# SECURITIES AND EXCHANGE COMMISSION

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URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3A0c7e0c90d298430b

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

DIVISION OF
TRADING AND MARKETS

January 11,2011
Mr. Ryan D. Foster
Manager, SIFMA
Office of General Counsel
1101 New York Avenue, NW, 8th Floor
Washington, DC 20005
Re:

Request for No-Action Relief Under Broker-Dealer Customer
Identification Rule (31 C.F R. § 103.122)

Dear Mr. Foster:
In your letter dated January 11, 2011, you request assurances that the staff of the
Division 1 will not recommend enforcement action to the Commission under Exchange
Act Rule 17a-8 if a broker-dealer relies on a registered investment adviser to perform
some or all of its CIP obligations, subject to certain enumerated conditions set forth in
your incoming letter. Specifically, you request that the Division take a no-action position
similar to a no-action position that it took in 2004, and again in 2005, 2006, 2008, and
201O?
On February 12, 2004, the Division, in consultation with FinCEN, issued a letter
stating that it would not recommend enforcement action to the Commission if a brokerdealer treated a registered investment adviser as if it were subject to an Anti-Money
Laundering Program Rule ("AML Program Rule") under 31 U.S.C. 5318(h) for the
purposes of paragraph (b)(6) of the CIP Rule. By its terms, the 2004 Letter was to be
withdrawn without further notice on the earlier of: (1) the date upon which an AML
Program Rule for investment advisers becomes effective, or (2) February 12,2005.
Because an AML Program Rule for investment advisers did not become effective, and in
response to your subsequent requests for no-action relief, the no-action position in the
2004 Letter was extended for an additional 18 months on February 10,2005, for an

Unless otherwise noted, each defined term in this letter has the same meaning as
those defined directly or by reference in your letter.
2

See Letter from Annette L. Nazareth, Director, Division, Commission, to Alan
Sorcher, Securities Industry Association ("SIA"), dated February 12,2004 (the "2004
Letter"); Letter from Annette L. Nazareth, Director, Division, Commission, to Alan
Sorcher, SIA, dated February 10,2005; Letter from Robert L.D. Colby, Acting Director,
Division, Commission, to Alan Sorcher, SIA, dated July 11, 2006; Letter from Erik Sirri,
Director, Division, Commission to Alan Sorcher, SIFMA, dated January 12,2008; Letter
from Daniel M. Gallagher, Jr., Deputy Director, Division, Commission, to Ryan Foster,
SIFMA, dated January 11, 2010 (the "2010 Letter").

Mr. Ryan D. Foster
January 11,2011
Page 2 of3
additional 18 months on July 11, 2006, for an additional 2 years on January 10, 2008, and
for an additional 12 months on January 11,2010.
In your letter, you indicate that broker-dealers have come to rely on the no-action
position that was taken in the 2004 Letter, and ask that the Division take a position
similar to that of the 2004 Letter, but with additional conditions imposed.
Response
Without necessarily agreeing with your assertions, the Division, following further
consultation with FinCEN staff, extends the no-action position in the 2004 Letter for an
additional 2 years from the date of this letter, subject to some modifications.
Accordingly, the Division will not recommend enforcement action to the
Commission under Exchange Act Rule 17a-8 if a broker-dealer treats an investment
adviser as if it were subject to an AML Program Rule for the purposes of paragraph
(b)(6) of the CIP Rule provided that the other provisions of the CIP Rule are met, and: (I)
the broker-dealer's reliance on the investment adviser is reasonable under the
circumstances, as discussed in more detail below; (2) the investment adviser is a U.S.
investment adviser registered with the Commission under the Investment Advisers Act of
1940; and (3) the investment adviser enters into a contract with the broker-dealer in
which the investment adviser agrees that: (a) it has implemented its own AML Program
consistent with the requirements of 31 U.S.C. 5318(h) and will update such AML
Program as necessary to implement changes in applicable laws and guidance, (b) it (or its
agent) will perform the specified requirements of the broker-dealer's CIP in a manner
consistent with Section 326 of the PATRIOT Act, (c) it will promptly disclose to the
broker-dealer potentially suspicious or unusual activity detected as part of the CIP being
performed on the broker-dealer's behalf in order to enable the broker-dealer to file a
Suspicious Activity Report, as appropriate based on the broker-dealer's judgment3, (d) it
will certif/ annually to the broker-dealer that the representations in the reliance
3

Firms are reminded that nothing in this no-action letter relieves a broker-dealer of
its obligation to establish policies, procedures, and controls that are reasonably designed
to detect and report suspicious activity that is attempted or conducted by, at, or through
the broker-dealer. See 31 C.F.R. § 103.19(a)(2).
4

We understand that some broker-dealers may cease to enter into reliance
agreements pursuant to the terms set forth in this 2011 letter. In those cases, a brokerdealer that had been obtaining forward-looking certifications need not obtain further
certifications regarding an investment adviser's activities. For example, if the next
certification due from the investment adviser would have applied to the upcoming year,
from January 11,2011, through January 11,2012, then a broker-dealer ceasing the
reliance relationship as of January 11,2011, would not be required to obtain such a
certification from the investment adviser.

Mr. Ryan D. Foster
January 11,2011
Page 3 of3
agreement remain accurate and that it is in compliance with such representations, and, (e)
it will promptly provide its books and records relating to its performance of CIP to the
Commission, to an SRO that has jurisdiction over the broker-dealer, or to authorized law
enforcement agencies, either directly or through the broker-dealer, at the request of (i) the
broker-dealer, (ii) the Commission, (iii) an SRO that has jurisdiction over the brokerdealer, or (iv) an authorized law enforcement agency.s
As to the reasonableness of a broker-dealer's reliance on an investment adviser,
we understand that broker-dealers seeking to rely on the no-action position taken in this
letter will undertake appropriate due diligence on the investment adviser that is
commensurate with the broker-dealer's assessment of the anti-money laundering risk
presented by the investment adviser and the investment adviser's customer base. Such
due diligence would be undertaken at the outset of the broker-dealer's relationship with
the investment adviser, and updated during the course of the relationship, as appropriate.
So that broker-dealers wishing to avail themselves of the relief being granted
pursuant to this letter have sufficient time to become compliant with its terms, the relief
granted pursuant to the 2010 Letter is hereby extended for 120 days from the date of this
letter, until May 11, 2011. After that date, the 2010 Letter will be withdrawn without
further action, and the terms of this January 11, 2011, no-action letter shall control.
This is a staff position with respect to enforcement action only and does not
purport to express any legal conclusions. It may be withdrawn or modified if the staff
determines that such action is necessary to be consistent with the Bank Secrecy Act and
in the public interest.

Sincerely,

l,-,--,--~ b,-.3~

Lourdes Gonzalez
Acting Co-Chief Counsel

S

A broker-dealer that chooses not to avail itself of the relief being granted pursuant
to this letter may still contractually delegate the implementation and operation of its CIP
to an investment adviser; however, the broker-dealer will remain solely responsible for
assuring compliance with the CIP Rule, and therefore must actively monitor the operation
of its CIP and assess its effectiveness. See "Customer Identification Programs for
Broker-Dealers," Exchange Act Release No. 47752 (April 29, 2003), 68 FR 25113,
25123 n. 132 (May 9, 2003).

sifmao
Invested in America
January 11, 2011
Via Email and Courier
Lourdes Gonzalez
Acting Co-Chief Counsel
Office of Chief Counsel
Division of Trading and Markets
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549

Re:

Request for No-Action Relief Under Broker-Dealer Customer
Identification Rule (31 C.F.R. § 103.122)

Dear Ms. Gonzalez:
The Securities Industry and Financial Markets Association (“SIFMA”) 1 is submitting this
request on behalf of its member broker-dealers for No-Action relief with respect to the reliance
provisions in the customer identification rule (“CIP Rule”) applicable to broker-dealers (31 C.F.R.
§103.122) issued pursuant to Section 326 of the USA PATRIOT Act. 2
As you know, the CIP Rule requires broker-dealers to adopt written customer identification
programs (“CIP”) that include risk-based procedures for verifying the identity of each customer. The
CIP Rule permits broker-dealers to rely on certain financial institutions to perform CIP procedures
with respect to shared customers. Such reliance is permissible under the CIP regulations where: (1) it
is reasonable under the circumstances; (2) the relied-upon financial institution is subject to an antimoney laundering program (“AML Program”) rule (“AMLP Rule”) under 31 U.S.C. § 5318(h) of the
Bank Secrecy Act (“BSA”) 3 and regulated by a Federal functional regulator; and (3) the relied-upon
financial institution enters into a contract requiring it to certify annually to the broker-dealer that it has
implemented an AML Program, and that it (or its agent) will perform specified requirements of the
CIP. 4 The reliance provision is designed to permit two financial institutions with mutual customers to
reach agreements between themselves as to how they will allocate performance of the requirements of
1

The Securities Industry and Financial Markets Association brings together the shared interests of more than 600 securities
firms, banks and asset managers. SIFMA’s mission is to promote policies and practices that work to expand and perfect
markets, foster the development of new products and services and create efficiencies for member firms, while preserving
and enhancing the public’s trust and confidence in the markets and the industry. SIFMA works to represent its members’
interests locally and globally. It has offices in New York, Washington D.C., and London and its associated firm, the Asia
Securities Industry and Financial Markets Association, is based in Hong Kong.
2
“Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of
2001,” (“PATRIOT Act”) Pub. L. No. 107-56 (2001), signed into law by President Bush on October 26, 2001.
3
31 U.S.C. § 5311 et seq.
4
31 C.F.R. § 103.122(b)(6).

Lourdes Gonzalez
Page 2 of 6
January 11, 2011
the CIP Rule and, thereby, rely on one another to avoid unnecessary duplication of efforts with respect
to a given customer.
Although registered investment advisers (“RIAs”) are regulated financial institutions and were
subject to a proposed AMLP Rule, 5 because the AMLP Rule was not yet finalized at the time the CIP
Rule went into effect, broker-dealers were not technically permitted to rely upon RIAs to perform any
part of their CIP requirements. For that reason, SIFMA specifically sought and received assurances
from the U.S. Securities and Exchange Commission (“Commission”) Staff on a number of occasions
that it would not recommend enforcement action if a broker-dealer relied on an RIA under 31 C.F.R.
§103.122(b)(6) to perform some or all of its CIP obligations with respect to shared customers.
SIFMA is writing again to seek assurances from the Staff of the Division of Trading and
Markets (“Division”) 6 that it will not recommend enforcement action to the U.S. Securities and
Exchange Commission (“Commission”) if a broker-dealer, subject to the conditions set forth in this
letter, relies on an RIA pursuant to 31 C.F.R. § 103.122(b)(6) to perform some or all of its customer
identification program obligations.
Previous No-Action Requests Have Been Granted
The requested relief was first issued by the Commission’s Division of Trading and Markets
(f/k/a Division of Market Regulation) (the “Division”), in consultation with the Department of
Treasury’s Financial Crimes Enforcement Network (“FinCEN”), in 2004 and has been renewed on a
number of occasions since that time. (See Letters from the Division to the SIA 7 dated February 12,
2004, February 10, 2005, July 11, 2006, and to SIFMA dated January 10, 2008.) 8 In each of its prior
No-Action Letters, the Division stated that it would not recommend to the Commission that
enforcement action be taken under Rule 17a-8 of the Securities Exchange Act of 1934 (“Exchange
Act”) 9 if a broker-dealer relies on an RIA, prior to such adviser becoming subject to an AMLP Rule
for the purposes of paragraph (b)(6) of the CIP Rule, provided that all of the other provisions of the
CIP regulations were met i.e., “(1) reliance on the investment adviser is reasonable under the
circumstances; (2) the investment adviser is registered with the Commission; (3) the investment
adviser enters into a contract with the broker-dealer requiring it to certify annually to the broker-dealer
that it has implemented its own AML Program that is consistent with the requirements of 31 U.S.C.
5318(h); and (4) the adviser (or its agent) performs the specified requirements of the broker-dealer’s
CIP.” 10 In addition, the Division routinely provided reasonable time limits to its No-Action relief, i.e.,
5

68 Fed. Reg. 23646 (May 5, 2003)
The Division was formerly known as the Division of Market Regulation.
7
SIFMA was previously known as the Securities Industry Association (“SIA”) before its merger with the Bond Market
Association.
8
See Letter from Annette L. Nazareth, Director, Division, Commission, to Alan Sorcher, SIA, dated February 12, 2004;
Letter from Annette L. Nazareth, Director, Division, Commission, to Alan Sorcher, SIA, dated February 10, 2005; Letter
from Robert L.D. Colby, Acting Director, Division, Commission, to Alan Sorcher, SIA, dated July 11, 2006; Letter from
Erik Sirri, Director, Division, Commission, to Alan Sorcher, SIFMA, dated January 10, 2008.
9
17 C.F.R. § 240.17a-8.
10
See, e.g., Letter from Daniel M. Gallagher, Jr., Deputy Director of Division of Trading and Markets, Commission, to
Ryan Foster, SIFMA, dated January 11, 2010 (“2010 Letter”). In the context of the bank FAQs (in response to a question
raised by SIFMA), FinCEN clarified that the program need not be the Bank’s but need only follow the elements of the CIP
Rule required to be in a bank’s CIP. See FAQ: Final CIP Rule, Guidance on Customer Identification Regulations, FinCEN,
at 9 (Jan. 2004), available at http://www.fincen.gov/statutes_regs/guidance/pdf/finalciprule.pdf.
6

Lourdes Gonzalez
Page 3 of 6
January 11, 2011
the earlier of: (1) 12-18 months from the date of the No-Action Letter, or (2) the date upon which an
AMLP Rule for advisers becomes effective.
Shortly before the Division’s last No-Action Letter was set to expire, by letter dated January 7,
2010, SIFMA once again approached the Division with its request for renewal of the No-Action relief.
However, by that time, the AMLP Rule that FinCEN had proposed in May 2003 had been withdrawn
(effective November 4, 2008). Although FinCEN stated that it would not proceed with an AMLP
requirement for investment advisers without publishing a new proposal, it also noted its view that, as it
continues to consider the extent to which BSA requirements should be imposed on investment
advisers, the activity of investment advisers is not entirely outside the current BSA regulatory
regime. 11
On January 11, 2010, the Division again issued a No-Action Letter stating that it would not
recommend to the Commission that enforcement action be taken under Rule 17a-8 of the Exchange
Act on these same conditions. 12 Because RIAs were no longer subject to a proposed AMLP Rule at
the time of SIFMA’s last request, and were not defined as a covered financial institution under an
AMLP Rule, the Division’s Staff apparently had concerns about renewing the No-Action relief beyond
January 10, 2011. Hence, although the Division again agreed to extend the prior No-Action relief, its
January 11, 2010 response indicated -- in language not previously used in this context -- that “[t]he noaction position taken by this letter will be withdrawn without further action on January 10, 2011.” 13
(A copy of the letter is attached). 14 The Division acknowledged that it had consulted with FinCEN
and that it would reconsider its position if FinCEN were to re-propose an AMLP Rule for investment
advisers before January 10, 2011.
Reliance on Registered Investment Advisers
As we have previously indicated in our prior No-Action relief requests to the Commission,
SIFMA broker-dealer members have come to rely on RIAs under the CIP Rule to perform some or all
of the CIP obligations related to customers with whom both have a customer relationship. SIFMA
believes strongly that the reliance provisions of the CIP Rule play an important and necessary role in
effective anti-money laundering compliance because intermediary and shared business relationships
are a common and legitimate part of the securities industry and U.S. capital markets. RIAs are
regulated by a Federal functional regulator and many have established AMLPs consistent with 31
U.S.C. 5318(h). Permitting two regulated financial institutions with a common customer to rely on
one another to perform some or all of the CIP requirements avoids duplication of efforts and inefficient
allocation of significant and costly resources.
SIFMA also believes that the interaction between broker-dealers and RIAs is precisely the type
of relationship intended to be covered by the reliance provisions, and should continue to be available
11

73 Fed. Reg. 65568-69 (Nov. 4, 2008).
2010 Letter.
13
Id.
14
In contrast, when the Commodity Futures Trading Commission (“CFTC”) granted similar relief to futures commission
merchants and introducing brokers in March 2005, with respect to their reliance on commodity trading advisors (“CTAs”),
the CFTC stated that its no-action relief letter “will be deemed withdrawn automatically, without further action . . . upon
the earlier of (a) the date upon which AMLP Rules for CTAs become effective, or (b) 30 days after FinCEN publicly
announces that it will not issue AMLP Rules for CTAs.” See CFTC letter No. 05-05 (Mar. 14, 2005).
12

Lourdes Gonzalez
Page 4 of 6
January 11, 2011
to firms in a position to implement such reliance. RIAs often have the most direct relationship with
the customers they introduce to broker-dealers, are best able to obtain the necessary documentation
and information from and about the customers, and therefore are in the best position to perform some
or all of the requirements of the CIP Rule. Moreover, RIAs are often reluctant to have the brokerdealer contact the customer because they view the other institution as their competitor. Accordingly,
SIFMA member firms would like to continue to rely on RIAs under the CIP Rule to perform some or
all of the CIP obligations with respect to customers with whom both have a customer relationship.
Request for No-Action Relief
In connection with the renewal of this No-Action relief, SIFMA has been advised by the
Division’s Staff, that, given the withdrawal of the proposed AMLP Rule and the fact that an RIA is not
a defined covered financial institution, the Staff would not recommend the extension of the No-Action
Letter unless additional conditions were added to the No-Action Letter, which would, in the Staff’s
view, enhance the ability of a broker-dealer to ascertain the reasonableness of its reliance on the RIAs
in order to comply with its own anti-money laundering obligations.
Based on our discussions with the Staff and FinCEN, SIFMA is submitting a request for NoAction relief based on the following proposal, which we believe addresses the Staff’s concerns. We
understand from our discussions that the Staff does not intend, by the addition of these new conditions,
to impose any supervisory obligations on the broker-dealer with respect to the investment adviser.
Under this proposal, broker-dealers may treat an RIA as if it were subject to an AMLP Rule for
the purposes of paragraph (b)(6) of the CIP Rule (31 C.F.R. § 103.122(b)(6)) where, provided that the
other provisions of the CIP Rule are met: (1) the broker-dealer’s reliance on the RIA is reasonable
under the circumstances, as discussed in more detail below; (2) the RIA is a U.S. investment adviser
registered with the Commission under the Investment Advisers Act of 1940; and (3) the RIA enters
into a contract with the broker-dealer in which the RIA agrees that: (a) it has implemented its own
AML Program consistent with the requirements of 31 U.S.C. 5318(h) and will update such AML
Program as necessary to implement changes in applicable laws and guidance, (b) it (or its agent) will
perform the specified requirements of the broker-dealer’s CIP in a manner consistent with Section 326
of the PATRIOT Act, (c) it will promptly disclose to the broker-dealer potentially suspicious or
unusual activity detected as part of the CIP being performed on the broker-dealer’s behalf in order to
enable the broker-dealer to file a Suspicious Activity Report, as appropriate based on the brokerdealer’s judgment, (d) it will certify annually to the broker-dealer that the representations in the
reliance agreement remain accurate and that it is in compliance with such representations, and (e) it
will promptly provide its books and records relating to its performance of CIP to the Commission, to a
self-regulatory organization (“SRO”) that has jurisdiction over the broker-dealer, or to authorized law
enforcement agencies, either directly or through the broker-dealer, at the request of (i) the brokerdealer, (ii) the Commission, (iii) an SRO that has jurisdiction over the broker-dealer, or (iv) an
authorized law enforcement agency.
To confirm that the broker-dealer’s reliance on the RIA is reasonable under the circumstances,
the broker-dealer would undertake appropriate due diligence on the RIA that is commensurate with the
broker-dealer’s assessment of the AML risk presented by the RIA and the RIA’s customer base. For
example, an affiliate might be considered lower risk than a less well known RIA. Such due diligence
would be undertaken at the outset of the broker-dealer’s relationship with the investment adviser, and
updated during the course of the relationship, as appropriate. Consistent with the broker-dealer’s

Lourdes Gonzalez
Page 5 of 6
January 11, 2011
assessment of the risk and the nature of the relationship, examples of appropriate due diligence, either
at the outset or during the relationship, might include obtaining a copy of (or a summary of) the RIA’s
CIP processes or procedures, obtaining a completed questionnaire from the investment adviser
regarding its CIP program, or obtaining attestations from the RIA relating to the adviser’s performance
of CIP. Such attestations could include, by way of example, that an affiliate is in compliance with the
parent company’s global CIP.
SIFMA respectfully requests that the Commission issue No-Action relief that allows brokerdealers to continue to rely on RIAs to perform CIP with respect to common customers based on the
conditions proposed herein.
In the event that the Commission grants our No-Action request, SIFMA requests that the
Commission provide additional time for our broker-dealer members to become compliant with the new
conditions. Among other steps, broker-dealers would need to contact all of the RIAs upon whom they
have relied in good faith for years, establish and implement multiple procedures to address the new
steps necessary under the Commission’s No-Action position, and ensure that the necessary technology
and personnel resources are trained and in place. Because it will take broker-dealers some time to alter
their existing procedures and implement new ones, we respectfully request that broker-dealers, which
have determined to rely on the No-Action position taken by the Commission, be provided a sufficient
period of time to become compliant with the terms of such position. Under this proposal, such brokerdealers would become compliant with a No-Action position taken by the Commission within 120 days
from the date of such No-Action position being issued by the Commission. In addition, we request
that the Staff confirm that broker-dealers who, pursuant to the prior No-Action Letters, have
previously relied on a particular investment adviser to perform CIP and who have determined not to do
so on a going forward basis, need not obtain any further certifications for those customer accounts
subject to the prior No-Action relief.
***
We thank you for the opportunity to submit this letter. We would be happy to discuss with you
any of the comments described above or any other matters you feel would be helpful in your review of
the No-Action Request. Please do not hesitate to contact Ryan Foster at 202-962-7388 or via email at
rfoster@sifma.org if you would like to discuss these matters further.
Respectfully submitted,

Ryan D. Foster
Manager, SIFMA
Office of General Counsel

Lourdes Gonzalez
Page 6 of 6
January 11, 2011
cc:

James H. Freis, Jr. Director, FinCEN
Jamal L. El-Hindi, Associate Director, FinCEN
John Fahey, U.S. Securities and Exchange Commission

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3A0c7e0c90d298430b. Public record. Not legal advice.