The guidance clarifies the CIP and BO requirements applicable to introducing brokers (IBs) under the Bank Secrecy Act (BSA). The guidance provides regulatory clarity to certain IBs who lack access to the information n...

Summary: The guidance clarifies the CIP and BO requirements applicable to introducing brokers (IBs) under the Bank Secrecy Act (BSA). The guidance provides regulatory clarity to certain IBs who lack access to the information needed to comply with CIP and BO obligations. The guidance eliminates duplicative efforts without impacting money laundering or terrorist financing risk, as the customer due diligence obligations will continue to be performed by the futures commission merchant (FCM) that carries the customer account. The particular IBs subject to this guidance do not introduce their customers’ accounts to FCMs. The IBs do not receive or have access to the customer identification and financial information obtained by FCMs, or the monthly account information issued by FCMs. This guidance clarifies that these IBs are not required to carry out CIP and comply with BO requirements.

CFTC Letter No. 19-18 Interpretative July 22, 2019

Division of Swap Dealer and

Matthew B. Kulkin

Intermediary Oversight

Director

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5000

Re:

Interpretive Guidance Regarding Voice Broker Customer Identification

Program and Beneficial Ownership Rule Requirements

Ladies and Gentlemen:

The Division of Swap Dealer and Intermediary Oversight (DSIO) of the U.S.

Commodity Futures Trading Commission (Commission or CFTC) is issuing this

interpretive guidance to clarify the obligations of a certain subset of entities

operating as Introducing Brokers (IBs) in commodities under the Customer

Identification Program (CIP)1 and Beneficial Ownership (BO) regulations issued

under the Bank Secrecy Act (BSA).2 The Financial Crimes Enforcement Network

(FinCEN), a bureau of the U.S

Trading Commission (Commission or CFTC) is issuing this

interpretive guidance to clarify the obligations of a certain subset of entities

operating as Introducing Brokers (IBs) in commodities under the Customer

Identification Program (CIP)1 and Beneficial Ownership (BO) regulations issued

under the Bank Secrecy Act (BSA).2 The Financial Crimes Enforcement Network

(FinCEN), a bureau of the U.S. Department of Treasury, exercises delegated

authority to implement, administer and enforce compliance with the Bank Secrecy

Act and its associated regulations. The CFTC exercises examination authority

under the Bank Secrecy Act and joint authority with respect to the promulgation of

the CIP Rule. In consultation with FinCEN, DSIO issues this guidance to clarify the

applicability of CIP and BO requirements to voice brokers, which became subject to

IB registration under the Dodd-Frank Wall Street Reform and Consumer

Protection Act.3 Specifically, an IB that is registered with the CFTC and is a

member of NFA that does not introduce an account to a Futures Commission

Merchant (FCM), does not have customers or accounts for the purposes of the CIP

Rule. An IB that has neither customers nor accounts as defined under the CIP Rule

has no obligations under the CIP Rule, and it likewise has no obligations under the

BO Rule. This guidance does not establish any new regulatory requirements;

1 31 CFR § 1026.220 (hereinafter CIP Rule).

2 31 CFR § 1010.230 (hereinafter BO Rule).

3 Dodd Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010)

(“Dodd-Frank Act”). The Dodd-Frank Act regulatory framework revised the IB definition in the CEA to

include persons engaged in soliciting or accepting orders for the purchase or sale of swaps. This revision

resulted in the registration as IBs of persons that broker swap transactions in the over-the-counter

markets that previously did not have to register.

, 124 Stat. 1376 (2010)

(“Dodd-Frank Act”). The Dodd-Frank Act regulatory framework revised the IB definition in the CEA to

include persons engaged in soliciting or accepting orders for the purchase or sale of swaps. This revision

resulted in the registration as IBs of persons that broker swap transactions in the over-the-counter

markets that previously did not have to register.

VOICE BROKERS: INTERPRETIVE GUIDANCE

Page 2

rather, it clarifies a particular set of circumstances under which CIP and BO

requirements do not apply.

I.

Regulatory Background

The BSA4 authorizes the Secretary of the Treasury (the Secretary) to issue

regulations requiring financial institutions (FIs) to keep records and file reports.5

The authority of the Secretary to administer the BSA has been delegated to the

Director of FinCEN.6 Section 5318(h) of the BSA requires FIs to establish anti-

money laundering (AML) programs and specifies that these programs must

contain certain minimum requirements.7 Section 1010.100 of FinCEN’s regulations

defines IBs as FIs.8 Therefore, IBs are required to establish AML programs under

section 5318(h) of the BSA. FinCEN regulations also require that IBs, among other

obligations, establish AML programs that address the CIP Rule and BO Rule.9

Commission regulation 42.2, which was issued under the authority of the CFTC to

jointly issue the CIP Rule, sets forth the obligation of IBs to comply with the CIP

Rule. Specifically, every IB is required to comply with the applicable provisions of

the BSA, the FinCEN regulations promulgated thereunder, and the requirements of

31 U.S.C. 5318(l) and 31 CFR 1026.220, which require that CIP be adopted as part

of the firm’s BSA compliance program.10

An Introducing Broker in commodities is defined in both the CIP Rule

11 and BO

Rule12 as “any person registered or required to be registered as an introducing

broker with the CFTC under the Commodity Exchange Act [CEA] (7 U.S.C

ulgated thereunder, and the requirements of

31 U.S.C. 5318(l) and 31 CFR 1026.220, which require that CIP be adopted as part

of the firm’s BSA compliance program.10

An Introducing Broker in commodities is defined in both the CIP Rule

11 and BO

Rule12 as “any person registered or required to be registered as an introducing

broker with the CFTC under the Commodity Exchange Act [CEA] (7 U.S.C. 1 et

seq.), except persons who register pursuant to Section 4f(a)(2) of the Commodity

4 The BSA is codified at 12 U.S.C. § 1892b, 12 U.S.C. § 1951 et seq. 31 U.S.C. § 5311 et seq.

5 31 U.S.C. § 5311.

6 See Treasury Order 180-01 (Sept. 26, 2002).

7 Section 5318(h)(1) identifies these minimum requirements as follows: In order to guard against

money laundering through financial institutions, each financial institution shall establish AML programs,

including, at a minimum—(A) the development of internal policies, procedures, and controls; (B) the

designation of a compliance officer; (C) an ongoing employee training program; and (D) an independent

audit function to test programs.

8 31 CFR § 1010.100(t)(9).

9 31 CFR § 1026.210.

10 17 CFR § 42.2.

11 31 CFR § 1026.100(g).

12 31 CFR § 1010.100(bb).

VOICE BROKERS: INTERPRETIVE GUIDANCE

Page 3

Exchange Act (7 U.S.C. 6f(a)(2)).” The Dodd-Frank Act revised the IB definition in

the CEA to include persons engaged in soliciting or accepting orders for the

purchase or sale of swaps. This revision has resulted in the registration as IBs of

persons that historically brokered swap transactions without having to register.13

Traditional IBs “introduce” their customers to FCMs that carry their customers’

accounts. Such IBs solicit or accept orders for commodity futures contracts, options

on futures contracts, and commodity options as well as solicit customers for

referral to an FCM for the institution of a trading relationship

of

persons that historically brokered swap transactions without having to register.13

Traditional IBs “introduce” their customers to FCMs that carry their customers’

accounts. Such IBs solicit or accept orders for commodity futures contracts, options

on futures contracts, and commodity options as well as solicit customers for

referral to an FCM for the institution of a trading relationship.

DSIO understands that there are registered IBs that operate differently from

traditional IBs, in that they do not “introduce” customers to the FCMs that carry

their customers’ accounts. Rather, transacting parties, often through their

independent efforts, establish or have already established accounts with the

carrying FCMs. An IB that works with such a transacting party may not have a

direct and formal relationship with any FCM that carries the transacting party’s

accounts. Where such a relationship does not exist, the IB will obtain a license

enabling it to directly enter orders into the electronic order system of a designated

contract market (DCM) on behalf of the transacting party. The transacting party

then gives permission to the IB to electronically enter orders on its behalf. In such

an instance, the IB does not receive or have access to the transacting party’s

records or account statements, and invoices the transacting party directly for

payment of commissions owed regarding the order.14

II.

Application of CIP Rule

The CIP Rule applicable to FCMs and IBs requires the implementation of a written

CIP that “must include risk-based procedures for verifying the identity of each

customer” and “must include procedures for opening an account that specify

identifying information that will be obtained from each customer.”15 For purposes

of the CIP Rule, account is defined as a formal relationship with an FCM. This

definition is silent as to IBs.16 Customer is defined as one opening an account with

13 An IB is defined under the CEA (7 U.S.C

st include procedures for opening an account that specify

identifying information that will be obtained from each customer.”15 For purposes

of the CIP Rule, account is defined as a formal relationship with an FCM. This

definition is silent as to IBs.16 Customer is defined as one opening an account with

13 An IB is defined under the CEA (7 U.S.C. § 1a(31)) as any person (except an individual who elects to

be and is registered as an associated person of an FCM) who is registered with the CFTC as an IB, or

any person who is engaged in soliciting or in accepting orders for: (1) the purchase or sale of any

commodity for future delivery, security futures product, or swap; (2) any agreement, contract, or

transaction described in § 2(c)(2)(C)(i) or § 2(c)(2)(D)(i) of the CEA; (3) any commodity option

authorized under section 4c of the CEA; or (4) any leverage transaction authorized under section 19 of

the CEA; and, does not accept any money, securities, or property (or extend credit in lieu thereof) to

margin, guarantee, or secure any trades or contracts that result or may result therefrom.

14 IBs operating in this manner are often referred to as “voice brokers.”

15 31 CFR § 1026.220(a)(1)-(2).

16 31 CFR § 1026.100(a)(1).

VOICE BROKERS: INTERPRETIVE GUIDANCE

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an FCM for itself or another (if an individual lacking legal capacity or an entity that

is not a legal person).17 This definition further states that “[w]hen an account is

introduced to a futures commission merchant by an introducing broker, the person

or individual opening the account shall be deemed to be a customer of both” the

FCM and IB.18 Based on the application of the regulatory text to these

circumstances, an IB only has a customer for the purpose of the CIP Rule if the IB

introduces the account in question, as opposed to the account having been

established directly at the FCM through the transacting party’s independent efforts

on

or individual opening the account shall be deemed to be a customer of both” the

FCM and IB.18 Based on the application of the regulatory text to these

circumstances, an IB only has a customer for the purpose of the CIP Rule if the IB

introduces the account in question, as opposed to the account having been

established directly at the FCM through the transacting party’s independent efforts.

If this condition is not met, i.e., if an IB operates solely in a manner such that it

does not introduce an account to an FCM, that IB has neither customers nor

accounts for the purposes of the CIP Rule.

The CIP Rule sets forth the minimum elements required to be contained in a CIP.

These elements address the application of CIP explicitly to customers and/or

accounts.19 Based on the application of these provisions of the CIP Rule to these

circumstances, an IB that does not introduce an account to an FCM does not have

customers or accounts for the purposes of the CIP Rule, therefore does not have

obligations under these provisions of the CIP Rule.

An IB that does not introduce an account to an FCM would have no occasion to

implement a CIP, given that it lacks both customers and accounts under the CIP

Rule. Therefore, DSIO hereby clarifies, in consultation with FinCEN, that if an IB

has neither customers nor accounts as defined under the CIP Rule, it is not

required to maintain a written CIP under § 1026.220(a)(1). To interpret the CIP

Rule otherwise would produce a result inconsistent with the purpose of the CIP

Rule by requiring an entity to maintain written procedures that are inapplicable to

its current activities and that it has no expectation of ever having to apply.

III

her customers nor accounts as defined under the CIP Rule, it is not

required to maintain a written CIP under § 1026.220(a)(1). To interpret the CIP

Rule otherwise would produce a result inconsistent with the purpose of the CIP

Rule by requiring an entity to maintain written procedures that are inapplicable to

its current activities and that it has no expectation of ever having to apply.

III.

Application of BO Rule

In consultation with FinCEN, and based upon the rationale of FinCEN, set forth

below, DSIO hereby clarifies that if an IB has neither customers nor accounts as

defined under the CIP Rule, it therefore has no obligations under the CIP Rule, and

it likewise has no obligations under the BO Rule (footnotes omitted):

17 31 CFR § 1026.100(d).

18 31 CFR § 1026.100(d)(3).

19 See, e.g., 31 CFR § 1026.220(a)(2) [“CIP must include risk-based procedures for verifying the identity

of each customer....”]; 31 CFR § 1026.220(a)(3)(i)(A) [CIP recordkeeping must include “All identifying

information about a customer....”]; 31 CFR § 1026.220(a)(4) [“The CIP must include procedures for

determining whether a customer appears on any list of known or suspected terrorists or terrorist

organizations....”]; 31 CFR § 1026.220(a)(S) [CIP must provide customers adequate notice].

VOICE BROKERS: INTERPRETIVE GUIDANCE

Page 5

The BO Rule clarified and strengthened due diligence

requirements for certain financial institutions (including IBs) by

imposing requirements for these financial institutions to identify

and verify the identity of beneficial owners of legal entity

customers

tions....”]; 31 CFR § 1026.220(a)(S) [CIP must provide customers adequate notice].

VOICE BROKERS: INTERPRETIVE GUIDANCE

Page 5

The BO Rule clarified and strengthened due diligence

requirements for certain financial institutions (including IBs) by

imposing requirements for these financial institutions to identify

and verify the identity of beneficial owners of legal entity

customers. In the BO Rule a legal entity customer is defined as

“a corporation, limited liability company, or other entity that is

created by the filing of a public document with a Secretary of

State or similar office, a general partnership, and any similar

entity formed under the laws of a foreign jurisdiction that opens

an account,.” Although most of the provisions of this definition

focus on the “legal entity” portion of the defined term, the

definition explicitly states that a legal entity customer is a legal

entity “that opens an account.”

The definition of account in the BO Rule incorporates by

reference the definitions of account used in the CIP Rule for all

covered financial institutions, which for FCMs and IBs is 31 CFR

§ 1026.100(a). Although the policies and procedures for

identification and verification under the BO Rule need not be

identical to those adopted under the CIP Rule, they “must

contain all the elements of the applicable CIP Rule.” FinCEN

developed the BO Rule framework in this manner in order to,

among

other

things,

“facilitate

financial

institutions’

implementation of the requirement through leveraging existing

[CIP] procedures and systems.”

As described above, the specific condition under which an IB has

CIP Rule obligations (i.e., the introduction of an account) is

contained in the definition of customer. This same language

does not appear in the BO Rule's definition of legal entity

customer. However, the BO Rule defines legal entity customer

as one who opens an account, and explicitly ties the definition of

account to that which applies to the CIP Rule

cific condition under which an IB has

CIP Rule obligations (i.e., the introduction of an account) is

contained in the definition of customer. This same language

does not appear in the BO Rule's definition of legal entity

customer. However, the BO Rule defines legal entity customer

as one who opens an account, and explicitly ties the definition of

account to that which applies to the CIP Rule. Reading the CIP

Rule and BO Rule together requires that only those IBs subject

to obligations under the CIP Rule be subject to obligations under

the BO Rule. To interpret otherwise in the circumstances

addressed in this guidance would put an IB which does not

introduce accounts in the impossible situation where it was

required to identify the beneficial owner of a purported

customer, but not to identify the purported customer itself.

VOICE BROKERS: INTERPRETIVE GUIDANCE

Page 6

IV.

DSIO Interpretative Guidance

In arriving at the conclusions in this guidance, DSIO has relied upon its

understanding of how the IBs described herein operate. Nothing precludes DSIO

from arriving at a different conclusion regarding how the CIP Rule or BO Rule apply

to an entity operating in a manner different from that specifically described herein.

This guidance represents the views of DSIO only, and does not necessarily represent the

position or view of the Commission or of any other office or division of the Commission.

Persons may rely upon this guidance strictly for the purposes of compliance with the

CIP Rule and BO Rule. Further, this guidance is based upon the representations made

to DSIO. Any different, changed, or omitted material facts or circumstances might

render this guidance void.

Questions concerning the relief in this letter may be directed to Andrew Chapin,

Associate Chief Counsel, DSIO at (202) 418-5465 or achapin@cftc.gov; Helene

Schroeder, Special Counsel, DSIO at (202) 418-5424 or hschroeder@cftc.gov; or Scott

Lee, Special Counsel, DSIO at (202) 418-5090 or slee@cftc.gov

ent, changed, or omitted material facts or circumstances might

render this guidance void.

Questions concerning the relief in this letter may be directed to Andrew Chapin,

Associate Chief Counsel, DSIO at (202) 418-5465 or achapin@cftc.gov; Helene

Schroeder, Special Counsel, DSIO at (202) 418-5424 or hschroeder@cftc.gov; or Scott

Lee, Special Counsel, DSIO at (202) 418-5090 or slee@cftc.gov.

Very truly yours,

_______________________

Matthew B. Kulkin

Director

Division of Swap Dealer and Intermediary Oversight

cc:

Regina Thoele, Compliance

National Futures Association, Chicago

Yvette Christman, Registration

National Futures Association, Chicago