Chapter 14

AML programs required by the USA Patriot Act

- Policies, procedures and internal controls reasonably designed to achieve compliance with the BSA and its rules - Policies and procedures that can reasonably be expected to detect and cause the reporting of suspicious transactions - Ongoing AML employee training, which generally requires annual training for persons designated by the firm FINRA rules require that a firms AML program, and any subsequent changes, be approved in writing by a member of senior management

Maintaining an Account with another broker dealer

- a registered rep must obtain PRIOR written consent from his or her employer before opening an account and, - notify the opening firm of his association with the employing member PRIOR to opening the account - If a registered representative joins a new firm, to maintain securities accounts open at other financial institutions, written consent from the new employer must be obtained within 30 calendar days of association with the new firm - The opening firm - the firm opening the account - must send duplicate copies of account statements and trade confirmations upon written request from the employer

Institutional Communications

- include any written or electronic communications distributed or made available exclusively to institutional investors. These require SUPERVISION and SPOT Checks but not approval prior to first use

Insider Trading Act

-requires firms to impose supervisory procedures to prevent the misuse of MNPI by employee or proprietary accounts. -this includes establishing information barriers that prevent the free flow of material nonpublic information. Physical separation is also required between departments that regularly receive inside information and a firm's trading desk.

Key Note

A deposit of cash, a traveler's check, or a cashier's check (aka money order) for more than $10,000 requires that the rep fill out a currency transaction report (CTR). A personal check for more than $10,000 would not require CTR, as it would originate from the bank.

Sharing in customer accounts

A joint investment account between a rep and a client requires: 1. permission of the firm 2. Permission of the customer, and 3. Sharing must be in proportion to each person's financial contributions to the account (except for with family members)

Civil Penalties for insider trading

Also referred to as treble damages. Civil penalties are limited to a dollar amount equal to three times the profit gained or loss avoided by illegal insider trades. Supervisors who should have known about or could have prevented the illegal activity can also be subject to treble damages.

Misappropriation theory

Broadens the liability for insider trading violations to individuals who misappropriate (steal) information from their employers and trade on that information in ANY stock, not just their employers stock.

Criminal Penalties

Criminal penalties for willful violations are limited to $5 million in fines and up to 20 years in prison. The cap on fines increases to $25 million for corporations.

Borrowing and Lending to Customers

Doesnt require permission if it is with - immediate family members (this time includes grandparents, grandchildren, aunts, uncles, cousins, etc.) and any person whom the registered person supports directly, or indirectly, to a material extent - With financial institutions regularly engaged in this activity (i.e. banks) Firm permission is required if: - loan is based on an outside business relationship or personal relationship (i.e. loan is not based on the brokerage account) - client is a registered person at the same firm

Firm submission of customer complaints

Firms must submit a report to FINRA by the 15th day of the month following the calendar quarter in which customer complaints have been received

Ban on conducting business

If a municipal securities firm, an MFP of the firm, or a PAC controlled by the firm makes a political contribution to an official issuer, the firm is prohibited from engaging in any negotiated municipal securities business with that issuer for a period of two years. There is one exception. MFPs are allowed to make contributions without triggering the ban if the following applies: - They are entitled to vote for the candidate based on their residence or voting district - The contribution does not exceed $250 per election. So basically an MFP can give a maximum contribution of $250 per election (both primary and general) to a candidate he is eligible to vote for

Key Note

If a registered representative learns that a person or company on the OFAC list of terrorist organizations is involved in a transaction the rep is facilitating, the rep is required to report this information to the appropriate principal. The firm must then block the transaction and report the issue to OFAC within 10 business days.

Key Note

If representative come into contact with activities that require reporting, they should inform their supervisors, who will then be responsible for taking the appropriate actions

USA Patriot Act

In response to the September 11th, 2001 terrorist attacks, amended and strengthened the BSA. It imposed a number of new AML obligations directly on broker-dealers including: - The development of an AML compliance program and a customer identification program (CIP) - Prohibitions on transactions with persons on the Specifically Designated Nationals (SDN) list by the Office of Foreign Assets Control (OFAC). Any transactions with someone on the list must be blocked and the attempt must be reported to OFAC within 10 days. -Mandatory information sharing in response to requests by federal law enforcement

Key Note on borrowing and lending

It is not permissible for a broker-dealer or a registered rep to make a loan to a client so that the client can meet a margin call.

Municipal finance professionals

MFPs do not include persons who are involved in only retail sales of municipal securities to individual customers (essentially does not include the people involved in retail sales)

Can a registered rep inform a client that a SAR has been filed against them?

No, a registered rep is prohibited from telling a client that a SAR has ben filed against them

Unsolicited transactions

One thing that the firm or employee can do while in possession of nonpublic information is accept an unsolicited order. For example, if an equity trader learns of an imminent takeover of ABC corp, the trader can accept an unsolicited order from a customer to buy ABC Corp common stock.

Customer Complaints

Only written complaints, not verbal complaints, must be forwarded to the principal. Even if the rep receives a written complaint from a client that the rep believes is without merit, the complaint must still be forwarded to a principal.

Insider

Person who has knowledge of or access to any meaningful nonpublic information about the company. Examples of insiders include corporate officers, directors, and shareholders who own more than 10% of a company's outstanding shares. However a violation of insider trading is not just limited to these people.

Guaranteeing against loss

Prohibited in connection with any securities transaction or any customer account by a broker-dealer or representative

Communication through private email

Registered Reps are allowed to communicate with clients through a personal email address as long as they receive prior permission from their supervisor and the firm appropriately monitors the communications

Integration

The illegal funds are mixed with legitimate funds

Insider Trading

The illegal practice of trading securities based on material, nonpublic information (HAVE TO TRADE the SECURITIES, it is not just about the possession of MNPI). Key Note: Both the tipper and the tippee have potential liability for insider trading.

What are the two types of penalties for insider trading?

There are civil penalties and their are criminal penalties for insider trading.

Key Note:

These rules about disclosing and receiving permission for accounts to not apply to brokerage accounts containing investments solely in mutual funds, UITs and variable annuities

Key Note

To ensure that a firm's supervisory procedures and all FINRA rules are being adhered to, ALL REGISTERED EMPLOYEES of a firm must attend an annual compliance meeting conducted by the firm's chief compliance officer.

Conflicts of Interest

When effecting transactions with or for a customer for which a conflict exists, the broker-dealer must make VERBAL disclosure of the conflict PRIOR to the trade, and WRITTEN disclosure of the conflict must appear on the trade confirmation.

Financial Crimes Enforcement Network (FinCEN)

a bureau within the Treasury Department, is the administer of the BSA. Requires the submission of a number of documents by broker-dealers and other financial institutions in its effort to prevent money-laundering

Watch list

a current list of securities that generally do not carry trading restrictions but the trading of which is subject to close scrutiny by the firm's compliance department.

Duty of Trust

a duty of trust, or confidence, applies when two people have a history of sharing sensitive information in confidence and the recipient of the information should reasonably understand that the information should be kept confidential. This allows an individual to avoid liability for insider trading if the recipient should have known that nonpublic information was being shared. For example, an individual who steals a file from a colleagues desk and trades on the information would be expected to know that the information was nonpublic, even though no one explicitly told him so.

Continuing Commissions

allows registered reps to receive commissions from customers' accounts that were opened prior to their retirement. A contract between the broker-dealer and the retiring rep must explain the arrangement and prohibit the retiree from soliciting new business or servicing accounts to generate additional business

Payments to unregistered persons

broker-dealers and their registered representatives are not permitted to pay or compensate unregistered persons in connection with securities transactions or business. For example you cant pay the receptionist 2% of your share of commissions. HOWEVER registered reps may split commissions with registered reps of the same firm or affiliated firms.

Static Content

does not change very often. Examples include website copy, information posted on a Facebook wall or profile, and blog posts. Static content is treated as a retail communication and subject to prior principal review.

Retail Communications

include any written or electronic communications distributed or made available to more than 25 retail investors within any 30 calendar day period. This covers traditional print, internet and TV ads. These require approval to first use.

Correspondence

includes any written or electronic communications distributed or made available to 25 or fewer retail investors in any 30 day calendar period. These require supervision and spot checks but not approval prior to first use.

Bank Secrecy Act (BSA)

initially adopted in 1970, established the basic framework for anti-money laundering (AML) regulations. Among other things, it authorizes it authorizes the US Treasure to issue regulations requiring financial firms to keep records and file reports of certain financial transactions.

Interactive Content

is in real-time, such as tweets, Facebook comments, or responses to comments on a blog post. It does not require prior principal review but it is subject to supervision and spot checks.

Layering

is when money is transferred through complex financial transactions (such as wire transfers) to separate the funds from their illegal origins

Restricted List

list of securities in which proprietary, employee, and certain solicited transactions are restricted or prohibited

Suspicious Activity Reports (SARs)

must be filed by broker-dealers if customers' actions indicate that they may be engaging in money laundering activities or otherwise violating federal laws. The following examples of suspicious activities are: - A request to shred account information - Frequent wire transfers between seemingly unrelated accounts - Indifference to churning or higher-than normal fees -Deposits just under the $10,000 limit that would trigger a CTR filing (e.g. a $9,900 deposit)

Currency Transaction Report

must be filed whenever a financial institution receives a cash deposit in excess of $10,000 in a single business day from a single customer, whether it be in one transaction or in a combination of transactions. CTRs are filed with FInCEN within 15 days of the cash deposit(s). Separate regulations also require that businesses report cash payments of more than $10,000 to the IRS.

Key Note on purely verbal or oral communication

purely verbal and oral communication (e.g. conversation) is not considered communication with the public.

Control Relationships

requires forms to disclose any control relationships to investors. A control relationship occurs when the firm selling the security is controlled by, controls, or is under common control with the issuer.

Outside Business Activities (OBA)

requires that individuals employed by broker-dealers notify their firms of any business activities that are outside the scope of their relationship with the firm. this applies to any situation where the associated person may be employed by or accept compensation from any entity outside the firm.

The USA Patriot Act CIP

the UPA requires broker dealers to establish customer identification programs (CIPs). These programs aim to: - Obtain identifying information from each customer prior to account opening - Verify the identity of each customer within a reasonable time before or after account opening - Create and maintain a record of information relating to identity verification - Determine whether a customer appears on any US Treasury list of known or suspected terrorist organizations - Provide each customer with adequate notice, prior to account opening, that information will be requested to verify the customer's identity

Gifts and Gratuities

the limit on gifts and gratuities given by a firm or its associated persons to employees or representatives of other firms are limited to $100 per year per individual. This rule does not apply to entertainment expenses, such as meals or sporting events, provided the registered rep attends the event and that the event is not so egregious as to create the appearance of impropriety. Gifts that the registered rep attends are not considered gifts and therefore are not subject to the $100 limit.

Placement

the process of depositing illegal funds into financial institutions. This is the part of the process that is most easily detected

Money Laundering

the process of making illicit funds obtained from criminal activity appear legal

Private Securities Transactions (Selling Away)

these are securities transactions that have not been approved by the firm. A person may not engage in any private securities transactions without: - providing detailed notice of the proposed transaction, the role the person has to play, and whether or not compensation will be paid and - receiving written approval from his or her firm to participate. The individual needs PRIOR WRITTEN APPROVAL to participate if receiving COMMISSION, if not only notice, not permission is required.

Pay to play

this is the practice of municipal firms and their representatives making political contributions to issuers and other persons in exchange for receiving municipal underwriting and advisory business opportunities. This is a restricted practice.

When do CTRs have to be filed

with FINCen within 15 days of the cash deposit

When do SARs have to be filed

with FinCen within 30 days of the suspicious activity