Many broker-dealers have taken the view that they fall under the two-year, rather than one-year, cycle for independent anti-money laundering (“AML”) testing. In light of recent FINRA staff comments about the applicability of the two-year cycle for AML testing, ACA recommends that such firms review their business activities to determine whether annual testing is actually required.
By way of background, FINRA Rule 3310(c) requires broker-dealers to conduct independent AML testing either annually or on a two-year cycle. Per the rule, annual testing is required unless the broker-dealer:
While some broker-dealers that do not conduct retail brokerage operations may take the view that they do not execute transactions for “customers,” the rule further clarifies that the two-year cycle applies only to a broker-dealer that engages “solely in proprietary trading or conducts business only with other broker-dealers.”
During recent conversations with FINRA staff, ACA was informed that FINRA adheres to a “strict interpretation” of this provision. The staff emphasized that only broker-dealers that transact solely with other dealer-dealers qualify for the two-year cycle. The staff clarified that broker-dealers with the following business activities, which are not conducted “only with other broker-dealers,” would generally not be eligible for the two-year testing cycle:
The FINRA staff advised ACA that a broker-dealer conducting the above-mentioned activities is executing transactions for a customer. FINRA Rule 0160 defines “customer” as anyone who is not a broker-dealer.
If you have questions about the AML testing rule, or would like more information, please contact Dee Stafford at (310) 322-8840.