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News January 11, 2010 Issue

AML Relief Gets Another Year

As of tomorrow, six-year old no-action relief benefitting advisers was going away. In an eleventh-hour action, the SEC has given it another year of life.

Since 2004, a broker has been able to rely on an adviserís performance to satisfy certain of its obligations to maintain a customer identification program (CIP) under rule 31 CFR 103.122. Pursuant to the rule, a broker may rely on the practices of third party financial institutions and others to satisfy one or more procedures in the brokerís CIP provided certain conditions are met. The brokerís reliance must be reasonable under the circumstances and the third party must have a contractual obligation to the broker to certify annually that it will perform the procedures as expected.

The brokerís reliance is also conditioned on the other party being subject to its own anti-money laundering rule. Advisers have not, and do not currently, meet this requirement.

In early 2004, the Securities Industry and Financial Markets Association sought and obtained no-action relief from the then-Division of Market Regulation that permitted a broker to treat a registered adviser as subject to anti-money laundering program rules in satisfaction of the condition. The February 12, 2004 letter provided that the relief would be withdrawn after twelve months, or earlier if an anti-money laundering program rule for advisers became effective. The no-action relief has been extended three times by the SEC since then, on February 10, 2005, July 11, 2006, and most recently on January 10, 2008 for a two-year period that expires January 12, 2010.

Today, the Division of Trading and Markets once again extended the relief, "subject to some modification." SIFMAís latest letter to the SEC indicated that brokers now rely on this no-action position. Should the SEC permit it to lapse, SIFMA indicated that brokers "would need time to re-evaluate relationships that were entered in to in reliance on the 2004 letter and the subsequent no-action positions."

In response, the SEC extended the no-action relief for another year. "The Division will not recommend enforcement action to the Commission under Exchange Act Rule 17a-8 if a broker-dealer treats an investment adviser as if it was subject to an AML Program Rule for the purposes of paragraph (b)(6) of the CIP Rule provided that the other provisions of the CIP Rule are met and: (1) reliance on the investment adviser is reasonable under the circumstances; (2) the investment adviser is registered with the Commission (3) the investment adviser enters into a contract with the broker-dealer requiring it to certify annually to the broker-dealer that it has implemented its own AML Program that is consistent with the requirements of 31 U.S.C. 5318(h); and (4) the adviser (or its agent) performs the specified requirements of the broker-dealerís CIP."

The no-action position will be withdrawn without further action on January 10, 2011. It may be withdrawn or modified before then if the staff "determines that such action is necessary to be consistent with the Bank Secrecy Act and in the public interest."