United States: FinCEN Publishes An Administrative Ruling Regarding Customer Identification Program And Customer Due Diligence Requirements For Designated Beneficiaries Of Individual Retirement Accounts

Regulatory Developments

FinCEN Publishes an Administrative Ruling Regarding Customer Identification Program and Customer Due Diligence Requirements for Designated Beneficiaries of Individual Retirement Accounts

On March 15, FinCEN issued an administrative ruling affirming that broker-dealers must comply with Customer Identification Program (CIP) and Customer Due Diligence (CDD) requirements when distributing to a beneficiary of IRA funds inherited as part of a charitable estate. The ruling confirms that such broker-dealers must implement a CIP enabling them to verify the identity of each customer. Specifically, for legal entity customers, broker-dealers must collect a name, address, and employer identification number, at a minimum. These broker-dealers must also establish and maintain written CDD requirements to identify and verify the beneficial owners of legal entity customers by obtaining the same information.

CFPB Director Delivers Remarks on Standard Setting in an Open Banking System at the Financial Data Exchange Global Summit

On March 13, CFPB Director Rohit Chopra delivered remarks at the Financial Data Exchange Global Summit about the importance of setting industry standards, specifically with respect to data standards and sharing protocols, as the US shifts to an open banking system under the CFPB's proposed Personal Financial Data Rights rule intended to empower consumers to more seamlessly switch between financial products by giving consumers rights to access their data. Emphasizing the need for standard-setting in financial services and open banking, Chopra warned of the dangers to competition in open banking when dominant firms with prevailing market power weaponize industry standards to limit consumers' exercise of their rights. To prevent large incumbents from too heavily influencing standards in their favor, the CFPB plans to codify which attributes (e.g., board composition, funding structure, independence from powerful players) standard-setting organizations must demonstrate to be recognized by the CFPB as a standard-setting organization under the rule and then have those organizations apply for recognition – all before the rule is finalized in the fall.

Enforcement and Litigation Developments

SEC Charges Two Investment Advisers with Making False and Misleading Statements About Their Use of AI

On March 18, the SEC announced that it settled charges against two investment advisers, Delphia (USA) Inc. and Global Predictions Inc., for making false and misleading statements about their use of AI. The SEC found that the two firms falsely marketed to their clients that they were utilizing AI in particular ways when, in fact, they were not. Both firms were also found to have violated the Marketing Rule, which prohibits registered investment advisers from disseminating advertisements that include untrue statements of material fact. Both firms consented to the entry of orders finding that they violated the Advisers Act and paid a fine; the firms did not admit or deny the SEC's findings.

"As more and more investors consider using AI tools in making their investment decisions or deciding to invest in companies claiming to harness its transformational power, we are committed to protecting them against those engaged in 'AI washing'."

‒ Gurbir S. Grewal, Director of the SEC's Division of Enforcement

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