINRA manual.
Final Rules
Per Release No. 34-99477, the SEC is adopting new rules to further define the phrase “as a part of a regular business” as used in the statutory definitions of “dealer” and “government securities dealer” under sections 3(a)(5) and 3(a)(44), respectively, of the Securities Exchange Act of 1934 (“Exchange Act”).
Per Release No. IA-6546, the CFTC and SEC are adopting amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds, including those that also are registered with the CFTC as a commodity pool operator (“CPO”) or commodity trading adviser (“CTA”). The amendments are designed to enhance the Financial Stability Oversight Council’s (“FSOC’s”) ability to monitor systemic risk as well as bolster the SEC’s regulatory oversight of private fund advisers and investor protection efforts. In connection with the amendments to Form PF, the SEC is amending a rule under the Investment Advisers Act of 1940 (“Advisers Act”) to revise instructions for requesting a temporary hardship exemption.
Per Release No. 34-99582the SEC with the concurrence of the Office of Government Ethics (“OGE”), is adopting jointly issued amendments to the Commission’s existing Supplemental Standards of Ethical Conduct for Members and Employees of the Securities and Exchange Commission (“Supplemental Standards”). This rule amends the existing Supplemental Standards jointly issued by SEC and OGE, supplements the Standards of Ethical Conduct for Employees of the Executive Branch (“OGE Standards”) issued by OGE, and is necessary and appropriate to address ethical issues unique to the SEC. Specifically, the SEC is prohibiting employee ownership of sector funds that have a stated policy of concentrating their investments in entities directly regulated by the SEC; revising transaction and reporting requirements for certain assets that pose a low risk of conflicts of interest or appearance concerns; permitting employees to comply with reporting obligations by authorizing their financial institutions to transmit information on behalf of employees about their covered securities transactions and holdings data through an approved automated compliance system; clarifying that the limitation on purchasing securities that are part of an initial public offering (IPO) until seven days after the IPO also applies to direct listings of securities; correcting certain technical matters; and adjusting its transaction and reporting requirements to provide the flexibility necessary to implement an automated compliance system. This final rule is effective March 29, 2024.
Proposed Rules
Per Release No. IC-35129, the SEC is proposing a rule that would adjust for inflation the dollar threshold used in defining a “qualifying venture capital fund” under the Investment Company Act of 1940 (“Investment Company Act” or “Act”). The proposed rule also would allow the SEC to adjust for inflation this threshold amount by order every five years and specify how those adjustments would be determined. Comments should be submitted on or before March 22, 2024.
Interim Final Rules
There were no interim final rules in February.
Interpretive Releases
There were no interpretive releases in February.
There were no policy statements in February.
Notices to Members
Notice I-24-03
February 12, 2024
Educational resources, common deficiencies and other important regulatory information for FCM, FDM and IB Members
NFA is committed to providing its Members with the resources they need to meet their regulatory obligations as efficiently as possible. This Notice covers educational resources, common deficiencies and links to Notices to Members regarding recent amendments to NFA Rules and Interpretive Notices.
Members Section of NFA's Website
From the Members section of NFA's website, Members can access information detailing their regulatory obligations including the following:
Futures Commission Merchants (FCM)
Forex Dealer Members (FDM)
Introducing Brokers (IB)
Regulatory Obligations Related to Common Deficiencies
The following section describes several regulatory obligations related to common deficiencies noted during NFA examinations of Member FCMs for which NFA is the DSRO, FDMs and IBs.
Self-Examination Questionnaire: NFA Members must annually review their operations using NFA's Self-Examination Questionnaire. This Questionnaire is designed to aid Members in recognizing potential problem areas and to alert them to procedures that need to be revised or strengthened. A common deficiency in this area includes failing to review the Questionnaire on an annual basis. NFA encounters firms with deficient policies and procedures, indicating an inadequate review of the Self-Examination Questionnaire. Thorough Questionnaire completion and review ensures firms are alerted to deficient policies and procedures that should be updated to comply with NFA Rules.
Supervision: FCM, FDMs and IBs Members must have written supervisory policies and procedures to address the manner, frequency and results of monitoring written and oral communications. Such supervision includes, when required1, maintaining a record of all oral and written communications provided or received concerning quotes, solicitations, bids, offers, instructions, trading and prices that lead to the execution of a transaction in a commodity interest and related cash or forward transaction, whether communicated by telephone, voicemail, facsimile, instant messaging, chat rooms, electronic mail, mobile device or other digital or electronic media. Common deficiencies in this area include firms not maintaining all required communications, failing to identify brokers using unapproved and unrecorded communication methods and permitting unregistered individuals to act as associated persons.
Digital Assets: Members engaging in activities related to digital assets or digital asset derivatives must comply with the customer disclosure requirements established in NFA's Interpretive Notice 9073.
Third Party Service Providers: Members that outsource regulatory functions must adopt and implement a written supervisory framework over outsourced functions to mitigate outsourcing-related risks pursuant to Interpretive Notice 9079. The supervisory framework must address activities the firm will undertake with respect to initial risk assessment, onboarding due diligence, ongoing monitoring, termination and recordkeeping. Appendix E of the Self-Examination Questionnaire includes several questions to help Members understand these requirements. Firms must also maintain records demonstrating that they have addressed the items outlined in the Interpretive Notice and are following their procedures.
Cybersecurity: FCM, FDM and IB Members must adopt a written information systems security program (ISSP) pursuant to Interpretive Notice 9070 to address the risk of unauthorized access to or attack of their information technology systems and to respond appropriately should unauthorized attacks occur. Members are also required to notify NFA of certain cybersecurity incidents related to their commodity interest activities via NFA's Cyber Notice Filing System. One common deficiency in this area is failure to provide cybersecurity training to employees upon hiring and annually thereafter.
Members that fail to establish and implement an ISSP may be subject to disciplinary action.
Financial Reporting: FCM, FDM and IB Members must periodically file financial reports. Each financial report filed late will be subject to a fee of $1,000 for each business day it is late. Firms that fail to file financial reports in a timely manner may be subject to disciplinary action.
Subordinated Loan Agreements: FCMs and IBs that are also SEC registered broker-dealers are required to submit SLAs and any corresponding amendments to NFA when they are submitted to the firm's designated examining authority (i.e., FINRA), pursuant to CFTC Regulation 1.17.
Eligibility for Membership: If a Member fails to have at least one principal that is registered as an associated person, NFA shall deem that Member's failure to be a request to withdraw from NFA Membership in accordance with NFA Bylaw 301.
Ongoing Updates
On an ongoing basis, each NFA Member must update its Annual Questionnaire in the event of a material change to its operations. For example, if a Member begins doing business or begins soliciting for digital asset or micro contract products, the Member must immediately update its Annual Questionnaire. Doing so ensures that NFA's BASIC system displays correct information about the firm's business activities and ensures the firm receives all applicable notices relating to its reporting requirements in a timely manner.
Recent Amendments and Reminders
The following links contain Notices to Members regarding reminders and recent amendments to NFA Rules and Interpretive Notices.
Notice I-23-18: CPOs and IBs—NFA enhances notice filing user experience
Notice I-24-04
February 12, 2024
Educational resources, common deficiencies and other important regulatory information for CPO and CTA Members
NFA is committed to providing its Members with the resources they need to meet their regulatory obligations as efficiently as possible. This Notice covers educational resources, common deficiencies and links to Notices to Members regarding recent amendments to NFA Rules and Interpretive Notices.
Members Section of NFA's Website
From the Members section of NFA's website, Members can access information detailing their regulatory obligations including the following:
Commodity Pool Operators (CPO)
Commodity Trading Advisors (CTA)
Regulatory Obligations Related to Common Deficiencies
The following section describes a number of regulatory obligations related to common deficiencies noted during NFA examinations of CPO and CTA Members.
Self-Examination Questionnaire: NFA Members must annually review their operations using NFA's Self-Examination Questionnaire. This Questionnaire is designed to aid Members in recognizing potential problem areas and to alert them to procedures that need to be revised or strengthened. A common deficiency in this area includes failing to review the Questionnaire on an annual basis. NFA encounters firms with deficient policies and procedures, indicating an inadequate review of the Self-Examination Questionnaire. Thorough Questionnaire completion and review ensures firms are alerted to deficient policies and procedures that should be updated to comply with NFA Rules.
Digital Assets: Members engaging in activities related to digital assets or digital asset derivatives must comply with the customer disclosure requirements established in NFA's Interpretive Notice 9073.
Third Party Service Providers: Members that outsource regulatory functions must adopt and implement a written supervisory framework over outsourced functions to mitigate outsourcing-related risks pursuant to Interpretive Notice 9079. The supervisory framework must address activities the firm will undertake with respect to initial risk assessment, onboarding due diligence, ongoing monitoring, termination and recordkeeping. Appendix E of the Self-Examination Questionnaire includes several questions intended to help Members understand these requirements. Firms must also maintain records demonstrating that they have addressed the items outlined in the Interpretive Notice and are following their procedures.
Cybersecurity: CPO and CTA Members must adopt a written information systems security program (ISSP) pursuant to Interpretive Notice 9070 to address the risk of unauthorized access to or attack of their information technology systems and to respond appropriately should unauthorized attacks occur. Members are also required to notify NFA of certain cybersecurity incidents related to their commodity interest activities via NFA's Cyber Notice Filing System. One common deficiency in this area is failure to provide cybersecurity training to employees upon hiring and annually thereafter.
4.7 Exemption: CPO Members who operate pools pursuant to CFTC Regulation 4.7 must file notice of claim for exemption with NFA prior to the offer or sale of participation in the exempt pool, if the claimed relief includes that provided under 4.7(b)(1). If the relief claimed is limited to that provided under 4.7(b)(2), (3) and (4), however, the notice of claim for relief must be submitted to NFA before the pool first enters into a commodity interest transaction.
CTA Members who want to avail themselves of the relief available in CFTC Regulation 4.7, with respect to qualified eligible persons, must file the notice of claim for exemption before the Member enters into an agreement to direct or guide the customer's commodity interest account.
Eligibility for Membership: If a Member fails to have at least one principal that is registered as an associated person, NFA shall deem that Member's failure to be a request to withdraw from NFA membership pursuant to NFA Bylaw 301.
Pool Financial Reporting— Notification Requirements
Notice Filing Requirements: CPOs are required to file notice with NFA when a market or other event affects a commodity pool's ability to fulfill its participant obligations. Notice must be filed by 5:00 p.m. CT the next business day following one of the events outlined in Compliance Rule 2-50 and Interpretive Notice 9080.
Changes in Fiscal Year End: If a CPO elects a fiscal year end other than the calendar year end for a pool, it must give written notice of the election to all participants and file notice with NFA via EasyFile pursuant to CFTC Regulation 4.22(g) within 90 calendar days after the pool's formation. If this notice is not given, the CPO will be deemed to have elected the calendar year end as the pool's fiscal year end. The CPO must continue to use the elected fiscal year end for the pool unless it provides written notice of any proposed change to all participants and files such notice with NFA via EasyFile at least 90 days before the change.
Changes in Certified Public Accountant (CPA): In the event that a CPO changes the independent CPA engaged to audit a pool's financial statements, the CPO must file notice with NFA via EasyFile pursuant to CFTC Regulation 1.16(g) no more than 15 days after the CPA's resignation or dismissal by the CPO.
Extension Requests: If a CPO requests an extension to file an annual pool financial statement, the extension must be filed with NFA via EasyFile prior to the due date of the filing.
Cessation of Trading: When a pool ceases trading, the CPO must promptly update the Annual Questionnaire. With few exceptions, a CPO must also distribute to participants a final Annual Report and file the Annual Report with NFA. This Annual Report is due within 90 days after the pool ceases trading, absent an extension.
Calculation of Financial Ratios
CPO and CTA Members must compute financial ratios using the accrual method of accounting and in accordance with U.S. generally accepted accounting principles or another internationally recognized accounting standard as outlined in Interpretive Notice 9071. Members should consult Notice I-18-20 for additional guidance on calculating these ratios.
Financial Reporting: With few exceptions, each CPO Member must distribute an Annual Report, certified by an independent public accountant, to pool participants within 90 days of the pool's fiscal year end or the permanent cessation of trading, whichever is earlier. Each CPO must also report to NFA on a quarterly basis specific information about the firm and the pools it operates. These pool quarterly reports (PQRs) are due within 60 days of each calendar quarter end. Each PQR filed after its due date will be subject to a late filing fee of $200 for each business day it is late.
CTA Members that direct trading of commodity interests are required to file a quarterly CTA Form PR report within 45 days of the quarter end. Each Form PR report filed after its due date will be subject to a late filing fee of $200 for each business day it is late. CTAs that commence trading client accounts during a quarter must update the Annual Questionnaire immediately to receive timely reporting notifications.
As a reminder, NFA views late filings as a serious rule violation, and we have taken disciplinary action against Member firms in the past for filing reports after the due date.
Ongoing Updates
On an ongoing basis, each NFA Member must update its Annual Questionnaire in the event of a material change to its operations. For example, if a Member begins doing business or begins soliciting for digital asset or micro contract products, the Member must immediately update its Annual Questionnaire. Doing so ensures that NFA's BASIC system displays correct information about the firm's business activities and ensures the firm receives all applicable notices relating to its reporting requirements in a timely manner.
Pool Relationships: A CPO Member who operates an umbrella-series structure (i.e., a single legal entity that has several distinct sub-funds which, in effect, are traded as individual funds) needs to list the umbrella entity with NFA through the Annual Questionnaire and mark it as such. CPOs may also identify the series funds that are tied to that umbrella through the questionnaire. Exemptions must be claimed at the umbrella level and must apply to the structure as a whole.
CPOs should take special care when establishing relationships in the Annual Questionnaire between master funds and feeder funds, umbrella funds and series, registered investment companies (RIC) and controlled foreign corporations (CFC), and parent pools and trading subsidiaries. See the Annual Questionnaire User Guide for assistance.
CPO Beneficial Ownership Reporting Requirements: Beginning January 1, 2024, subject to certain exemptions, reporting companies are required to file a report with the Financial Crimes Enforcement Network (FinCEN) identifying their beneficial ownership information (BOI). Generally, BOI refers to identifying information about individuals who directly or indirectly own or control a reporting company. A pooled investment vehicle (PIV) such as a commodity pool is generally considered a reporting company and, therefore, required to file BOI information with FinCEN unless it qualifies for an exemption under the Corporate Transparency Act. See Notice I-23-23 for additional details and FinCEN dedicated resources.
Pool Account Statements: With few exceptions, CPO Members must distribute monthly or quarterly account statements to pool participants within 30 days of month or quarter-end. See CPO Reporting Requirements for details.
Recent Amendments and Reminders
The following links contain Notices to Members regarding reminders and recent amendments to NFA Rules and Interpretive Notices.
Notice I-23-23: CPO Members— Effective date of FinCEN's beneficial ownership reporting rule
Notice I-23-18: CPOs and IBs— NFA enhances notice filing user experience
Notice I-24-05
February 12, 2024
Educational resources, common deficiencies and other important regulatory information for SD Members
NFA is committed to providing its Members with the resources they need to meet their regulatory obligations as efficiently as possible. This Notice covers educational resources, common deficiencies and links to Notices to Members regarding recent amendments to NFA Rules and Interpretive Notices.
Members Section of NFA's Website
From the Members section of NFA's website, swap dealer (SD) Members can access information detailing their regulatory obligations including the following:
Regulatory Obligations Related to Common Deficiencies
The following section describes several regulatory obligations related to common deficiencies noted during NFA examinations.
Required Records: SD Members are required to make and keep records of all its swaps activity, including daily trading records for all swaps executed, as well as other transaction, position and business records, pursuant to CFTC Regulation 23.201 and CFTC Regulation 23.202. SD Members should ensure required records are both complete and accurate. Additionally, SD Members should consider taking preventative measures against the use of unauthorized or unrecorded channels for pre-execution trade communications.
Business Conduct Standards: SD Members are required to obtain and retain a record of essential facts to accurately categorize their counterparties to facilitate compliance with various regulatory requirements pursuant to CFTC Regulation 23.402. The failure to properly identify and classify counterparties may result in non-compliance with other transaction-specific requirements. Additionally, SD Members are required to make several disclosures to non-SD counterparties pursuant to CFTC Regulation 23.431. A common deficiency in this area is a failure to disclose material information and pre-trade mid-market marks to counterparties prior to entering into uncleared swap transactions.
Market Practice: SD Members are required to have a supervisory program to diligently supervise all activities relating to their business pursuant to CFTC Regulation 23.602 and must implement policies and procedures designed to prevent fraud, manipulation and other abusive practices prohibited by CFTC Regulation 23.410. Additionally, SD Members are required to communicate with counterparties in a fair and balanced manner as detailed in CFTC Regulation 23.433. Common deficiencies in this area include:
Swap Data Reporting: SD Members must report swap transaction data to swap data repositories pursuant to CFTC Regulation 23.204 and CFTC Regulation 23.205. To ensure the accuracy and completeness of reporting, once every 30 calendar days, SD Members must reconcile all open swap positions in its internal records to that maintained by the relevant swap data repository. Errors should be corrected within seven business days after discovery. If an error is not timely corrected, the SD Member must notify the Division of Market Oversight. Common deficiencies in this area include:
Calculation of Initial Margin Using Risk-based Models: SD members using NFA-approved risk-based models to calculate initial margin (IM) must conform to the model requirements pursuant to CFTC Regulation 23.154, and NFA requirements detailed in the IM Model Approval Letter and the IM Model Oversight program. As part of these requirements, each SD must monitor its model performance by employing, at a minimum, all of the tests required by CFTC Regulation 23.154 and NFA. Test results must be assessed with clearly established and justified thresholds for acceptable model performance and remediation procedures for each type of testing.
Each SD must re-validate the IM model on a periodic basis, and at least annually. SD Members must adopt procedures and processes enabling them to implement the new version of the IM model in production on a semi-annual or ad-hoc basis. Each new version of the IM Model must be opined on by the internal Model Risk Management function prior to release into production. Furthermore, the IM Model framework must be subject to annual internal audit activities, responsive to requirements in CFTC Regulation 23.154.
SDs must have controls in place to ensure that the information submitted to NFA on a quarterly and annual basis as part of the IM Model Oversight program is accurate, consistent across various regulatory filings and responsive to NFA requirements. All IM model performance issues reported to NFA must be adequately analyzed, and root causes of deteriorated performance must be assessed. Furthermore, each SD's Model Risk Management team must review, assess, and opine on the ongoing monitoring testing results and reports, in a timely manner on a quarterly basis before submitting them to NFA.
Finally, SDs must notify the CFTC and NFA of certain events related to an NFA-approved IM model. Common deficiencies in this area include:
Capital Requirements: SD Members subject to CFTC minimum capital requirements must maintain regulatory capital as defined under the bank holding company regulations in 12 CFR Part 217 as if the SD itself were a bank holding company or as defined in SEC Regulation 240.18a-1 as if the SD were a security-based SD registered with the SEC. Certain SDs that are predominately engaged in non-financial activities may instead choose to maintain tangible net worth in an amount equal to or in excess of minimum capital requirements. Regulatory capital, tangible net worth and minimum capital requirements are determined at the legal entity level. Additionally, when internal models are used to determine regulatory capital or minimum capital requirements, including those used to determine the risk margin amount, the SD must demonstrate independent model validation and ongoing performance monitoring of the SD's own use of the internal models. Validation and monitoring activities must be conducted at the legal entity level.
The SD with NFA-approved capital models must focus on meeting milestones required in the Approval Letters and update the internal processes in line with the timelines required for quarterly model performance submissions to NFA.
Recent Notices to Members
Notice I-24-06
February 22, 2024
NFA's Board of Directors elects Gerald F. Corcoran to serve as Chair
At its February meeting, NFA's Board of Directors elected Gerald F. Corcoran, Chairman and Chief Executive Officer of R.J. O'Brien & Associates LLC, to serve a one-year term as Chair.
Public Directors
Additionally at its February meeting, the Board elected the following individuals to serve as Public Directors:
Executive Committee
The Board also appointed the following individuals to serve one-year terms on NFA's Executive Committee:
NFA's Permanent Special Advisor Leo Melamed and NFA's President also serve on the Executive Committee.
During its meeting, the Board, pursuant to Article VII, Section 3, elected the following nominees to the Board and Nominating Committee:
Board of Directors
FCM Category:
IB Category:
CPO/CTA Category:
SD/MSP/RFED Category:
2024 NFA Member Category Nominating Committee
FCM Category:
IB Category:
CPO/CTA Category:
SD/MSP/RFED Category:
The terms of NFA's Board of Directors and Member Category Nominating Committee began on February 15, 2024.
Member Category Nominating Committee members serve three-year terms.
A complete list of NFA's Board of Directors, Executive Committee, and Member Category Nominating Committee can be found on NFA's website.
NFA News Releases
February 6, 2024
NFA orders New York, N.Y. futures commission merchant Lime Trading Corp. to pay a $100,000 fine
February 6, Chicago—NFA has ordered Lime Trading Corp. (Lime Trading) to pay a $100,000 fine. Lime Trading is a futures commission merchant Member of NFA located in New York, N.Y.
The Decision, issued by NFA's Business Conduct Committee (BCC), is based on a Complaint issued by the BCC and a settlement offer submitted by Lime Trading, in which the firm neither admitted nor denied the allegations of the Complaint. The Complaint charged Lime Trading with failing to file various required financial reports and notifications timely with NFA, in apparent violation of NFA Financial Requirements Sections 1(e) and 16(e). The Complaint also charged Lime Trading with a failure to supervise, in apparent violation of NFA Compliance Rule 2-9(a).
In its Decision, the BCC found that Lime Trading violated NFA Financial Requirements Sections 1(e) and 16(e), and NFA Compliance Rule 2-9(a). The BCC's Decision further ordered Lime Trading to cease and desist from violating NFA Financial Requirements Sections 1(e) and 16(e) and NFA Compliance Rule 2-9(a).
The complete text of the Complaint and Decision can be viewed on NFA's website.
February 8, 2024
NFA permanently bars Florida-based commodity pool operator Bit5ive Mining Fund Advisor, LLC from membership
February 8, 2024, Chicago—NFA has permanently barred Bit5ive Mining Fund Advisor, LLC (Bit5ive Advisor), an NFA Member commodity pool operator (CPO) located in Doral, Florida, from NFA membership and from acting or being listed as a principal of an NFA Member.
The default Decision, issued by NFA's Business Conduct Committee (BCC), is based on a Complaint issued by the BCC and Bit5ive Advisor's failure to file an Answer. Among other findings, the BCC found that Bit5ive Advisor willfully submitted materially false or misleading information to NFA about the operations of the firm and its commodity pool, failed to comply with CPO reporting requirements, and failed to cooperate promptly with NFA during an examination.
In September 2023, NFA issued an emergency enforcement action against Bit5ive Advisor, which suspended the firm from NFA membership and imposed restrictions on the firm's operations (e.g., prohibited the firm from soliciting or accepting any funds). This action was taken to protect customers, the derivatives industry and other NFA Members due to Bit5ive Advisor's failure to cooperate with NFA during an examination.
The complete text of the Complaint and Decision can be viewed on NFA's website.
FinCEN News Releases
February 01, 2024
WASHINGTON—Today, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued an alert related to the financing of Israeli extremist settler violence against Palestinians in the West Bank. The alert provides select red flags to assist U.S. financial institutions in identifying and reporting suspicious activity that finances such violence.
“Financial institutions can play a critical role in detecting and reporting potential suspicious activity related to the financing of Israeli extremist settler violence,” said FinCEN Director Andrea Gacki. “The U.S. financial system should be protected from those who seek to support or perpetrate violence and bring further instability to the West Bank.”
While the alert highlights the potential involvement of certain nonprofit organizations (NPOs) in facilitating payments to fund violence in the West Bank, FinCEN continues to emphasize that legitimate charities should have access to financial services and can transmit funds through legitimate and transparent channels. FinCEN is also reminding financial institutions to apply a risk-based approach to Customer Due Diligence (CDD) requirements when developing the risk profiles of charities and other non-profit customers. No specific customer types, including charities and NPOs, automatically presents a higher risk of illicit activity. Additionally, as no single red flag is necessarily indicative of illicit or suspicious activity, U.S. financial institutions are encouraged to consider all the surrounding facts and circumstances before determining whether a specific transaction is suspicious or associated with potential Israeli violent extremist groups or campaigns.
Finally, through the alert, Treasury’s Office of Foreign Assets Control (OFAC) is highlighting for members of the public that under the Executive Order of February 1, 2024, “Imposing Certain Sanctions on Persons Undermining Peace, Security, and Stability in the West Bank,” the U.S. government is authorized to impose sanctions on foreign persons that are responsible for or complicit in, or have directly or indirectly engaged or attempted to engage in (1) actions that threaten the peace, security, or stability of the West Bank; or (2) planning, ordering, otherwise directing, or participating in specified actions affecting the West Bank, such as violence targeting civilians and property destruction. The United States seeks to impose tangible and significant consequences on those engaged in such activities, as well as to protect the U.S. financial system from abuse.
The full notice is available online at FIN-2024-Alert001.
February 05, 2024
LOS ANGELES—Today, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) convened a FinCEN Exchange—a voluntary public-private partnership—to share strategic and operational information to combat illicit financial networks that enable fentanyl trafficking. In addition to other lines of effort, the Exchange supports Treasury’s Counter-Fentanyl Strike Force, which launched in December 2023 to bring together personnel, expertise, intelligence, and resources across key Treasury offices to combat the flow of deadly fentanyl into communities throughout the United States. It is the third fentanyl-related FinCEN Exchange in a series specifically aimed at engaging with regional financial institutions across the United States.
Co-hosted by the United States Attorney’s Office for the Central District of California, the FinCEN Exchange included representatives from the financial industry, as well as regional and national law enforcement agencies such as the U.S. Department of Justice, the Drug Enforcement Administration, Homeland Security Investigations, U.S. Customs and Border Protection, the Federal Bureau of Investigation, IRS – Criminal Investigation, the United States Postal Inspection Service, the Los Angeles Police Department, and the Los Angeles Sheriff’s Department.
FinCEN and law enforcement representatives highlighted the significant value that suspicious activity reports contribute to law enforcement efforts to combat fentanyl trafficking. They also shared views on ways the financial industry can further increase the effectiveness of suspicious activity reporting involving suspected fentanyl trafficking and related money laundering in Southern California and beyond. Similarly, financial institutions shared information on money laundering flows and tactics used by narcotraffickers and their enablers. All participants discussed ways to deepen collaboration and to enhance the value of suspicious activity reporting to counter this threat.
This event continues a series of FinCEN Exchanges on fentanyl trafficking and related funds flows, including two in 2023, in San Antonio, Texas and Cincinnati, Ohio. The Treasury Department has long recognized the threat from money laundering linked to drug trafficking. The Department is a key implementer of the President’s National Drug Control Strategy, which identifies countering illicit finance as a critical pillar to degrade and disrupt transnational criminal organizations (TCOs) that traffic these drugs. In December, Secretary Yellen traveled to Mexico City, Mexico to further close cooperation with Mexican government counterparts on fentanyl trafficking.
FinCEN continues to call on financial institutions to monitor for and report suspicious activity related to the trafficking of fentanyl, fentanyl analogues, and other synthetic opioids, including on the basis of its 2019 advisory to financial institutions on the subject.
February 07, 2024
WASHINGTON—Today, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking to combat and deter money laundering in the U.S. residential real estate sector by increasing transparency.
The proposed rule would require certain professionals involved in real estate closings and settlements to report information to FinCEN about non-financed transfers of residential real estate to legal entities or trusts. FinCEN’s proposal is tailored to target residential real estate transfers considered to be high-risk for money laundering, while minimizing potential business burden, and it would not require reporting of transfers made to individuals.
“Illicit actors are exploiting the U.S. residential real estate market to launder and hide the proceeds of serious crimes with anonymity, while law-abiding Americans bear the cost of inflated housing prices,” said FinCEN Director Andrea Gacki. “Today marks an important step toward not only curbing abuse of the U.S. residential real estate sector, but safeguarding our economic and national security.”
The proposed rule describes the circumstances in which a report would be filed; who would file a report; what information would need to be provided, including information about the beneficial owners of the legal entities and trusts; and when a report about the transaction would be due. Data from the reports would assist the Department of the Treasury and its law enforcement and national security partners in addressing vulnerabilities that leave the U.S. residential real estate market exposed to abuse by illicit actors.
The proposed rule is consistent with the Bank Secrecy Act’s longstanding directive to extend anti-money laundering measures to the real estate sector and builds on the success of FinCEN’s Real Estate Geographic Targeting Order program, which has demonstrated the need for increased transparency and further regulation of this sector nationwide. Under the proposed rule, persons involved in real estate closings and settlements would continue to be exempt from the anti-money laundering compliance program requirements of the Bank Secrecy Act.
FinCEN strongly encourages the public to submit written comments in response to the proposed rule. Comments will be accepted for 60 days following publication in the Federal Register.
A Fact Sheet on the Notice of Proposed Rulemaking is available on FinCEN’s website.
February 13, 2024
WASHINGTON—Today, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking (NPRM) to keep criminals and foreign adversaries from exploiting the U.S. financial system and assets through investment advisers. This proposed rule, which complements Treasury’s other recent actions to combat the illicit finance risks from anonymous companies and all-cash real estate transactions, will add further transparency to the U.S. financial system and help assist law enforcement in identifying illicit proceeds entering the U.S. economy.
The proposed rule would require certain investment advisers to apply Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) requirements pursuant to the Bank Secrecy Act (BSA), including implementing risk-based AML/CFT programs, reporting suspicious activity to FinCEN, and fulfilling recordkeeping requirements. Treasury today also published its risk assessment of this sector, which identifies illicit finance threats and vulnerabilities in the sector, including how the uneven application of AML/CFT requirements across the sector allows both legitimate and illicit investors to “shop around” for an adviser who does not need to inquire into their source of wealth.
“Investment advisers are important gatekeepers to the American economy, overseeing the investment of tens of trillions of dollars. The current patchwork of AML/CFT requirements creates regulatory gaps that criminals and foreign adversaries exploit to launder money, hide illicit wealth, and compromise American innovation,” said FinCEN Director Andrea Gacki. “This proposed rule would level the regulatory playing field, protect U.S. economic and national security, and safeguard American businesses.”
The proposed rule would add investment advisers to the list of businesses classified as “financial institutions” under the BSA. Investment advisers registered with the Securities and Exchange Commission (SEC), as well as those that report to the SEC as exempt reporting advisers, would be required to implement AML/CFT programs. They would also be required to file suspicious activity reports, fulfill certain recordkeeping requirements, and fulfill other obligations applicable to financial institutions subject to the BSA and FinCEN’s implementing regulations.
The proposed rule would also apply information-sharing provisions between and among FinCEN, law enforcement government agencies, and certain financial institutions, along with special measures that have been applied under Section 311 of the USA PATRIOT Act. Finally, FinCEN is proposing to delegate examination authority for this rule to the SEC given the SEC’s expertise in the regulation of investment advisers and experience in examining other financial institutions with respect to AML/CFT responsibilities.
The proposed rule builds on the 2021 U.S. Strategy on Countering Corruption, which recommended that Treasury assess the risks posed by the investment adviser industry, and to reexamine a 2015 NPRM that similarly proposed to extend AML/CFT requirements to certain investment advisers. Recognizing the importance of the investment adviser sector to legitimate investors and the U.S. economy, the proposed rule is tailored towards addressing material risks and strengthening financial transparency while minimizing potential business burden as much as possible.
FinCEN strongly encourages the public to submit written comments in response to the proposed rule. Comments will be accepted until April 15, 2024.
February 13, 2024
WASHINGTON—The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a Financial Trend Analysis (FTA) today reflecting an increase in Bank Secrecy Act (BSA) reporting associated with the use of convertible virtual currency (CVC) and online child sexual exploitation (OCSE) and human trafficking. This FTA is based on BSA reporting filed between January 2020 and December 2021.
“Human traffickers and perpetrators of related crimes despicably exploit adults and children for financial gain,” said FinCEN Director Andrea Gacki. “Financial institutions’ vigilance and timely reporting is critical to providing law enforcement agencies with the information needed to investigate potential cases of human trafficking, sexual crimes against children, and related crimes. This reporting ultimately helps law enforcement protect and save innocent lives.”
The analysis detailed in this FTA furthers Treasury efforts to combat human trafficking as well as the illicit uses of CVC. For example, Brian Nelson, Treasury’s Under Secretary for Terrorism and Financial Intelligence, announced at the President’s Interagency Task Force to Monitor and Combat Trafficking that FinCEN has joined the Canadian financial intelligence unit’s Project Protect—a flagship public-private partnership on human trafficking. In addition, in June 2021, FinCEN identified human trafficking and cybercrime as among the “Anti-Money Laundering and Countering the Financing of Terrorism National Priorities” issued pursuant to the Anti-Money Laundering Act of 2020. More recently, in October 2023, FinCEN issued a finding pursuant to Section 311 of the USA PATRIOT Act that CVC mixing is a class of transactions of primary money laundering concern and proposed reporting requirements to increase transparency in connection with CVC mixing.
FinCEN’s analysis highlights the value of BSA reporting filed by regulated financial institutions. Key findings in the FTA include:
If you suspect OCSE or human trafficking is occurring or has occurred, please immediately contact law enforcement. To report suspicious activity indicative of OCSE or human trafficking to the U.S. Immigration and Customs Enforcement (ICE) Homeland Security Investigations (HSI) Tip Line, call 1-866-DHS-2-ICE (1-866-347-2423) 24 hours a day, seven days a week, every day of the year. The Tip Line is also accessible outside the United States by calling 802-872-6199.
February 29, 2024
WASHINGTON—The Financial Crimes Enforcement Network (FinCEN) is informing U.S. financial institutions that the Financial Action Task Force (FATF), an intergovernmental body that establishes international standards for anti-money laundering, countering the financing of terrorism, and countering the financing of proliferation of weapons of mass destruction (AML/CFT/CPF), issued an additional public statement at the conclusion of its plenary meeting this month reiterating how the Russian Federation’s war of aggression against Ukraine continues to run counter to FATF’s principles, and, thus, the suspension of the membership of the Russian Federation continues to stand. The FATF highlighted the potential risks to the international financial system, including growing financial connectivity of Russia with the Democratic People’s Republic of Korea (DPRK) and Iran, and risks of proliferation financing, malicious cyber activities, and ransomware attacks. In order to protect the international financial system, the FATF continues to urge all jurisdictions to remain vigilant to these risks.
The FATF also updated its lists of jurisdictions with strategic AML/CFT/CPF deficiencies. U.S. financial institutions should consider the FATF’s stance toward these jurisdictions when reviewing their obligations and risk-based policies, procedures, and practices.
On February 23, 2024, the FATF added Kenya and Namibia to its list of Jurisdictions Under Increased Monitoring and removed Barbados, Gibraltar, Uganda, and the United Arab Emirates from that list.
The FATF’s list of High-Risk Jurisdictions Subject to a Call for Action remains the same, with Iran, DPRK, and Burma subject to calls for action. Iran and DPRK are still subject to the FATF’s countermeasures, while Burma is still subject to the application of enhanced due diligence, but not countermeasures.
As part of the FATF’s listing and monitoring process to ensure compliance with its international standards, the FATF issued two statements: (1) Jurisdictions Under Increased Monitoring, which publicly identifies jurisdictions with strategic deficiencies in their AML/CFT/CPF regimes that have committed to, or are actively working with, the FATF to address those deficiencies in accordance with an agreed upon timeline; and (2) High-Risk Jurisdictions Subject to a Call for Action, which publicly identifies jurisdictions with significant strategic deficiencies in their AML/CFT/CPF regimes and calls on all FATF members to apply enhanced due diligence, and, in the most serious cases, apply countermeasures to protect the international financial system from the money laundering, terrorist financing, and proliferation financing risks emanating from the identified countries.
Jurisdictions Under Increased Monitoring
With respect to theFATF-identified Jurisdictions Under Increased Monitoring, U.S. covered financial institutions are reminded of their obligations to comply with the due diligence obligations for foreign financial institutions (FFI) under 31 CFR § 1010.610(a) in addition to their general obligations under 31 U.S.C. § 5318(h) and its implementing regulations. As required under 31 CFR § 1010.610(a), covered financial institutions should ensure that their due diligence programs, which address correspondent accounts maintained for FFIs, include appropriate, specific, risk-based, and, where necessary, enhanced policies, procedures, and controls that are reasonably designed to detect and report known or suspected money laundering activity conducted through or involving any correspondent account established, maintained, administered, or managed in the United States. Furthermore, money services businesses (MSBs) have parallel requirements with respect to foreign agents or foreign counterparties, as described in FinCEN Interpretive Release 2004-1, which clarifies that the AML program regulation requires MSBs to establish adequate and appropriate policies, procedures, and controls commensurate with the risk of money laundering and the financing of terrorism posed by their relationship with foreign agents or foreign counterparties. Additional information on these parallel requirements (covering both domestic and foreign agents and foreign counterparts) may be found in FinCEN’s Guidance on Existing AML Program Rule Compliance Obligations for MSB Principals with Respect to Agent Monitoring. Such reasonable steps should not, however, put into question a financial institution’s ability to maintain or otherwise continue appropriate relationships with customers or other financial institutions, and should not be used as the basis to engage in wholesale or indiscriminate de-risking of any class of customers or financial institutions. Financial institutions should also refer to previous interagency guidance on providing services to foreign embassies, consulates, and missions.
The United Nations (UN) continues to adopt several resolutions implementing economic and financial sanctions. Member States are bound by the provisions of these UN Security Council Resolutions (UNSCRs), and certain provisions of these resolutions are especially relevant to financial institutions. Financial institutions should be familiar with the requirements and prohibitions contained in relevant UNSCRs. In addition to UN sanctions, the U.S. Government maintains a robust sanctions program. For a description of current Office of Foreign Assets Control (OFAC) sanctions programs, please consult OFAC’s Sanctions Programs and Country Information.
High-Risk Jurisdictions Subject to a Call for Action
With respect to the FATF-identified High-Risk Jurisdictions Subject to a Call for Action, Burma remains in this category and the FATF urges jurisdictions to apply enhanced due diligence proportionate to the risks. As a general matter, FinCEN advises U.S. financial institutions to apply enhanced due diligence when maintaining correspondent accounts for foreign banks operating under a banking license issued by a country designated by an intergovernmental group or organization of which the United States is a member, as noncooperative with respect to international anti-money laundering principles or procedures, and with which designation the U.S. representative to the group or organization concurs. U.S. financial institutions should continue to consult existing FinCEN and OFAC guidance on engaging in financial transactions with Burma.
With respect to the FATF-identified High-Risk Jurisdictions Subject to a Call for Action, specifically, countermeasures, in the case of DPRK and Iran, U.S. financial institutions must comply with the extensive U.S. restrictions and prohibitions against opening or maintaining any correspondent accounts, directly or indirectly, for North Korean or Iranian financial institutions. Existing U.S. sanctions and FinCEN regulations already prohibit any such correspondent account relationships.
The Government of Iran and Iranian financial institutions remain persons whose property and interests in property are blocked under E.O. 13599 and section 560.211 of the Iranian Transactions and Sanctions Regulations (ITSR), 31 CFR Part 560. U.S. financial institutions and other U.S. persons continue to be broadly prohibited under the ITSR from engaging in transactions or dealings with Iran, the Government of Iran, and Iranian financial institutions, including opening or maintaining correspondent accounts for Iranian financial institutions. These sanctions impose obligations on U.S. persons that go beyond the relevant FATF recommendations. In addition to OFAC-administered sanctions, on October 25, 2019, FinCEN found Iran to be a Jurisdiction of Primary Money Laundering Concern and issued a final rule, pursuant to Section 311 of the USA PATRIOT Act, imposing the fifth special measure available under Section 311. This rule prohibits U.S. financial institutions from opening or maintaining correspondent accounts for, or on behalf of, an Iranian financial institution, and the use of foreign financial institutions’ correspondent accounts at covered United States financial institutions to process transactions involving Iranian financial institutions (31 CFR § 1010.661).
For jurisdictions removed from the FATF listing and monitoring process, U.S. financial institutions should take the FATF’s decisions and the reasons behind the delisting into consideration when assessing risk, consistent with financial institutions’ obligations under 31 CFR § 1010.610(a) and 31 CFR § 1010.210.
If a financial institution knows, suspects, or has reason to suspect that a transaction involves funds derived from illegal activity or that a customer has otherwise engaged in activities indicative of money laundering, terrorist financing, or other violation of federal law or regulation, the financial institution must file a Suspicious Activity Report.
FINRA published the results of its crypto asset communications sweep in late January. More than 500 crypto asset-related retail communications were reviewed, and FINRA identified potential violations of FINRA Rule 2210 (Communications with the Public) in 70 percent of the communications. The sweep update included questions for firms to consider if they produce retail communications concerning crypto assets as well as initial themes from the exam.
Regulators continue to demonstrate their commitment to protecting investors by aggressively pursuing bad actors and reviewing and updating regulations to guard investors against constantly evolving threats.
The best approach to regulatory compliance is a proactive one. Staying ahead of the curve by taking note of statements and guidance released by regulators and using them as a barometer to assess the current regulatory climate can help ensure that a firm is prepared for a regulatory exam. Rather than scrambling to rectify issues or meet deadlines, a thorough, active compliance program that considers and incorporates regulatory developments is in a better position to satisfy regulators and preserve operations so they can best serve their clients.
For more information, please contact:
Mitch Avnet
p. (646) 346-2468
David Amster
p. (917) 568-6470
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