We have updated this post! We are leaving this post up as to not disturb any saved links; however, please visit our more recent post, Customer Identification Program (CIP): Definitions and Requirements, for current information on the topic.
[Continued from Customer Identification Program (CIP) – Part I]
The CIP rule defines an account as a formal relationship with a broker-dealer established to effect transactions in securities. These transactions may include, but are not limited to: purchasing or selling securities; loaning and borrowing securities; and holding securities (or other assets) as safekeeping or collateral. This definition does have two exclusions, though.
An account that the broker-dealer acquires through any acquisition, merger, purchase of assets, or assumption of liability does not count as an “account” because customers don’t initiate these transfers, and, therefore, don’t fall within the scope of Section 326 of the USA Patriot Act. Section 326 of the USA PATRIOT Act is the final rule issued by the U.S. Department of Treasury and the Securities and Exchange Commission outlining the minimum requirements for CIP procedures as outlined above. The definition of account also excludes an account opened for the purpose of participating in an employee benefits plan that was established under the Employee Retirement Income Security Act of 1974 (ERISA).
For the purposes of the CIP rule, a customer is either a person opening a new account, a person opening a new account for someone who lacks the legal capacity to do so, or a person opening a new account for an entity that is not a legal person. It does not refer to the person who fills out the account opening paperwork or who provides the required information to set up an account, unless said person is also the accountholder.
The Financial Crimes Enforcement Network (FinCEN) further clarified that, for CIP purposes, a fully-disclosed introduced account is not a customer of the clearing firm – as long as the firms enter into a clearing agreement where the functions of opening and approving customer accounts, and of directly receiving and accepting orders from the introduced customer, are allocated exclusively to the introducing firm; and, as long as the functions of extending credit, safeguarding funds and securities, and issuing confirmations and statements are allocated to the clearing firm. However, a best laptop under 500 dollarsclearing firm must still do due diligence in identifying, monitoring, and reporting suspicious activities of its introducing brokers and introduced accounts.
Broker-dealers are generally not required to look at the beneficiaries of a trust or similar account – they must only verify the identity of the named accountholder. Broker-dealers are also generally not required to look at the beneficial owners of an omnibus account that was established by an intermediary, as long as the intermediary is identified as the accountholder. However, AML compliance programs are risk-based: if an account if determined to be higher risk, more information may be required, even from beneficiaries of trust or omnibus accounts.
A firm may be able to rely on another financial institution for some or all of the parts of the firm’s CIP. A firm’s CIP procedures may specify when the broker-dealer will rely on another financial institution (including an affiliate) to perform any procedures of the broker-dealer’s CIP; this specification must be in respect to a customer of the broker-dealer that is opening or has established an account (or similar business relationship) with the other financial institution to provide services, dealings, or other financial transactions.
To rely on another financial institution, a broker-dealer must establish that the reliance is reasonable under the circumstances. The other financial institution must implement the AML compliance program requirements established by the BSA, as well as being regulated by a Federal functional regulator. And the other financial institution must contractually agree to annually certify to the broker-dealer that they have implemented their own AML program and that they are performing (or having an agent perform) any specific requirements of the broker-dealer’s CIP. If a broker-dealer does not provide a standard means of documenting the amount that it is relying on another financial institution to perform its CIP, the broker-dealer will remain solely responsible for any failure of the other financial institution to adequately fulfill the broker-dealer’s CIP responsibilities.
For more information on AML Compliance Programs, please see our other blogs on the subject. For more information about customer information verification, please see
- FINRA’s Customer Identification Program Notice;
- the Joint Guidance on Obtaining and Retaining Beneficial Ownership Information;
- the Guidance from the Staffs of the Department of the Treasury and the U.S. Securities and Exchange Commission, October 1, 2003;
- SIFMA’s suggested due diligence practices for hedge funds;
- NASD Notice to Members 02-80, fn.5;
- And NASD Notice to Members 06-07.