Effective May 11, 2018, the U.S. Treasury's Financial Crimes Enforcement Network ("FinCEN") implemented a new customer due diligence requirement. The requirement applies to certain financial institutions, including banks, broker-dealers and mutual funds, at the time each new account is opened. The rule enhances the information that financial institutions must collect regarding the identity of individuals (i.e., beneficial owners) who own or control their legal entity customers, which includes any corporation, limited liability company or partnership. Information must be collected for each owner of 25% or more of the equity interests of a legal entity customer. As a result of the rule's recent implementation, financial institutions are devoting significant time and resources to modifying their internal systems and to implementing appropriate procedures to ensure compliance with the rule. Certain entities are excluded from the definition of "legal entity customer." For example, SEC reporting companies are excluded from the rule because they are subject to public disclosure and reporting requirements that provide information similar to what would otherwise be collected under the rule. Companies listed on foreign exchanges are not excluded from the definition of legal entity customer. Such companies may not be subject to the same or similar public disclosure and reporting requirements as companies publicly traded in the United States and, therefore, collecting beneficial ownership information for them is required. Certain institutions are considering revising some standard form agreements, including underwriting agreements and engagement letters, to include ownership certification representations and covenants to ensure compliance. FinCEN has provided financial institutions with a certification form that may be used to obtain the required beneficial ownership information. To read FinCEN's "Frequently Asked Questions" relating to the new rule, please click here, and to read SIFMA's memorandum relating to the new rule in the context of certain sales of securities, click here (with attachments providing form certifications at the 25% equity ownership threshold and 10% equity ownership threshold).
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