[Federal Register Volume 83, Number 89 (Tuesday, May 8, 2018)]
[Notices]
[Pages 20906-20909]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-09694]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83154; File No. SR-FINRA-2018-016]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to FINRA Rule 3310 to Conform FINRA Rule 
3310 to FinCEN's Final Rule on Customer Due Diligence Requirements for 
Financial Institutions

May 2, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 20, 2018, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. FINRA has 
designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under 
the Act,\3\ which renders the proposal effective upon receipt of this 
filing by the Commission. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rule 3310 (Anti-Money Laundering 
Compliance Program) to reflect the Financial Crimes Enforcement 
Network's (``FinCEN'') adoption of a final rule on Customer Due 
Diligence Requirements for Financial Institutions (``CDD Rule''). 
Specifically, the proposed amendments would conform FINRA Rule 3310 to 
the CDD Rule's amendments to the minimum regulatory requirements for 
member firms' anti-money laundering (``AML'') compliance programs by 
requiring such programs to include risk-based procedures for conducting 
ongoing customer due diligence. This ongoing customer due diligence 
element for AML programs includes: (1) Understanding the nature and 
purpose of customer relationships for the purpose of developing a 
customer risk profile; and (2) conducting ongoing monitoring to 
identify and report suspicious transactions and, on a risk basis, to 
maintain and update customer information.
    The text of the proposed rule change is available on FINRA's 
website at http://www.finra.org, at the principal office of FINRA and 
at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
a. Background
    The Bank Secrecy Act \4\ (``BSA''), among other things, requires 
financial institutions,\5\ including broker-dealers, to develop and 
implement AML programs that, at a minimum, meet the statutorily 
enumerated ``four pillars.'' \6\ These four pillars currently require 
broker-dealers to have written AML programs that include, at a minimum:
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    \4\ 31 U.S.C. 5311, et seq.
    \5\ See 31 U.S.C. 5312(a)(2) (defining ``financial 
institution'').
    \6\ 31 U.S.C. 5318(h)(1).
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     The establishment and implementation of policies, 
procedures and internal controls reasonably designed to achieve 
compliance with the applicable provisions of the BSA and implementing 
regulations;

[[Page 20907]]

     independent testing for compliance by broker-dealer 
personnel or a qualified outside party;
     designation of an individual or individuals responsible 
for implementing and monitoring the operations and internal controls of 
the AML program; and
     ongoing training for appropriate persons.\7\
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    \7\ 31 CFR 1023.210(b).
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    In addition to meeting the BSA's requirements with respect to AML 
programs, broker-dealers must also comply with FINRA Rule 3310, which 
incorporates the BSA's four pillars, as well as requiring broker-
dealers' AML programs to establish and implement policies and 
procedures that can be reasonably expected to detect and cause the 
reporting of suspicious transactions.
    On May 11, 2016, FinCEN, the bureau of the Department of the 
Treasury responsible for administering the BSA and its implementing 
regulations, issued the CDD Rule \8\ to clarify and strengthen customer 
due diligence for covered financial institutions,\9\ including broker-
dealers. In its CDD Rule, FinCEN identifies four components of customer 
due diligence: (1) Customer identification and verification; (2) 
beneficial ownership identification and verification; (3) understanding 
the nature and purpose of customer relationships; and (4) ongoing 
monitoring for reporting suspicious transactions and, on a risk basis, 
maintaining and updating customer information.\10\ As the first 
component is already required to be part of a broker-dealer's AML 
program under the BSA, the CDD Rule focuses on the other three 
components.
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    \8\ FinCEN Customer Due Diligence Requirements for Financial 
Institutions; CDD Rule, 81 FR 29397 (May 11, 2016) (CDD Rule 
Release); 82 FR 45182 (September 28, 2017) (making technical 
correcting amendments to the final CDD Rule published on May 11, 
2016). FinCEN is authorized to impose AML program requirements on 
financial institutions and to require financial institutions to 
maintain procedures to ensure compliance with the BSA and associated 
regulations. 31 U.S.C. 5318(h)(2) and (a)(2). The CDD Rule is the 
result of the rulemaking process FinCEN initiated in March 2012. See 
77 FR 13046 (March 5, 2012) (Advance Notice of Proposed Rulemaking) 
and 79 FR 45151 (Aug. 4, 2014) (Notice of Proposed Rulemaking).
    \9\ See 31 CFR 1010.230(f) (defining ``covered financial 
institution'').
    \10\ See CDD Rule Release at 29398.
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    Specifically, the CDD Rule focuses particularly on the second 
component by adding a new requirement that covered financial 
institutions identify and verify the identity of the beneficial owners 
of all legal entity customers at the time a new account is opened, 
subject to certain exclusions and exemptions.\11\ The CDD Rule also 
addresses the third and fourth components, which FinCEN states ``are 
already implicitly required for covered financial institutions to 
comply with their suspicious activity reporting requirements,'' by 
amending the existing AML program rules for covered financial 
institutions to explicitly require these components to be included in 
AML programs as a new ``fifth pillar.'' As a result of the CDD Rule, 
member firms should ensure that their AML programs are updated, as 
necessary, to comply with the CDD Rule by May 11, 2018.
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    \11\ See 31 CFR 1010.230(d) (defining ``beneficial owner'') and 
31 CFR 1010.230(e) (defining ``legal entity customer'').
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    On November 21, 2017, FINRA published Regulatory Notice 17-40 to 
provide guidance to member firms regarding their obligations under 
FINRA Rule 3310 in light of the adoption of FinCEN's CDD Rule. In 
addition, the Notice summarized the CDD Rule's impact on member firms, 
including the addition of the new fifth pillar required for member 
firms' AML programs. This proposed rule change amends FINRA Rule 3310 
to incorporate the fifth pillar.
b. FINRA Rule 3310 and Amendment to Minimum Requirements for Member 
Firms' AML Programs
    Section 352 of the USA PATRIOT Act of 2001 \12\ amended the BSA to 
require broker-dealers to develop and implement AML programs that 
include the four pillars mentioned above. Consistent with Section 352 
of the PATRIOT Act, and incorporating the four pillars, FINRA Rule 3310 
requires each member firm to develop and implement a written AML 
program reasonably designed to achieve and monitor the member firm's 
compliance with the BSA and implementing regulations. Among other 
requirements, FINRA Rule 3310 requires that each member firm, at a 
minimum: (1) Establish and implement policies and procedures that can 
be reasonably expected to detect and cause the reporting of suspicious 
transactions; (2) establish and implement policies, procedures, and 
internal controls reasonably designed to achieve compliance with the 
BSA and implementing regulations; (3) provide for annual (on a 
calendar-year basis) independent testing for compliance to be conducted 
by member firm personnel or a qualified outside party; \13\ (4) 
designate and identify to FINRA an individual or individuals (i.e., AML 
compliance person(s)) who will be responsible for implementing and 
monitoring the day-to-day operations and internal controls of the AML 
program and provide prompt notification to FINRA of any changes to the 
designation; and (5) provide ongoing training for appropriate persons.
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    \12\ Uniting and Strengthening America by Providing Appropriate 
Tools Required to Intercept and Obstruct Terrorism Act of 2001, 
Public Law 107-56, 115 Stat. 272 (2001).
    \13\ If a member firm does not execute transactions for 
customers or otherwise hold customer accounts or act as an 
introducing broker with respect to customer accounts (e.g., engages 
solely in proprietary trading or conducts business only with other 
broker-dealers), then ``independent testing'' is required every two 
years. See FINRA Rule 3310(c). However, a member should conduct more 
frequent testing than required if circumstances warrant. See 
Supplementary Material .01(a).
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    FinCEN's CDD Rule does not change the requirements of FINRA Rule 
3310 and member firms must continue to comply with its 
requirements.\14\ However, FinCEN's CDD Rule amends the minimum 
regulatory requirements for member firms' AML programs by explicitly 
requiring such programs to include risk-based procedures for conducting 
ongoing customer due diligence.\15\ Accordingly, FINRA is proposing to 
amend FINRA Rule 3310 to incorporate into the Rule this ongoing 
customer due diligence element, or ``fifth pillar'' required for AML 
programs. Thus, proposed Rule 3310(f) would provide that the AML 
programs required by this Rule shall, at a minimum include appropriate 
risk-based procedures for conducting ongoing customer due diligence, to 
include, but not be limited to: (1) Understanding the nature and 
purpose of customer relationships for the purpose of developing a 
customer risk profile; and (2) Conducting ongoing monitoring to 
identify and report suspicious transactions and, on a risk basis, to 
maintain and update customer information.
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    \14\ In fact, FinCEN notes that broker-dealers must continue to 
comply with FINRA Rules, notwithstanding differences between the CDD 
Rule and FINRA Rule 3310. See CDD Rule Release 29421, n. 85.
    \15\ See CDD Rule Release at 29420; 31 CFR 1023.210.
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    As stated in the CDD Rule, these provisions are not new and merely 
codify existing expectations for firms to adequately identify and 
report suspicious transactions as required under the BSA and 
encapsulate practices generally already undertaken by securities firms 
to know and understand their customers.\16\ The proposed rule change 
simply incorporates into FINRA Rule 3310 the ongoing customer due 
diligence

[[Page 20908]]

element, or ``fifth pillar,'' required for AML programs by the CDD Rule 
to aid member firms in complying with the CDD Rule's requirements. 
However, to the extent that these elements, which are briefly 
summarized below, are not already included in member firms' AML 
programs, the CDD Rule requires member firms to update their AML 
programs to explicitly incorporate them.
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    \16\ See id. at 29419.
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c. Summary of Fifth Pillar's Requirements
Understanding the Nature and Purpose of Customer Relationships
    FinCEN states in the CDD Rule that firms must necessarily have an 
understanding of the nature and purpose of the customer relationship in 
order to determine whether a transaction is potentially suspicious and, 
in turn, to fulfill their SAR obligations.\17\ To that end, the CDD 
Rule requires that firms understand the nature and purpose of the 
customer relationship in order to develop a customer risk profile. The 
customer risk profile refers to information gathered about a customer 
to form the baseline against which customer activity is assessed for 
suspicious transaction reporting.\18\ Information relevant to 
understanding the nature and purpose of the customer relationship may 
be self-evident and, depending on the facts and circumstances, may 
include such information as the type of customer, account or service 
offered, and the customer's income, net worth, domicile, or principal 
occupation or business, as well as, in the case of existing customers, 
the customer's history of activity.\19\ The CDD Rule also does not 
prescribe a particular form of the customer risk profile.\20\ Instead, 
the CDD Rule states that depending on the firm and the nature of its 
business, a customer risk profile may consist of individualized risk 
scoring, placement of customers into risk categories or another means 
of assessing customer risk that allows firms to understand the risk 
posed by the customer and to demonstrate that understanding.\21\
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    \17\ See id. at 29421.
    \18\ See id. at 29422.
    \19\ See id.
    \20\ See id.
    \21\ See id.
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    The CDD Rule also addresses the interplay of understanding the 
nature and purpose of customer relationships with the ongoing 
monitoring obligation discussed below. The CDD Rule explains that firms 
are not necessarily required or expected to integrate customer 
information or the customer risk profile into existing transaction 
monitoring systems (for example, to serve as the baseline for 
identifying and assessing suspicious transactions on a contemporaneous 
basis).\22\ Rather, FinCEN expects firms to use the customer 
information and customer risk profile as appropriate during the course 
of complying with their obligations under the BSA in order to determine 
whether a particular flagged transaction is suspicious.\23\
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    \22\ See id.
    \23\ See id.
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Conducting Ongoing Monitoring
    As with the requirement to understand the nature and purpose of the 
customer relationship, the requirement to conduct ongoing monitoring to 
identify and report suspicious transactions and, on a risk basis, to 
maintain and update customer information, merely adopts existing 
supervisory and regulatory expectations as explicit minimum standards 
of customer due diligence required for firms' AML programs.\24\ If, in 
the course of its normal monitoring for suspicious activity, the member 
firm detects information that is relevant to assessing the customer's 
risk profile, the member firm must update the customer information, 
including the information regarding the beneficial owners of legal 
entity customers.\25\ However, there is no expectation that the member 
firm update customer information, including beneficial ownership 
information, on an ongoing or continuous basis.\26\
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    \24\ See id. at 29402.
    \25\ See id. at 29420-21. See also Regulatory Notice 17-40 
(discussing identifying and verifying the identity of beneficial 
owners of legal entity customers).
    \26\ See id.
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    FINRA has filed the proposed rule change for immediate 
effectiveness. The implementation date for the proposed changes will be 
May 11, 2018 to coincide with the compliance date under the CDD Rule.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\27\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes the proposed rule change will aid 
member firms in complying with the CDD Rule's requirement that member 
firms' AML programs include risk-based procedures for conducting 
ongoing customer due diligence by also incorporating the requirement 
into FINRA Rule 3310.
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    \27\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change simply 
incorporates into FINRA Rule 3310 the ongoing customer due diligence 
element, or ``fifth pillar,'' required for AML programs by the CDD 
Rule. Regardless of the proposed rule change, to the extent that the 
elements of the fifth pillar are not already included in member firms' 
AML programs, the CDD Rule requires member firms to update their AML 
programs to explicitly incorporate them by May 11, 2018. In addition, 
as stated in the CDD Rule, these elements are already implicitly 
required for covered financial institutions to comply with their 
suspicious activity reporting requirements. FINRA is not imposing any 
additional direct or indirect burdens on member firms or their clients 
through this proposal, and as such the proposal imposes no new burdens 
on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \28\ and Rule 19b-
4(f)(6) thereunder.\29\
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    \28\ 15 U.S.C. 78s(b)(3)(A).
    \29\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings

[[Page 20909]]

to determine whether the proposed rule should be approved or 
disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FINRA 2018-016 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2018-016. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of FINRA. All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FINRA-2018-016 and should be submitted 
on or before May 29, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-09694 Filed 5-7-18; 8:45 am]
BILLING CODE 8011-01-P