On May 11, 2016, the Financial Crimes Enforcement Network (FinCEN) issued its final rules to strengthen the customer due diligence requirements for covered financial institutions. Broker-dealers are deemed a “covered financial institution” and therefore must comply with the new rules, which includes a requirement to verify the identity of certain beneficial owners of legal entity customers (for example, corporations, partnerships, trusts). This beneficial ownership requirement, as it is called, becomes effective May 11, 2018. We provide an overview of the new requirement through a series of Questions & Answers (Q&As).

1.     Who Is Considered a Beneficial Owner of a Legal Entity Customer?

“Beneficial owner” is a defined term. Only certain individuals who own or control a legal entity are a “beneficial owner” for purposes of the beneficial ownership requirement. There are two ways for an individual to be deemed a beneficial owner. The first is, not surprisingly, through ownership; the second is through control.

2.     Who Is a Beneficial Owner Based on Ownership?

Each individual who owns, directly or indirectly, 25 percent or more of the legal entity customer is a beneficial owner. A broker-dealer must identify each individual whose ownership equals or exceeds 25 percent. Because an individual could be a beneficial owner based on indirect ownership, a broker-dealer may find that it needs to look through several levels of legal entities to identify any individuals who indirectly own 25 percent or more of a legal entity customer.

3.     Who Is a Beneficial Owner Based on Control?

Whereas a broker-dealer must identify each individual who is a beneficial owner based on ownership, a broker-dealer must identify only a single individual who is a beneficial owner based on control. For purpose of identifying an individual with control, “beneficial owner” means a single individual with significant responsibility to control, manage, or direct a legal entity customer, including:

  • an executive officer or senior manager (for example, a Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Managing Member, General Partner, President, Vice President, or Treasurer); or
  • any other individual who regularly performs similar functions.

4.     Are There Special Requirements for Accounts of Intermediaries?

A broker-dealer must identify the intermediary’s underlying clients (for example, the investors in an omnibus account) only if such clients are deemed customers of the broker-dealer for CIP purposes.

5.     Must a Broker-Dealer Maintain Written Procedures for Identifying Beneficial Owners?            

Yes. A broker-dealer’s anti-money laundering program must include written procedures reasonably designed to identify and verify beneficial owners of legal entity customers at the time a new account is opened.

Concluding Thoughts

We prepared these Q&As to introduce you to the new beneficial ownership requirements. In a subsequent blog post, we will build on this introduction by discussing some technical aspects, such as exemptions and exclusions.

For more topics related to broker/dealers, our previous blogs are great places to start.