FINANCIAL CRIMES ENFORCEMENT NETWORK
Customer Due Diligence Requirements for Financial Institutions Finalized
On May 11, 2016, the Financial Crimes Enforcement Network (“FinCEN”) issued its final rules under the Bank Secrecy Act (“BSA”) to strengthen and clarify the customer due diligence (“CDD”) requirements for covered financial institutions such as: bank; brokers or dealers in securities; mutual funds; and futures commission merchants (“FCMs”) and introducing brokers in commodities. Such financial institutions, under the final CDD rules (“CDD Rules”), will now be required to verify and identify the beneficial owners of all legal entity customers during the account opening process. Further, the CDD Rules identified four (4) core elements of CDD and FinCEN believes that there should be explicit anti-money laundering requirements for all covered financial institutions, in order to ensure uniformity and clarity across all sectors. The core elements of CDD are as follows:
i. Customer identification and verification;
ii. Beneficial ownership identification and verification;
iii. Understanding the nature and purpose of customer relationships to develop a customer risk profile; and
iv. Ongoing monitoring for reporting suspicious transactions and, on a risk basis, maintaining and updating customer information.
The first, third and fourth core elements are already an AML program or suspicious activity reporting requirement and the second element will be required as part of the CDD Rules. Further, CDD rules will amend the AML program requirements for all covered financial institutions to explicitly include the third and fourth elements. The CDD Rules become effective July 11, 2016.
COMMODITY FUTURES TRADING COMMISSION
Earlier FCM Residual Interest Deadline Would be Impracticable.
The staff of the Commodity Futures Trading Commission (“CFTC”) issued “Residual Interest Deadline for Futures Commission Merchants Report” on May 13, 2016 (the “Report”). The Report is based on the public comments received regarding residual interest as a result of the CFTC’s March roundtable. The Report concludes that the industry has adapted well to the current residual interest deadline and moving the deadline to an earlier time would be impracticable.
As per CFTC Regulation 1.22, the CFTC hosted a public roundtable on residual interest deadline and issued a report following the public roundtable. The CFTC hosted the roundtable in March 2016. CFTC customer protection rules, which have been implemented to prevent FCMs from using the funds of one customer to purchase, margin, secure or settle positions for another customer. The CFTC amended Regulation 1.22, to require an FCM to maintain its own capital in customer segregated accounts in the amount equal to or greater than its customer’s aggregate undermargined amounts. This required capital is referred to as the FCM’s “residual interest”.
The March roundtable specifically addressed the requirement that FCMs cover any shortfalls in customer accounts at an earlier time than currently required. Currently, the residual interest deadline for FCMs is 6:00 pm EST on the date of settlement. Effective December 2018, the residual interest deadline was to be moved to an earlier time on the settlement date. As previously mentioned, the Report found that there is no basis to believe that an earlier residual interest deadline would be practicable to FCMs or their customers at this time.
NATIONAL FUTURES ASSOCIATION
Annual Reports for Commodity Pool Operators (“CPOs”)
The extended due date for the 2015 Annual Report is quickly approaching. Commodity pools that have previously filed the appropriate 4.22(f) notice with the NFA and were granted an extension are required to submit the 2015 Annual Report on or before June 28, 2016. CFTC Regulations require commodity pool operators to follow reporting deadlines and failure to adhere to those deadlines could result in disciplinary action. Annual Reports are filed electronically through EasyFile.
The quarterly reports, PQRs, for the period ending March 31, 2016 are due in seven (7) days. The 1st quarter PQRs are due on May 31, 2016, sixty (60) days after the end of the reporting period. The information required to be reported to the NFA depends upon the CPO’s highest AUM for the reporting period. The PQR is filed electronically through EasyFile.
For further information about any of the topics covered, please feel free to contact the Ruddy Gregory, PLLC (www.ruddylaw.com) or 202-797-0762.