A recent interpretation by the CFTC (in consultation with FinCEN) of the customer identification program and beneficial ownership rules specifies that these rules do not apply to nontraditional introducing brokers, or so-called “voice brokers,” but does not provide guidance on whether traditional introducing brokers may rely on the interpretation when engaged in both traditional and nontraditional activities.
The US Commodity Futures Trading Commission’s (CFTC’s) Division of Swap Dealer and Intermediary Oversight (DSIO), in consultation with the US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), clarified in a July 22 interpretation (Interpretation) that the customer identification program (CIP) and beneficial ownership (BO) rules do not apply to introducing brokers (IBs) that do not introduce accounts to futures commission merchants (FCMs). Although the Interpretation provides clarity to those IBs that operate solely as so-called “voice brokers,” it is unclear how the Interpretation applies to traditional IBs that also may act as voice brokers in some instances.
Introducing Brokers Without ‘Customers’ and ‘Accounts’
In a typical IB and FCM relationship, the IB introduces its customers to the FCM that carries the customers’ accounts. Further, the IB solicits or accepts orders for commodity futures contracts, options on futures contracts, and commodity options as well as solicits customers for referral to an FCM for the institution of a trading relationship. After the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the definition of IB to include persons engaged in soliciting or accepting orders for the purchase or sale of swaps, voice brokers traditionally outside the scope of registration requirements were required to register as IBs. Voice brokers’ customers (referred to as transacting parties in the Interpretation) independently establish accounts with carrying FCMs. As a result, a voice broker that works with such a transacting party may not have a direct and formal relationship with the FCM that carries the transacting party’s accounts. In this case, a voice broker may arrange to directly enter orders into the electronic order system of an exchange on behalf of the transacting party. Under these circumstances, according to the Interpretation, a voice broker does not receive or have access to the transacting party’s records or account statements, and invoices the transacting party directly for commission payments it is owed regarding the order.
Anti-Money Laundering Framework
As a “financial institution” under the Bank Secrecy Act, an IB is required to establish an anti-money laundering program that addresses the CIP and beneficial ownership rules. The CIP rule requires an IB to implement a written CIP with risk-based procedures for verifying the identity of each customer, including procedures for opening an account that specify the identifying information that will be obtained from each customer. Although the CIP rule defines “account” as a formal relationship with an FCM, the definition is silent with respect to IBs. The rule defines “customer” as one opening an account with an FCM for itself or another, and when an IB introduces an account to an FCM, the person opening the account is deemed to be a customer of both the FCM and the IB.
Certain Nontraditional IBs Are Not Required to Maintain a Written CIP
Based on the regulatory framework, an IB only has a customer for the purpose of the CIP rule if the IB introduces the account at issue rather than the transacting party independently establishing the account directly at the FCM. If an IB does not introduce an account to an FCM, the IB does not have customers or accounts for purposes of the CIP rule. The Interpretation states that an IB with “neither customers nor accounts” (a nontraditional IB) is not required to maintain a written CIP under FinCEN Regulation 1026.220(a)(1).
Nontraditional IBs Are Not Subject to Beneficial Ownership Regulations
The BO rule imposes the requirement that a financial institution (including an IB) verify the identity of beneficial owners of legal entity customers, and requires that an IB’s beneficial ownership policies and procedures contain all of the elements of the applicable CIP rule to leverage existing procedures. A legal entity customer is a legal entity that “opens an account” and refers to the definition of account that applies to the CIP rule. The Interpretation explains that reading the CIP and BO rules together requires that only IBs subject to the CIP rule must be subject to the BO rule’s obligations. Otherwise, a nontraditional IB would be in “the impossible situation where it was required to identify the beneficial owner of a purported customer, but not to identify the purported customer itself.” Accordingly, the Interpretation provides nontraditional IBs with relief from the BO rule.
The Interpretation states that it applies solely to nontraditional IBs. However, in practice, IBs can have traditional arrangements with FCMs as well as the nontraditional arrangements described in the Interpretation. In this regard, the Interpretation does not explain whether a traditional IB may rely on the Interpretation to avoid applying its CIP and BP rule programs to its “customers” that are part of its nontraditional business. This is significant because the reasoning that supports a nontraditional IB’s noncompliance with the CIP and BO rules in connection with voice broker activities should apply just as equally to those same activities if engaged in by a traditional IB.
The Interpretation is self-executing, effective immediately, and not time limited. Therefore, nontraditional IBs may rely on the guidance for relief from the CIP and BO regulations. Although the Interpretation states that it is not imposing any new regulatory obligations, as a best practice, nontraditional IBs relying on the relief may want to consider including a record of reliance on the Interpretation in relationship or other account-opening documentation.