SEC, Treasury propose broker-dealers exercise more scrutiny on new accounts

WASHINGTON – The Department of the Treasury, through the Financial Crimes Enforcement Network (FinCEN), and the Securities and Exchange Commission have jointly issued a proposed regulation that would require broker-dealers to do more to verify the identities of those opening accounts. The agencies are seeking to implement section 326 of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA Patriot Act of 2001). At a minimum, broker-dealers would be required to “implement reasonable procedures” to verify the identity of any person seeking to open an account, to the extent reasonable and practicable; maintain records of the information used to verify the person’s identity; and determine whether the person appears on any lists of known or suspected terrorists or terrorist organizations provided to the broker-dealer by any government agency. Section 326 would apply to all financial institutions including credit unions, banks, agencies and branches of foreign banks in the United States, investment companies, thrifts, brokers and dealers in securities or commodities, insurance companies, travel agents, pawnbrokers, dealers in precious metals, check-cashers, casinos, and telegraph companies, among many others. The proposed rule’s definition of “account” is intended to include all types of securities accounts maintained by brokers or dealers. These include accounts to purchase, sell, lend or otherwise hold securities or other assets, cash accounts, margin accounts, prime brokerage accounts that consolidate trading done at a number of firms, and accounts for repurchase and stock loan transactions. Broker-dealers would also be required to establish a customer identification program (CIP) considering the risks involved to do so as associated with their business operations. Such factors to consider include the broker-dealer’s size which may affect the CIP if the firm is larger and deals in substantial account activity on a daily basis. The location should also be considered to assess whether it is located in areas where money laundering activities have been known to exist or that otherwise raise the risk that attempts will be made to open accounts for money laundering purposes, the SEC wrote. Other risks may stem from accounts opened online, which, “present different, and perhaps greater, risks than those opened in person on the firm’s premises” and whether certain types of accounts and their transactions are deemed more riskier than others. The Treasury will take comments on the proposed section 326 until mid-September. Comments may be mailed to FinCEN, Section 326 Broker-Dealer Rule Comments, P.O. Box 39, Vienna, VA 22183, or sent to Internet address [email protected] with the caption “Attention: Section 326 Broker-Dealer Rule Comments.” Comments to the SEC should be submitted in triplicate to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, D.C. 20549-0609. Comments also may be submitted electronically at the following e-mail address: [email protected]. Comment letters should refer to File No. S7-25-02. -