[Federal Register Volume 74, Number 44 (Monday, March 9, 2009)]
[Proposed Rules]
[Pages 10161-10164]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-4695]


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DEPARTMENT OF THE TREASURY

31 CFR Part 103

[Docket Number: TREAS-FinCen-2008-0022]


Interpretive Guidance--Sharing Suspicious Activity Reports by 
Securities Broker-Dealers, Mutual Funds, Futures Commission Merchants, 
and Introducing Brokers in Commodities With Certain U.S. Affiliates

AGENCY: Financial Crimes Enforcement Network, Department of the 
Treasury.

ACTION: Proposed guidance.

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SUMMARY: The Financial Crimes Enforcement Network (``FinCEN'') of the 
Department of the Treasury, after consulting with staffs of the U.S. 
Securities and Exchange Commission (``SEC'') and the Commodity Futures 
Trading Commission (``CFTC''), is issuing for comment this proposed 
interpretive guidance. Published elsewhere in this part of the Federal 
Register are proposed rules clarifying the scope of the statutory 
prohibition on the disclosure by a financial institution of a report of 
a suspicious transaction set forth in the Bank Secrecy Act (``BSA''). 
The proposed rules include a provision which states that the 
prohibition does not apply when a securities broker-dealer, mutual 
fund, futures commission merchant, or introducing broker in commodities 
shares a suspicious activity report (``SAR''), or any information that 
would reveal the existence of a SAR, within its corporate 
organizational structure for purposes consistent with Title II of the 
BSA, as determined by regulation or guidance. The proposed guidance 
interprets this provision to permit a securities broker-dealer, mutual 
fund, futures commission merchant, or introducing broker in commodities 
to share a SAR with its affiliates that are also subject to SAR rules.

DATES: Written comments on the proposed guidance may be submitted on or 
before June 8, 2009.

ADDRESSES: You may submit comments, identified by docket number TREAS-
FinCen-2008-0022,\1\ by any of the following methods:
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    \1\ This single docket number is shared by three related 
documents (a notice of proposed rulemaking, and this and another 
piece of proposed guidance related to that notice of proposed 
rulemaking) published simultaneously by FinCEN in today's Federal 
Register. Accordingly, commenters may submit comments related to any 
of the proposals, or any combination of proposals, in a single 
comment letter.
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     Federal e-rulemaking portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Include docket 
number TREAS-FinCen-2008-0022 in the subject line of the message.
     Mail: FinCEN, P.O. Box 39, Vienna, VA 22183. Include 
docket number TREAS-FinCen-2008-0022 in the body of the text.

FOR FURTHER INFORMATION CONTACT: Regulatory Policy and Programs 
Division, FinCEN, (800) 949-2732.

SUPPLEMENTARY INFORMATION:

I. Background

    FinCEN, through its authority under the BSA as delegated by the 
Secretary of the Treasury, may require financial institutions to keep 
records and file reports that FinCEN determines have a high degree of 
usefulness in criminal, tax, or regulatory investigations or 
proceedings, or for intelligence or counterintelligence activities to 
protect against international terrorism. Within this framework, FinCEN 
may require financial institutions to file SARs and has issued rules 
implementing that specific authority with respect to certain types of 
financial institutions.\2\
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    \2\ See 31 CFR 103.15 to 103.21.
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Sharing Within the Corporate Organizational Structure

    In January 2006, FinCEN, after consulting with the staffs of the 
Securities Exchange Commission (``SEC'') and the Commodity Futures 
Trading Commission (``CFTC''), determined that, subject to certain 
exceptions or qualifications, a securities broker-dealer, futures 
commission merchant, or introducing broker in commodities may share a 
SAR with its parent entities, both domestic and foreign.\3\ Moreover, 
guidance issued by

[[Page 10162]]

FinCEN in consultation with the SEC in October 2006 stated that a U.S. 
mutual fund may share a SAR with the investment adviser that controls 
the fund, whether domestic or foreign, so that the investment adviser 
could implement enterprise-wide risk management and compliance 
functions over all of the mutual funds that it controls \4\ and improve 
its identification and reporting of suspicious activity.\5\ FinCEN also 
issued joint guidance with the Board of Governors of the Federal 
Reserve System (``FRB''), the Federal Deposit Insurance Corporation 
(``FDIC''), the Office of the Comptroller of the Currency (``OCC''), 
and the Office of Thrift Supervision (``OTS''), concluding that, 
subject to certain exceptions or qualifications, a U.S. branch or 
agency of a foreign bank may share a SAR with its head office outside 
the United States, and a U.S. bank or savings association may disclose 
a SAR to its controlling company, no matter where the entity or party 
is located.\6\ Nothing in the proposed guidance for sharing with 
affiliates supersedes any of the guidance mentioned in the preceding 
paragraph, or the adopting release for the mutual fund SAR rule.\7\
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    \3\ ``Guidance on Sharing of Suspicious Activity Reports by 
Securities Broker-Dealers, Futures Commission Merchants, and 
Introducing Brokers in Commodities'' (January 20, 2006).
    \4\ ``Control'' for the purposes of the October 2006 Guidance is 
defined in section 2(a)(9) of the Investment Company Act of 1940 (15 
U.S.C. 80a-2(a)(9)) to mean ``the power to exercise a controlling 
influence over the management or policies of a company, unless such 
power is solely the result of an official position with such 
company.'' A mutual fund typically is organized and operated by an 
investment adviser that controls the fund. By contrast, an 
investment adviser that performs limited functions in managing a 
mutual fund's securities portfolio (also known as a ``subadviser'') 
would not typically control the fund and therefore would be outside 
the scope of the guidance.
    \5\ FIN-2006-G013, ``Frequently Asked Questions: Suspicious 
Activity Reporting Requirements for Mutual Funds'' (October 4, 
2006).
    \6\ ``Interagency Guidance on Sharing Suspicious Activity 
Reports with Head Offices and Controlling Companies'' (January 20, 
2006).
    \7\ Specifically, we note that in both the mutual fund SAR rule 
adopting release (71 FR 26213) and the October 2006 guidance, FinCEN 
acknowledged the role of transfer agents and other service providers 
in the suspicious activity monitoring, detection, and reporting 
obligations of mutual funds. These service providers may be 
unaffiliated or affiliated with the mutual funds. The October 2006 
guidance and adopting release clarified that a mutual fund may 
contractually delegate its SAR functions to such an agent, although 
the mutual fund remains responsible for assuring compliance with the 
rule, and therefore must monitor actively the performance of its 
reporting obligations.
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    These guidance documents reflected a recognition by FinCEN, the 
FDIC, the FRB, the OCC, the OTS, the SEC, and the CFTC (referred to 
collectively in the proposed guidance as the ``Federal regulators'') 
that a head office, controlling entity or party, or parent entity of a 
depository institution, broker-dealer, mutual fund, futures commission 
merchant, and introducing broker in commodities, has oversight 
responsibilities with respect to enterprise-wide risk management. These 
responsibilities include a valid need to review compliance by U.S.-
based depository institutions, broker-dealers, mutual funds, futures 
commission merchants, and introducing brokers with legal requirements 
to identify and report suspicious activity.
    The guidance documents regarding the sharing of SARs with head 
offices, controlling companies or parties, and parent entities 
(referred to here as the ``2006 Guidance'') expressly noted that the 
sharing of a SAR with a non-U.S. entity raises concerns about the 
ability of the foreign entity to protect the SAR in light of possible 
requests for disclosure abroad that may be subject to foreign law. The 
2006 Guidance also provides that the recipient may not disclose further 
any SAR, or the fact that such a report has been filed; however, the 
recipient may disclose without permission underlying information. The 
2006 Guidance also stated that FinCEN and the other Federal regulators 
were considering whether a financial institution may share a SAR with 
other entities within the financial institution's corporate 
organization located inside the United States and those located abroad, 
and instructed financial institutions not to share SARs with such 
entities until further guidance was issued.

Proposed Regulatory Changes

    In proposed regulations issued today, FinCEN is proposing to revise 
the regulations implementing the BSA regarding the confidentiality of a 
SAR to clarify, among other things, the scope of the statutory 
prohibition against the disclosure by a financial institution of a SAR. 
These rules include a provision clarifying that the statutory 
prohibition does not apply to sharing by a securities broker-dealer, 
mutual fund, futures commission merchant, or introducing broker in 
commodities, or any director, officer, employee, or agent thereof, of a 
SAR, or any information that would reveal the existence of a SAR, 
within the corporate organizational structure of a securities broker-
dealer, mutual fund, futures commission merchant, or introducing broker 
in commodities for purposes consistent with Title II of the BSA, as 
determined by regulation or in guidance, provided that no person 
involved in any reported suspicious transaction is notified that the 
transaction has been reported.

II. Proposed Guidance

    This proposed guidance interprets the general statement in the 
proposed SAR confidentiality rules \8\ that a securities broker-dealer, 
mutual fund, futures commission merchant, or introducing broker in 
commodities, or any director, officer, employee, or agent thereof, may 
share a SAR, or information that reveals the existence of a SAR, within 
its corporate organizational structure for purposes consistent with 
Title II of the BSA. First, the proposed guidance acknowledges that the 
2006 Guidance regarding securities broker-dealers, mutual funds, 
futures commission merchants, and introducing brokers in commodities 
continues to be applicable. It explains that sharing of a SAR or 
information that reveals the existence of a SAR by a securities broker-
dealer, mutual fund, futures commission merchant, or introducing broker 
in commodities with its head office or its controlling company, whether 
domestic or foreign, promotes compliance with the BSA by enabling the 
head office or controlling company to discharge its oversight 
responsibilities with respect to enterprise-wide risk management, 
including oversight of the securities broker-dealer's, mutual fund's, 
futures commission merchant's, and introducing broker in commodities' 
compliance with applicable laws and regulations.
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    \8\ The proposed guidance interprets a provision in the proposed 
SAR regulations. The final guidance issued will be modified to 
correspond to any changes made in the final SAR regulations.
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    Next, the guidance explains that FinCEN also has concluded that the 
proposed regulations may be interpreted to permit a securities broker-
dealer, mutual fund, futures commission merchant, and introducing 
broker in commodities that has filed a SAR to share the SAR, or any 
information that would reveal the existence of the SAR, with an 
affiliate \9\ that is subject to a SAR regulation.\10\
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    \9\ For the purposes of this proposed guidance, an ``affiliate'' 
is effectively defined as a company under common control with, or a 
subsidiary of, the securities broker-dealer, mutual fund, futures 
commission merchant, or introducing broker in commodities. 
``Affiliate'' does not include holding companies because sharing 
with these entities is already addressed in the 2006 Guidance.
    \10\ See 31 CFR 103.15 to 103.21. See also, 12 CFR 208.62 (FRB); 
12 CFR 353.3 (FDIC); 12 CFR 748.1 (NCUA); 12 CFR 21.11 (OCC); and 12 
CFR 563.180 (OTS).
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    FinCEN has concluded that such sharing within a corporate 
organization is consistent with two important purposes of the BSA: 
promoting efforts to detect and report money laundering and terrorist 
financing by financial institutions that are subject to the BSA,

[[Page 10163]]

and ensuring the confidentiality of a SAR or any information that would 
reveal the existence of a SAR. The sharing by a securities broker-
dealer, mutual fund, futures commission merchant, or introducing broker 
in commodities of a SAR, or any information that would reveal the 
existence of a SAR, can facilitate the identification of suspicious 
transactions taking place through the securities broker-dealer's, 
mutual fund's, futures commission merchant's, or introducing broker in 
commodities' affiliates that are also subject to SAR reporting 
requirements. Although the sharing of information underlying the filing 
of a SAR has never been prohibited under the BSA, it is understood that 
the sharing of a SAR itself pursuant to this proposed guidance may 
entail greater efficiencies.\11\
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    \11\ For example, the sharing of a SAR eliminates the need to 
create a separate summary document which, if shared, might 
inadvertently reveal the existence of a SAR itself.
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    Moreover, the proposed SAR confidentiality rules provide that a 
``SAR, and any information that would reveal the existence of a SAR, 
are confidential.'' \12\ Accordingly, affiliates subject to a SAR rule 
are prohibited from disclosing any SAR or information that a SAR was 
filed, including both SARs they have filed, and any SARs they have 
received that have been filed by others. In addition, because the 
guidance applies only to the sharing of a SAR by the securities broker-
dealer, mutual fund, futures commission merchant, and introducing 
broker in commodities ``that has filed'' the SAR, the guidance includes 
a statement clarifying that it is not permissible for an affiliate that 
has received such a SAR to share that SAR, or any information that 
would reveal the existence of that SAR with another affiliate, even if 
that affiliate is an affiliate subject to a SAR rule. The guidance also 
states that a broker-dealer in securities, mutual fund, futures 
commission merchant, and introducing broker in commodities, as part of 
its internal controls, should have written confidentiality agreements 
in place ensuring that its affiliates protect the confidentiality of 
the SAR through appropriate internal controls. Given the above 
restrictions, FinCEN is satisfied that the sharing permitted by this 
guidance is consistent with the BSA objective to ensure that suspicious 
activity reporting remains confidential.
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    \12\ See the Notice of Proposed Rulemaking published elsewhere 
in today's Federal Register.
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    FinCEN has declined to permit sharing with affiliates that are not 
subject to a SAR rule, whether domestic or foreign.\13\ At this time, 
it is not apparent that such sharing would be consistent with the 
purposes of the BSA, to promote efforts to detect and report money 
laundering and terrorist financing by financial institutions that are 
subject to rules implementing the BSA, and to ensure the 
confidentiality of a SAR or any information that would reveal the 
existence of a SAR.
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    \13\ FinCEN does not intend this guidance to permit the sharing 
of SARs with affiliates where such sharing would subject the SARs to 
the laws of a foreign jurisdiction, and elsewhere in this notice 
seeks specific comment on whether as drafted, the guidance meets 
that purpose based on present industry practices.
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    Finally, this proposed guidance is intended only to remove 
unnecessary obstacles to detecting and reporting suspicious activity. 
It should not be read to impose new BSA requirements or to suggest that 
sharing with affiliates is compulsory.

III. Request for Comment

    FinCEN invites comments on all aspects of the proposed guidance. 
FinCEN solicits comment on whether this proposed guidance would achieve 
the intended effect of promoting compliance with the BSA. We also 
request comment on whether the proposed guidance will be beneficial, 
whether it raises any ambiguities, and whether it will result in any 
negative consequences. In addition, we specifically invite comment on 
the following:
     Whether the definition of ``affiliate'' is appropriate?
     Whether the scope of the guidance should be expanded to 
permit sharing with other affiliates within the United States. 
Commenters suggesting that the scope of the guidance be expanded should 
address how additional sharing would be consistent with the purposes of 
Title II of the BSA;
     Whether the scope of the guidance clearly limits sharing 
with affiliates to only those affiliates within the United States based 
on the application of FinCEN's SAR rules or whether further 
clarification is needed to ensure that SARs are shared only in a 
domestic context;
     Whether the scope of the guidance should be expanded to 
permit sharing with other affiliates outside of the United States. 
Commenters suggesting that the scope of the guidance be expanded should 
address how additional sharing outside the U.S. would be consistent 
with the purposes of Title II of the BSA. In particular, commenters 
should explain how a foreign affiliate might protect a SAR in light of 
a possible request for disclosure abroad that may be subject to foreign 
law;
     Whether similar provisions to allow sharing with certain 
affiliates should be permitted among all financial institutions subject 
to a SAR rule; and
     Whether financial institutions, other than depository 
institutions, securities broker-dealers, mutual funds, futures 
commission merchants, or introducing broker in commodities, subject to 
a SAR rule should be permitted to share a SAR, or any information that 
would reveal the existence of a SAR, with parent entities and/or 
affiliates; and

Whether and how a securities broker-dealer, mutual fund, futures 
commission merchant, and introducing broker in commodities can store 
and provide access to SARs in an electronic system in a way that 
prevents the SARs from being subject to disclosure laws or obligations 
of foreign jurisdictions.

Proposed Interpretive Guidance \14\
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    \14\ For purposes of the guidance text below, all citations to 
Title 31 SAR regulations are references to the amended regulations 
we anticipate promulgating as discussed in the above section, 
Proposed Regulatory Changes.
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Sharing Suspicious Activity Reports by Securities Broker-Dealers, 
Mutual Funds, Futures Commission Merchants, and Introducing Brokers in 
Commodities With Certain U.S. Affiliates \1\
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    \1\ For purposes of this guidance, ``affiliate'' of a person 
means any company under common control with, or controlled by, such 
person. ``Control'' of a company means the power to exercise a 
controlling influence over the management or policies of a company 
whether through ownership of securities, by contract, or otherwise. 
Any person who owns beneficially, either directly or through one or 
more controlled companies, more than 25 percent of the voting 
securities of any company is presumed to control the company. Any 
person who does not own more than 25 percent of the voting 
securities of any company will be presumed not to control the 
company.
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    The Financial Crimes Enforcement Network (``FinCEN''), after 
consulting with staff of the U.S. Securities and Exchange Commission 
(``SEC'') and the Commodity Futures Trading Commission (``CFTC''), is 
issuing this guidance to confirm that under the Bank Secrecy Act 
(``BSA'') and its implementing regulations, securities broker-dealers, 
mutual funds, futures commission merchants, and introducing brokers in 
commodities that have filed a Suspicious Activity Report (``SAR'') may 
share the SAR, or any information that would reveal the existence of 
the SAR, with certain affiliates. This guidance does not address the 
applicability of any other Federal or state laws.

[[Page 10164]]

    The BSA prohibits the filer of a SAR from notifying any person 
involved in a suspicious transaction that the activity has been 
reported.\2\ Regulations issued by FinCEN \3\ construe this 
confidentiality provision as generally prohibiting a securities broker-
dealer, mutual fund, futures commission merchant, or introducing broker 
in commodities from disclosing a SAR, or any information that would 
reveal the existence of a SAR.
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    \2\ See 31 U.S.C. 5318(g)(2).
    \3\ See 31 CFR 103.15(d), 103.17(e), and 103.19(e).
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    However, the regulations make clear that, provided no person 
involved in the transaction is notified that the transaction has been 
reported, the prohibition does not include disclosures to (1) FinCEN; 
(2) any Federal, State, or local law enforcement agency; (3) any 
Federal or state regulatory agency that examines the securities broker-
dealer, mutual fund, futures commission merchant, or introducing broker 
in commodities for compliance with the BSA; or (4) a self-regulatory 
organization for the purpose of examining the filing financial 
institution for compliance with its SAR reporting requirements. The 
regulations also provide that the prohibition does not apply to: (i) 
The disclosure of the underlying facts, transactions, and documents 
upon which a SAR is based, including, but not limited to, disclosures 
related to filing a joint SAR and in connection with certain employment 
references or termination notices; and (ii) the sharing of a SAR, or 
any information that would reveal the existence of a SAR, within the 
corporate organizational structure of a securities broker-dealer, 
mutual fund, futures commission merchant, or introducing broker in 
commodities for purposes consistent with Title II of the BSA, as 
determined by regulation or in guidance.\4\
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    \4\ See the Notice of Proposed Rulemaking published elsewhere in 
today's Federal Register.
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    In previously issued guidance (``January 2006 Guidance''), FinCEN, 
in consultation with the staffs of the SEC and the CFTC, determined 
that a securities broker-dealer, futures commission merchant, or 
introducing broker in commodities may share a SAR with its parent 
entity (whether domestic or foreign).\5\ In October 2006, FinCEN 
additionally published guidance stating that a mutual fund may share 
SARs with an investment adviser that controls the fund, whether 
domestic or foreign.\6\ These guidance documents continue to be 
applicable and comport with the SAR regulations referenced above.\7\ 
The sharing of a SAR or, more broadly, any information that would 
reveal the existence of a SAR, with a parent entity or investment 
adviser that controls a mutual fund (including a foreign parent entity 
or foreign investment adviser) promotes compliance with the applicable 
requirements of the BSA by enabling the parent entity or investment 
adviser that controls a mutual fund to discharge its oversight 
responsibilities with respect to enterprise-wide risk management and 
compliance with applicable laws and regulations.
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    \5\ ``Guidance on Sharing of Suspicious Activity Reports by 
Securities Broker-Dealers, Futures Commission Merchants, and 
Introducing Brokers in Commodities'' (January 20, 2006).
    \6\ ``Frequently Asked Questions: Suspicious Activity Reporting 
Requirements for Mutual Funds'' (October 4, 2006).
    \7\ See supra note 4.
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    The January 2006 Guidance deferred taking a position on whether a 
securities broker-dealer, futures commission merchant, or introducing 
broker in commodities is permitted to share a SAR with affiliates and 
directed institutions not to share with such affiliates. FinCEN, in 
consultation with SEC and CFTC staff, has now concluded that a 
securities broker-dealer, mutual fund, futures commission merchant, or 
introducing broker in commodities that has filed a SAR may share the 
SAR, or any information that would reveal the existence of the SAR, 
with an affiliate, provided the affiliate is subject to a SAR 
regulation \8\ issued by FinCEN, the Board of Governors of the Federal 
Reserve System, the Federal Deposit Insurance Corporation, the National 
Credit Union Administration, the Office of the Comptroller of the 
Currency, or the Office of Thrift Supervision. The sharing of SARs with 
such affiliates facilitates their compliance with the identification of 
suspicious transactions taking place through the securities broker-
dealer's, mutual fund's, futures commission merchant's, or introducing 
broker in commodities' affiliates that are subject to a SAR rule. 
Therefore, such sharing within the corporate organizational structure 
of a securities broker-dealer, mutual fund, futures commission 
merchant, or introducing broker in commodities is consistent with the 
purposes of Title II of the BSA.
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    \8\ See 31 CFR 103.15 to 103.21. See also, 12 CFR 21.11 (Office 
of the Comptroller of the Currency); 12 CFR 208.62, 211.5(k), 
211.24(f), 225.4(f) (Board of Governors of the Federal Reserve 
System); 12 CFR 353.3 (Federal Deposit Insurance Corporation); 12 
CFR 563.180 (Office of Thrift Supervision); 12 CFR 748.1(c) 
(National Credit Union Administration).
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    It is not consistent with the purposes of Title II of the BSA for 
an affiliate that has received a SAR from a securities broker-dealer, 
mutual fund, futures commission merchant, or introducing broker in 
commodities to share that SAR, or any information that would reveal the 
existence of that SAR with an affiliate of its own, even if that 
affiliate is subject to a SAR rule.
    As is the case with sharing SARs with parent entities, there may be 
circumstances under which a securities broker-dealer, mutual fund, 
futures commission merchant, or introducing broker in commodities, its 
affiliate, or both entities would be liable for direct or indirect 
disclosure by the affiliate of a SAR or any information that would 
reveal the existence of a SAR. Therefore, the securities broker-dealer, 
mutual fund, futures commission merchant, or introducing broker in 
commodities, as part of its internal controls, should have written 
confidentiality agreements in place ensuring that its affiliates 
protect the confidentiality of the SAR through appropriate internal 
controls.
    Consistent with the BSA and the implementing regulations issued by 
FinCEN, a SAR, or any information that would reveal the existence of a 
SAR, must not be disclosed, even under this guidance, if the securities 
broker-dealer, mutual fund, futures commission merchant, or introducing 
broker in commodities has reason to believe it may be disclosed to any 
person involved in the suspicious activity that is the subject of the 
SAR.

    Dated: February 27, 2009.
James H. Freis, Jr.,
Director, Financial Crimes Enforcement Network.
 [FR Doc. E9-4695 Filed 3-6-09; 8:45 am]
BILLING CODE 4810-02-P