AML in a Best Practices Environment:

Transcription

1 AML in a Best Practices Environment: An Update on Registered dinvestment Advisers Workshop 1B January 29 th, :00 2:15pm Catherine LaFalce (Citi) Kevin Taylor (Pershing) Alan P. Williamson (Barclays) Moderator: Meg Zucker (PIMCO)

2 U.S. REGISTERED INVESTMENT ADVISERS: AML OVERVIEW USA PATRIOT Act Covered Financial Institution DIRECT: Application of Rules (pending) AML Program Rule Establish and Implementation Period (e.g., 90 days) Suspicious Activity (Monitoring &) Reporting Rule Current State o Voluntary filing? o Safe Harbor? Customer Identification Program Rule (?) INDIRECT: Broker dealer ( Counterparty ) Expectations

3 U.S. REGISTERED INVESTMENT ADVISERS: AML OVERVIEW In Practice Risk Based (Global) Model Best Practice Approach Sanctions Application Reliance/Liability Shift Standard Rep Letters

4 RIA STATE OF THE STATE

5 FINRA Statistics Source: FINRA as of 11/13 FINRA November 2013 Member Firms 4,895 4,720 4,578 4,456 4,289 4,180 Branch Offices 171, , , , , ,369 Registered Reps 664, , , , , ,294 Broker Dealer Breakdown and the Adviser Landscape Adviser Category AML Program Required Example firms Bank Brokerage Yes J.P Morgan Chase, Citizens Bank, Fifth Third Bank Wirehouses Yes Bank of America/Merrill Lynch, Morgan Stanley Wealth Management, UBS, Wells Fargo Advisors Regional broker/dealers Yes RBC, Oppenheimer & Co., Robert W Baird Insurance broker/dealers Yes AXA Advisors, NYLIFE Securities, Mass Mutual Independent broker/dealers (IBD) Yes LPL, Mutual Service Corp., Raymond James Financial Registered Investment Advisers (RIA) NO (But may have voluntary programs in place) Silvercrest Asset Management Group, Hanlon Investment Management Inc., Lockwood Advisors, Chieftain Capital Management Inc. Source: Cerulii and Associates 5

6 The SEC Registered Investment Adviser Landscape According to the Investment Adviser Association, the number of investment advisers registered with the SEC totaled 10,533 in 2013, and the total assets under management reported by all investment advisers increased 10.9% to $54.8 trillion in 2013, from $49.4 trillion in According to the SEC, there are more than 249,324 state registered investment adviser representatives. More than 17,306 state registered investment advisers. Approximately 4.5% 5%of SEC registered investment advisers are also registered as broker dealers, and 22% have a related person that is a broker dealer. Approximately 88% of investment adviser representatives are also registered representatives of broker dealers. 6

7 The 2013 Typical SEC Registered Investment Adviser U.S Based limited liability company or corporation clients (median) Exercises discretionary authority over most accounts 100 accounts (median) $299.0 million in regulatory assets under management (median) 8 employees (median) Clients include individuals, high net worth individuals, pension and profit sharing plans Does not have actual physical custody of client assets or securities Source: Investment Adviser Association FinCEN Continues to Recognize that: Investment advisers must conduct financial transactions for their clients through other financial institutions that are subject to BSA requirements, and their clients assets must be carried at these financial institutions. Thus, as FinCEN continues to consider the extent to which BSA requirements should be imposed on investment advisers, their activity is not entirely outside the current BSA regulatory regime. Source: Federal Register 7

8 General Consequences of Registration Under the Investment Advisers Act of 1940 Fiduciary Section 206 of the Investment Advisers Act of 1940 imposes a fiduciary duty on advisers by operation of law. The purpose of this duty is to eliminate conflicts of interest and to prevent an adviser from overreaching or taking unfair advantage of a client s trust; As a fiduciary, an adviser owes its clients more than honesty and good faith alone. Rather, an adviser has an affirmative duty of utmost good faith to act solely in the best interests of the client and to make full and fair disclosure of all material facts, particularly where the adviser s interests may conflict with the client s; Pursuant to this duty, an adviser must at all times act in its clients best interests, and its conduct will be measured against a higher standard of conduct than that used for mere commercial transactions. Among the specific obligations that the SEC has indicated flow from an adviser s fiduciary duty are the following: A duty to have a reasonable, independent basis for its investment advice A duty to obtain best execution for clients securities transactions when the adviser has brokerage discretion A duty to ensure that its investment advice is suitable to the client s objectives, needs and circumstances A duty to refrain from effecting personal securities transactions inconsistent with client interest A duty to be loyal to clients 8

9 Further Requirements: Investment Advisers Act of 1940 Disclosures inform ADV State Filings Disclosure of MaterialFinancialandDisciplinary and Information Form ADV Distribution Privacy Policy Section 13 Filings Antifraud Provisions Compliance Polices and Procedures Chief Compliance Officer Advertising Payments for Referrals Trading Practices Comply with Requirements for Custody of Possession of Client Funds or Securities Principal Transactions Agency Cross Transactions Recordkeeping Rule Insider Trading Policies Supervisory Polices Assignment of Advisory Contract Performance Fees ERISA Plans Must Comply and Adhere to SEC Examinations and Performance Power 9

10 Key Points RIAs are fiduciaries RIAs have Compliance programs RIAs have fiduciary KYC obligations RIAsaretypicallymulti custodial li l RIAs have discretion over their client accounts RIAs typically do not maintain custody of their client accounts RIAs introduce their clients to broker dealers, banks, and other financial institutions that are required to have AML programs in place Question: How much would an AML Program requirement; SAR; CIP Rule impact what youare currently doing for purposesof p oversight and due diligence? 10

11 RIA: THE INSTITUTIONAL STATE

12 Investment Advisers as Institutional Clients Drivers of Risk Assessment and Due Diligence of the Adviser Characteristics of the Adviser Independent Adviser vs. subsidiary of a regulated financial institution Registered with federal/national regulator vs. not Size/complexity i of the Adviser s business Nature of relationship with the Adviser Omnibus vs. Proprietary Master/subaccount Regulatory Supervision of the Adviser Regulatory Supervision of the Adviser Is Adviser subject to AML regulations?

13 Investment Advisers as Institutional Clients Considerations i for AML Program Due Diligence Due diligence on Adviser and principals Contractual t lrepresentations ti AML Representation Letters Scope and Content General reps vs. specific attestations Considerations for mutual and hedge/private equity funds Collect from all or some jurisdictions? Consider 312 requirements? Reliance Agreements Understand the regulatory framework for them (e.g. in the U.S.): Need for written agreements Due diligence obligation Applicable only to CIP program elements Safeharbor applies only to agreements with other US regulated FI s

14 Investment Advisers as Institutional Clients Reliance Agreements To Use or Not To Use Evaluate the reasons for maintaining reliance arrangements are they still valid and do they help mitigate risks? Consider nature of relationship lti and adviser s di client base Weigh pro s and con s of maintaining the reliance agreement Due diligence obligations supporting reliance agreement Need for periodic renewal and reevaluation of the agreement Consider limitations of the arrangement from a safe harbor perspective p (CIP vs. CDD)

15 Investment Advisers as Institutional Clients Other Risk and Process Considerations Surveillance and SAR Filing Sanctions Screening Would AML, SAR and CIP Regulations for US Investment Advisers Change Due Diligence of Advisers? Heightened expectations re: responses to AML program questions Potential for improved interaction/cooperation re: investigations No changes from a due diligence perspective

16 RIA: THE RETAIL STATE

17 Investment Advisers as Retail Clients Risk Assessment and Due Diligence of the Adviser Risk Characteristics of the Investment Adviser: Subsidiary of a regulated financial institution vs. independent Registered with federal regulator vs. not Domestic vs. foreign Individual d clients vs. Hedge Fund Consequences: Identification of owners of the advisor vs. KYC of owners of the adviser No AML Representation Letter vs. Representation Letter Required Other factors? Client base Regulatory history

18 Investment Advisers as Retail Clients AML Representation Letters Sent: Implemented and maintain an AML program including: risk based customer due diligence procedures, including the identification and verification of beneficial ownership and enhanced due diligence for those customers presenting higher risk; sanctions/ofac Screening of existing and prospective customers; risk based systems and procedures to monitor customer accounts and activity; internal procedures for reporting suspicious transactions or activity and the reporting of suspicious activity to the relevant law enforcement authorities Does not transact with Shell Banks Does not transact with persons subject to economic sanctions promulgated by OFAC Identifies any Politically Exposed Persons and will disclose them Holds appropriate evidence to verify the identity information for clients Will provide all client information required in order to comply with any request from any regulatory authority, law enforcement agency, or court of competent jurisdiction

19 Investment Advisers as Retail Clients AML Representation Letters Various Received: Signed under penalty of perjury Unrestricted access to KYC documents Written reports of suspicious activity PEPs in your management structure Acknowledge reliance by the sender on your due diligence Ongoing responsibility to inform On site audits What are the standards? For making changes For accepting changes For refusing to accept at all Anecdotal evidence of pushback or changes 50%. Would you sign your own letter?

20 Investment Advisers as Retail Clients Middle Market Problem Only a DVP account FINRA Exam Priorities Compatibility with institutional systems Complexity of AML Program Complexity of monitoring, surveillance, investigations Hedge funds, Private Equity Funds, Venture Capital Funds Would AML, SAR and CIP Regulations for U.S. Investment Advisers Change Due Diligence of Advisers? Standardize due diligence for domestic advisers Increase use of reliance Increase joint SAR filings Increase number of jobs for AML professionals