Wednesday, July 8, 2009

Red Flags Rule - Could FINRA treat like AML & Patriot Act?

FINRA doesn't plan to give broker dealers more time than they've already had to deal with a Federal Trade Commission identity theft rule that's effective Aug. 1.

Guidance posted Monday by FINRA, about how to comply with the Red Flags Rule means it expects adherence from the onset. The rule will be a likely focus of upcoming Finra examinations and sweeps, say compliance consultants.

The FTC will require broker dealers to periodically reassess whether they offer or maintain certain types of accounts covered by the rule and, if so, have a written program for identity theft prevention. Such a program should include, at a minimum, policies and procedures to detect certain "red flags" that could indicate identity theft. Broker dealers would also have to update those policies in response to changing risks to customers.

The rule applies to financial institutions and creditors who offer or maintain certain types of accounts, which could include margin accounts. The rule initially caused widespread confusion among broker dealers and other industries about exactly who was affected, and as a result, the FTC extended the compliance deadline twice from its original Nov. 1, 2008 effective date.

As quoted in A DOW JONES COLUMN, Tim Pedregon, a Los Angeles-based compliance consultant and former FINRA examiner, says the self-regulator's interest in the Red Flags Rule mirrors activity beginning in 2002 related to a Patriot Act provision requiring financial institutions to establish money laundering procedures. The National Association of Securities Dealers included Patriot Act anti-money laundering compliance as a focus in its brokerage audits. It often imposed administrative fees for small infractions and, in more egregious cases, fines, he said. An enforcement sweep in about six months is also possible, says Pedregon.(Suzanne Barlyn writes Compliance Watch, a column that focuses on compliance and regulatory issues affecting financial advisers. She can be reached at 212-416-2230 or by email at

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