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BDs Must Implement Beneficial Ownership Due Diligence by May

Pursuant to recent FINRA guidance, broker-dealers will have until May 11, 2018 to amend their Anti-Money Laundering programs to include risk-based procedures for conducting ongoing customer due diligence as required FinCEN’s Customer Due Diligence Rule.  Most significantly, BDs must identify the beneficial owner of each account and implement risk-based procedures for verifying customer identities.  FINRA and FinCEN will allow firms to obtain such information by using FinCEN’s standard certification form.  FINRA calls this beneficial ownership requirement the “fifth pillar” of a required AML program, which must also include reasonable policies and procedures, independent testing, a designated AML officer, and ongoing training.

OUR TAKE: Next May might seem like a long way off, but the work required to implement this fifth pillar will be significant.  We recommend following FINRA’s guidance and using the FinCEN form as a starting point.

https://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-17-40.pdf

Underwriter Failed to Conduct Due Diligence

A municipal underwriter was fined and censured, and its principal was suspended from the industry, for failing to conduct adequate due diligence.  The public disclosure documents for the bond offerings at issue made misrepresentations about compliance with Continuing Disclosure Agreements.  The SEC faults the underwriter for failing to conduct due diligence to determine the (in)accuracy of those misrepresentations, including its failure to check the Electronic Municipal Market Access website maintained by the MSRB.  As a result, the underwriter violated several provisions of the securities laws by failing “to form a reasonable basis for believing in the truthfulness of the [issuer’s] assertions that [it] had complied with its prior CDAs.”

OUR TAKE: Market participants have an affirmative obligation to conduct due diligence on issuers and their disclosure statements.  This obligation applies to underwriters, administrators, lawyers, consultants, and auditors, who, since the Madoff scandal, have found themselves in the regulatory cross-hairs as market watchdogs.

https://www.sec.gov/litigation/admin/2017/33-10405.pdf