Welcome to the Regulatory Roundup. Each month, Eversheds Sutherland Investment Services attorneys review significant regulatory developments (including notable rulemakings and guidance from securities regulators) from the previous month that are of interest to retail broker-dealer and investment adviser firms.
SEC Staff Extend No-Action Relief Allowing Broker-Dealers to Rely on Investment Advisers for Anti-Money Laundering Compliance
- On December 5, the SEC’s Division of Trading and Markets again extended no-action relief (No-Action Relief) for broker-dealers who rely on registered investment advisers (RIAs) to perform some or all of their anti-money laundering (AML) obligations under the Bank Secrecy Act’s (BSA) customer identification program (CIP) rule and/or the portion of the customer due diligence rule regarding beneficial ownership requirements for legal entity customers. The no-action letter was initially issued in 2004 and has been extended several times since.
- As background, the CIP rule recognizes that there may be situations where a firm can depend on another financial institution to perform some or all elements of its CIP. However, for a broker-dealer to rely on another financial institution, that institution, among other things, must be subject to a rule enforcing the AML requirements under the BSA. Since investment advisers are not subject to AML requirements under the BSA (for now), the No-Action Relief is essential for broker-dealers to be able to rely on RIAs for purposes of the CIP rule and the due diligence rule regarding beneficial ownership requirements for legal entity customers.
- On August 28, 2024, FinCEN issued a new rule to include RIAs in the definition of “financial institutions” under the BSA (IA AML Rule). The compliance effective date for the IA AML Rule is January 1, 2026, at which time the No-Action Relief will expire.
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SEC Publishes Risk Alert Regarding Municipal Advisors
- On December 9, the SEC’s Division of Examinations published a Risk Alert to help municipal advisors better understand the Division’s examination process and prepare for an examination. The Risk Alert provides information regarding what Division staff may consider when selecting firms to examine, and areas of focus for the examination. It also provides the types of information, including documents, that staff may initially request during an examination of a municipal advisor and includes a Sample Initial Information Request List.
- Regarding selecting municipal advisors to examine, the Division notes that it considers risk factors related to a particular municipal advisor’s business activities and regulatory history, including, among other things, its prior examination history, supervisory concerns, the firm’s client base and activity level, and the services offered by the firm.
- Regarding selecting examination focus areas, the Division notes that the scope of an examination differs from firm to firm depending on the particular firm’s business model, associated risks, and the Division’s reasons for conducting the examination.
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FINRA Provides Guidance Regarding Unexpected Closures of the Securities Markets
- On December 31, FINRA issued Regulatory Notice 24-18, which provides updated guidance to members on compliance with regulatory requirements in the event of an unexpected market closure. The Notice, issued in the wake of the death of former President of the United States Jimmy Carter, provides guidance as to the circumstances under which the day of an unexpected closure should be considered a regular business day versus a nonbusiness day for purposes of key financial, operational, and reporting rules.
- FINRA notes that the Notice was put together with the assistance of staff from the SEC and the Federal Reserve.
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Texas Federal Court Issues a Temporary Injunction Against the Corporate Transparency Act
- On December 3, 2024, the US District Court for the Eastern District of Texas (District Court) granted a nationwide preliminary injunction in favor of certain small businesses, ruling that: (1) the Corporate Transparency Act (CTA) is likely unconstitutional and should not be enforced; and (2) beneficial ownership information reports are no longer required to be filed by the January 1, 2025 filing deadline.
- A few weeks later, in mid-December, a three-judge Fifth Circuit panel stayed the injunction pending an appeal of the District Court’s order filed by the Financial Crimes Enforcement Network (FinCEN), saying the CTA was “likely constitutional on its face.” However, just a few days after that ruling, a larger Fifth Circuit panel vacated its prior order and reinstated the preliminary injunction pending the resolution of FinCEN’s appeal.
- On December 31, the US Justice Department filed an application with the United States Supreme Court asking for a stay of the nationwide injunction. To date, there has been no indication of how quickly the Supreme Court will rule. As of now, FinCEN is not able to enforce the CTA.
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