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  • FINRA issues enhancements to disclosure review process for public records

    Securities

    On May 18, the Financial Industry Regulatory Authority (FINRA) issued a notice covering enhancements to its disclosure review process. According to the notice, the enhancements will allow firms, for purposes of compliance with public record search requirements, to rely on FINRA’s verification process. Specifically, beginning on July 9, FINRA will conduct a public records search for bankruptcies, judgements, and liens within fifteen calendar days of receiving a firm’s Uniform Application for Securities Industry Registration or Transfer (Form U4). FINRA will provide any information to the firm that is different from what was provided on the Form U4. FINRA expects these enhancements to (i) reduce the cost associated with public records searches for firms; (ii) result in timelier reporting of disclosure information; and (iii) significantly reduce late disclosure fees.

    Securities FINRA Public Records

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  • FINRA, SEC reach settlements with Chinese broker-dealers over anti-money laundering compliance

    Financial Crimes

    On May 16, the Financial Industry Regulatory Authority (FINRA) and the SEC reached settlements (here and here) with a Chinese-based broker-dealer following an inquiry and investigation into the firm’s anti-money laundering (AML) programs. According to FINRA, the broker-dealer allegedly failed to implement reasonable processes to ensure that its AML programs were able to detect and report potentially suspicious transactions, particularly those concerning penny stocks. In addition, FINRA claimed the broker-dealer’s AML program compliance testing was “inadequate and failed to uncover any of the deficiencies in the firm’s trade monitoring.” In a separate investigation conducted by the SEC in conjunction with FINRA’s inquiry, the broker-dealer reached a settlement over allegations that it failed to, among other things, file suspicious activity reports as required under the Bank Secrecy Act or comply in a timely fashion with SEC record requests. Under the terms of the settlements, the broker-dealer agreed to pay $5.3 million to FINRA for systemic anti-money laundering compliance failures and $860,000 to the SEC. In agreeing to the settlements, the broker-dealer neither admitted nor denied the charges, but consented to the entry of the findings.

    The SEC’s investigation also resulted in settlements with a second broker-dealer and its AML officer for allegedly violating the Exchange Act and SEC financial recordkeeping and reporting requirements for not reporting the suspicious sales of billions of penny stock shares. The broker dealer agreed to pay a civil money penalty of $1,000,000 to the SEC, was censured, and was ordered to cease and desist from causing or committing any violations or future violations of the SEC’s suspicious activity reporting requirements. The AML officer was assessed a $15,000 civil money penalty and barred from association with any broker, dealer, investment advisor, municipal securities dealer, municipal advisor, transfer agency, or national recognized statistical rating organization for a period of three years, among other things.

    Financial Crimes FINRA SEC Enforcement Anti-Money Laundering Bank Secrecy Act Securities

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  • FINRA amends anti-money laundering rule to comply with FinCEN’s CDD rule

    Financial Crimes

    On May 3, FINRA issued a Regulatory Notice 18-19 amending Rule 3310—Anti-Money Laundering (AML) Compliance Program rule—to reflect FinCEN’s final rule concerning customer due diligence requirements for covered financial institutions (CDD rule), which becomes applicable on May 11. According to Regulatory Notice 18-19, member firms should ensure that their AML programs are updated to include, among other things, appropriate risk-based procedures for conducting ongoing customer due diligence including (i) “understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile,” and (ii) “conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.” The announcement also makes reference to FINRA’s Regulatory Notice 17-40, issued last November, which provides additional guidance for member firms complying with the CDD rule. (See previous InfoBytes coverage here.). The notice further states that the “provisions are not new and merely codify existing expectations for firms.”

    Financial Crimes FINRA CDD Rule Anti-Money Laundering FinCEN Department of Treasury Customer Due Diligence

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  • FINRA releases new Sanctions Guidelines revisions

    Financial Crimes

    On May 2, FINRA issued a notice revising its Sanction Guidelines to reflect recent changes to General Principle No. 2, which instructs adjudicators “to consider customer-initiated arbitrations that result in adverse arbitration awards or settlements” in addition to the more traditional disciplinary history when assessing sanctions. FINRA Regulatory Notice 18-17 states that if an adjudicator determines that a “pattern of causing harm” to investors or market integrity exits, or a respondent demonstrates a disregard to regulatory requirements, then more stringent sanctions should be considered. New FAQs related to the revisions are available here.

    Revisions to the Sanctions Guidelines will apply to all complaints filed in FINRA’s disciplinary system beginning June 1.

    Financial Crimes FINRA Enforcement Sanctions

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  • FINRA revises anti-money laundering template for small firms

    Agency Rule-Making & Guidance

    On April 4, the Financial Industry Regulatory Authority (FINRA) released a revised template to assist FINRA-registered small firms in developing and implementing risk-based anti-money laundering (AML) programs as required by the Bank Secrecy Act and FINRA Rule 3310. Changes to the template reflect FinCEN’s final rule concerning customer due diligence requirements for covered financial institutions (CDD rule), which goes into effect May 11. (See previous InfoBytes coverage on the CDD rule here.) The CDD rule requires covered financial institutions, including FINRA-registered firms, to identify the beneficial owners of legal entity customers who open new accounts.

    Agency Rule-Making & Guidance FINRA FinCEN Anti-Money Laundering Customer Due Diligence Department of Treasury Bank Secrecy Act Financial Crimes CDD Rule

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  • FINRA releases 2018 regulatory and examinations priorities letter

    Securities

    On January 8, the Financial Industry Regulatory Authority (FINRA) published its Annual Regulatory and Examination Priorities Letter (2018 Letter), which focused on several broad issues within the securities industry, including improving the examination program to “implement a risk-based framework designed to better align examination resources to the risk profile of [] member firms.” As previously covered in InfoBytes, last July FINRA360 (a comprehensive self-evaluation and organizational improvement initiative) prompted the organization to announce plans currently underway to enhance operations by consolidating its existing enforcement teams into a single unit. In the 2018 Letter, FINRA announced ongoing efforts to work with member firms to understand the risks and benefits of fintech innovation such as blockchain technology, as well as the impact initial coin offerings (ICOs) and digital currencies have on broker-dealers.

    Additional areas of regulatory and examination focus for FINRA in 2018 will include: (i) fraudulent activities and suspicious activity report filing requirements; (ii) business continuity planning; (iii) protection and verification of customer assets, including whether firms have implemented adequate controls and supervision methods along with measuring the effectiveness of cybersecurity programs; (iv) anti-money laundering monitoring and surveillance resources and policies and procedures; and (v) the role firms and other registered representatives play when effecting transactions in cryptocurrencies and ICOs—specifically with regard to the supervisory, compliance and operational infrastructure firms implement to “ensure compliance with relevant federal securities laws and regulations and FINRA rules.”

    Securities Fintech FINRA Examination Fraud Privacy/Cyber Risk & Data Security Anti-Money Laundering Initial Coin Offerings Virtual Currency SARs Blockchain Financial Crimes

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  • FINRA Fines Brokerage Firm $2.8 Million for Customer Protection Rule Violations

    Securities

    On December 27, the Financial Industry Regulatory Authority (FINRA) announced that it fined a New York-based brokerage firm $2.8 million based on allegations that the firm violated the SEC’s Customer Protection Rule and due to other related supervisory failures. According to the Letter of Acceptance, Waiver, and Consent (AWC), from March 2008 to June 2016, the firm did not have reasonable processes in place to ensure that its control systems were operating properly.  As a result of these design flaws, the firm failed to properly segregate customers’ foreign and domestic securities in appropriate control locations, leading to deficits in securities valued at hundreds of millions of dollars.” The firm neither admitted nor denied the findings set forth in the AWC agreement.

    Securities FINRA Enforcement SEC

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  • FINRA Provides Additional Guidance on AML Obligations

    Financial Crimes

    On November 21, the Financial Industry Regulatory Authority (FINRA) published additional guidance regarding member firms’ obligations under FINRA Rule 3310, which requires adoption of an anti-money laundering (AML) program. The guidance provided in Regulatory Notice 17-40 follows the Financial Crime Enforcement Network’s (FinCEN) 2016 adoption of a final rule on customer due diligence requirements for financial institutions (CDD Rule). Under the CDD Rule, member firms must now comply with a “fifth pillar,” which requires them to “identify and verify the identity of the beneficial owners of all legal entity customers” at the time when a new account is opened, subject to certain exclusions and exemptions. Additionally, the “fifth pillar” requires member firms to understand the nature and purpose of customer relationships, conduct ongoing monitoring to report suspicious activities and transactions, and maintain and update customer information “on a risk basis.”

    The “fifth pillar” supplements the previously established Bank Secrecy Act AML program requirements, coined the “four pillars,” which require member firms to (i) establish policies and procedures to “achieve compliance”; (ii) conduct independent compliance testing; (iii) designate responsible individuals to implement and monitor AML compliance; and (iv) provide ongoing training.

    The CDD Rule became effective on July 11, 2016, and member firms must comply by May 11, 2018. FINRA advises members firms to consult the CDD Rule, along with FinCEN's related FAQs, to ensure AML program compliance.

    Financial Crimes FinCEN FINRA Anti-Money Laundering Bank Secrecy Act Customer Due Diligence CDD Rule

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  • SEC Approves FINRA’s Streamlined Securities Competency Exams for Industry Professionals and Consolidated Registration Rules

    Securities

    On October 5, the Financial Industry Regulatory Authority (FINRA) announced SEC approval of its proposal to consolidate certain registration rules and streamline competency exams for professionals entering or re-entering the securities industry. Under Regulatory Notice 17-30, the NASD and NYSE incorporated registration rules are now consolidated as “FINRA rules” to provide member firms “consistency and uniformity.” The rules will allow member firms to permissively register all associated persons of a firm and establish waiver programs for registered employees who “move to a financial services industry affiliate of a member firm.” Further, as previously discussed in an InfoBytes post concerning the proposed rule, FINRA’s new streamlined examination structure is designed to eliminate duplicative testing and remove outdated categories. The changes include a general knowledge examination that all new representative-level applicants will be required to pass, in addition to a revised qualification examination appropriate to their job functions. Changes to FINRA’s continuing education requirements have also been made. The rule takes effect October 1, 2018.

    Securities FINRA SEC

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  • SEC Issues Regulatory Notice Approving Amendments to FINRA Arbitration Proceedings

    Securities

    Earlier this month, the SEC released Regulatory Notice 17-25 approving amendments to FINRA customer and industry arbitration procedures, which will impact Rules 1240212403, and 13403. The changes will require the Director of FINRA’s Office of Dispute Resolution to make lists of arbitrators available to all parties at the same time “within approximately 30 days after the last answer is due.” Party agreements to extend answer due dates will no longer have any bearing on when the arbitrator list is provided. The amendments will affect cases filed on or after September 18, 2017.

    Securities Agency Rule-Making & Guidance FINRA Arbitration

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