SIFMA issued a comment letter to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury regarding proposed customer due diligence ("CDD") requirements for financial institutions.  SIFMA General Counsel Ira Hammerman signed off on the letter, as did the General Counsels of ICI and FIA.  SIFMA's 'AML and Financial Crimes Committee' assisted in the preparation of the 34-page comment letter. Strong Support. SIFMA strongly supports FinCEN’s goal of creating greater transparency and harmonizing and clarifying expectations relating to CDD, particularly given the industry’s historical understanding of the AML statutory requirements, which does not fully comport with recent guidance issued by FinCEN.  SIFMA shares key comments with respect to each element of the proposed CDD rule. SIFMA and its Anti-Money Laundering and Financial Crimes Committee also provide comments on the proposal, which is filed under Regulatory ID Number 1506-AB15, Docket Number FinCEN-2012-0001. SIFMA's Specific Comments. SIFMA strongly supports FinCEN's efforts in working with financial institutions to implement robust, risk-based AML compliance programs - and its willingness to engage in open and meaningful dialogue on this topic.  SIFMA further strongly supports FinCEN’s goal of creating greater transparency and harmonizing and clarifying expectations relating to CDD, particularly given the industry’s historical understanding of the AML statutory requirements, which does not fully comport with recent guidance issued by FinCEN. SIFMA's Key Comments. Here SIFMA presents its key comments in summary form, followed by in depth discusssion.  C-I takes you through the executive summary stage and provides an access link for further reading. 1.  Complexities of the Securities Industry. FinCEN should take into account the complexities and unique nature of the securities industry when crafting any proposed CDD rule to ensure that a final rule effectively mitigates potential money laundering risks. 2.  New AML Requirements. With the exception of the CIP requirement in the first CDD element (Element One), the remaining prongs of the proposed CDD rule are new requirements for the securities industry. 3.  Risk-Based Requirements. Any proposed CDD rule should be risk-based. 4.  CDD Coverage. Only a “Customer,” as defined under the CIP Rule, should fall within the scope of any proposed CDD rule.  Any proposed CDD rule should confirm that existing regulatory guidance with respect to the definition of Customer - e.g., CIP guidance re: omnibus and introducing/clearing relationships - continues to remain in effect. 5.  CDD Element One. Any proposed CDD rule should make explicitly clear that Element One of the proposed CDD rule is satisfied by compliance with the existing and independent CIP Rule. 6.  CDD Element Two. Obtaining the purpose and nature of account and expected activity does not advance the detection of suspicious activity. 7.  CDD Element Three. FinCEN’s Proposed Definition of beneficial ownership (“Proposed Definition”) should be modified for the following reasons:

• Proposed Definition of beneficial ownership is vague, difficult to implement from an operational perspective, may cause confusion because it conflicts with other beneficial ownership definitions (e.g., FATCA and Section 312 of the PATRIOT Act) and does not fit all types of customer relationships (e.g., trusts, omnibus relationships and pooled investment vehicles).
• Identification of beneficial ownership should be risk-based.  Where appropriate, verification of beneficial ownership should be limited to verifying the identity the beneficial owner, and not verifying beneficial ownership status.

8.  CDD Element Four. Term “ongoing due diligence” needs to be clarified to explain:

• whether it is addressing monitoring for suspicious activity pursuant to the existing and independent suspicious activity reporting requirement of Section 356 of the PATRIOT Act (the “SAR Rule”);
• whether it pertains to an expectation that broker-dealers will periodically update CDD, or
• whether FinCEN expects that CDD information should be tied to suspicious activity monitoring.

If the first interpretation is correct, any proposed CDD Rule should be explicitly clear that Element Four is satisfied by compliance with the SAR Rule. If the second interpretation is correct, the requirement should be limited to event-driven situations. If the third interpretation is the right one, the present technology used by securities firms does not permit them to implement this approach to suspicious activity monitoring;  FinCEN should therefore re-evaluate whether this approach is feasible. 9.  Existing Customers. All 4 elements of any proposed CDD rule - unless Element Four pertains to compliance with the SAR Rule - should not apply to existing Customers, unless they are limited to event-driven situations. 10.  Exemptions. Existing exceptions from the CIP Rule should be applied to the proposed CDD rule and any beneficial ownership requirement, and expanded to include certain lower risk entities. 11.  Proposed CDD Rule Timing. Any proposed CDD rule should include: (i) a sufficient time period to implement the rule;  (ii) provide for a reasonable time period to perform CDD consistent with the CIP Rule;  and,  (iii) provide for an effective implementation date going forward, as material aspects of any proposed CDD rule will be new requirements. 12.  Cost Considerations. Costs will be substantial. FinCEN should therefore conduct a cost-benefit analysis as the ANPRM does not clearly articulate the benefits to law enforcement from the proposed CDD rule that would outweigh the costs to the industry, and should evaluate whether the proposed CDD rule will mitigate the risks that FinCEN is attempting to address. Significant costs would include, among others, any necessary technology enhancements, additions to staff to handle increased workload and updates to relevant documentation  - e.g., applications, policies,procedures and training. Sign-Offs. Ira D. Hammerman, General Counsel. Securities Industry and Financial Markets Association Karrie McMillan, General Counsel Investment Company Institute Barbara Wierzynski, General Counsel Futures Industry Association For further details, go to [SIFMA, 6/8/12].