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 24-12, FINRA has adopted amendments to Rule 3240 (Borrowing From or Lending to Customers) to strengthen the rule’s general prohibition against borrowing and lending arrangements between registered persons and their customers, narrow some existing exceptions to the general prohibition, modernize the “immediate family” definition, and enhance the notice and approval requirements related to permissible arrangements. The amendments will become effective on April 28, 2025.
The text of the rule change is set forth in Attachment A to the Notice.
Per Regulatory Notice 24-13, FINRA is conducting a retrospective review of its requirements governing day trading to assess their effectiveness and efficiency. This Notice outlines the general retrospective rule review process and seeks comment on all aspects of these requirements, from members, investors and other interested parties. The Notice includes questions seeking comment on the public’s experiences with the requirements; in addressing the requirements, commenters should not feel limited to these questions.
Per Regulatory Notice 24-14, FINRA’s Renewal Program supports the collection and disbursement of fees related to the renewal of broker-dealer (BD) and investment adviser (IA) registrations, exempt reporting and notice filings with participating self-regulatory organizations (SRO) and jurisdictions. FINRA communicates information about renewal fees BD and IA firms owe via a Preliminary Statement in November, and publishes a Final Statement in January to confirm or reconcile the actual renewal fees BD and IA firms owe after January 1, 2025. Renewal statements reflect all applicable renewal fees assessed for BD and IA firms, branches and individuals.
It is critical that firms ensure they pay in full by the Preliminary Statement deadline. If payment is late, firms should ensure that the Preliminary Statement is paid in full before the year-end system shutdown. Payments received after the Preliminary Statement deadline for FINRA-registered firms are subject to a late fee.
More information, including key dates, is provided below. In addition to this Notice, firms should review resources on the following pages:
Questions regarding this Notice should be directed to the FINRA Support Center at (301) 869-6699.
Final Rules
Per Release No. 34-101446, the SEC is adopting amendments to certain rules in the Covered Clearing Agency Standards (“CCA Standards”) under the Securities Exchange Act of 1934 (“Exchange Act”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The amendments strengthen existing rules by adding new requirements related to the collection of intraday margin by a covered clearing agency (“CCA”) and the use of substantive inputs in its risk-based margin system. The SEC is also adopting a new rule to establish required elements of a CCA’s recovery and orderly wind-down plan (“RWP”).
Proposed Rules
There were no proposed rules in October.
Interim Final Rules
There were no interim final rules in October.
Interpretive Releases
There were no interpretive releases in October.
There were no policy statements in October.
Notices to Members
Notice I-24-17
October 22, 2024
NFA Announces the 2024 Member Category Nominating Committee's Subcommittees' Nominations
Pursuant to NFA's Articles of Incorporation (NFA's Articles), NFA's 2024 Member Category Nominating Committee's Subcommittees have provided NFA's Secretary with a list of its nominees for the open positions on NFA's Board of Directors and 2025 Member Category Nominating Committee. The list of nominees included with this Notice serves as notification to NFA Members of the candidates nominated by the 2024 Member Category Nominating Committee's Subcommittees.
NFA Bylaw 406 provides that other nominations may be made for elected FCM and LTM, IB; CPO and CTA; and SD, MSP and RFED Director positions as follows:
(i) Petition signed by 50 or more NFA Members* in the category for which the nomination is made (i.e., FCM and LTM; SD, MSP and RFED; IB; and CPO and CTA); or
(ii) Petition submitted by any organization or association recognized by NFA as fairly representing the category (See (i) above) for which the nomination is made.
No petition may nominate more than one candidate for the same position.
NFA Bylaw 406 also requires that each petition identify the position to which the nomination pertains, and that petitions must be received by the Secretary within 21 days of the date of this Notice (i.e., November 12, 2024). Any petition received after November 12, 2024 will not be considered.
Petitions must be submitted by mail or email for receipt no later than November 12, 2024.
NFA News Releases
October 29, 2024
NFA orders New York, N.Y. commodity pool operator AC Investment Management, LLC to pay a $100,000 fine
October 29, Chicago--NFA has ordered AC Investment Management, LLC (ACIM), an NFA Member commodity pool operator located in New York, N.Y., to pay a $100,000 fine.
The Decision, issued by an NFA Hearing Panel, is based on a Complaint issued by NFA's Business Conduct Committee and a settlement offer submitted by ACIM, in which the firm neither admitted nor denied the allegations in the Complaint.
The Complaint alleged that ACIM permitted Aurelian Plus LLC (Aurelian Plus), a pool ACIM operates, to make an improper loan to an affiliated entity, in violation of NFA Compliance Rule 2-45. The Complaint also alleged that ACIM failed to uphold high standards of commercial honor and just and equitable principles of trade by failing to act in the best interests of Aurelian Plus, AGR Master LP, another pool the firm operates, and their participants, in violation of NFA Compliance Rule 2-4.
In its Decision, the Hearing Panel found that, based on the actions of its former sole managing member, ACIM violated NFA Compliance Rules 2-4 and 2-45.
The complete text of the Complaint and Decision can be viewed on NFA's website.
October 30, 2024
NFA orders New Jersey-based commodity pool operator Scalebuilder LLC to pay a $200,000 fine
October 30, Chicago--NFA has ordered Scalebuilder LLC (Scalebuilder) to pay a $200,000 fine. Scalebuilder is an NFA Member commodity pool operator located in Summit, N.J.
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 Scalebuilder, in which the firm neither admitted nor denied the allegations in the Complaint.
In its Decision, the BCC found that Scalebuilder allowed unregistered individuals to act as associated persons without being NFA Associates in violation of NFA Bylaw 301(b) and failed to report individuals as principals of the firm in violation of NFA Registration Rule 208. The BCC also found Scalebuilder failed to supervise its operations and employees, in violation of NFA Compliance Rule 2-9(a).
The complete text of the Complaint and Decision can be viewed on NFA's website.
FinCEN News Releases
FinCEN Assesses Record $1.3 Billion Penalty against TD Bank
October 10, 2024
WASHINGTON—The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) assessed a record $1.3 billion penalty against TD Bank, N.A. and TD Bank USA, N.A. (collectively, TD Bank, or the Bank) for violations of the Bank Secrecy Act (BSA), the primary U.S. anti-money laundering (AML) law that safeguards the financial system from illicit use. TD Bank is among the largest banks in the United States.
FinCEN’s $1.3 billion settlement is the largest penalty against a depository institution in U.S. Treasury and FinCEN history. FinCEN’s action also imposes a four-year independent monitorship to oversee TD Bank’s required remediation.
“The vast majority of financial institutions have partnered with FinCEN to protect the integrity of the U.S. financial system. TD Bank did the opposite. From fentanyl and narcotics trafficking, to terrorist financing and human trafficking, TD Bank’s chronic failures provided fertile ground for a host of illicit activity to penetrate our financial system,” said Deputy Secretary of the Treasury Wally Adeyemo. “Our historic action represents a significant step in safeguarding our country and communities from criminal activity like fentanyl and human trafficking by requiring TD Bank to fix the vast deficiencies in its safeguards against money laundering. The Biden-Harris Administration is committed to taking action to keep our communities safe from the sort of behavior facilitated by illicit finance and enabled by TD Bank’s lax oversight, and we are making clear that financial institutions will face severe repercussions if they fail to maintain necessary safeguards.”
“For over a decade, TD Bank allowed its AML program to languish, making TD Bank a target for illicit actors—including its own employees,” said FinCEN Director Andrea Gacki. “The magnitude of FinCEN’s action is consistent with the harm that TD Bank’s failures caused. This historic action should serve as a powerful reminder that we will not tolerate financial institutions who flagrantly violate their obligation to safeguard our financial system from criminal activity.”
As part of the settlement, TD Bank admits that it willfully failed to implement and maintain an AML program that met the minimum requirements of the BSA and FinCEN’s implementing regulations. FinCEN’s investigation revealed that TD Bank knew that its AML program was neither appropriately designed nor adequately resourced to mitigate the actual illicit finance risks that it faced on multiple fronts. Among other failures, TD Bank’s processing of peer-to-peer transactions (e.g., Venmo and Zelle), including transactions indicative of human trafficking, was insufficient, and as a result, TD Bank failed to identify and timely report these transactions to FinCEN. TD Bank also allowed significant backlogs of potentially suspicious activity to persist, thereby depriving law enforcement of necessary information. TD Bank knew that it was the subject of significant funnel account activity involving high-risk countries yet failed to take timely action to address this substantial risk.
TD Bank also failed to timely detect suspicious activity involving its own employees. For example, in 2021, a TD Bank employee facilitated the laundering of narcotics proceeds in exchange for bribes. This employee opened numerous accounts, including for shell companies, that then engaged in millions of dollars’ worth of funnel account activity in a high-risk jurisdiction where TD Bank maintained no operations. TD Bank knew that this type of activity was not subject to appropriate controls and failed to mitigate this glaring risk.
As a result of these failures, TD Bank allowed trillions of dollars in transactions annually to go unmonitored for potentially suspicious activity that would require reporting to FinCEN. Specifically, during the time period covered by the Consent Order, TD Bank willfully failed to file Suspicious Activity Reports (SARs) on thousands of suspicious transactions—totaling approximately $1.5 billion. Additionally, TD Bank’s Currency Transaction Reports (CTRs) of large cash transactions were often delayed, and, in some instances, misleading to law enforcement.
TD Bank failed to properly limit or report suspicious transactions and cash activity that included substantial criminal activity, as further detailed in the Consent Order. For example, from 2017 to 2021, TD Bank facilitated over $400 million in transactions for Da Ying Sze (Sze), who pled guilty to money laundering in 2022 for his role in conspiring to hide proceeds of narcotics trafficking. Sze conducted most of these transactions in large sums of cash (often in bags that Sze brought into TD Bank branches), yet the Bank failed to timely limit or restrict Sze’s activity. TD Bank failed to timely file SARs on a substantial portion of this activity and also failed to identify Sze in more than 500 CTRs totaling more than $400 million, which hindered FinCEN and law enforcement.
TD Bank has agreed to engage an independent consultant, who, under the auspices of FinCEN’s monitor, would conduct a historical analysis of TD Bank’s transaction data, often referred to as a “SAR lookback,” to remediate the SAR filings that TD Bank missed due to its extensive control gaps. TD Bank has also agreed that the monitor will oversee an independent, end-to-end review of its AML Program. For the first time, FinCEN is imposing accountability and data governance reviews. The accountability review will independently assess the involvement or failure to escalate by TD Bank personnel in conjunction with certain conduct described in the Consent Order’s Statement of Facts. The accountability review will provide corresponding recommendations to the Bank, including recommendations related to the culture of compliance at TD Bank. The data governance review will help to ensure that TD Bank identifies and fixes the root causes of many gaps in its AML program.
The Department of Justice, the Office of the Comptroller of the Currency, and the Board of Governors of the Federal Reserve System will also announce settlements in parallel investigations today.
FinCEN’s Enforcement and Compliance Division is responsible for investigating serious violations of the BSA. For additional information regarding the facts and circumstances associated with this enforcement action, including the specific BSA violations and their underlying causes, please see the Consent Order between FinCEN and TD Bank.
FinCEN Renews Real Estate Geographic Targeting Orders
October 15, 2024
FinCEN today announced the renewal of its Geographic Targeting Orders (GTOs) that require U.S. title insurance companies to identify the natural persons behind shell companies used in non-financed purchases of residential real estate.
The terms of the GTOs are effective beginning October 16, 2024, and ending on April 14, 2025. The GTOs continue to provide valuable data on the purchase of residential real estate by persons possibly involved in various illicit enterprises. Renewing the GTOs will further assist in tracking illicit funds and other criminal or illicit activity, as well as continuing to inform FinCEN’s regulatory efforts in this sector.
FinCEN renewed the GTOs that cover certain counties and major U.S. metropolitan areas in California, Colorado, Connecticut, Florida, Hawaii, Illinois, Maryland, Massachusetts, Nevada, New York, Texas, Washington, Virginia, and the District of Columbia.
The purchase price threshold remains $300,000 for each covered metropolitan area, with the exception of the City and County of Baltimore, where the purchase price threshold is $50,000.
FinCEN appreciates the continued assistance and cooperation of title insurance companies and the American Land Title Association in protecting real estate markets from abuse by illicit actors.
In August 2024, FinCEN issued a final rule requiring certain industry professionals to report information to FinCEN about non-financed transfers of residential real estate to a legal entity or trust. This nationwide reporting framework will replace the GTOs and goes into effect on December 1, 2025.
Any questions about the Orders should be directed to FinCEN’s Regulatory Support Section at FRC@FinCEN.gov.
A copy of the GTO is available here.
Frequently asked questions regarding these GTOs are available here.
FinCEN Issues Alert to Financial Institutions to Counter Financing of Hizballah and Its Terrorist Activities
October 23, 2024
FinCEN issued an alert to assist financial institutions in identifying and reporting suspicious activity supporting Lebanese Hizballah (Hizballah), a U.S.-designated Foreign Terrorist Organization. The alert builds upon FinCEN’s May 2024 advisory on Iran-backed terrorist organizations and offers a comprehensive overview of Hizballah’s global criminal financial networks.
“Hizballah’s role in the ongoing conflict in the Middle East has exacerbated the risk of a wider regional war, and its strikes on Israeli territory have displaced thousands and killed innocent civilians,” said FinCEN Director Andrea Gacki. “As part of the Treasury Department’s enduring campaign against Hizballah’s finances, and in response to Hizballah’s attacks against Israel, we are issuing this alert to help financial institutions uncover Hizballah’s illicit activities and protect the U.S. financial system from abuse by terrorists.”
Hizballah is part of a network of Iran-backed terrorist organizations that seeks to erode U.S. influence in the Middle East and encircle Israel with hostile forces. Hizballah has engaged in ongoing violence against Israel since its inception in 1982 and is responsible for multiple large-scale terrorist attacks around the world, to include attacks against U.S. interests and persons. In addition to receiving hundreds of millions of dollars in support from Iran, Hizballah’s revenue generating activities are global in scale and include oil smuggling, money laundering, black market money exchange, counterfeiting, and illegal weapons procurement.
Today’s alert is issued consistent with FinCEN’s Anti-Money Laundering/Countering the Financing of Terrorism National Priorities, as well as Treasury’s 2024 National Terrorist Financing Risk Assessment. 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-Alert003.
Financial Action Task Force Identifies Jurisdictions with Anti-Money Laundering, Combating the Financing of Terrorism, and Counter-Proliferation Finance Deficiencies
October 30, 2024
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), updated its lists of jurisdictions with strategic AML/CFT/CPF deficiencies at the conclusion of its plenary meeting this month. 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 October 25, 2024, the FATF added Algeria, Angola, Côte d’Ivoire, and Lebanon to its list of Jurisdictions Under Increased Monitoring and also removed Senegal from the list.
The FATF’s list of High-Risk Jurisdictions Subject to a Call for Action remains the same, with Iran, the Democratic People’s Republic of Korea (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 the FATF-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 (FFIs) 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 enable the covered financial institution to detect and report, on an ongoing basis, any known or suspected money laundering activity conducted through or involving any correspondent account established, maintained, administered, or managed in the United States for an FFI. 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 several sanctions programs. 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 as noncooperative with international anti-money laundering principles or procedures by an intergovernmental group or organization of which the United States is a member, 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 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 FFIs’ 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.
The SEC’s Division of Examinations recently published its FY 2025 Examination Priorities. Overarching focus areas include things like information security and operational resiliency, emerging financial technologies, crypto assets, Regulation Systems Compliance and Integrity, and anti-money laundering.
Be on the lookout for an in-depth publication from CRC that highlights and analyzes key aspects of the report as it relates to particular registrant types.
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
Sources:
