Series 6

AAA

Customer Accounts - Anti-Money Laundering Regulations

There are a number of federal laws designed to thwart criminal activity involving large sums of cash. Originally enacted in 1970, the Bank Secrecy Act required financial institutions to report cash transactions exceeding $10,000 and wire transactions exceeding $3,000 to the federal government. The broker-dealer must provide information on both the transmitting party and the recipient of the funds. The Patriot Act, passed after 9/11, was designed to further control cash and other transactions that could be related to terrorism. For example, broker-dealers must file SARs (Suspicious Activity Reports) for any transaction that involves at least $5,000 in funds or securities if the broker/dealer knows or suspects that it falls within one of these four classes:
 

  • The transaction involves funds derived from illegal activity.
  • The transaction is structured to evade the Bank Secrecy Act requirements.
  • The transaction appears to serve no lawful purpose and is not the type of transaction in which the particular customer would be expected to engage.
  • The transaction involves the use of the broker/dealer to facilitate criminal activity.

The Patriot Act also requires broker/dealers to institute a Customer Identification Program. Such a program spells out the types of identification that different types of customers must provide in order to open an account.

Privacy of Consumer Financial Information
In 2000, the Securities and Exchange Commission (SEC) adopted Regulation S-P, created under Section 504 of the Gramm-Leach-Bliley Act. This legislation required the SEC (and other federal organizations) to adopt rules implementing notice requirements and restrictions on a financial institution's ability to disclose nonpublic personal information about consumers. As a result, broker-dealers must provide their customers with a notice of privacy policies and practices, and must not disclose nonpublic personal information about a consumer to nonaffiliated third parties unless the institution provides certain information to the consumer and the consumer has not elected to opt out of the disclosure.

Regulation S-P spells out requirements for delivery of initial and annual notices about the broker-dealer's privacy policies and practices, and about the opportunity and methods for customers to opt out of the sharing of their nonpublic personal information with nonaffiliated third parties. The rule requires these disclosures to be clear and conspicuous and to accurately reflect the broker-dealer's privacy policies and practices.

Certain exceptions apply, including one that permits broker-dealers, mutual funds and registered investment advisers to disclose information to nonaffiliated third parties in circumstances such as maintaining or servicing a customer's account, or complying with federal, state, or local laws. For example, client information may be shared without consent if necessary to allow a third party to perform services such as processing and servicing transactions.

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