We are always looking to identify good forums for keeping abreast of global fintech developments and trends. One such interesting platform was Cross-Border Fintech: Regulation & the Law 2019, held in London on June 6, where we heard some great insights into the current market trends in and the future of fintech. The conference was well attended, with representatives of many industry leaders, authorities, and industry bodies in attendance. The participation of many on the front lines of fintech from financial institutions, fintech startups, and industry bodies created a forum to share innovative ideas and trends that allowed participants—including us—to keep up with the latest innovation.

Practitioners, academics, and entrepreneurs joined SEC regulators at the 2019 FinTech Forum hosted by the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub) on May 31 in Washington, DC. Panelists discussed a range of considerations on digital assets, including capital formation, trading and markets, investment management, and innovations in distributed ledger technology (DLT). In keeping with a positive trend that has emerged among the federal financial regulatory agencies, the forum demonstrated the SEC’s desire for industry engagement and the depth of its knowledge in the emerging technology.

Two years ago, we wondered in our blog post whether the staff of the US Securities and Exchange Commission (SEC) would have to further extend no-action relief to permit a broker-dealer to rely on an SEC registered investment adviser (RIA) to perform the broker-dealer’s customer identification program (CIP) requirements. And . . . here we are.

On December 12, the SEC staff issued the latest in a series of letters to the Securities Industry and Financial Markets Association (SIFMA). The letters conditionally extend no-action relief to allow a broker-dealer to rely on RIAs to perform some or all of the broker-dealer’s CIP requirements as well as the broker-dealer’s obligations under beneficial ownership requirements that went into full effect in May 2018.

As we have been reporting, cryptocurrency, as an asset class, is currently taking the world financial markets by storm. Total market capitalization of cryptocurrency is estimated to be in the hundreds of billions of dollars and new initial coin offerings (ICOs) seem to crop up every other day, while the United States and other countries' governments have been left scrambling to figure out how to best regulate this new asset class and protect market participants and end users.

The US Securities and Exchange Commission (SEC) has been a leader in taking affirmative steps toward exercising some oversight of the fragmented cryptocurrency market. On January 18, the SEC’s Division of Investment Management published a staff letter detailing some of the Commission’s concerns about how cryptocurrency-related products will comply with the Investment Company Act of 1940, including specific issues relating to valuation, liquidity, custody, arbitrage, and potential manipulation.

US Attorney General Jeff Sessions has just issued a memorandum (AG Memo) rescinding prior US Department of Justice (DOJ) guidance on the federal prosecution of marijuana offenses, including the 2013 “Cole Memorandum” (Cole Memo) and subsequent guidance regarding marijuana-related financial crimes (Financial Crimes Memo). The Cole Memo, among other things, expressly acknowledged the legalization of marijuana in several states for medical and recreational purposes and directed federal prosecutors to focus their enforcement priorities and resources on activities that align with current DOJ enforcement priorities. In turn, these priorities emphasized the prevention of marijuana-related activities posing the most significant threats to public safety and welfare (such as preventing the sale of marijuana to minors, or preventing marijuana sales from benefiting criminal enterprises). The Cole Memo in substance encouraged federal prosecutors to take a “hands-off” approach on the prosecution of “low level” marijuana-related offenses in those states that have legalized in some form the possession or use of marijuana for medical or recreational purposes. The subsequent Financial Crimes Memo carried forward the Cole Memo principles to the prosecution of banks and other financial institutions participating in marijuana-related banking and financial activities.

On December 12, the staff of the US Securities and Exchange Commission (SEC) issued the latest in a series of letters to the Securities Industry and Financial Markets Association (SIFMA). The letters conditionally extend no-action relief that allows broker-dealers to rely fully on SEC-registered investment advisers (RIAs) to perform some or all of the broker-dealers’ Customer Identification Program (CIP) obligations under federal anti-money laundering (AML) requirements. The SEC extended the no-action relief for the earlier of (i) two years (December 18, 2018) or (ii) such time that RIAs become subject to an AML program rule.

Although the extension of relief applying to broker-dealers’ CIP obligations is not new, in this newest iteration of the letter, the staff also extended no-action relief to permit broker-dealers to rely on RIAs to perform the portion of the customer due diligence rule regarding the recently adopted beneficial ownership requirements for legal entity customers (31 C.F.R. § 1010.230) (Beneficial Ownership Requirements). In submitting the request this year, SIFMA asked the SEC staff to apply the principles underlying the CIP no-action position to the Beneficial Ownership Requirements.

On July 19, the Financial Crimes Enforcement Network (FinCEN), a bureau within the US Department of the Treasury responsible for the Bank Secrecy Act, issued guidance in the form of frequently asked questions (FAQs) regarding its recently adopted customer due diligence requirements (CDD Rule). The FAQs offer a condensed summary of the CDD Rule’s requirements, but FinCEN has missed an opportunity to address an ambiguity in the CDD Rule regarding its application to private investment vehicles.

On May 5, the Financial Crimes Enforcement Network (FinCEN) announced final rules under the Bank Secrecy Act that enhance the customer due diligence obligations of banks, broker-dealers, mutual funds, futures commission merchants, and introducing brokers in commodities (collectively, Covered Financial Institutions). The final rules will become effective 60 days after publication in the Federal Register (publication expected on May 11). The new rules, however, provide for a two-year compliance period, meaning that affected financial institutions will have until May 11, 2018 to come into full compliance.


We expect to publish a more comprehensive overview of the final rules in the coming days. In the meantime, we note that the final rules require Covered Financial Institutions to obtain beneficial ownership information of all legal entity customers (other than certain exempt accounts) for all persons who beneficially own 25% or more of the legal entity customer. Covered Financial Institutions can comply by either obtaining the required information on a standard certification form or by any other means that satisfy the requirements of the rule.

FinCEN also amended the anti-money laundering program rules applicable to Covered Financial Institutions to explicitly include risk-based procedures for conducting ongoing customer due diligence to better allow for understanding the nature and purpose of customer relationships in developing customer risk profiles.

Impact on Registered Investment Advisers

Although registered investment advisers (RIAs) are not included as Covered Financial Institutions at this time, we expect that FinCEN will soon propose rules that would apply to RIAs as part of FinCEN’s efforts to bring such entities within its regulatory umbrella. For a discussion of FinCEN’s proposed AML rules for RIAs, please see our September 2015 White Paper “AML Requirements Proposed for SEC Registered Advisers.

Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) instructed six federal financial regulatory agencies—the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board), the Federal Deposit Insurance Corporation (FDIC), the US Securities and Exchange Commission (SEC), the Federal Housing Finance Authority (FHFA), and the National Credit Union Administration (NCUA) (collectively, the Agencies)—to jointly issue rules or guidelines limiting incentive-based executive compensation for certain financial institution senior officers and employees. Such guidelines must (1) prohibit incentive-based payment arrangements that the Agencies determine encourage inappropriate risks by providing excessive compensation or that could lead to a material financial loss and (2) require “covered financial institutions” (in general, financial institutions with $1 billion or more in total assets) to disclose information regarding the structure of their incentive-based compensation arrangements to their federal regulator.

So far, four of the Agencies (OCC, FDIC, SEC, and NCUA) have approved the proposed rule (Proposed Rule), and the Board and the FHFA are expected to approve the Proposed Rule shortly. The Proposed Rule is actually a reproposal of an April 2011 proposed rule that was never issued in final form, and according to the draft release, reflects the numerous comments on the 2011 proposal as well as experience that the Agencies have gained in applying prior guidance on incentive-based compensation. The Proposed Rule has an effective date of at least 18 months after the final rule is published, and as proposed, would not apply to any incentive-based compensation plan with a performance period that begins before the effective date.

The recent disclosure of the so-called “Panama Papers” has brought customer due diligence of nominee companies into renewed focus. Perhaps coincidentally, the disclosure of these papers comes as the Financial Crimes Enforcement Network (FinCEN) appears to be reaching the homestretch on finalizing its proposed rules that impose enhanced customer due diligence requirements on financial institutions. On April 13, FinCEN submitted a final version of the rule to the Office of Management and Budget (OMB) for review.

As discussed in our LawFlash FinCEN Proposes to Expand Financial Institution Customer Due Diligence Requirements, the proposed rule’s enhanced customer due diligence requirements would require covered financial institutions to (1) identify and verify the natural persons who are the principal beneficial owners of legal entity customers and (2) codify explicit customer due diligence requirements for covered financial institutions to (a) understand the nature and purpose of customer relationships and (b) conduct ongoing customer monitoring, both of which would become required elements of a core anti-money laundering (AML) program.

Interestingly, on April 8, FinCEN also submitted to OMB for review proposed rules to impose AML programs on banks that do not have a Federal functional regulator. The proposed rule would remove the AML program exemption for banks and similar financial institutions that lack a Federal functional regulator. Banks that could be captured by the proposed rule include private banks, non–federally insured credit unions, and certain trust companies. If eventually finalized, we would expect FinCEN to also impose customer identification program and enhanced due diligence requirements on these banking entities.