As the regulatory landscape is constantly evolving, Compliance Risk Concepts (“CRC”) is issuing its monthly […]
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 24-15, FINRA has amended Rule 13606 of the Code of Arbitration Procedure for Industry Disputes to provide that the Director of FINRA Dispute Resolution Services will provide a copy of the official record of an expungement hearing held pursuant to Rule 13805, and any transcription if the recording is transcribed, to any customers, upon request, who attend and participate in the expungement hearing, or who provide their position on the expungement request in writing.
The text of the amendments is set forth in Attachment A.
The amendments are effective for arbitration cases filed on or after December 1, 2024.
Final Rules
Per Release No. 33-11325, the SEC is adopting amendments to correct certain errors in various rules and forms under the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, and the Investment Advisers Act of 1940. The SEC is also amending a rule that displays control numbers assigned to information collection requirements by the Office of Management and Budget pursuant to the Paperwork Reduction Act.
This rule is effective November 18, 2024.
Per Release No. IA-6773, the SEC is adopting technical amendments to various rules under the Investment Advisers Act of 1940 (“Advisers Act”) to reflect a Federal court’s vacatur of new rules and rule amendments that the SEC adopted on August 23, 2023. The SEC adopted new rules designed to protect investors who directly or indirectly invest in private funds, corresponding amendments to the Advisers Act books and records rule to facilitate compliance with the new rules and assist examination staff, and additional amendments to the Advisers Act compliance rule to better enable staff to conduct examinations (together, the “Private Fund Adviser Rules”). The court’s vacatur of the Private Fund Adviser Rules was effective as of June 5, 2024, and had the legal effect of: vacating the new rules and the reservation of a rule number in the Code of Federal Regulations (“CFR”); as well as vacating the amendments to the existing books and records and compliance rules such that those vacated amendments are no longer in effect. These technical amendments revise the CFR to reflect the court’s vacatur of the Private Fund Adviser Rules.
Effective November 19, 2024; however, the Federal court issued its vacatur of the rule amendments June 5, 2024.
Proposed Rules
There were no proposed rules in November.
Interim Final Rules
There were no interim final rules in November.
Interpretive Releases
There were no interpretive releases in November.
There were no policy statements in November.
Notices to Members
Notice I-24-18
November 6, 2024
FCM and IB Members—FinCEN updates its list of FATF-identified jurisdictions with AML/CFT/CPF deficiencies
On October 30, 2024, the Financial Crimes Enforcement Network (FinCEN) issued a news release announcing that the Financial Action Task Force (FATF) updated its list of jurisdictions with strategic AML/CFT/CPF deficiencies. NFA Member futures commission merchants (FCM) and introducing brokers (IB) should review this release to ensure that their AML programs have the most current information on FATF-identified jurisdictions with AML/CFT/CPF deficiencies and revise their AML programs accordingly. A copy of the news release is available on FinCEN's website.
NFA News Releases
November 20, 2024
NFA sanctions Chicago-based introducing broker X-Change Financial Access LLC and two employees
November 20, Chicago—NFA has ordered X-Change Financial Access LLC (XFA) to pay a $400,000 fine. XFA is an NFA Member introducing broker located in Chicago, Ill.
The Decision, issued by an NFA Hearing Panel, is based on Complaint issued by NFA's Business Conduct Committee (BCC) and a settlement offer submitted by XFA, in which the firm neither admitted nor denied the allegations in the Complaint. The Decision found that XFA failed to keep full, complete and systematic records of all transactions and maintain pre-trade communications, in violation of NFA Compliance Rule 2-10(a); allowed two unregistered individuals to act as associated persons (AP) without being NFA Associates, in violation of NFA Bylaw 301(b); and failed to adequately supervise the firm's operations and employees, in violation of NFA Compliance Rule 2-9(a).
The Hearing Panel's Decision also ordered Timothy Francis Hendricks (Hendricks), a principal and AP of XFA, to share liability with the firm, jointly and severally, for $100,000 of the $400,000 fine. The Decision further ordered Hendricks not to act in a supervisory capacity for XFA or any other NFA Member for a period of 90 days.
In a separate Decision, the Hearing Panel ordered Peter Gordon Scheffler (Scheffler), a former principal and AP of XFA, not to reapply for NFA membership, associate membership or principal status through December 31, 2024, and to pay a $150,000 fine if he subsequently seeks NFA membership or principal status. The Decision further ordered Scheffler not to be employed as a supervisor by, or act in a supervisory capacity for, any NFA Member through March 31, 2025.
The Hearing Panel's Decisions against Hendricks and Scheffler are based on the same Complaint issued by the BCC against XFA and settlement offers submitted by Hendricks and Scheffler, in which they neither admitted nor denied the allegations in the Complaint. The Decisions each found that Hendricks and Scheffler failed to adequately supervise the firm's operations and employees, in violation of NFA Compliance Rule 2-9(a).
The complete text of the Complaint, the XFA and Hendricks Decision and the Scheffler Decision can be viewed on NFA's website.
FinCEN News Releases
Readout: FinCEN, Law Enforcement, and Financial Industry Representatives Meet to Discuss Collaborative Efforts to Combat Illicit Finance Related to Fentanyl Trafficking
November 12, 2024
EL PASO, Texas—Today, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), in partnership with Treasury’s Internal Revenue Service - Criminal Investigation (CI), held the eighth event of its Promoting Regional Outreach to Educate Communities on the Threat of Fentanyl (PROTECT) series of the FinCEN Exchange program. The event brought together public and private sector representatives in the area surrounding El Paso, Texas to discuss ways to deepen collaboration against the illicit trafficking of fentanyl into the United States. Financial institutions briefed on emerging trends and typologies they have observed regarding fentanyl-related money laundering, federal law enforcement discussed the threat that illegal fentanyl trafficking poses to the U.S. Southern border, and FinCEN presented on precursor chemicals involved in fentanyl-related illicit finance.
To date, FinCEN and CI have co-hosted PROTECT events in Boston, MA; Tucson, AZ; Miami, FL; Portland, OR; Denver, CO; New York, NY; and Charlotte, NC. Today’s event marks the second time FinCEN has convened a FinCEN Exchange session in Texas focused on combating illicit financial transactions related to fentanyl trafficking. Prior to launching its PROTECT series in May 2024, FinCEN gathered financial institutions, regulators, and law enforcement in San Antonio in July 2023, with the goal of promoting efficient and effective reporting by financial institutions of actionable information related to fentanyl trafficking.
Combatting fentanyl trafficking remains a top priority for FinCEN, as fentanyl continues to threaten the nation’s security, economy, communities, and families. FinCEN encourages financial institutions to carefully review its August 2019 and June 2024 advisories on the trafficking of fentanyl, fentanyl analogues, and other synthetic opioids and the precursor chemicals and associated manufacturing equipment needed to synthesize these deadly drugs.
FinCEN Issues Alert on Fraud Schemes Involving Deepfake Media Targeting Financial Institutions
November 13, 2024
WASHINGTON—Today, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued an alert to help financial institutions identify fraud schemes associated with the use of deepfake media created with generative artificial intelligence (GenAI) tools. The alert explains typologies associated with these schemes, provides red flag indicators to assist with identifying and reporting related suspicious activity, and reminds financial institutions of their reporting requirements under the Bank Secrecy Act.
“While GenAI holds tremendous potential as a new technology, bad actors are seeking to exploit it to defraud American businesses and consumers, to include financial institutions and their customers,” said Director Andrea Gacki. “Vigilance by financial institutions to the use of deepfakes, and reporting of related suspicious activity, will help safeguard the U.S. financial system and protect innocent Americans from the abuse of these tools.”
FinCEN has observed an increase in suspicious activity reporting by financial institutions describing the suspected use of deepfake media, particularly the use of fraudulent identity documents to circumvent identity verification and authentication methods. The abuse of GenAI tools contributes to cybercrime and fraud, two of FinCEN’s Anti-Money Laundering/Countering the Financing of Terrorism National Priorities.
This alert is part of the U.S. Department of the Treasury’s broader effort to provide financial institutions with information on the opportunities and challenges that may arise from the use of artificial intelligence.
Questions regarding the contents of this alert should be sent to the FinCEN Regulatory Support Section at frc@fincen.gov.
The full alert is available online at FIN-2024-Alert004.
FinCEN Joins Public-Private Partnership to Combat Fraud and Scams Impacting Innocent Americans
November 25, 2024
WASHINGTON—The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) has joined a multi-sector national task force dedicated to the prevention of fraud and scams. The National Task Force on Fraud and Scam Prevention, convened by the Aspen Institute’s Financial Security Program, brings together key stakeholders including the financial services sector, technology companies, consumer advocacy groups, information sharing and analysis centers, and federal government agencies to develop a comprehensive national strategy for combating fraud and scams. Fraud and cybercrime (including fraudulent schemes) are two of FinCEN’s Anti-Money Laundering and Countering the Financing of Terrorism National Priorities.
As part of its role on the Task Force, FinCEN will participate in specific working groups that will develop recommendations to include in the Task Force’s national strategy to combat fraud through cross-sector collaboration and “whole-of-government” support. FinCEN’s participation in the Task Force furthers its efforts to expand public-private partnerships to combat fraud, scams, and other illicit finance risks.
Although a “hot issue” since the election is speculation regarding the potential policy decisions of the incoming presidential administration, CRC believes that some long-standing topics will continue to be regulatory priorities despite the change in top-level appointees. These persistent subjects include such things as anti-money laundering and countering the financing of terrorism (AML/CFT), cybersecurity, and core fiduciary responsibilities.
As recently as the Monthly Disciplinary Actions reported for November 2024, FINRA highlighted on the front page its enforcement against a firm for findings that its AML program was not reasonably designed to achieve compliance with Customer Identification Program (CIP) and Customer Due Diligence (CDD) requirements. This AWC resulted in a fine of $125,000 and over $43,000 in restitution to customers.
Also, in November, the SEC published a press release announcing charges against a defendant for allegedly engaging in cherry-picking – allocating hundreds of millions of dollars in net first day gains and losses to favored and disfavored portfolios, respectively. The SEC’s complaint, filed in the United States District Court for the Southern District of New York, charges the defendant with violating antifraud and other provisions of the federal securities laws, and seeks permanent and conduct-based injunctions, an officer-and-director bar, disgorgement, prejudgment interest, civil penalties, and other relief.
In the face of uncertainty around new (de)regulatory policy initiatives, CRC believes that firms will be well-served in the meanwhile to maintain a focus on perennial issues like these.
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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