Compliance Risk Concepts Archives - Compliance Risk Concepts

SEC Charges Five More Investment Advisers for Marketing Rule Violations

CRC — Thu, 18 Apr 2024 12:09:35 +0000

Last week the SEC announced that it had settled charges against five more registered investment advisers for Marketing Rule violations, resulting in $200,000 in combined penalties (with one firm making up half the total on its own). This latest round of cases resulted from an ongoing targeted sweep concerning the Marketing Rule, and it follows another group of cases from September 2023 against nine other advisory firms.

In the present actions, the SEC’s orders found that the five firms advertised hypothetical performance to the general public on their websites without adopting and implementing policies and procedures reasonably designed to ensure that the hypothetical performance was relevant to the likely financial situation and investment objectives of each advertisement’s intended audience, as required by the Marketing Rule. Four of the five firms received reduced penalties because of the corrective steps they undertook in advance of being contacted by the SEC staff.

According to the SEC’s order, the fifth firm also violated other regulatory requirements, including by making false and misleading statements in advertisements, advertising misleading model performance, being unable to substantiate performance shown in its advertisements, and failing to enter into written agreements with people it compensated for endorsements. In addition, the SEC also found that the firm committed recordkeeping and compliance violations and made misleading statements about its performance to a registered investment company client and that the misleading statements were included in the client’s prospectus filed with the SEC.

Compliance Risk Concepts believes that the best approach to regulatory compliance is a proactive one. Staying ahead of the curve by taking note of actions 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.

For more information, please contact:

Mitch Avnet | p. (646) 346-2468 | mavnet@compliance-risk.com

The post SEC Charges Five More Investment Advisers for Marketing Rule Violations appeared first on Compliance Risk Concepts.

Monthly Regulatory Summary (February 2024)

CRC — Fri, 08 Mar 2024 15:42:33 +0000

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.

FINRA

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:

FINRA Rule 2341 (Investment Company Securities)
FINRA Rule 4515 (Approval and Documentation of Changes in Account Name or Designation)
FINRA Rule 6282 (Transactions Reported by Members to the ADF)
FINRA Rule 6380A (Transaction Reporting)
FINRA Rule 6380B (Transaction Reporting)
FINRA Rule 6622 (Transaction Reporting)
FINRA Rule 7140 (Trade Report Processing)
FINRA Rule 7240A (Trade Report Processing)
FINRA Rule 7340 (Trade Report Processing)
FINRA Rule 11140 (Transactions in Securities “Ex-Dividend,” “Ex-Rights” or “Ex-Warrants”)
FINRA Rule 11150 (Transactions “Ex-Interest” in Bonds Which Are Dealt in “Flat”)
FINRA Rule 11210 (Sent by Each Party)
FINRA Rule 11320 (Dates of Delivery)
FINRA Rule 11620 (Computation of Interest)
FINRA Rule 11860 (COD Orders)
FINRA Rule 11893 (Clearly Erroneous Transactions in OTC Equity Securities)
FINRA Rule 11894 (Review by the Uniform Practice Code (“UPC”) Committee)

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.

SEC

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.

Policy Statements

There were no policy statements in February.

NFA

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-23-15: Effective date for repeal of NFA Interpretive Notice regarding reduced NFA assessment fee for diminutive notional value-designated contracts

Notice I-23-13: Effective date of amendments to NFA's Articles of Incorporation and Bylaws to implement changes to NFA's governance structure

Notice I-23-10: Effective date for NFA rule establishing requirements for Members engaged in digital asset commodity activities

Notice I-23-08: Immediate attention required—Financial Requirements Section 12—Increases in required minimum security deposits for forex transactions

Notice I-24-02: Member obligations under NFA Bylaw 1101 and Compliance Rule 2-36(d) with respect to CPOs/CTAs exempt from registration

Notice I-24-04

February 12, 2024

Educational resources, common deficiencies and other important regulatory information for CPO and CTA Members

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

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-23-03: Member obligations under NFA Bylaw 1101 and Compliance Rule 2-36(d) with respect to CPOs/CTAs exempt from registration

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-23-15: Effective date for repeal of NFA Interpretive Notice regarding reduced NFA assessment fee for diminutive notional value-designated contracts

Notice I-23-13: Effective date of amendments to NFA's Articles of Incorporation and Bylaws to implement changes to NFA's governance structure

Notice I-23-10: Effective date for NFA rule establishing requirements for Members engaged in digital asset commodity activities

Notice I-24-02: Member obligations under NFA Bylaw 1101 and Compliance Rule 2-36(d) with respect to CPOs/CTAs exempt from registration

Notice I-24-05

February 12, 2024

Educational resources, common deficiencies and other important regulatory information for SD Members

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:

Failure to conduct adequate trade surveillance to detect fraud, manipulation and abusive practices; and
Failure to reasonably tailor communication surveillance procedures based on approved communication methods, including foreign languages, to ensure fair and balanced communications and the prohibition of fraud, manipulation and other abusive practices.

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:

Failure to report required regulatory messages, either at all or within the regulatory timeframes;
Failure to report accurately required data fields to the SDR;
Failure to remediate errors and omissions ASATP after discovery;
Failure to perform complete reconciliations of open swap positions in internal records to that maintained by the relevant trade repository; and
Failure to notify the Division of Market Oversight timely after determining that an error will not be remediated within seven business days after discovery.

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:

Failure to adequately monitor model performance and timely report material model performance issues. Notifications must be made upon identification of the issue, and later, upon the remediation;
Failure to have adequate documentation supporting monitoring activities; and
Failure to notify CFTC and NFA in writing 60 days prior to an event specified under CFTC Regulation 23.154 (see Notice 1-22-18).

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-23-13: Effective date of amendments to NFA's Articles of Incorporation and Bylaws to implement changes to NFA's governance structure

Notice I-23-10: Effective date for NFA rule establishing requirements for Members engaged in digital asset commodity activities

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:

Ana Beskin, Amazon People Experience and Tech
(Term expiring 2026);
Michael C. Dawley, Bluefin Partners LLC
(Term expiring 2025);
Ronald H. Filler, New York Law School
(Term expiring 2026);
Arthur W. Hahn
(Term expiring 2026);
Mary M. McDonnell, McDonnell & Associates
(Term expiring 2026);
Ronald S. Oppenheimer
(Term expiring 2025); and
Todd E. Petzel, Offit Capital Advisors LLC
(Term expiring 2025).

Executive Committee

The Board also appointed the following individuals to serve one-year terms on NFA's Executive Committee:

Ana Beskin, Amazon People Experience and Tech;
Michael T. Burke, HighGround Trading LLC;
Gerald F. Corcoran, R.J. O'Brien & Associates LLC;
Arthur W. Hahn;
Julie Holzrichter, CME Group;
Ernest L. Jaffarian, Efficient Capital Management LLC;
Mary M. McDonnell, McDonnell & Associates; and
Don Thompson, JPMorgan Chase & Co.

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:

Scott Andersen
SG Americas Securities LLC
(Term expiring 2026)
Gerald F. Corcoran
R.J. O'Brien & Associates LLC
(Term expiring 2026)
Alicia Crighton
Goldman Sachs & Co. LLC
(Term expiring 2025)
Thomas R. Kadlec
ADM Investor Services, Inc.
(Term expiring 2025)

IB Category:

Michael T. Burke
HighGround Trading LLC
(Term expiring 2025)

CPO/CTA Category:

Ernest L. Jaffarian
Efficient Capital Management LLC
(Term expiring 2025)
Martin Lueck
Aspect Capital Limited
(Term expiring 2025)
Constance R. Wick
Crabel Capital Management LLC
(Term expiring 2026)

SD/MSP/RFED Category:

Seth P. Bender
HSBC Bank USA, NA
(Term expiring 2025)
Mark L. Maurer
StoneX Markets LLC
(Term expiring 2026)
Charlotte B. McLaughlin
PNC Capital Markets LLC
(Term expiring 2025)
Don Thompson
JPMorgan Chase & Co.
(Term expiring 2026)

2024 NFA Member Category Nominating Committee

FCM Category:

Ruth Arnould
BofA Securities, Inc.

IB Category:

Steven L. Petillo
Paragon Investments LLC

CPO/CTA Category:

Dede Welles
PDT Partners LLC

SD/MSP/RFED Category:

Dan Dan Liu
Credit Agricole Corporate & Investment Bank

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

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.

Fact Sheet: Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers Notice of Proposed Rulemaking

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:

The total number of OCSE- and human trafficking-related BSA reports involving CVC increased from 336 in 2020 to 1,975 in 2021.
BSA filers specifically reported child sexual abuse material (CSAM) or human trafficking and CSAM in 95 percent of the OCSE- and human trafficking-related BSA reports involving CVC.
BSA reports overwhelmingly identified bitcoin as the primary CVC used for purported OCSE- and human trafficking-related activity, however, this does not necessarily mean that other types of CVC are not used for such crimes.
FinCEN identified four typologies (i.e. the use of darknet marketplaces that distribute CSAM, peer-to-peer exchanges, CVC mixers, and CVC kiosks) that describe common trends within BSA reports related to OCSE and human trafficking.

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.

Hot Issue

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.

Our Perspective

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

mavnet@compliance-risk.com

David Amster

p. (917) 568-6470

damster@compliance-risk.com

Sources:

FINRA Notices
FINRA January 2024 Sweep Update
SEC Regulatory Actions
SEC Press Releases
NFA Notices
FinCEN News Releases

The post Monthly Regulatory Summary (February 2024) appeared first on Compliance Risk Concepts.

Monthly Regulatory Summary (January 2024)

CRC — Thu, 29 Feb 2024 14:44:25 +0000

FINRA

Regulatory Notices

Per Regulatory Notice 24-01, 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. During this program, FINRA announces renewal fees BD and IA firms owe via Preliminary Statements issued in November. FINRA publishes Final Statements in January to confirm or reconcile the actual renewal fees BD and IA firms owe after Jan. 1, 2024.

FINRA is issuing this Notice to help firms review, reconcile and respond to their Final Statements in E-Bill as well as view the reports that are currently available in the Central Registration Depository (CRD) and Investment Adviser Registration Depository (IARD) systems for the annual registration renewal process.

The deadline to remit payment for any additional amounts owed and to report any discrepancies to FINRA is Jan. 26, 2024. It is critical that firms ensure they pay in full or report discrepancies by this deadline. More information about reporting discrepancies, as well as key dates, is provided below.

Firms should also refer to the following web pages for additional information and resources:

FINRA’s Renewal Program page (for BDs)
IARD Renewal Program page (for IAs)

Questions concerning this Notice should be directed to the FINRA Support Center at (301) 869-6699.

Per Regulatory Notice 24-02, FINRA is issuing this Notice to announce the effective dates of two new supplementary materials under FINRA Rule 3110 (Supervision) as follows:

Rule 3110.19 (Residential Supervisory Location) becomes effective on June 1, 2024; and
Rule 3110.18 (Remote Inspections Pilot Program) becomes effective on July 1, 2024.

FINRA expects to publish additional guidance outlining in greater detail operational processes for compliance with the data and information requirements of Rules 3110.18 and 3110.19.

The rule text for Rules 3110.18 and 3110.19 is available in Attachment A. In addition, FINRA is announcing May 31, 2024, as the end date of the regulatory relief set forth in Regulatory Notice 20-08 (March 2020) (Notice 20-08 Relief) with respect to the obligation of firms to maintain current information for employment addresses and branch offices on specified uniform registration forms. In light of these changes, firms are encouraged to consult with FINRA’s Membership Application Program (MAP) Group as they consider the materiality of any potential increase in the number of offices or locations.

SEC

Final Rules

Per Release No. 33-11265, the SEC is adopting rules intended to enhance investor protections in initial public offerings by special purpose acquisition companies (commonly known as SPACs) and in subsequent business combination transactions between SPACs and private operating companies (commonly known as de-SPAC transactions). Specifically, the SEC is adopting disclosure requirements with respect to, among other things, compensation paid to sponsors, conflicts of interest, dilution, and the determination, if any, of the board of directors (or similar governing body) of a SPAC regarding whether a de-SPAC transaction is advisable and in the best interests of the SPAC and its shareholders. The SEC is adopting rules that require a minimum dissemination period for the distribution of security holder communication materials in connection with de-SPAC transactions. The SEC is adopting rules that require the re-determination of smaller reporting company (“SRC”) status in connection with de-SPAC transactions. The SEC is also adopting rules that address the scope of the safe harbor for forward-looking statements under the Private Securities Litigation Reform Act of 1995. Further, the SEC is adopting a rule that would deem any business combination transaction involving a reporting shell company, including a SPAC, to be a sale of securities to the reporting shell company’s shareholders and are adopting amendments to a number of financial statement requirements applicable to transactions involving shell companies. In addition, the SEC is providing guidance on the status of potential underwriters in de-SPAC transactions and adopting updates to the SEC’s guidance regarding the use of projections in SEC filings as well as requiring additional disclosure regarding projections when used in connection with business combination transactions involving SPACs. Finally, the SEC is providing guidance for SPACs to consider when analyzing their status under the Investment Company Act of 1940.

Proposed Rules

There were no proposed rules in January.

Interim Final Rules

There were no interim final rules in January.

Interpretive Releases

There were no interpretive releases in January.

Policy Statements

There were no policy statements in January.

NFA

Notices to Members

Notice I-24-01

January 4, 2024

Notice of Annual Meeting of NFA Members and Board and Nominating Committee election

Notice of Annual Meeting

NFA will hold its Annual Meeting of Members on Tuesday, February 6, 2024, at 12:00 p.m. CT, via videoconferencing. The agenda of the meeting is:

Opening remarks.
Members' questions regarding NFA-related topics.
Any other business that may properly come before the Annual Meeting (or any adjournment or postponement thereof).

To register for the Annual Meeting of Members, please email your name, NFA ID and contact email to MemberMeeting2024@nfa.futures.org. Registration is due by Wednesday, January 31, 2024. NFA will then provide you with an invitation to the Annual Meeting.

Board and Nominating Committee Election

On October 23, 2023, NFA notified all Members of the candidates that the 2023 Nominating Committee nominated for election to NFA's Board of Directors and 2024 Nominating Committee and advised Members of the procedures by which additional candidates could petition to be nominated for election. No Members have petitioned for nomination of a candidate for election to the Board of Directors or Nominating Committee. Accordingly, NFA's Board of Directors, pursuant to Article VII, Section (3)(a) and NFA Bylaw 709 (effective February 15, 2024), will elect the nominees to the Board and Nominating Committee in February 2024.

Notice I-24-02

January 25, 2024

Member obligations under NFA Bylaw 1101 and Compliance Rule 2-36(d) with respect to CPOs/CTAs exempt from registration

The CFTC requires any person that claims an exemption from CPO registration under CFTC Regulation 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), 4.13(a)(5), an exclusion from CPO registration under CFTC Regulation 4.5 or an exemption from CTA registration under 4.14(a)(8) (collectively, exemption) to annually affirm the applicable notice of exemption within 60 days of the calendar year end. Persons that fail to file the affirmation notice by February 29, 2024, will be deemed to have requested a withdrawal of the exemption and, therefore, may be required to be registered and NFA Members.

Since exempt CPOs/CTAs have until February 29, 2024, to complete the affirmation process, NFA recognizes that it may be difficult for a Member to conclusively determine prior to that date whether a previously exempt CPO/CTA continues to be eligible for a current exemption.

Therefore, Members who take reasonable steps to determine the registration and membership status of these previously exempt persons will not be in violation of NFA Bylaw 1101 or Compliance Rule 2-36(d) if, between January 1 and March 31, 2024, they transact customer business with a previously exempt person that fails to become registered and an NFA Member, file a notice affirming its exemption from CPO/CTA registration, or provide a written representation as to why the person is not required to register or file the notice affirming the exemption.

How to identify whether an exempt CPO/CTA has affirmed its exemption

Members should compare their list of exempt CPO/CTAs with which the Member transacts customer business to the information NFA makes available to assist Members in determining whether an exempt CPO/CTA has affirmed its exemption(s). Members can review exemption information in two ways. Members can view individual persons or entities by navigating to NFA's BASIC System, opening the person or entity's record, and, if applicable, clicking 'View All' in the Firm Exemptions box and/or the Pools & Pool Exemptions box. The Firm Exemptions page and/or the Pools & Pool Exemptions page will reflect an affirmation date if an exempt person or entity has properly filed a notice affirming an exemption, if applicable. Any exemption that was not affirmed in the previous year will no longer appear in BASIC as of March 1, 2024.

Alternatively, Members can access a spreadsheet that includes a list of all persons or entities that have exemptions on file with NFA that must be affirmed on an annual basis. This spreadsheet, which is updated nightly, can be found in the Member's Annual Questionnaire which can be accessed by logging into the system. The spreadsheet includes all persons or entities with an exemption(s) that requires an annual affirmation, as well as the most recent affirmation date, if applicable, and the affirmation due date. If the affirmation due date is February 29, 2024, the exemption has not yet been affirmed. Once the exemption has been affirmed, the affirmation due date will change to March 1, 2025. Any exemptions not affirmed after February 29, 2024, will be withdrawn.

Expectations for Members transacting customer business with an exempt CPO/CTA that has not affirmed its exemption

NFA expects any Member transacting customer business with a person that previously claimed an exemption from CPO/CTA registration under the regulations listed above, and that has not filed a notice in NFA's Exemption System affirming the exemption, not filed a notice of exemption for another available exemption, or not properly registered and become an NFA Member by December 31, 2023, to promptly contact the person to determine whether the person intends to file a notice affirming the exemption.

If the Member learns that the person does not intend to file a notice affirming the exemption, or the person does not file a notice affirming the exemption by February 29, 2024, then the Member must promptly obtain a written representation as to why the person is not required to register or file a notice of exemption and evaluate whether the representation appears adequate. If the Member determines that this written representation is inadequate and the person is required to be registered, then the Member must put a plan in place (e.g., liquidation-only trades) to cease transacting customer business with the person or risk violating NFA Bylaw 1101 or Compliance Rule 2-36(d). Any Member that acts in accordance with the information provided in this Notice will not be charged with violating NFA Bylaw 1101 or Compliance Rule 2-36(d). Members should be aware, however, that this Notice does not relieve their regulatory obligations pursuant to the Commodity Exchange Act and the CFTC's Regulations.

NFA News Releases

There were no NFA News Releases in January.

FinCEN

FinCEN News Releases

U.S. Beneficial Ownership Information Registry Now Accepting Reports

January 01, 2024

Existing Companies Have One Year to File; New Companies Must File Within 90 Days of Creation or Registration

WASHINGTON -- Today, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) began accepting beneficial ownership information reports. The bipartisan Corporate Transparency Act, enacted in 2021 to curb illicit finance, requires many companies doing business in the United States to report information about the individuals who ultimately own or control them.

Filing is simple, secure, and free of charge. Companies that are required to comply (“reporting companies”) must file their initial reports by the following deadlines:

Existing companies: Reporting companies created or registered to do business in the United States before January 1, 2024 must file by January 1, 2025.
Newly created or registered companies: Reporting companies created or registered to do business in the United States in 2024 have 90 calendar days to file after receiving actual or public notice that their company’s creation or registration is effective.

Beneficial ownership information reporting is not an annual requirement. A report only needs to be submitted once, unless the filer needs to update or correct information. Generally, reporting companies must provide four pieces of information about each beneficial owner:

name;
date of birth;
address; and
the identifying number and issuer from either a non-expired U.S. driver’s license, a non-expired U.S. passport, or a non-expired identification document issued by a State (including a U.S. territory or possession), local government, or Indian tribe. If none of those documents exist, a non-expired foreign passport can be used. An image of the document must also be submitted.

The company must also submit certain information about itself, such as its name(s) and address. In addition, reporting companies created on or after January 1, 2024, are required to submit information about the individuals who formed the company (“company applicants”).

FinCEN is committed to providing America’s small businesses with the resources and information they need to make filing as quick and easy as possible. FinCEN’s Small Entity Compliance Guide walks small businesses through the requirements in plain language. Filers can also view informational videos and webinars, find answers to frequently asked questions, connect to the contact center, and learn more about how to report at www.fincen.gov/boi.

FinCEN Issues Analysis of Identity-Related Suspicious Activity

January 09, 2024

Report examines suspicious activity tied to the exploitation of identity processes during account creation, account access, and transaction processing

WASHINGTON—Today, the Financial Crimes Enforcement Network (FinCEN) issued a Financial Trend Analysis (FTA) on information linked to identity-related suspicious activity in Bank Secrecy Act (BSA) reports filed in calendar year 2021. FinCEN’s analysis found that approximately 1.6 million reports (42% of the reports filed that year) related to identity—indicating $212 billion in suspicious activity.

“This report reveals the existence of significant identity-related exploitations through a large variety of schemes,” said FinCEN Director Andrea Gacki. “Robust customer identity processes are foundational to the security of the U.S. financial system, and critical to the effectiveness of financial institutions’ programs to combat money laundering and counter the financing of terrorism. Financial institutions are encouraged to work across their internal departments to address these schemes.”

The report, which is part of what FinCEN has previously referred to as its Identity Project, explores how bad actors exploit identity-related processes involved in processing transactions as well as opening and accessing accounts. FinCEN identified over 14 typologies commonly indicated in identity-related BSA reports. The most frequently reported were fraud, false records, identity theft, third-party money laundering, and circumvention of verification standards. These top five typologies accounted for 88% of identity-related BSA reports and 74% of the total identity-related suspicious activity amount reported during calendar year 2021.

Trends found in the BSA reporting include:

Although identity-related suspicious activity impacted all types of financial institutions, depository institutions filed the most identity-related BSA reports, around 54% of all identity-related filings.
While most financial institutions in the identity-related BSA dataset reported impersonation as their top identity exploitation, money services businesses most often reported circumvention of verification.
The report found that compromised credentials have a disproportionate financial impact as compared to other types of identity exploitation.

FinCEN’s FTAs highlight the value of information filed by financial institutions in accordance with the BSA. Additional reports on a variety of topics are located on FinCEN’s website.

FinCEN is committed to using its authorities to assist financial institutions with detecting, reporting, and preventing criminals from circumventing these processes to victimize customers. In line with the 2022 National Strategy for Combating Terrorist and Other Illicit Financing, Treasury and FinCEN recognizes that innovations in digital identity can strengthen anti-money laundering and countering the financing of terrorism compliance and help banks and other financial institutions more effectively and efficiently identify and report illicit financial activity.

To advance responsible innovation, FinCEN has engaged with the private and public sectors to assess opportunities and to explore the risks and challenges emerging technologies present to financial institutions—including through the Bank Secrecy Act Advisory Group, FinCEN Exchanges, and Innovation Hours. The bureau has partnered with the Federal Deposit Insurance Corporation in a digital identity-focused Tech Sprint, and with other regulators and law enforcement to support the U.S.-UK Privacy Enhancing Technologies Prize Challenges. FinCEN has also served as the Department of the Treasury’s point for the Federal Identity Forum and Expo or FedID conference, the U.S. government’s annual public-private identity conference. These efforts served as a forum for stakeholders to both embrace responsible innovation and leverage innovation to mitigate risks, as well as identify threats and opportunities to protect the American people and the financial sector from illicit finance.

FinCEN Finds Iraq-based Al-Huda Bank to be of Primary Money Laundering Concern and Proposes a Rule to Combat Terrorist Financing

January 29, 2024

WASHINGTON — Today, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a finding and notice of proposed rulemaking (NPRM) that identifies Al-Huda Bank, an Iraqi bank that serves as a conduit for terrorist financing, as a foreign financial institution of primary money laundering concern. Along with its finding, FinCEN proposed imposing a special measure that would sever the bank from the U.S. financial system by prohibiting domestic financial institutions and agencies from opening or maintaining a correspondent account for or on behalf of Al-Huda Bank.

Bad actors like Al-Huda Bank and its foreign sponsors fuel violence that threatens the lives of U.S. and Iraqi citizens alike while diverting funds that could otherwise support legitimate business and the economic aspirations of the Iraqi people. Treasury remains committed to its longstanding shared work with the Government of Iraq to strengthen the Iraqi economy and protect both the U.S. and Iraqi financial systems from abuse.

“Iraq has made significant progress in rooting out illicit activity from its financial system, but unscrupulous actors continue to seek to take advantage of the Iraqi economy to raise and move money for illicit activity,” said Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson. “By identifying Al-Huda Bank as a key money laundering channel for destabilizing terrorist activity by Iran, proposing a special measure that will sever its correspondent banking access, and imposing sanctions on their CEO, we can protect the Iraqi financial system and its legitimate businesses, as well as the international financial system, from abuse by Iran and other illicit actors.”

“Evidence available to FinCEN has demonstrated that Al-Huda Bank served as a significant conduit for the financing of foreign terrorist organizations (FTOs),” said FinCEN Director Andrea Gacki. “We will continue to leverage the full range of our authorities to target terrorist financing while simultaneously supporting the legitimate use of the international financial system.”

As described in the finding, for years, Al-Huda Bank has exploited its access to U.S. dollars to support designated FTOs, including Iran’s Islamic Revolutionary Guard Corps (IRGC) and IRGC-Quds Force (IRGC-QF), as well as Iran-aligned Iraqi militias Kata’ib Hizballah (KH) and Asa’ib Ahl al-Haq (AAH). Moreover, the chairman of Al-Huda Bank is complicit in Al-Huda Bank’s illicit financial activities including money laundering through front companies that conceal the true nature of and parties involved in illicit transactions, ultimately enabling the financing of terrorism.

Since its establishment, Al-Huda Bank has been controlled and operated by the IRGC and the IRGC-QF. After establishing the bank, the Al-Huda Bank chairman began money laundering operations on behalf of the IRGC-QF and KH. Additionally, Al-Huda Bank affords access to the U.S. financial system to actors known to use fraudulent documentation, fake deposits, identity documents of the deceased, fake companies, and counterfeit Iraq dinar, providing opportunities to obscure the identities of the transaction counterparties to correspondent banking relationship providers.

To protect U.S. banks from Al-Huda Bank’s illicit activity, FinCEN is taking this action pursuant to Section 311 of the USA PATRIOT Act (section 311). Section 311 actions alert the U.S. financial sector to foreign institutions, such as Al-Huda Bank, that are of primary money laundering concern and through the public rulemaking process, if necessary, prevent direct and indirect access to the U.S. financial system. FinCEN has proposed a rule that would impose special measure five, which would prohibit domestic financial institutions and agencies from opening or maintaining a correspondent account for or on behalf of Al-Huda Bank.

This finding and NPRM are issued today alongside complementary Treasury actions to disrupt funding for Iran-aligned terrorist groups. Treasury’s Office of Foreign Assets Control (OFAC) designated Hamad al-Moussawi, the owner and chairman of Al-Huda Bank, for having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, the IRGC-QF. Previously, on November 17, 2023, OFAC designated six key individuals affiliated with KH following the group’s attacks against United States personnel and partners in Iraq and Syria. On January 22, 2024, OFAC designated three additional key individuals affiliated with KH, a business used by KH to generate revenue and launder money, as well as an Iraqi airline that the IRGC-QF and its proxies in Iraq used to transport fighters, weapons, and money to Syria and Lebanon. Additionally, since the brutal attacks against Israel in October, OFAC has imposed five rounds of sanctions targeting Hamas-linked operatives and financial facilitators.

SECTION 311 SPECIAL MEASURES

Section 311 grants the Secretary of the Treasury authority, upon finding that reasonable grounds exist for concluding that one or more financial institutions operating outside of the United States is of primary money laundering concern, to require domestic financial institutions and domestic financial agencies to take certain “special measures.” The five special measures set out in section 311 are safeguards that may be employed to defend the United States financial system from money laundering and terrorist financing risks. The Secretary may impose one or more of these special measures in order to protect the U.S. financial system from such threats. Through special measure one, the Secretary may require domestic financial institutions and domestic financial agencies to maintain records, file reports, or both, concerning the aggregate amount of transactions or individual transactions. Through special measures two through four, the Secretary may impose additional recordkeeping, information collection, and reporting requirements on covered domestic financial institutions and domestic financial agencies. Through special measure five, the Secretary may prohibit, or impose conditions on, the opening or maintaining in the United States of correspondent or payable-through accounts for or on behalf of a foreign banking institution, if such correspondent account or payable-through account involves the foreign financial institution found to be of primary money laundering concern. The authority of the Secretary to administer the Bank Secrecy Act, including, but not limited to, section 311, codified at 31 U.S.C. § 5318A, has been delegated to the Director of FinCEN.

The NPRM as submitted to the Federal Register is currently available here. Written comments on the NPRM may be submitted within 30 days of publication of the NPRM in the Federal Register.

FinCEN Assesses $100,000 Civil Money Penalty against Gyanendra Kumar Asre for Violations of the Bank Secrecy Act

January 31, 2024

WASHINGTON—Today, the United States Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) assessed a $100,000 civil money penalty on Gyanendra Kumar Asre (Asre) for willful violations of the Bank Secrecy Act (BSA) and its implementing regulations. FinCEN’s action also imposes a five-year ban on Asre’s participation in the conduct of the affairs of any financial institution subject to the BSA.

“Asre allowed millions of dollars in high-risk transactions to be processed without required anti-money laundering controls or reporting to FinCEN,” said FinCEN Director Andrea Gacki. “Today’s action serves as a reminder that FinCEN will not hesitate to take action against individuals when their conduct jeopardizes the integrity of our financial system.”

Asre admitted to willfully violating the BSA. Asre failed to register his money services business (MSB) with FinCEN and, in his capacity as the BSA Compliance Officer of a credit union, failed to maintain an effective AML program and failed to detect and report suspicious transactions. During Asre’s tenure as BSA Compliance Officer, the credit union’s risk profile drastically increased, including by providing services to Asre’s unregistered MSB. Despite these elevated risks, Asre failed to implement adequate AML controls. As a result, hundreds of millions of dollars in high-risk and suspicious funds—including substantial bulk cash deposits—moved through the credit union without proper monitoring or reporting to FinCEN.

FinCEN appreciates the close collaboration with its partners at the National Credit Union Administration (NCUA) on this matter and thanks the Department of Justice Money Laundering and Asset Recovery Section (MLARS) for its work on the parallel criminal matter. Today, Asre entered into a guilty plea with MLARS for criminally violating the BSA.

Hot Issue

FINRA has finally announced an end date to the pandemic reporting relief under Notice 20-08. Starting on June 1, 2024, firms must resume their continuing obligation to:

Maintain updated Form U4 information regarding the office of employment address for registered persons who relocated due to COVID-19; and
Submit or update branch office applications on Form BR for any office locations or space-sharing arrangements established as a result of COVID-19 that have not otherwise been registered or updated with FINRA through Form BR.

Now that a timeline has been established, CRC recommends that firms not wait until June to evaluate the potential increase in registered or unregistered offices because of the need to consider whether changes may trigger a “material change in business operations” under Rule 1017 and related guidance.

Our Perspective

For more information, please contact:

Mitch Avnet

p. (646) 346-2468

mavnet@compliance-risk.com

David Amster

p. (917) 568-6470

damster@compliance-risk.com

Sources:

FINRA Notices
SEC Regulatory Actions
SEC Press Releases
NFA Notices
FinCEN News Releases

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10-Year Anniversary Letter From Mitch Avnet

CRC — Sat, 03 Feb 2024 15:53:23 +0000

To All our Amazing Clients:

No matter how you measure it, we want to express our profound gratitude as we mark our 10th Anniversary. Without your support throughout this transformative journey, Compliance Risk Concepts would not be what it is today.

CRC began as a one-person operation with a unique approach to compliance professional services: understanding each client’s needs and model, and then tailoring our solutions to suit them. We grew by underpinning our clients’ commercial success with a balanced, measured understanding of regulation and compliance. Today, we stand as a team of 50+ of the industry’s best and brightest, humbled by our growth and collective accomplishments. Through it all, we’ve strived to be a true partner – functioning as a seamless extension of your team.

Our proudest milestones include not only thriving in a remote environment during the pandemic, but also balancing our serious commitment to compliance with teamwork and fun. This balance is key to our culture and vision, making it possible for our team to achieve results we only dreamed were possible.

As we look into the future of a constantly evolving regulatory landscape, areas like digital currencies, alternative investments, best interest standards, cyber-threats, and off-channel communications all pose new and significant challenges. Rest assured, we will continue providing the insightful guidance and support you need to confidently navigate these emerging trends – and stay ahead of the pack.

To mark our first 10 years, we’ve refreshed our logo and educational materials. On behalf of everyone at CRC, thank you for entrusting us with your compliance programs and regulatory wellness. It’s an honor to partner with you, and we look forward to contributing to your success story in the decade to come.

With sincere thanks,

Mitch Avnet
Founder and Managing Partner

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Compliance Risk Concepts Receives Strategic Investment from MidOcean Partners

CRC — Tue, 30 Jan 2024 14:17:57 +0000

NEW YORK--(BUSINESS WIRE)--Compliance Risk Concepts (“CRC”), through its parent company, Re-Sourcing Group, has received a significant investment from MidOcean Partners to advance its position as a valued compliance partner to the financial services industry. This investment will support the continued growth of CRC’s unique brand of business-focused compliance and risk management advisory services.

The compliance and risk management industry has evolved in recent years, amid new regulations, rule modifications and heightened government oversight. These changes come amid consolidation in the outsourced compliance space, resulting in fewer options for clients seeking expertise coupled with exceptional service.

CRC has thrived as a provider of senior-level compliance advisory services for financial organizations. The firm delivers expert-driven advice and strategy for its clients, which include broker-dealers, investment advisers, fintech and digital asset firms, banks and credit unions, in helping them navigate the ever-changing regulatory landscape. Recognizing CRC’s strong position in the market, MidOcean Partners, a premier middle-market private equity firm focused on the business services and consumer sectors, anticipates CRC’s continued success in delivering compliance solutions to a diverse clientele.

“Market demand for outsourced solutions in the compliance advisory arena has grown significantly in recent years,” said Mitch Avnet, founder of CRC. “At the same time, consolidation has left clients with fewer premier options. CRC has over 50 senior compliance professionals on our team, and we can deliver the guidance, insight and day-to-day execution support that firms in the financial services market are seeking. We are known for our ‘in-the-seat’ approach to compliance and risk management support, and we plan to leverage this growth investment to extend our reach within the industry.”

The confluence of talent shortages and increasingly complex requirements for managing businesses on the legal and compliance front has led to a continued surge in demand for outsourced solutions. For example, in the investment adviser sector, an estimated 59%¹ of firms outsourced some or all of their compliance and legal work. Avnet and his partners at MidOcean see this as an opportunity for further growth.

Avnet added: “We are business people that know compliance and we are fully invested in helping our clients achieve great commercial outcomes while remaining regulatorily compliant. Our partnership with MidOcean is integral to our overall business thesis and we look forward to leveraging the impact of MidOcean’s investment to extend our reach within the industry.”

“There is incredible upside for a firm of CRC’s caliber to fill the void that firms have in meeting their compliance needs and having the support they want to help them make sound business decisions. We feel that the consolidation happening that has absorbed some boutique players has spurred the opportunity for CRC even more, and we’re eager to see how our investment can be a catalyst for Mitch and his team,” shared Elias Dokas, Managing Director at MidOcean Partners.

¹ Source: https://www.assetmark.com/blog/advisors-front-middle-back-office-outsourcing

About Re-Sourcing Group

Re-Sourcing is a leading professional services firm, offering staffing, consulting and direct hire services that specialize in finance & accounting, legal & compliance and information technology. Re-Sourcing serves clients through its distinguished portfolio of premium brands, including Compliance Risk Concepts, Conexus, JW Michaels, ExecuSource, Perennial Resources, Partnership Employment and Technology Navigators. Founded in 2003, Re-Sourcing and its brands are strategically located in 20 offices across 10 markets nationwide. Re-Sourcing’s differentiated operating partner model enables a strong focus on building direct relationships with clients to bolster retention and deepen understanding of client needs.

For more information, visit https://www.myresourcing.com/.

About MidOcean Partners

MidOcean Partners is a premier New York-based alternative asset manager specializing in middle-market private equity and alternative credit investments. Since its inception in 2003, MidOcean Private Equity has targeted investments in high-quality middle-market companies in the consumer and business services sectors. MidOcean Credit was launched in 2009 and manages a series of alternative credit strategies, collateralized loan obligations (CLOs) and customized separately managed accounts.

For more information, visit https://www.midoceanpartners.com/.

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Celebrating a Decade of Success and Growth: Compliance Risk Concepts Turns 10

CRC — Thu, 05 Oct 2023 15:27:32 +0000

Celebrating our 10th anniversary this year, Compliance Risk Concepts (CRC) remains committed to helping businesses succeed while maintaining regulatory compliance. As we reflect on the past decade, we are proud to have assisted numerous clients in reaching their financial, operational, and strategic goals.

"Celebrating CRC's 10-year anniversary is an amazing milestone for the company and for me, personally," said Mitch Avnet, Founder and Managing Partner. Avnet leveraged his 20+ years of in-house expertise and practical experience in professional services by identifying a gap in the industry: organizations needing comprehensive compliance support.

"We are businesspeople who know compliance," continued Avnet. "This unique commercial approach to solving compliance issues, combined with our proactive focus on our clients' future needs, separates us from the 'check-the-box' providers. Our practical, in-depth risk assessments focus on our clients' risk postures and have been our driving force since day one."

The CRC Advantage

What sets CRC apart is our team—business professionals armed with extensive compliance knowledge ready to help our clients navigate increasingly complex laws and regulations. Unlike conventional "check- the-box" providers, CRC thrives on critical thinking and risk assessment, tailoring solutions based on each client's risk appetite.

From thoroughly understanding each client's unique business model to assessing potential risks and creating comprehensive plans to mitigate exposure, CRC has successfully enabled its clients to achieve long-term, strategic, and scalable success.

Service That's Not "One-Size-Fits-All"

With the intensity of regulatory scrutiny at an all-time high, financial institutions must re-examine their compliance approach. For small businesses challenged with handling compliance matters without a dedicated in-house team, we offer ongoing, routine compliance services at a fraction of the cost of traditional resources. Larger organizations with an established in-house team can leverage our services to help manage workload surges and ensure all aspects of business compliance are adequately addressed.

Reflecting on a Decade of Growth

Principal Roland Reyes shared his excitement about the milestone: "The growth of our company is a testament to our team's professionalism, hard work and dedication. It is a pleasure every day to work alongside the best and brightest. It has been an incredible ten years. I am excited to see what the next will bring."

Culture of Collaboration

Our COO, Jaclyn Bowdren, believes this anniversary validates CRC's core values. "CRC's team is what sets us apart," said Bowdren. "CRC fosters a collaborative environment, where our team members work together to provide the best advice and guidance for our clients. We understand our clients and provide solutions that balance their risk with their commercial interests. We always strive to be valued partners to our clients; this has been pivotal to our success."

"I plan to continue work to build upon the success of CRC by listening to our team and clients to find additional opportunities for improvement and growth. I could not imagine working with a better group of people, and I look forward to seeing how we can work together to further build this incredible company."

Building a Future of Trust and Growth

Adding another perspective, Debbie Nathanson, our Senior HR Advisor, identifies industry expertise, client trust, and supportive team culture as the drivers of our success. She joined CRC about 2.5 years ago, and the team has since doubled in size. "Ten years is a milestone that announces staying power in the industry," said Nathanson. "It tells current and future staff that exciting times are still to come, and CRC will only become an even better place to work."

"CRCs success is a direct result of industry expertise, amazing client relationships and a truly unique and supportive employee culture. We know what we are doing. Our clients like and trust us. Our team likes and trusts each other. The future of CRC is supported by our past. We will continue to hire experienced professionals, provide expert advice and service, and respect each other."

Delivering on Our Promises

David Amster, Principal, aligned with the team's sentiments, commenting, "CRC's tenth anniversary validates the value proposition on which the firm has focused since day one; we expertly balance compliance solutions that keep our clients out of the regulatory crosshairs without hampering their business interests. CRC has thrived for a decade because that is what we've consistently delivered."

"CRC's success is firmly rooted in our culture," Amster continued. "We're professionals who deeply believe that our company's success is driven by helping our clients succeed. But while we're acutely serious about the quality of our work product, we love to laugh and don't take ourselves all too seriously."

Looking to the Future

As we celebrate this milestone, we look forward to the coming years with enthusiasm, fully committed to continuing to deliver exceptional compliance support services. With a team of senior compliance professionals and executives, CRC helps clients establish, maintain, and enhance their compliance programs.

Thanks to our incredible team, valued clients, and all those who have supported and helped shape CRC over the years, we're proud to celebrate this 10-year milestone in our journey. Contact us to learn more about partnering with CRC.

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Regulation Best Interest

CRC — Mon, 15 Jul 2019 16:18:35 +0000

On June 5, 2019 the Securities and Exchange Commission (“SEC”) voted to enhance the regulatory framework standard of conduct for broker-dealers (or “firms”) and provide an interpretation of the fiduciary duty for investment advisers by issuing Regulation Best Interest (“Reg BI”). The SEC is giving firms a transition period until June 30, 2020.

Reg BI framework is more expansive than the vacated Department of Labor (“DOL”) fiduciary rule as it covers all securities investment recommendations to retail customers rather than just those for retirement accounts. By setting out specific obligations of broker-dealers and investment advisers, the SEC is seeking to tailor requirements to the different types of products and services each provide in order to preserve customer choice in the industry. Reg BI sets out new rules which will increase compliance efforts for firms but provides a more uniform standard and does not include many of the onerous aspects of the DOL rule such as a private right of action.

The framework includes:

A “best interest” standard comprising four obligations for broker-dealers when providing recommendations to retail customers (Regulation Best Interest or Reg BI);
A required client relationship summary disclosure (Form CRS) for both broker-dealers and investment advisers;
An interpretation of the federal fiduciary standard for investment advisers that would reaffirm their fiduciary obligations; and
An interpretation clarifying that broker-dealers that provide advisory services are not considered to be investment advisors when such services are “solely incidental” to the conduct of their business.
Reg BI and Form CRS have a compliance date of June 30, 2020 while the interpretations will become effective upon publication in the Federal Register.

Reg BI consist of four obligations for broker-dealers when providing recommendations to retail customers. Reg BI does not expressly define “best interest,” instead stating that broker-dealers must act “without placing the financial or other interest of the broker ahead of the interest of the retail customer.” However, the SEC makes clear that the term does not create a fiduciary obligation and explains that it will determine whether a broker-dealer has acted in their customers’ best interest based on the four obligations: (1) disclosure, (2) care, (3) conflict of interest and (4) compliance.

Disclosure – Reg BI imposes an obligation on to provide a 2-page relationship summary (Form CRS) to clients in a question and answer format. Disclosures must contain a summary of fees, costs, conflicts, and standards of conduct along with alink to the SEC’s Investor.gov site.

The timing of the disclosure varies as following:

Broker-dealer: before or at the earliest of: (i) a recommendation of an account type, a securities transaction, or an investment strategy involving securities, (ii) placing an order for the retail investor, or (iii) the opening of a brokerage account for the retail investor
Investment adviser: before or at the time of entering into an advisory contract
Dual registrant: at earlier of investment adviser or broker-dealer delivery requirement

In addition, firms must provide additional disclosures when they:

Open a new account that is different from the retail investor’s existing account(s)
Recommend that the retail investor roll over assets from a retirement account into a new or existing account or investment
Recommend or provide a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in an existing account (e.g., securities sold through a “check and application” process)

So what does this mean: CRC recommends firms review their current customer agreements and disclosures to determine what changes will need to be made and involve technology teams to consider potential digital solutions. CRC also recommends a cross-functional team of business, compliance and operational employees work together to confirm disclosure of all material facts pertinent to a conflict of interest associated with the recommendation that are “full and fair”.

Care – Firms will have an obligation to provide reasonable “diligence, care, and skill” to satisfy three obligations: reasonable-basis, customer-specific and quantitative. Additionally, firms must evaluate reasonably available alternatives, however broker-dealers will not have to evidence review of all alternatives. Similar to the DOL fiduciary rule, Reg BI's care obligation covers recommendations concerning rollovers and account choice (e.g., brokerage or advisory), as well as those to take a retirement plan distribution for purposes of opening a securities trading account.

So what does this mean: We recommend firms dust off work done during their DoL fiduciary rule prep. Because the rule is not prescriptive, there is no “one size fits all” model for compliance. The compliance obligation requires firms to maintain policies and procedures to ensure compliance with Reg BI. Notably, this obligation provides an opportunity for the SEC and FINRA to bring enforcement actions for compliance failures without the existence of underlying violations of Reg BI. Therefore, firms should carefully develop Reg BI policies and procedures with a view towards how they will demonstrate that they have met the best interest standard - including documenting all written and oral disclosures to clients.

Conflict – Reg BI does not explicitly define material conflicts of interest. In contrast to the DOL rule, Reg BI allows firms to sell proprietary products, including initial public offerings, and continue to receive payments from third parties for shelf space – as long as they disclose conflicts of interest. For example, in instances where a registered representative holds a limited license (e.g., only to sell mutual funds), but the firm offers a full suite of products, the representative may need to disclose this to their customers. However, the final rule makes clear that there are certain conflicts of interest that cannot be cured through disclosure, specifically prohibiting certain types of sales contests and quotas within defined parameters (e.g., for specific security types in short time periods).

So what does this mean: CRC recommends firms review their range of products and services they offer along with their payout grid in order to identify potential conflicts and determine whether they will need to be mitigated, eliminated or disclosed^[1]. The final rule also instructs firms to develop a penalty system for any representatives that do not adequately manage or disclose their conflicts of interest. Firms will need to establish, maintain, and enforce written policies and procedures reasonably designed to:

Identify and at a minimum disclose (in accordance with the Disclosure Obligation) or eliminate all conflicts of interest associated with the recommendation
Identify and mitigate conflicts of interest that create an incentive for a broker-dealer’s financial professionals to place either their interests or the broker-dealer’s interest ahead of the retail customer’s interest
Identify and disclose any material limitations on offerings (e.g., proprietary or other limited range of products) and any conflicts associated with the limitations, and prevent the limitations and associated conflicts from causing the broker-dealer or its financial professionals to place their interests ahead of the retail customer’s interests
Eliminate sales contests, sales quotas, bonuses, and non-cash compensation based on the sale of specific securities or specific types of securities within a limited period of time

Compliance – Reg BI requires firms to develop policies and procedures in order to demonstrate that they have met the best interest standard - including documenting all written and oral disclosures to clients. The SEC has made changes to Rules 17a-3 and 17a-4, which require broker-dealers to maintain records of all information collected and provided to retail customers pursuant to Reg BI for six years, including the identity of each natural person who is an associated person of the broker-dealer responsible for the customer accounts. Firms that fail to maintain adequate policies and procedures may face enforcement actions from the SEC and FINRA for compliance failures.

So what does this mean: CRC advises firms to review and enhance their policies and procedures that address: Product and Pricing; Operations; Technology; and Communications. Additionally, firms should put in place processes to capture and retain disclosures, provide training on the new requirements and ensure that there is a supervisory structure to oversee compliance.

Investment Advisers – While investment advisers have an existing fiduciary obligation, the SEC’s investment adviser interpretation of Reg BI makes these obligations explicit:

Provide advice in the best interest of the client
A duty of loyalty
Best execution for client transactions
Disclosure of conflicts of interest

Because the final rule did not include enhancements contained in the proposal, investment advisor are not likely to require significant analysis or operational changes as those for broker-dealers, e.g. - licensing and continuing education requirements, provision of account statements to clients and similar financial responsibility requirements.

Determining whether broker-dealers’ advice provided to retail clients is “solely incidental” will be determined by 2 criteria:

Level of investment discretion
Unlimited investment discretion is not solely incidental advice and the broker-dealer would be subject to the Act
If investment discretion is limited in time, scope, or some other way the advice provided may be deemed solely incidental
Account monitoring
Continuous, previously agreed-upon account monitoring would likely not be considered solely incidental
Periodic account monitoring or voluntary account monitoring would likely be considered solely incidental

So what does this mean: Investment advisers should be aware that the SEC is continuing to evaluate these enhancements and may add them in the future. The SEC also clarified the solely incidental exception under the Advisers Act: broker-dealers do not have a fiduciary duty to a retail investor unless that broker-dealer is exercising unlimited investment discretion with respect to the account, or the broker-dealer has agreed to continuous monitoring of the account

To qualify for an exemption from the Advisers Act (“the Act”), broker-dealers must satisfy 2 conditions:

Receive no special compensation (i.e., only commissions and not asset-based fees)
Provide only “solely incidental” advice

DoL and States – After the DOL rule was vacated, a number of states began to introduce their own fiduciary or best interest standards. These rules vary across states – some states like Nevada, are contemplating a private right of action and a largely ongoing obligation. Others states like New York would only apply a best interest standard to the sale of life insurance annuities. These differences will make it challenging operationally for firms to adhere to each state’s specific requirements. The SEC declined to provide any opinion on whether its rules would preempt state standards and left the question to “future judicial proceedings.”

So what does this mean: The industry can likely expect litigation on this issue as states continue to move forward with their rulemakings and attempt to retain control over standards in their jurisdictions. Meanwhile, the DOL has stated that it will issue an updated version of its fiduciary rule later this year. While there have not been any explicit assurances, it is likely that the concepts and requirements from the DOL will align with Reg BI.

Not applicable – Equally as important, Reg BI will not:

Extend beyond a particular recommendation or generally require a broker-dealer to have a continuous duty to a retail customer or impose a duty to monitor^[2];
Require the broker-dealer to refuse to accept a customer’s order that is contrary to the broker-dealer’s recommendation; or
Apply to self-directed or otherwise unsolicited transactions by a retail customer, whether or not the customer also receives separate recommendations from the broker-dealer.

^[1] Firms can use the FINRA Report on Conflicts of Interest as guidance in managing, mitigating and eliminating conflicts of interest in their businesses.

^[2] It is the SEC’s position that when a broker-dealer agrees with a retail customer to provide account monitoring services: (1) the broker-dealer would be required to disclose the material facts, scope and frequency of those services pursuant to the Disclosure Obligation, and (2) such agreed-upon account monitoring services involve an implicit recommendation to hold (i.e., an implicit recommendation not to buy, sell, or exchange assets pursuant to that securities account review) at the time agreed-upon monitoring occurs, which is a recommendation “of any securities transaction or investment strategy involving securities” covered by Reg BI.

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