Customer Identification Responsibilities for Agency Lending Transactions
Posted by Peter Mucklestone and Stuart Louie
On April 25, 2006, the Department of the Treasury, Financial Crimes Enforcement Network issued a guidance statement in respect of Customer Identification Program ("CIP") responsibilities arising out of transactions where U.S. banks or broker-dealers ("Agent Lenders") arrange loans of securities to broker-dealers ("Borrowers") under the Agency Lending Disclosure Initiative. In a typical agency lending transaction, an Agent Lender agrees to make securities (held by such Agent Lender on behalf of its customers ("Customers")) available to be loaned to Borrowers through Agent Lender's securities loan program. Other than imposing certain lending requirements and receiving periodic reports regarding loan transactions involving its securities, the Customers have virtually no role in the transaction. The master loan agreement is entered into between the Agent Lender and the Borrower and the Borrower typically records the loan transaction in an account in the name of the Agent Lender. Under the Agency Lending Disclosure Initiative, the Agent Lender, after the fact, will provide to Borrower information regarding the identities of the Customers whose securities have been loaned to the Borrower; however, the disclosure of such information is typically limited to certain personnel of Borrower responsible for credit risk management and regulatory capital reporting.
In consideration of the foregoing, the policy statement provided guidance with respect to the following question: Is a Borrower required to treat Customers as "customers" for purposes of the CIP rule (31 C.F.R. ㋔ 103.122) issued jointly by the U.S. Department of the Treasury and the Securities and Exchange Commission? The short answer to this question is "No". Notwithstanding the limited information that the Borrower obtains about the Customer, the "customer" of the Borrower, for the purposes of the SIP rule, is the Agent Lender.
For a more comprehensive analysis, see here.
