Various regulations and rules exist from a plethora of regulatory authorities that require the constant and consistent monitoring of risks and violations of certain types. The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, for instance, brought the most significant changes to financial regulation in the United States since the regulatory reform that followed the Great Depression. Dodd-Frank enumerates a variety of rules designed to improve accountability and transparency in the financial system, to end "too big to fail", to protect the American taxpayer by ending bailouts, and to protect consumers from abusive financial services practices. Similarly, the abundance of regulatory organizations that recently have underscored their commitment to additional areas such as anti-money laundering, suitability, and know your customer (KYC) suggest that the ability to proactively identify and manage these types of risks is paramount to a compliance team's effectiveness.
The Regulatory Monitoring Requirements policies are intended to assist firms in adhering to the provisions of various rules in this context from a variety of regulatory authorities.
Anti-Money Laundering (AML) / OFAC Violations
“Money Laundering” is defined as the process whereby the proceeds of crime are transformed into ostensibly legitimate money or other assets, or the process by which the true origins of money is concealed in order to make it appear legitimate. FINRA, the SEC, the NYSE, the CFTC, as well as numerous acts such as the Bank Secrecy Act and the Patriot Act have all established regulations around the prevention of money laundering activities for various reasons. To enforce these regulations, FINRA Rule 3310 states that “Each member shall develop and implement a written anti-money laundering program reasonably designed to achieve and monitor the member compliance with the requirements of the Bank Secrecy Act (31 U.S.C. 5311 et seq.) and the implementing regulation promulgated thereunder by the Department of the Treasury.” In addition, the Office of Foreign Asset Controls (OFAC) administers and enforces economic and trade sanctions against foreign entities based on US foreign policy. Currently, these sanctions, of varying degrees, have been imposed on Cuba, North Korea, Iraq, Iran, Burma, Sudan, The African Diamond Trade, The Balkans, Zimbabwe, Syria, Côte D’ivore, Belarus, The Democratic Republic of Congo, and Somalia. Based upon requirements set forth by OFAC, the Anti-Money Laundering - OFAC policy is designed to identify trades, transactions and electronic communications concerning the countries and cities enumerated on the OFAC Sanctions and Country list, in combination with language and actions indicative of an illicit transfer.
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in July of 2010 and is a continuing work in progress today. There are many mentions about disclosure requirements in Dodd-Frank such as Title XV Section 1052 and 1503 and 1504. These sections outline the requirements for financial institutions that deal in mineral, mine operations, and natural gas commodities respectively, to provide form disclosures regarding the firm’s activity in these areas. Section 404 covers disclosures around swap counter-parties for special entities and broker dealers. Section 919 requires investor disclosures before the purchase of investment products and services, conflicts of interest disclosures, whistleblower disclosures. Section 932 covers disclosures for credit rating methodologies. Section 942 covers the disclosure and reporting requirements for asset-backed securities. There are numerous other disclosure requirements throughout the Dodd-Frank bill as one of the intentions of the act is to increase the transparency of financial instructions. The Dodd-Frank: Disclosures policy is an all-encompassing, general blanket policy that monitors surveilled users’ communicating the intention of omitting information from the required disclosure forms.
Dodd-Frank: End User Clearing
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in July of 2010 and is a continuing work in progress today. Section 723 of the Dodd-Frank Act amended the Commodity Exchange Act (CEA) by adding Section 2(h)(1), which provides that “it shall be unlawful for any person to engage in a swap unless that person submits such swap for clearing to a derivatives clearing organization that is registered under [the CEA] or a derivatives clearing organization that is exempt from registration under [the CEA] if the swap is required to be cleared.” The Dodd-Frank Act also added Section 2(h)(7) to the CEA, which provides that “the clearing requirement of Section 2(h)(1) shall not apply to a swap if one of the counter-parties of the swap is not a financial entity, is using swaps to hedge or mitigate commercial risk and notifies the Commission in a manner set forth by the Commission, how it generally meets it financial obligations associated with entering into non-cleared swaps”. The exception provided in Section 2(h)(7) is known as the “End User Exception."
Dodd-Frank: Influencing Clearing
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in July of 2010 and is a continuing work in progress today. Section 726 states “In order to mitigate conflicts of interest, not later than 180 days after the date of enactment of the Wall Street Transparency and Accountability Act of 2010, the Commodity Futures Trading Commission shall adopt rules which may include numerical limits on the control of, or the voting rights with respect to, any derivatives clearing organization that clears swaps, or swap execution facility or board of trade designated as a contract market that posts swaps or makes swaps available for trading, by a bank holding company (as defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841)) with total consolidated assets of $50,000,000,000 or more, a nonbank financial company (as defined in section 102) supervised by the Board, an affiliate of such a bank holding company or nonbank financial company, a swap dealer, major swap participant, or associated person of a swap dealer or major swap participant.” As of 2012, this rule was finalized as part of CFTC Regulation 1.71. This rule outlines the restrictions on relationship with the clearing organization and states “Non-research personnel may not direct a research analyst's decision to publish a research report or direct the views and opinions in the report; Research analysts may not be under the supervision, control (including with respect to performance evaluation and compensation) of employees of the firm's business trading unit or clearing unit.”
Dodd-Frank: Non-Associated Persons Discussing Swaps/Trades
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in July of 2010 and is a continuing work in progress today. 17 CFR 23.22 of the Dodd-Frank bill states that “No swap dealer or major swap participant may permit a person who is subject to a statutory disqualification under section 8a(2) or 8a(3) of the Act to effect or be involved in effecting swaps on behalf of the swap dealer or major swap participant, if the swap dealer or major swap participant knows, or in the exercise of reasonable care should know, of the statutory disqualification; Provided, however, that the prohibition set forth in this paragraph (b) shall not apply to any person listed as a principal or registered as an associated person of a futures commission merchant, retail foreign exchange dealer, introducing broker, commodity pool operator, commodity trading adviser, or leverage transaction merchant, or any person registered as a floor broker or floor trader, notwithstanding that the person is subject to a disqualification from registration under section 8a(2) or 8a(3) of the Act”.
Dodd-Frank: Non-Eligible Contract Participants
As defined in Section 1a(18) of the CEA The term “eligible commercial entity” means, with respect to an agreement, contract or transaction in a commodity, a financial institution, insurance company, a commodity pool that has total assets exceeding $5,000,000, a corporation or other entity with assets exceeding $10,000,000, an employee benefit plan subject to the Employee Retirement Income Security Act of 1974 that has assets exceeding $5,000,000, a government entity, a broker dealer that is subject to US regulations, a futures commission, an individual who has investments in excess of $10,000,000 or $5,000,000 if they enter into a contract in order to manage the risk associated with an asset owned by the individual, an investment adviser, or any other person that the commission determines to be eligible in light of the financial qualifications of the person. Parts of the Dodd-Frank act modify the existing Commodity Exchange Act (CEA). In Section 2(e) of the CEA it states that it is unlawful for a person that is not an eligible contract participant to enter into a swap, even if for hedging purposes, unless that swap is entered into over a board of trade that has been designated by the Commodity Futures Trading Commission as a contract market.
Dodd-Frank: Political Contributions
The Political Contributions policy was designed to address the pay-to-play rules that are covered in 17 C.F.R. §23.451(b)(1) in the Dodd-Frank Wall Street Reform bill, that states “As a means reasonably designed to prevent fraud, no swap dealer shall offer to enter into or enter into a swap or a trading strategy involving a swap with a governmental Special Entity within two years after any contribution to an official of such governmental Special Entity was made by the swap dealer or by any covered associate of the swap dealer”. This is an expansive policy covering not just Dodd-Frank but also § 130.6 of the International Traffic in Arms Regulations for Defense Contractors. The design of this policy requires that some type of deceptive or quid pro quo language is present in the communication along with language, such as an email address or a title, identifying the recipient or sender as an elected official such as “Your Honor, Mr. Mayor, Mr. Vice-President etc.”. The policy focuses on such language that would indicate trading a below-the-table deal for a donation to an elected official whether that donation is a gift, a sum of money, or an in-kind donation.
Dodd-Frank: Special Entities
A "special entity" is defined as a state or local municipalities, state or federal agencies, pension plans, governmental plans, and endowments. Section 1a(18) of the Dodd-Frank Wall Street Reform Bill refers to swap dealers' responsibilities with respect to special entities. A swap dealer that acts as an adviser to a special entity has a duty to act “in the best interests of” the special entity. These swap dealers, or MSPs, that perform a swap with a special entity must comply “with any duty” established by the swap dealer's regulator, the foremost being that they are “to have a reasonable basis to believe” that the special entity is advised by a qualified independent representative.
Know Your Customer (KYC) / Suitability
Know your customer (KYC) is the process of a business verifying the identity of its clients. The term is also used to refer to the bank regulation which governs these activities. Know your customer processes are also employed by financial services organizations of all sizes for the purpose of ensuring their proposed agents, consultants, or distributors are anti-bribery compliant. Banks, insurers and export creditors are increasingly demanding that customers provide detailed anti-corruption due diligence information, to verify their probity and integrity.Related procedures also enable banks to better understand their customers and their financial dealings. This helps them manage their risks prudently. The Know Your Customer policy incorporates the following four key elements as part of its analysis: Customer Policy, Customer Identification Procedures, Monitoring of Transactions, and Risk Management.